SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
Form 10-Q
[X] Quarterly Report Pursuant To Section 13 Or 15(D) Of The Securities
Exchange Act Of 1934
For the Quarterly Period Ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-27376
---------------
ELCOM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3175156
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 OCEANA WAY
NORWOOD, MASSACHUSETTS 02062
(781) 440-3333
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
The registrant had 27,901,000 shares of common stock, $.01 par value,
outstanding as of August 2, 1999.
<PAGE>
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Balance Sheets as of December 31, 1998
and June 30, 1999 (unaudited)................................2
Consolidated Statements of Operations - Three and Six Month
Periods Ended June 30, 1998 and 1999 (unaudited)............ 3
Consolidated Statements of Cash Flows - Six Month
Periods Ended June 30, 1998 and 1999 (unaudited).............4
Notes to Consolidated Financial Statements (unaudited)....... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations... ........................................7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................................16
Part II - OTHER INFORMATION
Item 1. None.
Item 2. None.
Item 3. None.
Item 4. Submission of Matters to a Vote of Security Holders...............17
Item 5. Other Information.................................................17
Item 6. Exhibits and Reports on Form 8-K..................................18
Signature ..................................................................18
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
December 31, June 30,
1998 1999
-------------- --------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 14,315 $ 27,503
Accounts receivable:
Trade.................................................................... 134,753 112,284
Other.................................................................... 36,068 26,994
-------------- -------------
170,821 139,278
Less-Allowance for doubtful accounts..................................... 6,796 5,440
-------------- -------------
164,025 133,838
Inventory................................................................... 39,617 18,558
Prepaids and other current assets........................................... 2,458 3,165
-------------- -------------
Total current assets..................................................... 220,415 183,064
-------------- -------------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software.............................................. 26,556 26,860
Land, buildings and leasehold improvements.................................. 3,507 3,412
Furniture, fixtures and equipment........................................... 9,228 9,002
-------------- -------------
39,291 39,274
Less - Accumulated depreciation and amortization............................ 25,034 26,382
-------------- -------------
14,257 12,892
-------------- -------------
GOODWILL AND OTHER ASSETS, NET OF ACCUMULATED
AMORTIZATION.................................................................. 27,179 3,379
-------------- -------------
$ 261,851 $ 199,335
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit............................................................. $ 104,772 $ 82,550
Accounts payable............................................................ 49,341 41,103
Accrued expenses and other current liabilities.............................. 20,747 13,788
Current portion of capital lease obligations................................ 991 646
Current portion of long-term debt........................................... 78 74
-------------- --------------
Total current liabilities................................................ 175,929 138,161
-------------- --------------
OTHER DEFERRED LIABILITIES.................................................... 418 -
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION............................. 191 48
LONG-TERM DEBT, NET OF CURRENT PORTION........................................ 296 263
-------------- --------------
905 311
-------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; Authorized -- 10,000,000 shares --
Issued and outstanding -- None.......................................... - -
Common stock, $.01 par value; Authorized -- 50,000,000 shares --
Issued - 27,547,061 and 28,113,237 shares............................... 275 281
Additional paid-in capital.................................................. 101,271 102,068
Retained earnings........................................................... (16,192) (40,381)
Treasury stock, at cost - 236,338 shares ................................... (1,182) (1,182)
Cumulative translation adjustment........................................... 845 77
-------------- --------------
Total stockholders' equity........................................... 85,017 60,863
============== ==============
$ 261,851 $ 199,335
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales.................................... $ 191,778 $ 150,547 $ 381,826 $ 324,900
Cost of sales................................ 169,192 134,353 337,086 291,532
-------------- ------------- ------------- -------------
Gross profit................................. 22,586 16,194 44,740 33,368
Expenses:
Selling, general and administrative........ 19,006 14,997 36,864 32,066
Research and development................... 346 224 621 575
Asset impairment charge (Note 4)........... - 22,552 - 22,552
-------------- ------------- ------------- -------------
Total expenses............................... 19,352 37,773 37,485 55,193
-------------- ------------- ------------- -------------
Operating profit (loss) 3,234 (21,579) 7,255 (21,825)
Interest expense............................. (2,223) (877) (4,165) (2,072)
Interest income and other, net............... 225 130 396 619
-------------- ------------- ------------- -------------
Income (loss) before income taxes............ 1,236 (22,326) 3,486 (23,278)
Provision for income taxes................... 721 408 1,599 911
-------------- ------------- ------------- -------------
Net income (loss)............................ $ 515 $ (22,734) $ 1,887 $ (24,189)
============== ============= ============= =============
Basic net income (loss) per share............ $ 0.02 $ (0.82) $ 0.07 $ (0.88)
============== ============= ============= =============
Basic weighted average shares outstanding.... 27,379 27,709 27,305 27,561
============== ============= ============= =============
Diluted net income (loss) per share.......... $ 0.02 $ (0.82) $ 0.07 $ (0.88)
============== ============= ============= =============
Diluted weighted average shares outstanding.. 28,254 27,709 28,512 27,561
============== ============= ============= =============
Other Comprehensive Income, Net of Tax:
Net income (loss)............................ $ 515 $ (22,734) $ 1,887 $ (24,189)
Foreign currency translation adjustments.... (70) (479) 450 (768)
-------------- ------------- ------------- -------------
Comprehensive income (loss).................. $ 445 $ (23,213) $ 2,337 $ (24,957)
============== ============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
June 30,
------------------------------
1998 1999
<S> <C> <C>
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss).................................................. $ 1,887 $ (24,189)
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation, amortization and asset impairment charge.......... 4,774 26,451
Provision for doubtful accounts................................. 620 2,130
Other deferred liabilities...................................... - (418)
Changes in current assets and liabilities, net of acquisitions--
Accounts receivable.......................................... (9,826) 24,838
Inventory..................................................... 12,123 20,278
Prepaids and other current assets............................. (1,904) (1,046)
Accounts payable.............................................. 15,477 (5,731)
Accrued expenses, other current liabilities and other......... (1,142) (6,470)
------------- -------------
Net cash provided by operating activities.................. 22,009 35,843
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software...................... (3,859) (2,075)
Increase (decrease) in other assets and deferred costs............ (73) 36
------------- -------------
Net cash used in investing activities....................... (3,932) (2,039)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under lines of credit................................ (16,407) (20,450)
Purchase of treasury stock .. (559) -
Repayment of capital lease obligations............................ (351) (506)
Proceeds from stock option exercises.............................. 486 801
------------- -------------
Net cash used in financing activities....................... (16,831) (20,155)
------------- -------------
FOREIGN EXCHANGE EFFECT ON CASH..................................... 208 (461)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,454 13,188
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD............................................... 33,165 14,315
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................ $ 34,619 $ 27,503
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid..................................................... $ 4,134 $ 882
============= =============
Income taxes paid................................................. $ 406 $ 445
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Retirement of fully depreciated / amortized property,
equipment and software.......................................... $ - $ 777
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Elcom
International, Inc. and its wholly owned subsidiaries (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company as of June 30, 1999, and the results of operations and cash flows
for the periods ended June 30, 1998 and 1999. The results of operations for
these periods are not necessarily comparable to, or indicative of, results of
any other interim period or for the year as a whole. Certain financial
information that is normally included in financial statements prepared in
accordance with generally accepted accounting principles, but which is not
required for interim reporting purposes, has been omitted. For further
information, reference should be made to the consolidated financial statements
and accompanying notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
2. Net Income Per Share
Net income per share is based on the weighted average number of common and
common equivalent shares outstanding during each period presented, calculated in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share. This statement establishes revised standards for computing
earnings per share ("EPS") by replacing the presentation of primary EPS with a
presentation of basic EPS. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted EPS gives effect to all
potential common shares outstanding during the period. In 1999, diluted EPS is
the same as basic EPS because the Company has reported a net loss, in which case
dilutive securities are not included in the determination of per share
calculations.
Basic and diluted earnings per share were calculated as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- ---------------------------
1998 1999 1998 1999
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
------------ ------------ ----------- ------------
Basic
------
Net income (loss) $ 515 $ (22,734) $ 1,887 $ (24,189)
============ ============ =========== ============
Weighted average shares outstanding 27,379 27,709 27,305 27,561
============ ============ =========== ============
Basic net income (loss) per share $ 0.02 $ (0.82) $ 0.07 $ (0.88)
============ ============ =========== ============
Diluted
---------
Net income (loss) $ 515 $ (22,734) $ 1,887 $ (24,189)
============ ============ =========== ============
Weighted average shares outstanding 27,379 27,709 27,305 27,561
Dilutive effect of stock options 875 - 1,207 -
------------ ------------ ----------- ------------
Weighted average shares as adjusted 28,254 27,709 28,512 27,561
============ ============ =========== ============
Diluted net income (loss) per share $ 0.02 $ (0.82) $ 0.07 $ (0.88)
============ ============ =========== ============
</TABLE>
Options to purchase 4,641,054 and 2,657,672 shares of common stock at
prices ranging from $5.03 to $8.80 and $5.44 to $8.80 were outstanding during
the three and six month periods ended June 30, 1998, respectively, but not
included in the computation of diluted earnings per share because such options'
exercise prices were greater than the average market price of the Company's
common stock for the applicable period ended June 30, 1998.
<PAGE>
Dilutive net loss per share in the 1999 periods does not reflect the
dilutive effect of stock options and warrants, as the impact of including them
is antidilutive. Based on the average market price of the Company's common
shares in the 1999 three and six month periods, a net total of 2,628,709 and
1,713,467 shares, respectively, covered by options and warrants would have been
dilutive, and 2,078,211 shares and 5,859,049 shares, respectively, covered by
options and warrants with per share exercise prices ranging from $5.22 to $8.80,
and $3.81 to $8.80, respectively, would not have been dilutive.
3 Industry Segment And Geographic Data
In 1998, the Company adopted the provisions of SFAS No. 131 Disclosures
About Segments of an Enterprise and Related Information. This statement
establishes the standards for reporting information about segments in annual and
interim financial statements. The statement introduces a new model for segment
reporting, the "management approach". The management approach is based on the
way the chief operating decision-maker organizes segments within a company for
making operating decisions and assessing performance. Reportable segments are
based on products and services, geography, legal structure, management structure
- - any manner in which management desegregates a company. The Company has
included the required disclosure under this standard. The Company believes that
substantially all of its material operations are part of the computer and
peripherals remarketer industry, and it currently reports as a single industry
segment. The Company's professional services and software licensing activities
are deemed immaterial in respect of segment reporting. Foreign operations are
conducted in the United Kingdom through the Company's wholly-owned indirect
subsidiaries. Geographic segments are identified based upon the origin of
shipment. Information relating to the Company's geographic segment operations is
set forth in the following table.
