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 March 31, 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 27,672,950 shares of common stock, $.01 par value,
outstanding as of May 3, 1999.
<PAGE>
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998
and March 31, 1999 (unaudited)................................2
Consolidated Statements of Operations - Three Months Ended
March 31, 1998 and 1999 (unaudited)..........................3
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 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 ..........13
Part II - OTHER INFORMATION
Item 1. None.
Item 2. None.
Item 3. None.
Item 4. None.
Item 5. None.
Item 6. Exhibits and Reports on Form 8-K................................13
Signature ................................................................13
EXHIBITS
Exhibit 27 Financial Data Schedule
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 14,315 $ 26,887
Accounts receivable:
Trade........................................................ 134,753 117,157
Other........................................................ 36,068 38,316
--------- ---------
170,821 155,473
Less - Allowance for doubtful accounts....................... 6,796 6,948
--------- ---------
Accounts receivable,net.................................. 164,025 148,525
Inventory......................................................... 39,617 23,590
Prepaids and other current assets................................. 2,458 3,322
--------- ---------
Total current assets..................................... 220,415 202,324
--------- ---------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware andsoftware................................... 26,556 25,893
Land, buildings and leasehold improvements...................... 3,507 3,437
Furniture, fixtures and equipment............................... 9,228 9,133
--------- ---------
39,291 38,463
Less -- Accumulated depreciation and amortization............... 25,034 25,172
--------- ---------
14,257 13,291
--------- ---------
GOODWILL AND OTHER ASSETS, NET OF ACCUMULATED
AMORTIZATION...................................................... 27,179 26,155
--------- ---------
$ 261,851 $ 241,770
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit................................................. $ 104,772 $ 89,377
Accounts payable................................................ 49,341 47,550
Accrued expenses and other current liabilities.................. 20,747 20,264
Current portion of capital lease obligations.................... 991 819
Current portion of long-term debt............................... 78 76
--------- ---------
Total current liabilities................................ 175,929 158,086
--------- ---------
OTHER DEFERRED LIABILITIES........................................ 418 -
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION................. 191 120
LONG-TERM DEBT, NET OF CURRENT PORTION............................ 296 278
--------- ---------
905 398
--------- ---------
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 27,657,993 shares................... 275 277
Additional paid-in capital...................................... 101,271 101,282
Accumulated deficit............................................. (16,192) (17,647)
Treasury stock, at cost 236,338 shares.......................... (1,182) (1,182)
Accumulated other comprehensiveincome........................... 845 556
--------- ---------
Total stockholders'equity................................ 85,017 83,286
--------- ---------
$ 261,851 $ 241,770
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
-------------------------
1998 1999
---------- ----------
Net sales...................................... $ 190,048 $ 174,353
Cost of sales.................................. 167,894 157,179
---------- ----------
Gross profit................................... 22,154 17,174
Expenses:
Selling, general and administrative.......... 17,858 17,069
Research and development..................... 275 351
---------- ----------
Total expenses................................. 18,133 17,420
---------- ----------
Operating profit (loss)........................ 4,021 (246)
Interest expense............................... (1,942) (1,195)
Interest income and other, net................. 171 489
---------- ----------
Income (loss) before income taxes.............. 2,250 (952)
Provision for income taxes..................... 878 503
---------- ----------
Net income (loss).............................. $ 1,372 $ (1,455)
========== ==========
Basic net income (loss) per share.............. $ 0.05 $ (0.05)
========== ==========
Basic weighted average shares outstanding...... 27,230 27,412
========== ==========
Diluted net income (loss) per share............ $ 0.05 $ (0.05)
========== ==========
Diluted weighted average shares outstanding.... 28,802 27,412
========== ==========
Other Comprehensive Income, Net of Tax:
Net income (loss).............................. $ 1,372 $ (1,455)
Foreign currency translation adjustments..... 293 (289)
---------- -----------
Comprehensive income (loss).................... $ 1,665 $ (1,744)
========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1999
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................. $ 1,372 $ (1,455)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation and amortization.................................... 2,326 2,214
Provision for doubtful accounts.................................. 320 212
Other deferred liabilities....................................... -- (418)
Changes in current assets and liabilities, net of acquisitions --
Accounts receivable............................................ (4,690) 13,308
Inventory...................................................... (7,473) 15,532
Prepaids and other current assets.............................. (527) (2,888)
Accounts payable. ............................................. 20,950 1,565