Net sales and net income (loss) (adjusted for allocation of U.K. goodwill
amortization and impairment charges) for the Company's U.S. and U.K. operations
for the quarters and six months ended June 30, 1998 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
United United
Three Months Ended States Kingdom Consolidated
June 30, 1998 ------------ ------------ -------------
-------------------------
<S> <C> <C> <C>
Net sales.............. $ 114,612 $ 77,166 $ 191,778
============= ============ =============
Net income............. $ 292 $ 223 $ 515
============= ============ =============
Six Months Ended
June 30, 1998
-------------------------
Net sales............... $ 223,030 $ 158,796 $ 381,826
============ ============ =============
Net income............ $ 295 $ 1,592 $ 1,887
============ ============ =============
Three Months Ended
June 30, 1999
-------------------------
Net sales................ $ 81,878 $ 68,669 $ 150,547
============= ============ =============
Net income (loss).... $ (885) $ (21,849) $ (22,734)
============= ============ =============
Six Months Ended
June 30, 1999
-------------------------
Net sales................ $ 177,518 $ 147,382 $ 324,900
============== ============ =============
Net income (loss).... $ (2,337) $ (21,852) $ (24,189)
============== ============ =============
</TABLE>
<PAGE>
4. Asset Impairment Charge
On July 31, 1999, the Company completed the sale of the substantial
majority of its United Kingdom remarketer group operations. Generally, the
Company sold its United Kingdom field-based sales operation, its professional
services organization, its distribution business, and specified inventory and
fixed assets. The disposed businesses accounted for approximately 75% of the
Company's United Kingdom revenues and 67% of its United Kingdom operating income
in 1998 and the first six months of 1999 (excluding the asset impairment charge
described below). The Company recorded total revenues related to its United
Kingdom operations of $147 million in the first half of 1999, $159 million in
the first half of 1998, and $314 million in calendar 1998. The Company has
retained its United Kingdom telemarketing group, which it intends to evolve
towards an Internet-based storefront business, similar to the business conducted
by elcom.com, inc., the Company's wholly-owned eBusiness subsidiary in the
United States. The Company also plans to use the retained business as the
platform from which it will market PECOS Procurement Manager, elcom.com's
Internet-based automated procurement system. The acquirer has assumed the lease
of the Company's Langley facility and has an option to assume the lease of the
Company's Glasgow facility; however, the Company is retaining substantially all
other balance sheet assets and liabilities of the disposed businesses.
Accordingly, the Company is responsible for severance liabilities, and
subleasing excess facilities, as well as realizing inventory and excess fixed
assets no longer required to operate the retained portion of the business.
Based on the sale price of approximately $12 million (excluding inventory
sold of approximately $6.4 million) and the Company's estimates of incremental
liabilities associated with the sale transaction, the Company has recorded an
asset impairment charge against goodwill of $22.6 million in the second quarter
of 1999 to reduce the carrying value of its United Kingdom assets to estimated
net realizable value. Prior to the impairment charge, the $25.7 million of
goodwill reflected on the Company's Balance Sheet was associated with the
acquisitions of its United Kingdom operations and, the remaining balance of $3.1
million will be written off in conjunction with recording the sale transaction
in the third quarter of 1999. Accordingly, although the Company's estimates are
subject to revision based on actual events, the sale transaction is not expected
to result in a gain or loss being reported in the third quarter of 1999
Statement of Operations and Other Comprehensive Income.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The Company was founded in 1992 as a developer of electronic commerce
software, commenced selling PC products in December 1993 through a separate
subsidiary using its software, and experienced rapid growth for several years.
The Company achieved its growth by using its proprietary Personal Electronic
Catalog and Ordering System ("PECOS") as a value-add differentiator and by
offering the use of PECOS through Elcom Services Group, Inc. (formerly Catalink
Direct, Inc.) to its customers and by various marketing efforts, including the
expansion of its direct sales force nationwide, and by the acquisition of six PC
products remarketers. To date, the Company's net sales have been derived
substantially from the sale of PC products by the Company's wholly-owned
subsidiary, Elcom Services Group, Inc. and its respective subsidiaries in the
United States and United Kingdom, to business and corporate customers. These
sales are accomplished through the Company's PECOS electronic commerce
technology and through telephone and other traditional ordering methods. In
addition, the Company, through another subsidiary of Elcom Services Group, Inc.,
elcom.com, inc. (formerly Elcom Systems, Inc.), licenses its PECOS technologies,
including its recently introduced Internet-based automated procurement system,
and provides implementation and consulting services. In March, 1999, elcom.com
commenced operating an Internet on-line storefront selling PC's and related
products. In the quarter ended June 30, 1999, elcom.com, inc. ("elcom.com")
added auction capabilities to its Internet site, launched an office supplies
product line and plans to introduce other business-oriented supplies during
1999.
<PAGE>
On July 31, 1999, the Company completed the sale of the substantial
majority of its United Kingdom remarketer group operations. Generally, the
Company sold its United Kingdom field-based sales operation, its professional
services organization, its distribution business, and specified inventory and
fixed assets. The disposed businesses accounted for approximately 75% of the
Company's United Kingdom revenues and 67% of its United Kingdom operating income
in 1998 and the first six months of 1999 (excluding the asset impairment
charge). The Company has retained its United Kingdom telemarketing group, which
it intends to evolve towards an Internet-based storefront business similar to
the business conducted by elcom.com, inc. in the United States. The Company also
plans to use the retained business as the platform from which it will market
PECOS Procurement Manager, its Internet-based automated procurement system.
Elcom Services Group, Inc.
Elcom Services Group, Inc.'s ("Elcom Services Group") revenues and
resultant gross profit are affected by price reductions and decreases in various
vendor support programs by PC manufacturers which have been substantial over the
last several years, and most particularly over the last year. Manufacturers'
price reductions require that Elcom Services Group increase its base unit
volumes and associated peripheral product sales to overcome the effect of such
price decreases and increase its revenue volume if it is to sustain its level of
gross profit dollars. Further, the Company experienced a softening of demand
from its customers which began in September of 1998, which, at that time, the
Company attributed to the Asian financial crisis and subsequent fluctuations and
related uncertainties in the worldwide financial markets, that impacted some of
the Company's customers and their capital outlays. The Company believes that the
relatively soft demand, which has continued in the first half of 1999, now
possibly relates to Year 2000 projects at certain of its customers which may
have caused delays in procuring PCs and related products and professional
services, as customers focus on their management information systems
infrastructure. Elcom Services Group's gross margins may vary quarter to
quarter, depending on the level of key vendor support programs, including
rebates, return policies and price protection as well as product mix, pricing
strategies and other factors.
During the third quarter of 1998, the Company restructured certain of
its Elcom Services Group (United States) operations. The primary objective of
this restructuring was to centralize and better leverage Elcom Services Group's
customer relations support functions. In addition, the Company also elected not
to pursue renewal of its Apple Educational Sales Agent contract, as management
is focusing on a broader educational market.
At the end of the fourth quarter of 1998, Elcom Services Group
"rightsized" its operations, reducing its work force by 133 positions worldwide
and closing six field sales and support offices in the United States. The
"rightsizing" primarily focused on reengineering and streamlining the Company's
sales force and operating infrastructure in a manner intended to better align
its costs with the revenues and margins expected to be generated by Elcom
Services Group. The Company continues to evaluate the results of this
rightsizing, and additional steps may be taken in the future.
elcom.com, inc.
In the third quarter of 1998, the Elcom Systems software division
("Elcom Systems") of elcom.com was restructured to serve as an electronic
commerce-oriented systems integration arm of Elcom Services Group, the Company's
PC-remarketing and professional services subsidiary. In addition, beginning in
March 1999, elcom.com, inc. ("elcom.com") launched an Internet on-line
storefront site at www.elcom.com where it markets and sells over 62,000 PC
products and over 20,000 office supply products to businesses and consumers, and
intends to offer other products, 24 hours a day, seven days a week. elcom.com
intends to begin a branding and marketing campaign later this year and to become
a leading supplier of these multiple commodity-type products through this site,
primarily to businesses. Further, elcom.com added auction capabilities to its
site as part of its Internet-based business-to-business storefront in April
1999. In May 1999, a new version of PECOS was launched, PECOS Internet
Procurement Manager ("PECOS.ipm"), an Internet and browser-based software
system. elcom.com intends to offer PECOS.ipm as an Internet-based automated
procurement system hosted on elcom.com's computer platform as a remote
outsourced service to businesses. The Company expects to expand its customer
base and encourage
<PAGE>
repeat buying through various marketing programs, including branding,
promotional campaigns and strategic alliances intended to provide access to
global markets. Therefore, elcom.com plans to increase its sales and marketing
expenditures in future periods.
Beginning in the latter half of 1998, the Company shifted its focus from
marketing its PECOS Commerce Manager ("PECOS.cm") technology to investing in the
development of PECOS Procurement Manager ("PECOS.pm"), its intranet-based
automated procurement management system and more recently, to PECOS.ipm. In
1999, the Company has focused primarily on fully developing PECOS.ipm for
commercial launch. Therefore, on a standalone basis, for the six months ended
June 30, 1999 and 1998, elcom.com reported revenues from licenses, including
associated professional services and maintenance fees of approximately $0.5
million and $1.8 million, respectively. In addition, elcom.com's Internet
storefront had product sales of approximately $16.5 million in the first half of
1999 (and none in the comparable 1998 period), substantially all of which was
from customers transitioned from Elcom Services Group. In total, primarily due
to the reduction in licensing and professional services revenue due to product
transitioning, elcom.com's consolidated gross profit decreased from $1.3 million
in the first half of 1998 to $1.2 million in the comparable 1999 period.
Consequently, because elcom.com's expenses increased approximately $1.4 million
from 1998 to 1999, as the Company commenced staffing the entity to support
expected growth of its Internet storefront, its consolidated operating loss
increased $ 1.5 million, to $2.7 million during the first half of 1999, versus
an operating loss of $1.2 million in the comparable 1998 period.
Engagement of Wit Capital Corporation
On July 19, 1999, the Company announced that it had engaged Wit Capital
Corporation ("Wit Capital") as its investment bank and strategic advisor for the
purpose of assisting the Company in evaluating strategic options for the Company
and elcom.com. Wit Capital will review strategic financing options, potential
strategic partners, and possible financing alternatives (including consideration
of an initial public offering of elcom.com). It is anticipated that the initial
focus of the Wit Capital engagement will be to evaluate the potential of a
private equity investment in the Company, which funds could be invested in the
branding and infrastructure of elcom.com.
Salomon Smith Barney Engagement
On July 23, 1997, the Company announced that its Board of Directors had
authorized the engagement of Salomon Smith Barney to assist the Company by
coordinating and evaluating options intended to help enable the strategic
potential of the Company to be realized. The rapid growth of the Company prior
to that time and the Board of Directors' belief that the Company's stock was
undervalued in the marketplace, prompted the Company to take this step. These
actions, intended to maximize stockholder value, included evaluating the
possible sale or merger of the Company or parts of the Company, strategic
financing options, and potential strategic partners.
On September 17, 1998, the Company announced that its Board of Directors
voted to continue to build its business as a standalone company and therefore
disengaged from its activities with Salomon Smith Barney associated with the
evaluation of strategic alternatives for the Company. The Board of Directors
decided, in light of the proposals discussed during the engagement, that the
interests of the stockholders would best be served by the Company continuing to
develop its business as a standalone company.
After disengaging from Salomon Smith Barney, the Company has had periodic
discussions with several companies. The Company intends to continue to have
discussions, if appropriate, with relevant and qualified companies. The Company
remains contractually committed to Salomon Smith Barney until late 1999 in the
event that a transaction is consummated with certain parties.
Year 2000 Readiness Disclosure
The Company has implemented an Oracle-based, Year 2000 compliant
Information Technology System ("IT System") in the United States. In the United
Kingdom, the Company has implemented a Year 2000 compliant upgrade to its
Computer Associates International, Inc. software system, which operates on an
IBM AS-400 hardware platform. Due to the extended timeframe of the United States
Oracle-based system implementation, and
<PAGE>
related ongoing enhancements, the Company has deferred implementation of the
Oracle-based system in the United Kingdom. The Company also has delayed
implementation of a new warehousing system in the United States and is currently
using its Oracle-based Year 2000 compliant inventory system. The Company's
near-term IT System efforts will continue to be focused on additional
enhancements to its systems, including ensuring the Company remains current in
applying any software "patches" issued by its software vendors to address Year
2000 compliance issues. The Company's various Year 2000 tests and related
efforts on its IT Systems and non-IT Systems have not uncovered any substantial
Year 2000 issues, and the Company believes that it is well positioned in respect
of this issue, and does not anticipate a significant cost to address the minor
issues identified. The Company has been assured by, and is confident that, its
key electronic trading partners' information systems applications either are, or
will be, Year 2000 compliant in sufficient time to avoid material problems,
however, there can be no assurance by the Company that its electronic trading
partners will not experience Year 2000 oriented problems which could effect the
supply of products to the Company. The Company's PECOS electronic commerce
technology applications have been developed in a Year 2000 compliant fashion.
Results of Operations
Quarter ended June 30, 1999 compared to the quarter ended June 30, 1998.
Net Sales. Net sales for the quarter ended June 30, 1999 decreased 22% to
$150.6 million from $191.8 million in the same period of 1998, a decrease of
$41.2 million. However, professional services revenues of Elcom Services Group
for the quarter increased 17% from approximately $7.3 million in 1998 to $8.5
million in 1999. Net sales in the United States decreased 28% to $82.1 million
in the 1999 quarter, from $114.6 million in the quarter ended June 30, 1998. Net
sales of the Company's United Kingdom based operations decreased 11% to $68.5
million in the 1999 quarter from $77.2 million in the second quarter of 1998.
The Company believes the decrease in United States sales reflects the continued
soft demand, possibly due to certain of its customers focusing on Year 2000
efforts, and possibly deferring purchase of PCs and related products, as well as
a general softening of demand from its larger customers. The Company believes
that there is potential for a rebound or partial rebound in United States PC
demand once its customers have completed their Year 2000 efforts. In addition,
in the United Kingdom, demand has softened consistent with a general economic
slowdown in 1999 versus 1998. The Company anticipates that revenues of Elcom
Services Group, its traditional full service remarketer, may continue to
decrease as the Company evaluates the profitability of certain customer
accounts, and continues to transition Elcom Services Group customers to
elcom.com. The Company's revenues also will decrease in future periods as a
result of the sale of the substantial majority of its United Kingdom remarketer
operations on July 31,1999.
Gross Profit. Gross profit for the quarter ended June 30, 1999 decreased to
$16.2 million from $22.6 million in the 1998 quarter, a decrease of $6.4 million
or 28%. The decrease in gross profit dollars reflects the decrease in net sales
as well as a decrease in the gross profit percentage between the 1998 and 1999
quarters. Gross profit as a percent of net sales decreased to 10.8% in the 1999
quarter from 11.8% in the 1998 quarter. The gross profit percentage was higher
in 1998 due to direct purchasing programs with certain manufacturers in the
United States which have been curtailed by the Company in 1999 due to changes in
certain manufacturers' product-distribution policies, as well as a general
decrease in availability of manufacturer rebate and incremental discount
programs. The Company anticipates ongoing pressure on its PC product gross
margins, the impact of which it intends to mitigate with a more streamlined
corporate infrastructure focused on Internet-based selling, and by leveraging
the Company's electronic commerce experience and software capabilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the quarter ended June 30, 1999 decreased 21% to
$15.0 million from $19.0 million in the 1998 quarter, a decrease of $4.0
million. This decrease is primarily attributable to the restructurings
accomplished by the Company in 1998 and a reduction in amortization expense, net
of the cost of the Company's increased investment in elcom.com's infrastructure
to support the anticipated future growth of the Internet-based storefront
businesses. The Company also intends to increase its marketing expenditures to
support the branding and growth of elcom.com. As a percentage of sales, selling,
general and administrative expenses increased slightly to 10.0% for the quarter
ended June 30, 1999, from 9.9% in the 1998 quarter, which reflects a lower level
of net sales in the second quarter of 1999, net of expense reductions.
<PAGE>
Research and Development Expense. Research and development expense
decreased 35% from $346,000 in the 1998 quarter to $224,000 in the 1999 quarter
reflecting a temporary pause in expenditures on the Company's PECOS Procurement
Manager technology. This decrease reflects a switch between product development
(in particular the newly announced Internet-based version of elcom.com's PECOS
technology, PECOS.ipm) and deployment of the product with customers, the cost of
which is not reflected in research and development expense. The Company's
research and development expense continues to focus on developing incremental
functionality and features for its PECOS product line using state-of-the-art
Java programming/code and other tools and techniques. The Company expects to
increase its investments in research and development as it enhances PECOS.ipm,
its automated procurement system.
Asset Impairment Charge. In the second quarter of 1999, the Company
recorded a charge of $22.6 million related to the July 31, 1999 sale of the
substantial majority of its United Kingdom remarketer operations, as further
described elsewhere herein. The asset impairment charge is based on the sale
price of the disposed business, less the Company's estimates of incremental
liabilities associated with the transaction. Accordingly, although the Company's
estimates are subject to revision based on actual events, the asset impairment
charge is intended to reduce the carrying value of the Company's United Kingdom
assets to their estimated net realizable value and recording the sale
transaction in the third quarter of 1999 is not expected to result in a gain or
loss being recorded in the third quarter.
Interest Expense. Interest expense for the quarter ended June 30, 1999
decreased to $0.9 million from $2.2 million in the comparable quarter of 1998, a
decrease of $1.3 million. Interest expense in both years reflects floor plan
line of credit borrowings in support of the Company's accounts receivable and
inventory balances and for 1999 is reflective of the decrease in the Company's
net sales, improved collection of receivables, and substantially lower inventory
balances versus the 1998 period, as well as lower interest rates in the 1999
quarter versus 1998.
Interest Income and Other, Net. Interest income and other, net, for the
quarter ended June 30, 1999 decreased by $95,000 to $130,000 from $225,000 in
the 1998 quarter, reflecting a decrease in interest-earning deposits.
Income Tax Provision. The income tax provision in 1999 primarily relates to
the income taxes of the Company's United Kingdom based operations, as well as
certain estimated current state income taxes payable by the Company. The
provision in 1998 included these same items, as well as estimated federal income
taxes in the United States. Throughout much of 1999, the Company anticipates
that it will not provide United States federal income taxes as it has net
operating losses which were generated in the second half of 1998 available to
offset any such provision. Such net operating losses were not benefited in the
Company's 1998 financial statements, and the asset impairment charge has not
been benefited in the 1999 financial statements.
Net Income (Loss). The Company generated a net loss for the quarter ended
June 30, 1999 of $22.7 million primarily as a result of the $22.6 million asset
impairment charge, as well as the other factors described herein.
Six months ended June 30,1999 compared to the six months ended June 30, 1998.
Net Sales. Net sales for the six months ended June 30, 1999 decreased to
$325 million from $382 million in the same period of 1998, a decrease of $57
million, or 15%. The Company believes that the decrease in sales reflects the
continued soft demand of its customers in the United States. Net sales in the
United Kingdom have also softened, consistent with a general economic slowdown
in the United Kingdom in 1999 versus 1998. Net sales in the United States were
$178 million in the first half of 1999 versus $223 million in the six months
ended June 30, 1998, a 20% decrease, which reflects relatively soft demand of
its customers in the United States in the first half of 1999, as well as the
other factors described in the quarterly and overview discussions above. Net
sales of the Company's United Kingdom-based operations decreased to $147 million
in 1999 from $159 million in the first six months of 1998, a decrease of $12
million or 8%. The Company anticipates that revenues of Elcom Services Group,
its traditional full service remarketer, may continue to decrease as the Company
evaluates the profitability of certain customer accounts, and continues to
transition Elcom Services Group customers to elcom.com. The Company's
<PAGE>
revenues also will decrease in future periods as a result of the sale of the
substantial majority of its United Kingdom remarketer operations on July
31,1999.
Gross Profit. Gross profit for the first six months of 1999 decreased to
$33.4 million from $44.7 million in the first half of 1998, a decrease of $11.3
million, or 25%. Gross profit, as a percent of net sales decreased from 11.7% in
the first six months of 1998 to 10.3% in the first six months of 1999. The gross
profit percentage was higher in 1998 primarily due to the Company's direct
purchasing arrangements in the United States and manufacturer discounts, which
were curtailed in 1999 as discussed in the quarterly comments above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 1999 decreased to
$32.1 million compared to $36.9 million for the six months ended June 30, 1998,
a decrease of $4.8 million, or 13%. This decrease is attributable primarily to
the "restructurings" accomplished by the Company in 1998 as described in the
overview, and a reduction in amortization expense. The Company intends to
increase its marketing expenditures to support the branding and growth of
elcom.com. Selling, general and administrative expenses increased slightly as a
percentage of net sales for the six months ended June 30, 1999 to 9.9%, from
9.7% in the comparable period of 1998 reflecting the lower net sales in 1999
versus 1998 , as well as the investment in elcom.com's infrastructure in 1999.
Research and Development Expense. Research and development expense has
remained relatively constant between 1998 and 1999. The Company's research and
development expense continues to focus on developing incremental functionality
and features for its PECOS product line using state-of-the-art Java
programming/code and other tools and techniques. The Company expects to increase
its investments in research and development as it enhances PECOS.ipm, its
automated procurement system.