Accrued expenses, other current liabilities and other.......... 3,715 (24)
--------- ---------
Net cash provided by operating activities.... ............... 15,993 28,046
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software...................... (2,092) (843)
Increase in other assets and deferred costs....................... (131) 22
--------- ---------
Net cash used in investing activities........................ (2,223) (821)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under lines of credit................................ (10,583) (14,328)
Repayment of capital lease obligations and long-term debt......... (165) (251)
Exercise of common stock options.................................. 345 12
--------- ---------
Net cash used in financing activities........................ (10,403) (14,567)
--------- ---------
FOREIGN EXCHANGE EFFECT ON CASH.................................... 266 (86)
--------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS...................................................... 3,633 12,572
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD.............................................. 33,165 14,315
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................... $ 36,798 $ 26,887
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................................... $ 2,049 $ 1,295
========= =========
Income taxes paid................................................ $ 212 $ 82
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:.............................. $ -- $ --
========= =========
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 March 31, 1999, and the results of operations and cash
flows for the periods ended March 31, 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 for 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:
Three Months Ended
Basic March 31,
-------------------------------- -----------------------
1998 1999
--------- ---------
Net income (loss) $1,372 $(1,455)
========= =========
Weighted average shares outstanding 27,230 27,412
========= =========
Basic net income (loss) per share $ 0.05 $ (0.05)
========= =========
Diluted
--------------------------------
Net income (loss) $ 1,372 $(1,455)
========= =========
Weighted average shares outstanding 27,230 27,412
Dilutive effect of stock options 1,572 -
--------- ---------
Weighted average shares as adjusted 28,802 27,412
========= =========
Diluted net income (loss) per share $ 0.05 $ (0.05)
========= =========
<PAGE>
Options to purchase 1,650,188 shares of common stock at prices ranging from
$5.99 to $8.80 were outstanding at March 31, 1998 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 in the
quarter ended March 31, 1998.
Dilutive net loss per share in the 1999 quarter 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 quarter, a net total of 1,091,632 shares covered by options
would have been dilutive, and 6,413,147 shares covered by options and warrants
with per share exercise prices ranging from $2.55 to $8.80, 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 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 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 goodwill
amortization for the Lantec acquisition) for the Company's U.S. and U.K.
operations for the quarters ended March 31, 1998 and 1999 are as follows (in
thousands):
United United
Three Months Ended States Kingdom Consolidated
March 31, 1998 ------------ ------------- -------------
---------------------
Net sales............. $ 108,418 $ 81,630 $ 190,048
============ ============= =============
Net income............ $ 3 $ 1,369 $ 1,372
============ ============= =============
Three Months Ended
March 31, 1999
---------------------
Net sales................ $ 95,640 $ 78,713 $ 174,353
============ ============= =============
Net income (loss).... $ (1,451) $ (4) $ (1,455)
============ ============= =============
<PAGE>
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 ("Elcom Services Group"), 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, elcom.com, inc. (formerly Elcom Systems, Inc.), licenses its
PECOS technologies and provides implementation and consulting services, and in
March, 1999, commenced operating an Internet on-line storefront selling PC's and
related products. In April 1999, elcom.com added auction capabilities to its
Internet site and plans to sell other business-oriented supplies during 1999.
Elcom Services Group, Inc.
Elcom Services Group's revenues and resultant gross profit are affected by
price reductions by PC manufacturers which have been substantial over the last
several years. 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 is
experiencing 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 the relatively soft demand it has
experienced in the first quarter of 1999 possibly relates to Year 2000 projects
at certain of its customers which may have caused delays in procuring PC's and
related products and professional services, as customers focus on their
management information systems infrastructure.
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 to
not pursue renewal of its Apple Educational Sales Agent contract, as management
intends to focus 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 support and sales 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 margin expected to be generated by Elcom Services Group. The
Company continues to evaluate the results of this rightsizing, and additional
steps may be taken.
elcom.com, inc.
In the third quarter of 1998, the Elcom Systems software division ("Elcom
Systems") of elcom.com, inc. 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 to businesses and consumers, and intends to offer office supplies and
other products, 24 hours a day, seven days a week. elcom.com intends be a
leading supplier of these multiple commodity-type
<PAGE>
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.