Asset Impairment Charge. See quarterly and overview discussions above.
Interest Expense. Interest expense for the six month period ended June 30,
1999 decreased to $2.1 million from $4.2 million in the comparable period of
1998 due primarily to lower average accounts receivable and inventory balances,
as well as lower interest rates. Interest expense in both years relates to floor
plan line of credit borrowings in support of the Company's accounts receivable
and inventory balances.
Interest Income and Other, Net. Interest income and other, net, for the six
month period ended June 30, 1999 increased to $619,000 from $396,000 in the same
period of 1998. Other income in the 1999 period includes proceeds of $418,000
resulting from the lapsing (without exercise) of options sold in 1997 to acquire
the Company's interest in Shoplink Incorporated. The Company therefore continues
to own approximately 3% of Shoplink Incorporated, which is a privately-held
on-line supplier of groceries and other consumables to homeowners.
Income Tax Provision. The income tax provision in 1999 primarily relates to
the income taxes of the Company's United Kingdom based operations, as well as
certain estimated current state income taxes payable by the Company. The
provision in 1998 included these same items, as well as estimated federal income
taxes in the United States. Throughout much of 1999, the Company anticipates
that it will not provide United States federal income taxes as it has net
operating losses which were generated in the second half of 1998 available to
offset any such provision. Such net operating losses were not benefited in the
Company's 1998 financial statements, and the asset impairment charge has not
been benefited in the 1999 financial statements.
Net Income (Loss). The Company reported a net loss for the six month period
ended June 30, 1999 of $24.2 million compared to net income for the six months
ended June 30, 1998 of $1.9 million primarily as a result of the $22.6 million
asset impairment charge, as well as the other factors described herein.
Liquidity and Capital Resources
Net cash provided by operating activities for the six months ended June 30,
1999 was $35.8 million, primarily reflecting the Company's net loss, adjusted
for $26.5 million in depreciation, amortization and asset
<PAGE>
impairment charges, a $24.8 million decrease in the level of accounts receivable
and a $20.2 million decrease in the Company's inventory balances in the period,
and is net of an $11.1 million decrease in current liabilities. Net cash used in
investing activities was $2.0 million, consisting primarily of additions to
property, equipment and software. Net cash used in financing activities was
$20.1 million, consisting primarily of a $20.4 million net decrease in
borrowings under the Company's lines of credit.
Net cash provided by operating activities for the six months ended June 30,
1998 was $22.0 million and reflected a net increase in current liabilities of
$14.3 million (primarily related to timing of certain payments) and a $12.1
million decrease in inventory, and is net of a $9.8 million increase in accounts
receivable. Net cash used for investing activities was $3.9 million, consisting
primarily of additions to property, equipment and software. Net cash used in
financing activities was $16.8 million, consisting primarily of repayments under
the Company's lines of credit.
At June 30, 1999, the Company's principal sources of liquidity included
cash and cash equivalents of $27.5 million, accounts receivable and floor plan
lines of credit from Deutsche Financial Services Corporation ("DFSC"). During
1998, the United States DFSC facility provided for borrowings of up to $120
million, and interest was charged at a rate of prime (7.75% at June 30, 1999,
increasing to 8% on July 1, 1999) minus 1%. The facility was amended in
connection with its March 1999 renewal to include elcom.com, inc. and to provide
for aggregate borrowings of up to $80 million, and as of April 1, 1999, the
interest rate was increased from the prime rate minus 1% to prime minus .5%,
although approximately one-half of the Company's initial United States
borrowings do not bear interest until after interest-free periods of 30 to 60
days have lapsed. In addition, the Company has agreed that its interest rate
will increase .25% for each quarter that it reports a loss, as defined in the
DFSC agreements. The Company's reported loss in the second quarter of 1999, is
not expected to result in an interest rate change due to the exclusion of
certain non-cash charges from the DFSC definition of a reported loss.
Availability of United States borrowings is based on DFSC's determination as to
eligible accounts receivable and inventory. As of June 30, 1999, the Company's
borrowings from DFSC on its United States floor plan line of credit were $51.4
million, which approximated the Company's availability based on eligible
accounts receivable and inventory at that date. The United States DFSC line of
credit is secured primarily by the Company's United States inventory and
accounts receivable, although substantially all of the Company's other United
States assets also are pledged as collateral on the facility. In December 1997,
the Company also established a United Kingdom DFSC credit facility which
provides for aggregate borrowings of up to (pound)30 million, or approximately
$47.3 million, as of June 30, 1999. Availability of United Kingdom borrowings is
based upon DFSC's determination of eligible accounts receivable and amounts
outstanding bear interest at the Base Rate of National Westminster Bank plc (5.0
% at June 30, 1999) plus 1.25%. As of June 30, 1999, the Company's borrowings
under its United Kingdom DFSC facility were (pound)19.8 million, or $31.2
million, which approximated the Company's availability thereunder.
The Company is dependent upon the DFSC lines of credit to finance its
eligible accounts receivable arising from sales of PC products as well as its
United States inventory purchases. The DFSC lines of credit limit borrowings to
defined percentages of eligible inventory (in the United States) and accounts
receivable and contain customary covenants, including financial covenants with
respect to the Company's net income, net worth and debt-to-equity ratios, as
defined in the agreements, and customary default provisions related to
non-payment of principal and interest, default under other debt agreements and
bankruptcy. After receiving a waiver from DFSC concerning the net income
covenant for 1998, the Company believes that it is in compliance with all other
covenants of the facility as of June 30, 1999. There can be no assurance,
however, that the DFSC lines of credit will continue to be available, or that
they can be increased if necessary to support the Company's requirements.
As of June 30, 1999, the Company had borrowings aggregating approximately
$82.6 million outstanding under its DFSC borrowing facilities, which
approximated its availability thereunder.
The Company also has a $5 million floor plan financing agreement with IBM
Credit Corporation ("IBMCC") to support purchases of IBM products. The IBMCC
borrowing facility is secured by the IBM products purchased under the
arrangement and relates to domestic operations only. At June 30, 1999, the
Company had no borrowings outstanding from IBMCC on its floor plan line of
credit.
<PAGE>
Based upon ongoing analyses, and the requirement that it establish a direct
purchasing relationship with a major PC manufacturer to support fulfillment
requirements under a contract awarded in 1996, the Company started purchasing
selected products directly from manufacturers in late 1996. Although the
Company's inventory investment imposes certain costs and risks, the Company
believes that this investment improves its delivery time to customers and the
quality control of configured systems. The Company also believes that it can
substantially mitigate the risks associated with its inventory positions by
limiting the range of models it stocks to those in demand and by carefully
monitoring items on hand and their associated net carrying costs, relative to
demand. These direct purchasing arrangements favorably impacted gross profit,
particularly in the third and fourth quarters of 1997, as the volume of direct
purchases increased significantly over prior quarters and the Company earned
substantial direct purchasing rebates and incremental discounts related to sales
to certain large customers. Nonetheless, during 1998 the Company reduced its
inventory levels 34% from its 1997 year-end position, and an additional 53% from
the year-end 1998 balance to its June 30, 1999 balance. These reductions were
particularly significant in the United States, where manufacturers have
substantially modified various policies to limit the Company's ability to
purchase direct from manufacturers, as well as the timeframe and/or availability
of price protection on products held in inventory, while at the same time the
Company's ability to return products also has been curtailed. Accordingly,
during 1999, the Company's direct purchases of inventory have been significantly
reduced and the Company continues to evaluate the levels of products that it
purchases and holds in inventory in the United States.
The Company is currently seeking to minimize the level of inventory it
stocks by leveraging its electronic commerce capabilities to quickly and
efficiently source product and/or by drop shipping product to customers whenever
possible. As a result of the Company's policy changes, as well as manufacturer
revisions to their rebate and incremental discount programs, the Company
received a significantly reduced amount of manufacturer funding support in 1999
versus the first half of 1998 and calendar 1997, and there can be no assurance
that the Company will be in a position to purchase the levels of product
necessary in order to continue to receive even these reduced levels of funding
support in the future, or that manufacturers will continue to make such support
available. Further reductions in manufacturer funding support would reduce the
Company's gross profit. The Company intends to continue to maintain logistical
and traditional relationships with selected distributors and/or aggregators and
is further investigating outsourcing of certain activities. The July 31, 1999
sale of the substantial majority of the Company's United Kingdom remarketer
group, is expected to allow the Company to further reduce its inventory position
and the Company is targeting to also outsource certain distribution activities
in the United Kingdom by leveraging its electronic commerce capabilities.
In September 1997, the Company sold options to acquire its interest in
ShopLink Incorporated, which now represents approximately a 3% ownership
position. The Company received $418,000 in payment for the options, which lapsed
without being exercised on March 31, 1999. The Company has included the $418,000
received in payment for the options in interest income and other, net in the
1999 Consolidated Statement of Operations and Other Comprehensive Income.
The Company's principal commitments consist of leases on its office
facilities, obligations under lines of credit, which are demand facilities and
are treated as current liabilities, and capital leases. In addition, the Company
will require ongoing investments in property, equipment and software.
The July 31, 1999 sale of the substantial majority of the Company's United
Kingdom remarketer group, after provision for incremental liabilities associated
with the sale, is expected to generate approximately $5.6 million of incremental
working capital, which the Company can use to support the marketing and branding
of elcom.com. The transaction also is expected to increase the Company's
tangible net book value by approximately $3.1 million.
The Company believes that its cash, cash equivalents, and accounts
receivable, together with its existing sources of liquidity and cash generated
from operations, will be sufficient to meet its working capital and capital
expenditure requirements for the next year, so long as its financing sources
continue to make lines of credit
<PAGE>
available. However, there can be no assurance the Company's lines of credit will
continue to be available to the Company or that replacement financing could be
arranged if necessary, or that the Company will be able to timely collect its
accounts receivable. Moreover, there can be no assurance that the Company,
working with Wit Capital as described in the overview discussion or otherwise,
can arrange appropriate financing to allow a substantial increase in its
marketing expenditures in order to support the branding of both its PECOS
Procurement Manager software and elcom.com, its technology and Internet-based
storefront "ebusiness" subsidiary.
SEASONALITY AND IMPACT OF INFLATION
In prior years, the Company has not experienced observable seasonality in
its business. Generally, however, sales in the PC remarketer industry slow in
the summer months and, in the United States, are stronger in the fourth calendar
quarter and somewhat weaker in the first calendar quarter, while sales are
generally strong in the first calendar quarter in the United Kingdom. Due to its
current size and the nature of its customer base, the Company's sales have
reflected this seasonality in 1999 and it is likely that the sales of the
Company will continue to be impacted by general industry seasonality in the
future.
Inflation has been relatively low in recent years and accordingly, the
Company has not been significantly impacted by the effects of general inflation.
However, since the latter half of 1996, the Company has been increasingly
impacted by the low unemployment rate in certain of its markets, particularly in
the Northeastern United States and the United Kingdom, which has resulted in
significant increases in salaries for a variety of personnel (particularly
technical personnel) in order for the Company to remain competitive in the
employment marketplace.
The Company's revenues are affected by general price reductions by PC
manufacturers, which have been substantial. Such price reductions require that
the Company increase its base unit volumes and associated peripheral product
sales to existing and newly acquired customers in order to overcome the effect
of this price cutting and increase its net sales. Consequently, in order to
increase revenues, such unit volumes of sales are required to increase
substantially, which amplifies the impact of any slowdown in corporate customer
demand on the Company's revenues.
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q could include forward-looking
information. All statements other than statements of historical fact, including,
without limitation, those with respect to the Company's objectives, plans and
strategies set forth herein and those preceded by or that include the words
"believes," "expects," "intends," "anticipates," "plans", or similar
expressions, are forward-looking statements. Although the Company believes that
such forward-looking statements are reasonable, it can give no assurance that
the Company's expectations are, or will be, correct. These forward-looking
statements involve a number of risks and uncertainties which could cause the
Company's future results to differ materially from those anticipated, including:
availability and terms of appropriate working capital and/or other financing
including, the many factors that could impact the viability of an equity sale by
the Company or a public offering by elcom.com, customer's acceptance and usage
of the Company's electronic commerce systems and acceptance of electronic
commerce software systems in general, the impact of competitive technologies,
products and pricing, control of expenses, levels of gross margins, revenue
growth, overall business conditions, price decreases of PC products, corporate
demand for and availability of PC products, trends toward less favorable
manufacturer policies (such as reduced price protection, more limited returns
and other policies), the success and timing of ongoing enhancements to the
Company's new management information system in the United States, risks
associated with acquisitions and dispositions of businesses, the consequent
results of operations given the aforementioned factors, and other risks detailed
from time to time in this Quarterly Report on Form 10-Q, the Company's 1998
Annual Report on Form 10-K and in the Company's other SEC reports, including the
Company's prospectus included as part of the S-1 Registration Statement declared
effective on December 19, 1995 under the Securities Act of 1933.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in inventory values,
interest rates and exchange rates, which could affect its future results of
operations and financial condition. The Company's risk associated with inventory
values is discussed elsewhere in this Form 10-Q.
The Company's cash and cash equivalents, lines of credit and long term debt
are sensitive to interest rate fluctuations. Changes in interest rates would
result in changes in interest income and interest expense resulting from the
difference between historical interest rates on these financial instruments and
the interest rates that these variable-rate instruments may adjust to in the
future. Based on June 30, 1999 balances, the Company estimates that a 1% change
in interest rates would have an annual effect of approximately $550,000 on
income before income taxes.
The Company's investment in its United Kingdom subsidiaries is sensitive to
fluctuations in the exchange rate between the United States dollar and the
United Kingdom pound sterling. The effect of such fluctuations is included in
other comprehensive income in the Consolidated Statements of Operations and
Other Comprehensive Income.
<PAGE>
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the Company's stockholders was held on May 12, 1999.
Two matters as specified in the Company's Notice of Annual Meeting and Proxy
Statement dated April 9, 1999, a copy of which has been previously filed with
the Securities and Exchange Commission, were considered, voted upon and approved
by the Company's stockholders. The specific results of the voting on the two
matters are as follows:
Proposal I: The size of the Company's Board of Directors was fixed at
six and Messrs. John W. Ortiz and James Rousou were elected to
the Board of Directors of the Company, each for a term to
expire at the 2001 Annual Meeting, by the following vote:
Number of Shares Voted
----------------------------------
For Withheld
--------------- ---------------
John W. Ortiz 22,339,179 129,561
James Rousou 22,339,179 129,561
Following the meeting, each of Messrs. Crowell, Smith, and Harries also
continued as Directors of the Company.
Proposal II: The Company's stockholders ratified and approved Amendment
Number Two to the Company's 1997 Stock Option Plan( to
increase the shares available for grant under the Plan from
2,000,000 to 3,000,000) by the following vote:
Number of Shares Voted
--------------------------------------------------------------
For Against Abstain
---------------- ----------------- ------------------
21,007,153 1,388,962 72,625
Item 5. Other Information
On July 31, 1999, the Company completed the sale of the substantial
majority of its United Kingdom remarketer operations as further described
elsewhere herein. The Company has retained its United Kingdom telemarketing
group, which it intends to evolve towards an Internet-based storefront business
similar to the business conducted by elcom.com, inc. in the United States. The
Company also plans to use the retained business as the platform from which it
will market PECOS Procurement Manager, its Internet-based automated procurement
system. The letter of intent covering this transaction was included as an
exhibit to a Current Report on Form 8-K dated July 9, 1999 and filed on July 14,
1999. The Company intends to file another Current Report on Form 8-K concerning
this transaction which will be dated July 31, 1999 and filed by August 16, 1999.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(10.1) Form of Indemnity Agreement for Executive Officers and/or
Directors of the Company (1), with attached list of Director
and/or Executive Officer Indemnities. (x)(*)
(10.4) $80,000,000 Business Credit and Security Agreement Dated as of
March 1, 1997 among Elcom Services Group, Inc. and Deutsche
Financial Services Corporation (2), and Amendments to Business
Credit and Security Agreement. (3)(4)(x)
(10.34) Guaranty by the Registrant in favor of Deutsche Financial
Services Corporation, dated March 31, 1999, guarantying
elcom.com, inc.'s indebtedness to Deutsche. (x)
(27) Financial Data Schedule. (x)
---------------
(1) Previously filed as an exhibit to Registration Statement No.
33-98866 on Form S-1 of the Registrant and incorporated herein by
reference
(2) Previously filed as an Exhibit to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, and incorporated
herein by reference.
(3) Previously filed as an exhibit to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997, and
incorporated herein by reference.
(4) Previously filed as an exhibit to Registrant's Quarterly Report
on Form 10-Q dated for the quarter ended June 30, 1998 and
incorporated herein by reference.
(x) Filed herewith.
(*) Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the period from April
1, 1999 through June 30, 1999.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Elcom International, Inc.
(Registrant)
Date: August 10, 1999 By: /s/ Laurence F. Mulhern
------------------------------
Laurence F. Mulhern
Chief Financial Officer and Treasurer
EXHIBIT 10.1
<TABLE>
LIST OF DIRECTORS AND/OR EXECUTIVE OFFICERS
WITH INDEMNITY AGREEMENTS
WITH THE COMPANY
<CAPTION>
Name of Capacity in Date of
Indemnitee Which Indemnified Agreement
- ------------------ ------------------------------------------- ---------------
<S> <C> <C>
Robert J. Crowell Executive Officer and Director October 9, 1995
William W. Smith Director October 9, 1995
Laurence F. Mulhern Executive Officer October 9, 1995
John W. Ortiz Director October 9, 1995
Richard J. Harries, Jr. Director October 9, 1995
James Rousou Executive Officer and Director May 30, 1996
Michael J. McEachern Executive Officer April 6, 1999
Peter Rendall Executive Officer April 12, 1999
John R. Kovalcik, Jr. Former Executive Officer and Former Director October 9, 1995
David Wolf Former Executive Officer October 9, 1995
Andres Escallon Former Executive Officer October 9, 1995
J. Richard Cordsen Former Director October 9, 1995
Peter F. McAree Former Executive Officer August 22, 1997
James G. Jameson Former Executive Officer and Former Director April 13, 1998
</TABLE>
EXHIBIT 10.4
AMENDMENT TO BUSINESS CREDIT AND SECURITY AGREEMENT
(Amendment No. 3)
THIS AMENDMENT TO BUSINESS CREDIT AND SECURITY AGREEMENT ("Amendment") is
entered into as of the 31st day of March, 1999 by and among Elcom Services
Group, Inc. ("Elcom Services"), Deutsche Financial Services Corporation ("DFS")
and elcom.com, inc., a Delaware corporation ("elcom.com"), having a principal
place of business located at 10 Oceana Way, Norwood, MA 02062.
RECITALS: DFS and Elcom Services are parties to that certain Business
Credit and Security Agreement executed as of March 1, 1997, as amended ("BCSA").
Capitalized terms shall have the same meaning as defined in the BCSA unless
otherwise indicated. DFS, Elcom Services and elcom.com now desire to add
elcom.com as a "Borrower" under and pursuant to the terms of the BCSA.
FOR VALUE RECEIVED, DFS, Elcom Services and elcom.com agree as follows:
1. The BCSA shall be amended to add elcom.com as a "Borrower" party to the
same extent as if elcom.com had been an original signatory thereto. The term
"Borrower" is hereby amended to mean Elcom Services and elcom.com, individually
and/or collectively. elcom.com, jointly and severally with Elcom Services, and
each hereby assumes all of the Obligations and duties under the BCSA and the
other Loan Documents as a Borrower, and agrees to all of the terms and
conditions thereof and of any of the other Loan Documents, including but not
limited to, the provisions of Section 3.15 of the BCSA. Within forty-five (45)
days of the date of this Amendment, elcom.com shall enter into a lockbox
agreement with a financial institution and in form and substance satisfactory to
DFS ("Lockbox Agreement") (and the Lockbox Agreement shall be a Loan Document)
and elcom.com shall direct all of its Account Debtors to make payment thereunder
to the lockbox established under the terms of the Lockbox Agreement. Prior to
the establishment of the Lockbox Agreement, elcom.com shall deposit all
collections from its Account Debtors in to the lockbox approved by DFS which is
used by Elcom Services for the deposit of its collections from Account Debtors.
All of the representations, warranties, covenants and agreements set forth
in the BCSA and the other Loan Documents are hereby made by elcom.com in favor
of DFS, all of which Elcom Services also hereby reaffirms as of the date hereof.
elcom.com agrees and confirms that its Collateral secures the Obligations. In
connection with the foregoing, elcom.com hereby delivers to DFS the Secretary's
Certificate attached hereto. Nothing herein, however, shall in any manner be
deemed a release of Elcom Services' obligations to DFS under the BCSA or any
other Loan Document.
2. The BCSA shall be further amended by incorporating the following as if
fully and originally set forth therein:
"Common Credit Facility. elcom.com is a wholly-owned subsidiary of Elcom
Services, both of which do business among each other and with third parties
substantially as an integrated family of companies, and accordingly, each
Borrower desires to have the availability of one common credit facility
instead of separate credit facilities. Each Borrower has requested that DFS
extend such a common credit facility on the terms set forth herein. Each
Borrower acknowledges that DFS will be lending against, and relying on a
lien upon, substantially all of Borrower's assets even though the proceeds
of any particular advance made hereunder may not be advanced directly to
such Borrower, and that such Borrower will nevertheless benefit by the
making of all such advances by DFS and the availability of a single credit
facility of a size greater than each might independently warrant.