On a standalone basis, for the quarters ended March 31, 1999 and 1998,
revenues generated by the Elcom Systems software division from licenses,
including associated professional services and maintenance fees were
approximately $222,000 and $900,000, respectively. The decline in Elcom Systems'
revenues reflects the shift in the Company's focus from its PECOS Commerce
Manager ("PECOS.cm") technology to PECOS Procurement Manager ("PECOS.pm"), its
intranet-based automated procurement management system. In addition, elcom.com's
Internet storefront had product sales of approximately $2.0 million in the 1999
quarter (and none in the comparable 1998 quarter), 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, elcom.com's
consolidated gross margin decreased from $686,000 in the 1998 quarter to
$291,000 in the 1999 quarter. Consequently, because elcom.com's expenses
increased approximately $500,000 from 1998 to 1999 as the Company commenced
staffing the entity to support expected growth of its Internet storefront, its
consolidated operating loss increased $900,000, to $1.3 million during the 1999
quarter, versus an operating loss of $400,000 in the 1998 quarter.
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, strategic financing options, and
potential strategic partners. Due to the size and scale of the Company's PC
remarketing and services business in the United Kingdom and the relative
strength of the United Kingdom stock market, particularly for information
technology stocks, the Company and Salomon Smith Barney also evaluated
alternatives intended to take advantage of this strength, including potential
separate transactions for the Company's United Kingdom and United States
remarketer businesses.
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 that none of the preliminary proposals or alternatives potentially
available to it at that time were of a structure or amount which, if
consummated, would have been in the best interests of the Company's
stockholders. 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 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 it's IT Systems and non-IT Systems have not
<PAGE>
uncovered anysubstantial Year 2000 issues, and the Company believes 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 March 31, 1999 compared to the quarter ended March 31, 1998.
Net Sales. Net sales for the quarter ended March 31, 1999 decreased 8% to
$174.4 million from $190.1 million in the same period of 1998, a decrease of
$15.7 million. However, professional services revenues of Elcom Services Group
increased 28% from approximately $6.9 million in 1998 to $8.8 million in 1999.
Net sales in the United States decreased 12% to $95.7 million in the 1999
quarter, from $108.5 million in the quarter ended March 31, 1998. Net sales of
the Company's United Kingdom based operations decreased 4% to $78.7 million in
the 1999 quarter from $81.6 million in the first quarter of 1998. The Company
believes the decrease in United States sales reflects the residual impact of the
Asian financial crisis on certain of its customers, as well as softer demand due
to certain of its customers focusing on Year 2000 efforts; and possibly
deferring purchase of PC's and related products. The Company believes that there
is potential for a rebound or partial rebound in 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.
Gross Profit. Gross profit for the quarter ended March 31, 1999 decreased
to $17.2 million from $22.2 million in the 1998 quarter, a decrease of $5.0
million or 23%. 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 9.9% in
the 1999 quarter from 11.7% 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-oriented policies. 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 March 31, 1999 decreased 4.5% to
$17.1 million from $17.9 million in the 1998 quarter, a decrease of $0.8
million. This decrease is primarily attributable to the restructurings
accomplished by the Company in 1998, net of the cost of the Company's investment
in elcom.com's infrastructure to support the anticipated future growth of the
Company's elcom.com Internet-based businesses. As a percentage of sales,
selling, general and administrative expenses increased slightly for the quarter
ended March 31, 1999 to 9.8% from 9.4% in the 1998 quarter, which reflects a
lower level of net sales in the first quarter of 1999, as noted above as well as
an increase in the selling, general and administrative expenses of elcom.com.
Research and Development Expense. Research and development expense
increased 28% from $275,000 in the 1998 quarter to $351,000 in the 1999 quarter
reflecting increased expenditures in support of the Company's PECOS Procurement
Manager technology. The Company's research and development expense is focused on
developing incremental functionality and features for its PECOS product line,
including developing an Internet-based version of elcom.com's PECOS technology
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 its newly announced version of PECOS Procurement Manager, its automated
procurement system.