Appointment of Elcom Services as Agent. elcom.com hereby appoints Elcom
Services as its agent and attorney-in-fact to take any action or execute
any document or instrument necessary or appropriate for the administration
of the Collateral hereunder and under the other Loan
<PAGE>
Documents. Without limiting the generality of the foregoing, Elcom Services
shall prepare and deliver to DFS all reports concerning the Accounts and
other Collateral required by this Agreement, whether such Collateral is
owned by Elcom Services or elcom.com, and elcom.com shall be fully bound by
the statements and actions of Elcom Services. In addition, Elcom Services
shall be the only Borrower from whom DFS shall recognize requests for
advances hereunder, whether such advance request is for the benefit of
Elcom Services or elcom.com. DFS shall be entitled to rely absolutely and
without duty of inquiry or investigation upon any agreement, request,
communication or other notice given by Elcom Services hereunder.
Joint and Several Liability. Notwithstanding anything herein to the
contrary, each Borrower is primarily and jointly and severally liable for
all Obligations. If and to the extent a Borrower shall be deemed a
guarantor of the other Borrower hereunder, such Borrower's joint liability
for any Obligations of such other Borrower shall be deemed to be a guaranty
of payment and performance, and not of collection. A Default by one
Borrower shall be deemed a Default by the other Borrower."
3. Conditions Precedent. Notwithstanding the foregoing, this Amendment
shall not be effective unless and until satisfaction of the following terms and
conditions, each as acceptable to DFS, in its sole discretion:
(a) execution and delivery of this Amendment by all parties hereto.
(b) execution of a Collateralized Guaranty by Elcom International, Inc.
("EII") of all of the obligations of elcom.com to DFS.
(c) a reaffirmation of EII's existing guaranty of the obligations of Elcom
Services to DFS.
(d) File stamped UCC financing statements on elcom.com, in form and
substance acceptable to DFS, in all relevant jurisdictions to ensure DFS'
valid first priority, fully perfected security interest in the Collateral
of elcom.com.
(e) UCC lien searches on elcom.com and "Elcom Systems, Inc." in all
relevant jurisdictions evidencing filing of the aforementioned UCC
financing statements and no prior filers other than those acceptable to
DFS, or in the event such prior filers appear in such searches,
subordinations and/or releases in form and substance acceptable to DFS.
(f) Revised and/or replacement insurance certificates and lender loss payee
endorsements, in the form currently required under the existing financing
agreements with DFS, to include elcom.com.
(g) the written consent of DFS' participant in these credit facilities.
(h) such other and further documents and agreements as DFS may determine in
connection with any of the foregoing.
All other terms and provision of the BCSA, to the extent consistent with
the foregoing, are hereby ratified and will remain unchanged and in full force
and effect.
IN WITNESS WHEREOF, Elcom Services, elcom.com and DFS have each executed
this Amendment as of the date first above written.
THIS AMENDMENT, THE BCSA AND ALL OF THE OTHER LOAN DOCUMENTS CONTAIN
BINDING ARBITRATION, JURY WAIVER AND PUNITIVE DAMAGE WAIVER PROVISIONS, WHICH
EACH PARTY, BY THEIR SIGNATURE BELOW, HEREBY ACKNOWLEDGES AND ACCEPTS.
<PAGE>
ELCOM SERVICES GROUP, INC.
Attest:
By: /s/ L. F. Mulhern
Name: L. F. Mulhern
/s/ Alfred J. Gauvin Title: Chief Financial Officer
(Assistant) Secretary
elcom.com, inc.
Attest:
By: /s/ L. F. Mulhern
Name: L. F. Mulhern
/s/ Michael J. McEachern Title: Chief Financial Officer
(Assistant) Secretary
DEUTSCHE FINANCIAL SERVICES CORPORATION
BY: /s/ M. B. Schafer
Name: Mark B. Schafer
Title: Regional Branch Manager
<PAGE>
PARTICIPANT CONSENT AND AGREEMENT
---------------------------------------
The undersigned ("Participant") is a party to that certain First Amended
and Restated Participation Agreement with DFS dated as of February 14, 1997 (as
amended, the "Participation Agreement"), concerning its participation in credit
facilities extended to Elcom Services Group, Inc. by DFS. The undersigned hereby
(i) acknowledges and agrees to the terms of the foregoing Amendment to Business
Credit and Security Agreement (Amendment No. 3), and does hereby ratify and
confirm its Participation Agreement in all respects, and (ii) agrees that the
Participation Agreement shall be amended in all respects to add elcom.com, Inc.
to the definition of "Borrower" therein.
BANKBOSTON, N.A.
By: /s/ D. E. Bryant
Name: D. E. Bryant
Title: Division Executive
Date: March 31, 1999
<PAGE>
Guarantor Consent and Agreement
The undersigned Guarantor hereby acknowledges and consents to the terms of the
foregoing Amendment to Business Credit and Security Agreement (Amendment No. 3),
and does hereby ratify and confirm each and every guaranty of Borrower
(inclusive of elcom.com) in all respects.
ELCOM INTERNATIONAL, INC.
By: /s/ L. F. Mulhern
Print Name: L. F. Mulhern
Title: Chief Financial Officer
Date: March 31, 1999
<PAGE>
AMENDMENT TO BUSINESS CREDIT AND SECURITY AGREEMENT
(Amendment No. 4)
This Amendment to Business Credit and Security Agreement ("Amendment") is made
by and among Deutsche Financial Services Corporation ("DFS"), Elcom Services
Group, Inc. ("Elcom Services"), and elcom.com, inc. ("elcom.com") (Elcom
Services and elcom.com are referred to herein collectively as "Borrower").
WHEREAS, DFS and Borrower are parties to that certain Business Credit and
Security Agreement dated March 1, 1997, as amended ("Agreement"); and
WHEREAS, DFS and Borrower desire to amend the Agreement as provided herein.
NOW, THEREFORE, for and in consideration of the premises, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, DFS and Borrower agree as follows:
1. Total Credit Facility. The first sentence of Section 3.1 is hereby
deleted in its entirety and replaced with the following:
"In consideration of Borrower's payment and performance of its
Obligations and subject to the terms and conditions contained in
this Agreement, DFS agrees to provide, and Borrower agrees to
accept, an aggregate credit facility (the "Credit Facility") of
up to Eighty Million Dollars ($80,000,000) ("Total Credit
Limit")."
2. Floorplan Inventory Loan Facility. The first sentence of Section 3.2 is
hereby deleted in its entirety and replaced with the following:
"Subject to the terms of this Agreement, DFS may provide to
Borrower floorplan financing for the acquisition of Inventory
from vendors approved by DFS in DFS' reasonable credit judgment
(each advance being a "Floorplan Inventory Loan"), up to an
aggregate unpaid principal amount at any time not to exceed
Thirty-Five Million Dollars ($35,000,000) (collectively, the
"Floorplan Inventory Loan Facility")."
3. Total Working Capital Credit Limit.
3.1 Total Working Capital Credit Limit. The first sentence of Section
3.3 is hereby deleted in its entirety and replaced with the following:
"Subject to the terms of this Agreement, DFS agrees, for so long
as no Default exists, to provide to Borrower, and Borrower agrees
to accept, working capital financing (each advance being a
"Working Capital Loan") on Eligible Accounts and Eligible
Inventory in the maximum aggregate unpaid principal amount at any
time equal to the lesser of (i) the Borrowing Base and (ii)
Forty-Three Million Dollars ($43,000,000) ("Total Working Capital
Credit Limit")."
3.2 Eligible Accounts. Section 3.3(a) of the Agreement is hereby
deleted in its entirety and replaced with the following:
"(a) Eligible Accounts. On receipt of each Borrowing Base
Certificate in form and substance acceptable to DFS (the
"Borrowing Base Certificate"), DFS will credit Borrower with
eighty-five percent (85%) ("Eligible Accounts Advance Rate") of
the net amount of the Eligible Accounts which are, absent error
or other discrepancy, listed in such Borrowing Base Certificate
("Eligible Account Availability"); provided, however,
<PAGE>
that DFS may reduce the Eligible Accounts Advance Rate to eighty
percent (80%) at any time and from time to time upon DFS'
determination that the aging of the Eligible Accounts has
increased. For purposes hereof, the net amount of Eligible
Accounts at any time shall be the face amount of such Eligible
Accounts less any and all returns, discounts (which may, at DFS'
option, be calculated on shortest terms), credits, rebates,
allowances, or excise taxes of any nature at any time issued,
owing, claimed by Account Debtors, granted, outstanding or
payable in connection with such Accounts at such time."
3.3 Interest. Section 3.3(c) of the Agreement is hereby deleted in its
entirety and replaced with the following:
"(c) Interest. Borrower agrees to pay interest to DFS, on the
Daily contract Balance owed under Borrower's Working Capital
Loans at a rate that is equal to the Prime Rate minus one-half of
one percentage point (0.5%) per annum ("Base Working Capital Loan
Interest Rate"); subject to the following periodic adjustments:
(1) the Base Working Capital Loan Interest Rate shall be
increased by one quarter of one percentage point (0.25%)
effective on the first day of the Borrower's fiscal quarter
immediately following each of Borrower's fiscal quarters
that Elcom (or Borrower, if Borrower's financial statements
are not consolidated with Elcom) shall evidence a before tax
loss, excluding any expense charges relating to the
Intangibles, as determined in accordance with GAAP ("Before
Tax Loss"), during such fiscal quarter;
(2) if during the fiscal quarter immediately following an
increase in the Base Working Capital Loan Interest Rate as
provided in Section 3.3(c)(1) above, Borrower's financial
statements do not evidence a cumulative Before Tax Loss and
provided that Borrower is not in Default, then the interest
rate applicable to Working Capital Loans shall be reduced by
one quarter of one percentage point (0.25%), but in no event
shall the interest rate applicable to Working Capital Loans
ever be less than the Base Working Capital Loan Interest
Rate; and
(3) if Borrower shall be in compliance with all Financial
Covenants set forth in Section 9.3.1 as of the last day of
Borrower's fiscal year, and provided that Borrower is not in
Default, then effective on the first day of the immediately
following fiscal year the applicable interest rate on the
Daily Contract Balance owed under Borrower's Working Capital
Loans shall be the Base Working Capital Loan Interest Rate,
subject to increases in the Base Working Capital Loan
Interest Rate as a result of subsequent Before Tax Losses as
described in this Section 3.3(c).
Each change in the Base Working Capital Loan Interest Rate
shall be applied retroactively to the effective date of
change. Any change to the Base Working Capital Loan Interest
Rate shall not be deemed to be a waiver of DFS' rights under
the Agreement, including, but not limited to, the right to
declare Borrower in Default as a result of Before Tax Losses
that constitute a Default under the Agreement."
4. Overadvance Facility.
4.1 Introductory Clause. The introductory clause of Section 3.4 is
hereby deleted in its entirety and replaced with the following:
"Subject to the terms of this Agreement, DFS agrees, for so long
as no Default exists, to provide borrower, and Borrower agrees to
accept, overadvance financing for the
<PAGE>
purposes described herein (each advance being an "Overadvance
Loan"), up to an aggregate unpaid principal amount not to exceed
at any time Two Million Dollars ($2,000,000), on and subject to
the following terms and conditions (the "Overadvance Facility"):"
4.2 Total Outstanding Principal. The second to last sentence of
Section 3.4 is hereby deleted in its entirety and replaced with the
following:
"Notwithstanding anything else herein, the total outstanding
principal amount of all Loans under this Agreement shall not at
any time exceed $80,000,000.00."
5. Financial Covenant Default Forbearance Fee. A new Section 9.3.3 is
incorporated into the Agreement as follows:
"9.3.3 Financial Covenant Default/Forbearance Fee. If Borrower is
in Default under the Agreement solely as a result of Borrower's
breach of one or more of the Financial Covenants set forth in
Section 9.3.1, and is not otherwise in Default, Borrower may
request that DFS' forbear from enforcing its rights and remedies
as a result of such Default. DFS in its sole discretion shall
determine whether to grant to Borrower such forbearance, with
such forbearance memorialized in a writing in form and substance
satisfactory to DFS (each a "Forbearance Letter"), and further
provided that Borrower pays to DFS a fee of $25,000.00 for such
forbearance ("Forbearance Fee"). Tender of the Forbearance Fee by
Borrower to DFS shall not obligate DFS to grant its forbearance.
Any Forbearance Letter provided by DFS to Borrower shall not be
deemed a waiver of DFS' rights and remedies under the Agreement
and DFS may issue any number of Forbearance Letters from time to
time with respect to the same or similar types of Defaults
without impairing DFS' rights under the Agreement."
6. Conditions Precedent. Notwithstanding the foregoing, this Amendment
shall not be effective unless and until satisfaction of the following terms
and conditions, each as acceptable to DFS, in its sole discretion:
(a) execution and delivery of this Amendment by all parties
hereto.
(b) a reaffirmation of Elcom International, Inc. existing
guaranties of the obligations of Borrower to DFS.
(c) execution of an amendment to the Participation Agreement
dated February 14, 1997, as amended, between DFS and BankBoston,
N.A. ("BankBoston"), in form and substance acceptable to each
party thereto.
(d) the written consent of BankBoston to this Amendment.
(e) satisfaction of all of the conditions precedent in that
certain Amendment to Business Credit and Security Agreement
making elcom.com a party to the Agreement.
(f) satisfaction of all of the conditions precedent in that
certain waiver letter delivered by DFS to Borrower.
(g) such other and further documents and agreements as DFS may
determine in connection with any of the foregoing.
<PAGE>
7. No Other Modifications. Except as expressly modified or amended herein,
all other terms and provisions of the Agreement shall remain unmodified and
in full force and effect and the Agreement, as hereby amended, is ratified
and confirmed by DFS and Borrower.
8. Capitalized Terms. Except as otherwise defined herein, all capitalized
terms will have the same meanings set forth in the Agreement.
IN WITNESS WHEREOF, DFS, Elcom Services and elcom.com have executed this
Amendment as of the 31st day of March, 1999.
ELCOM SERVICES GROUP, INC.
ATTEST:
Print Name: L. F. Mulhern
Title: Chief Financial Officer
/s/ Alfred J. Gauvin By: /s/ L. F. Mulhern
(Assistant) Secretary
ELCOM.COM, INC.
ATTEST: Print Name: L. F. Mulhern
Title: Chief Financial Officer
/s/ Michael J. McEachern By: /s/ L. F. Mulhern
(Assistant) Secretary
DEUTSCHE FINANCIAL SERVICES
CORPORATION
By: /s/ M. B. Schafer
Print Name: Mark B. Schafer
Title: Regional Branch Manager
<PAGE>
Participant Consent and Agreement
The undersigned ("Participant") is a party to that certain First Amended
and Restated Participation Agreement with DFS dated as of February 14, 1997, as
amended (the "Participation Agreement"), concerning its participation in credit
facilities extended to Elcom Services Group, Inc. and elcom.com, inc. by DFS.
The undersigned hereby acknowledges and agrees to the terms of the foregoing
Amendment to Business Credit and Security Agreement (Amendment No. 4), and does
hereby ratify and confirm its Participation Agreement in all respects.
BANKBOSTON, N.A.
By: /s/ D. E. Bryant
Name: D. E. Bryant
Title: Division Executive
Date: 03/31/99
<PAGE>
Guarantor Consent and Agreement
The undersigned Guarantor hereby acknowledges and consents to the terms of the
foregoing Amendment to Business Credit and Security Agreement (Amendment No. 4),
and does hereby ratify and confirm each and every guaranty of Borrower
(inclusive of elcom.com) in all respects.
ELCOM INTERNATIONAL, INC.
By: /s/ L. F. Mulhern
Print Name: L. F. Mulhern
Title: Chief Financial Officer
Date: March 31, 1999
EXHIBIT 10.34
COLLATERALIZED GUARANTY (ARBITRATION)
TO: Deutsche Financial Services Corporation
In consideration of financing provided or to be provided by you to
elcom.com, inc., a Delaware corporation ("Dealer"), and for other good and
valuable consideration received, we jointly, severally, unconditionally and
absolutely guaranty to you, from property held separately, jointly or in
community, the immediate payment of all current and future liabilities owed by
Dealer to you when due, whether such liabilities are direct or indirect
("Liabilities"). We will pay you on demand the full amount of all sums owed by
Dealer to you, together with all costs and expenses (including, without
limitation, reasonable attorneys' fees). We also indemnify and hold you harmless
from and against all (a) losses, costs and expenses you incur and/or are liable
for (including, without limitation, reasonable attorneys' fees) and (b) claims,
actions and demands made by Dealer or any third party against you, which in any
way relate to any relationship or transaction between you and Dealer.
Our guaranty will not be affected by any: (a) change in the manner, place
or terms of payment or performance in any current or future agreement between
you and Dealer, the release, settlement or compromise of or with any party
liable for the payment or performance thereof or the substitution, release,
non-perfection, impairment, sale or other disposition of any security
thereunder; (b) change in Dealer's financial condition; (c) interruption of
relations between Dealer and you or us; (d) claim or action by Dealer against
you; and/or (e) increases or decreases in any credit you may provide to Dealer.
We will pay you even if you have not (i) notified Dealer that it is in default
of the Liabilities and/or that you have accelerated the payment of all or any
part of the Liabilities, or (ii) exercised any of your rights or remedies
against Dealer, any other person or any current or future security. This
Guaranty is assignable by you and will inure to the benefit of your assignee. If
Dealer hereafter undergoes any change in its ownership, identity or
organizational structure, this Guaranty will extend to all current and future
obligations owed to you by such new or changed legal entity.
We irrevocably waive: notice of your acceptance of this Guaranty,
presentment, demand, protest, nonpayment, nonperformance, any right of
contribution from other guarantors, dishonor, the amount of indebtedness of
Dealer outstanding at any time, the number and amount of advances made by you to
Dealer in reliance on this Guaranty and any claim or action against Dealer;
notice and hearing as to any prejudgment remedy; all other demands and notices
required by law; all rights of offset and counterclaims against you or Dealer;
all rights in, and notices or demands relating to, any security now or hereafter
securing any Liabilities (including, without limitation, all rights, notices or
demands directly or indirectly relating to the sale or other disposition of such
security or the manner of such sale or other disposition); all defenses to the
enforceability of this Guaranty (including, without limitation, fraudulent
inducement); and all of our present and future rights and remedies (a) of
subrogation to any of your rights or remedies against Dealer, (b) of
contribution, reimbursement, indemnification and restoration from Dealer and (c)
to assert any other claim or action against Dealer directly or indirectly
relating to this Guaranty. All our waivers herein will survive any termination
of this Guaranty.
To secure payment of all Liabilities and all our current and future debts to
you, whether under this Guaranty or any other current or future agreement, we
grant you a security interest in all our inventory, equipment, fixtures,
accounts, contract rights, chattel paper, instruments, reserves, documents and
general intangibles, whether now owned or hereafter acquired, all attachments,
accessories, accessions, substitutions and replacements thereto and all proceeds
thereof. All such assets are defined in the Uniform Commercial Code and referred
to herein as the "Collateral." Our principal place of business is located at:
10 Oceana Way, Norwood, MA 2062
(Number and Street) (City, County, State, Zip Code)
and our business is conducted as a I___I SOLE PROPRIETORSHIP, I__I PARTNERSHIP,
IXXI CORPORATION, (check applicable term). We will immediately notify you of'
any change in our identity, name, form or ownership, principal place of business
or other business locations. AlI Collateral will be kept at our business
locations. We will immediately notify you if any Collateral is kept at any other
address. All Collateral will
<PAGE>
remain free from all claims and liens superior to yours, unless otherwise
expressly agreed by you in writing. We will (a) only exhibit and sell Collateral
to buyers in the ordinary course of business and (b) not rent, demonstrate,
transfer or use any Collateral, without your prior written consent. We will
execute all documents you request to perfect your security interest in the
Collateral. We wilI deliver to you, immediately upon your request, and you may
retain the Certificate of Title or Statement of Origin issued for any
Collateral. We will immediately provide you with all information regarding us
that you from time to time request. All our financial information will
accurately represent our financial condition, and we acknowledge your reliance
thereon.
We will: (a) pay all taxes and fees assessed against us or the Collateral
when due; (b) immediately notify you of any loss, theft or damage to any
Collateral; (c) keep the Collateral insured for its full insurable value under a
property insurance policy, with a company acceptable to you and naming you an a
loss-payee; and (d) provide you with written evidence of such insurance coverage
and loss-payee clause. If we don't pay any taxes or fees or keep the Collateral
insured, you may pay such taxes and fees and insure the Collateral, and the
amounts paid will be (i) an additional debt owed by us to you and (ii) due and
payable immediately in full. You have an irrevocable license to enter our
business locations whenever you deem necessary without any notice to us, to (A)
account for and inspect all Collateral, (B) verify our compliance with this
Guaranty and (C) examine and copy our books and records related to the
Collateral.