<PAGE>
Interest Expense. Interest expense for the quarter ended March 31, 1999
decreased to $1.2 million from $1.9 million in the comparable quarter of 1998, a
decrease of $700,000. Interest expense in both years reflects floor plan line of
credit borrowings in support of the Company's accounts receivable and inventory
and for 1999 is reflective of the decrease in the Company's net sales, improved
collections of receivables, and substantially lower inventory balances versus
the 1998 period, as well as lower interest rates in the 1999 quarter vs. 1998.
Interest Income and Other, Net. Interest income and other, net, for the
quarter ended March 31, 1999 increased to $489,000 from $171,000 in the 1998
quarter. Other income in the 1999 quarter includes proceeds of $400,000
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 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 such
provision.
Net Income (Loss). The Company generated a net loss for the quarter ended
March 31, 1999 of $1.5 million as a result of the factors described herein.
Liquidity and Capital Resources
Net cash provided by operating activities for the quarter ended March 31,
1999 was $28.0 million, primarily reflecting the Company's net loss, adjusted
for $2.2 million in depreciation and amortization, a $13.3 million decrease in
the level of accounts receivable and a $15.5 million decrease in the Company's
inventory balances in the period. Net cash used in investing activities was $0.8
million, consisting primarily of additions to property, equipment and software.
Net cash used in financing activities was $14.6 million, consisting primarily of
a $14.3 million net decrease in borrowings under the Company's lines of credit.
Net cash provided by operating activities for the quarter ended March 31,
1998 was $16.0 million, which is primarily due to an increase in accounts
payable and other accrued expenses of $24.7 million (primarily related to the
timing of certain payments), offset by a $12.2 million combined increase in
inventory and accounts receivable. Net cash used for investing activities was
$2.2 million, consisting primarily of additions to property, equipment and
software and $3.0 million of cash paid for acquisitions. Net cash used in
financing activities was $10.4 million, primarily due to a $10.6 million net
decrease in borrowings under the Company's lines of credit.
At March 31, 1999, the Company's principal sources of liquidity included
cash and cash equivalents of $26.9 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 March 31, 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 first 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 loss. Availability of United States borrowings is based on DFSC's
determination as to eligible accounts receivable and inventory. As of March 31,
1999, the Company's borrowings from DFSC on its United States floor plan line of
credit were $54.5 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
<PAGE>
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 $48.5 million, as of March 31, 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 (5.5% at March 31, 1999) plus 1.25%. The United Kingdom
DFSC facility replaced four separate facilities previously maintained in the
United Kingdom. As of March 31, 1999, the Company's borrowings under its United
Kingdom DFSC facility were (pound)21.7 million, or $34.9 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 March 31, 1999. There can be no assurance,
however, that the DFSC lines of credit will continue to be available, or be
increased to support the Company's requirements.
The Company also has a $9.5 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 March 31, 1999, the
Company had no borrowings outstanding from IBMCC on its floor plan line of
credit.
As of March 31, 1999, the Company had borrowings aggregating approximately
$89.4 million outstanding under these borrowing facilities, which approximated
its availability thereunder.
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 40% from
the year-end 1998 balance to its March 31, 1999 balance. These reductions were
particularly significant in the United States, where manufacturers have
substantially modified various policies to limit the timeframe and/or
availability of price protection on products held in inventory and the Company's
ability to return products also has been curtailed. Accordingly, during 1999,
the Company has limited its direct purchases of inventory and continues to
evaluate the levels of products that it purchases directly and holds in
inventory in the United States, versus the incremental cost to source the
product from its DFPs for shipment to a Company location or directly to a
customer. The Company is currently seeking to minimize the level of inventory it
stocks. 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 investigating outsourcing certain activities.
As of September 30, 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
<PAGE>
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 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 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 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 subsidiary.
SEASONALITY AND IMPACT OF INFLATION
The Company historically 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, it is likely that the sales of
the Company will 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," 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,
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
<PAGE>
enhancements to the Company's new management information system, risks
associated with acquisitions of companies, 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.
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 March 31, 1999 balances, the Company estimates that a 1% change
in interest rates would have an effect of approximately $600,000 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.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(27) Financial Data Schedule. (x)
- ---------------------------------
(x) Filed herewith.
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: May 14, 1999 By: /s/ Laurence F. Mulhern
Laurence F. Mulhern
Chief Financial Officer and Treasurer
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