We will be in default under this Guaranty if: we breach any terms,
warranties or representations contained herein or in any other agreement between
you and us; Dealer breaches any terms, warranties or representations contained
in any agreement between Dealer and you; any representation , statement, report
or certificate made or delivered by us or Dealer to you is not accurate; we
don't pay any of our debt to you when due and payable hereunder or under any
other agreement between you and us; Dealer fails to pay any Liabilities
immediately when due; we abandon any Collateral; we or Dealer are or become in
default in the payment of any debt owed to any third party; a money judgment
issues against us or Dealer; an attachment,. sale or seizure issues or is
executed against us, Dealer or any Collateral; the undersigned dies and our
business is operated as a sole proprietorship or partnership; Dealer dies and
Dealer's business is operated as a sole proprietorship or partnership; we or
Dealer cease or suspend business; we or Dealer make a general assignment for the
benefit of creditors; we or Dealer become insolvent or voluntarily or
involuntarily become subject to the Federal Bankruptcy Code, state insolvency
Iaws or any similar law; any receiver is appointed for any of our or Dealer's
assets; we or Dealer lose any franchise, permission, license or right to sell or
deal in an Collateral; or we or Dealer misrepresent our respective financial
condition or organizational structure. In event of a default:
(a) You may, at any time at your election, without notice or demand to us
do any one more of the following: declare all or any part of the debt
we owe you, whether contingent or noncontingent, immediately due and
payable, together with all costs and expenses of your collection
activity, including, without limitation, all attorney's fees; and
exercise any or all rights of a secured party under applicable law
(including, without limitation, the right to possess, transfer and
dispose of the Collateral).
(b) We will segregate and keep the Collateral in trust, in good order and
repair, for you and we will not exhibit, sell, further encumber,
otherwise dispose of or use any Collateral.
(c) Upon your oral or written demand, we will immediately deliver the
Collateral to you, in good order and repair, at a place specified by
you, together with all related documents; or you may, in your sole
discretion and without notice or demand to us, take immediate
possession of the Collateral together with all related documents.
(d) We waive and release: the benefit of all appraisal, exemption and
homestead laws; and all rights to notice or hearing prior to your
attachment, repossession, sequestration or seizure of any Collateral.
(e) We irrevocably appoint you or your agent as our Attorney-In-Fact to
do, in your sole discretion, any of the following: endorse our name on
any checks or other instruments received as payment for any
Collateral; sell or dispose of any Collateral; sell, assign, demand,
collect, receive, settle, extend or renew any amounts due on any
Collateral; and exercise any rights we have in the Collateral.
All your rights and remedies are cumulative. Your failure to exercise any of
your rights or remedies hereunder will not waive any of your rights or remedies
as to any past, current or future default.
<PAGE>
If you conduct a private sale of any Collateral you possess by soliciting
bids from 10 or more dealers or distributors in that type of Collateral, any
sale by you of such Collateral in bulk or in parcels within 120 days of (a) your
taking possession and control of such Collateral or (b) when you are otherwise
authorized to sell such Collateral, whichever occurs last, to the bidder
submitting the highest cash bid therefor, is a commercially reasonable sale of
such Collateral. Commercially reasonable notice of any public or private sale is
given to us if you send us a notice of such sale at least 7 days prior to the
date of any public sale or the time after which a private sale will be made. The
purchase of any Collateral by a supplier, as provided in any agreement between
you and the supplier is a commercially reasonable disposition or sale of such
Collateral. If you dispose of any such Collateral other than as herein
contemplated, the commercial reasonableness of such disposition will be
determined in accordance with the laws of the state governing this Agreement. We
will (i) pay you even if any Collateral is defective or fails to conform to any
warranties extended by any third party, (ii) not assert against you any claim or
defense we have against any third party and (iii) indemnify and hold you
harmless against any claims or defenses asserted by any buyer of the Collateral
relating to the condition of, or any representations made about, any Collateral.
We waive all rights of offset we may have against you. We grant you an
irrevocable power of attorney to: execute or endorse on our behalf any checks,
financing statements, instruments, Certificates of Title and Statements of
Origin pertaining to the Collateral; supply any omitted information and correct
errors in any documents between you and us; do anything we are obligated to do
hereunder; initiate and settle any insurance claim pertaining to the Collateral;
and do anything to preserve and protect the Collateral and your rights and
interest therein. You may provide to any third party any credit, financial or
other information on us that you posses.
We have made an independent investigation of the financial condition of
Dealer and give this Guaranty based on that investigation and not upon any
representation made by you. We have access to current and future Dealer
financial information which enables us to remain continuously informed of
Dealer's financial condition. This Guaranty will survive any federal and/or
state bankruptcy or insolvency action involving Dealer. We are solvent and our
execution of this Guaranty will not make us insolvent. If you are required in
any action involving Dealer to return or rescind any payment made to or value
received by you from or for the account of Dealer, this Guaranty will remain in
full force and effect and will be automatically reinstated without any further
action by you and notwithstanding any termination of this Guaranty or your
release of us. Any delay or failure by you, or your successors or assigns, in
exercising any of your rights or remedies hereunder will not waive any such
rights or remedies. This Guaranty supersedes all prior oral and written
agreements concerning the subject matter hereof. Any oral or other amendment or
waiver made or claimed to be made to this Guaranty that is not evidenced by a
written document signed by your and our authorized representatives will be null,
void and have no force or effect whatsoever. If any provision of this Guaranty
or its application is invalid or unenforceable, the remainder of this Guaranty
will not be impaired or affected and will remain binding and enforceable. If we
previously executed any guaranty or security agreement with you, this Agreement
will only amend and supplement such agreement(s). If the terms hereof conflict
with the terms of any such prior agreement(s), the terms of this Guaranty will
govern. We may terminate this Guaranty by a written notice to you, the
termination to be effective sixty (60) days after you receive and acknowledge
it, but the termination will not terminate our obligations hereunder arising
prior to the effective termination date. You will retain all of your rights,
interests and remedies hereunder until we have paid all our debts to you. The
meanings of all terms herein are equally applicable to both the singular and
plural forms of such terms.
BINDING ARBITRATION. Except as otherwise specified below, all actions,
disputes, claims and controversies under common law, statutory law or in equity
of any type or nature whatsoever (including, without limitation, all torts,
whether regarding negligence, breach of fiduciary duty, restraint of trade,
fraud, conversion, duress, interference, wrongful replevin, wrongful
sequestration, fraud in the inducement, or any other tort, all contract actions,
whether regarding express or implied terms, such as implied covenants of good
faith, fair dealing, and the commercial reasonableness of any collateral
disposition, or any other contract claim, all claims of deceptive trade
practices or lender liability, and all claims questioning the reasonableness or
lawfulness of any act), whether arising before or after the date of this
Guaranty, and whether directly or indirectly relating to: (a) this Guaranty
and/or any amendments and addenda hereto, or the breach, invalidity or
termination hereof; (b) any previous or subsequent agreement between you and us;
and/or (c) any other relationship, transaction or dealing between you and us
(collectively the "Disputes"), will be subject to and resolved by binding
arbitration.
<PAGE>
All arbitration hereunder will be pursuant to either: (a) the Code of
Procedure in effect from time to time ("Code") of the National Arbitration Forum
("NAF"), currently located at 2124 Dupont Avenue South, Minneapolis, Minnesota
55405; or (b) the Commercial Arbitration Rules ("Rules") in effect from time to
time of the American Arbitration Association ("AAA"), currently located at 140
West 51st Street, New York, New York 10020-1203. The party first filing any
claim for arbitration shall designate which arbitration procedures are to be
applied for all Disputes between and us, although if either the NAF or AAA is
dissolved, the procedures of the remaining arbitration body must be used. A copy
of the Code, Rules and any fee schedule of the NAF or AAA may be obtained by
contacting the NAF or AAA, as applicable. The parties agree that all arbitrators
selected shall be attorneys. The arbitrator(s) will decide if any inconsistency
exists between the Code, or Rules, as applicable, and the arbitration provisions
contained herein. If any such inconsistency exists, the arbitration provisions
contained herein will control and supersede the Code, or Rules, as applicable.
The site of all arbitration participatory hearings will be in the Division of
the Federal Judicial District of your branch office closest to Dealer. The laws
of the State of Massachusetts will govern this Guaranty; provided, however, that
the Federal Arbitration Act ("FAA"), to the extent inconsistent, will supersede
the laws of such state and govern. This Guaranty concerns transactions involving
commerce among the several states. All arbitration proceedings, including
testimony or evidence at hearings, will be kept confidential, although any award
or order rendered by the arbitrator(s) or director of arbitration pursuant to
the terms of this Guaranty may be entered as a judgment or order and enforced by
either party in any state or federal court having competent jurisdiction.
Nothing herein will be construed to prevent your or our use of bankruptcy,
receivership, injunction, repossession, replevin, claim and delivery,
sequestration, seizure, attachment, foreclosure, dation and/or any other
prejudgment or provisional action or remedy relating to any collateral for any
current or future debt owed by either party to the other. Any such action or
remedy will not waive your or our right to compel arbitration of any Dispute. If
either of us brings any other action for judicial relief with respect to any
Dispute, the party bringing such action will be liable for and immediately pay
all of the other party's costs and expenses (including attorneys' fees) incurred
to stay or dismiss such action and remove or refer such Dispute to arbitration.
If either of us brings or appeals an action to vacate or modify an arbitration
award and such party does not prevail, such party will pay all costs and
expenses, including attorneys' fees, incurred by the other party in defending
such action.
Any arbitration proceeding must be instituted: (a) with respect to any
Dispute for the collection of any debt owed by either party to the other, within
two (2) years after the date the last payment was received by the instituting
party; and (b) with respect to any other Dispute, within two (2) years after the
date the incident giving rise thereto occurred, whether or not any damage was
sustained or capable of ascertainment or either party knew of such incident.
Failure to institute an arbitration proceeding within such period will
constitute an absolute bar and waiver to the institution of any proceeding with
respect to such Dispute. Except as otherwise stated herein, all notices,
arbitration claims, responses, requests and documents will be sufficiently given
or served if mailed or delivered: (i) to us at our address specified below; and
(ii) to you at 655 Maryville Centre Drive, St. Louis, MO 63141, Attention:
General Counsel, or such other address as the parties may specify from time to
time in writing. No arbitration hereunder will include, by consolidation,
joinder or otherwise, any third party, unless such third party agrees to
arbitrate pursuant to the arbitration provisions contained herein and the Code,
or Rules, as applicable.
<PAGE>
If the arbitration section of this Guaranty or its application is invalid
or unenforceable, any legal proceeding with respect to any Dispute will be tried
in a court of competent jurisdiction by a judge without a jury. We waive any
right to a jury trial in any such proceeding.
THIS GUARANTY CONTAINS BINDING ARBITRATION AND JURY WAIVER PROVISIONS.
Date: March 31, 1999
CORPORATE OR PARTNERSHIP GUARANTOR:
Elcom International,Inc.
(Name of Corporation or Partnership Guarantor)
By: /s/ L. F.Mulhern
Print Name: L. F. Mulhern
Address of Guarantor(s):
10 Oceana Way
Norwood, MA 02062
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