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 September 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 28,025,000 shares of common stock, $.01 par value,
outstanding as of November 1, 1999.
<PAGE>
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999 (unaudited)................................2
Consolidated Statements of Operations and Other Comprehensive
Income (Loss) - Three and Nine Month Periods
Ended September 30, 1998 and 1999 (unaudited).....................3
Consolidated Statements of Cash Flows - Nine Month Periods Ended
September 30, 1998 and 1999 (unaudited)...........................4
Notes to Consolidated Financial Statements (unaudited)..............5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........15
Part II - OTHER INFORMATION
Item 1. None.
Item 2. None.
Item 3. None.
Item 4. None.
Item 5. Other Information..........................................16
Item 6. Index to Exhibits and Reports on Form 8-K..................16
Signature ...........................................................16
1
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
December 31, September 30,
1998 1999
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................$ 14,315 $ 33,472
Accounts receivable:
Trade.............................................. 134,753 60,871
Other.............................................. 36,068 15,317
--------- ---------
170,821 76,188
Less - Allowance for doubtful accounts............. 6,796 4,074
--------- ---------
164,025 72,114
Inventory............................................. 39,617 5,664
Prepaids and other current assets..................... 2,458 2,438
--------- ---------
Total current assets........................... 220,415 113,688
--------- ---------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software........................ 26,556 27,979
Land, buildings and leasehold improvements............ 3,507 3,558
Furniture, fixtures and equipment..................... 9,228 9,372
--------- ---------
39,291 40,909
Less - Accumulated depreciation and amortization...... 25,034 28,175
--------- ---------
14,257 12,734
--------- ---------
GOODWILL AND OTHER ASSETS, NET OF ACCUMULATED
AMORTIZATION (Note 4)................................. 27,179 157
--------- ---------
$261,851 $126,579
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit.......................................$104,772 $ 40,582
Accounts payable...................................... 49,341 17,046
Accrued expenses and other current liabilities........ 20,747 14,579
Current portion of capital lease obligations.......... 991 441
Current portion of long-term debt..................... 78 --
--------- ---------
Total current liabilities...................... 175,929 72,648
--------- ---------
OTHER DEFERRED LIABILITIES.............................. 418 --
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION....... 191 3
LONG-TERM DEBT, NET OF CURRENT PORTION.................. 296 --
--------- ---------
905 3
--------- ---------
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 28,258,687 shares............................... 275 283
Additional paid-in capital............................ 101,271 102,371
Retained earnings (deficit)........................... (16,192) (47,864)
Treasury stock, at cost - 236,338 and 257,739 shares.. (1,182) (1,282)
Cumulative translation adjustment..................... 845 420
--------- ---------
Total stockholders' equity 85,017 53,928
--------- ---------
$261,851 $126,579
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER
COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales ........................................... $ 194,993 $ 91,326 $ 576,819 $ 416,226
Cost of sales ....................................... 175,530 83,606 512,616 375,138
---------- ---------- ---------- ----------
Gross profit ........................................ 19,463 7,720 64,203 41,088
Expenses:
Selling, general and administrative ............... 21,837 14,972 58,702 47,036
Research and development .......................... 474 357 1,094 932
Asset impairment, restructuring and other related
charges (Note 4).................................. 12,338 -- 12,338 22,552
---------- ---------- ---------- ----------
Total expenses ...................................... 34,649 15,329 72,134 70,520
---------- ---------- ---------- ----------
Operating loss ...................................... (15,186) (7,609) (7,931) (29,432)
Interest expense .................................... (2,162) (790) (6,327) (2,862)
Interest income and other, net ...................... 241 145 637 764
---------- ---------- ---------- ----------
Loss before income taxes ............................ (17,107) (8,254) (13,621) (31,530)
Provision for (recovery of) income taxes ............ (2,071) (769) (472) 142
---------- ---------- ---------- ----------
Net loss ............................................ $ (15,036) $ (7,485) $ (13,149) $ (31,672)
========== ========== ========== ==========
Basic net loss per share ............................ $ (0.55) $ (0.27) $ (0.48) $ (1.14)
========== ========== ========== ==========
Basic weighted average shares outstanding............ 27,356 27,944 27,322 27,690
========== ========== ========== ==========
Diluted net loss per share .......................... $ (0.55) $ (0.27) $ (0.48) $ (1.14)
========== ========== ========== ==========
Diluted weighted average shares outstanding.......... 27,356 27,944 27,322 27,690
========== ========== ========== ==========
Other Comprehensive Income (Loss):
The components of other comprehensive income (loss),
net of tax are as follows:
Net loss ............................................ $ (15,036) $ (7,485) $ (13,149) $(31,672)
Foreign currency translation adjustments........... (956) 344 889 (425)
---------- ---------- ---------- ----------
Comprehensive loss .................................. $(15,992) $ (7,141) $ (12,260) $(32,097)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
Nine Months Ended
September 30,
---------------------
1998 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ................................................ $(13,149) $(31,672)
Adjustments to reconcile net loss to net cash provided by
Operating activities --
Depreciation and amortization ......................... 6,606 8,395
Restructuring, impairment and other related charges.... 10,137 22,552
Provision for doubtful accounts ....................... 2,728 5,309
Other deferred liabilities ............................ -- (418)
Changes in current assets and liabilities --
Accounts receivable ................................. (10,701) 84,381
Inventory ........................................... 18,122 33,272
Prepaids and other current assets ................... (1,637) (276)
Accounts payable .................................... (852) (30,232)
Accrued expenses, other current liabilities and other 4,132 (5,860)
--------- ---------
Net cash provided by operating activities ........ 15,386 85,451
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software ............ (5,902) (3,134)
(Increase) decrease in other assets and deferred costs .. (3,057) 212
--------- ---------
Net cash used in investing activities ............. (8,959) (2,922)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under lines of credit ...................... (19,495) (62,876)
Repayment of capital lease obligations .................. (532) (1,095)
Proceeds from stock option exercises .................... 547 1,069
Purchase of treasury stock .............................. (559) (100)
--------- ---------
Net cash used in financing activities ............. (20,039) (63,002)
--------- ---------
FOREIGN EXCHANGE EFFECT ON CASH ........................... 429 (370)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ....................................... (13,183) 19,157
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ..................................... 33,165 14,315
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................. $ 19,982 $ 33,472
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ........................................... $ 6,320 $ 2,977
========= =========
Income taxes paid ....................................... $ 599 $ 235
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Retirement of fully depreciated/amortized property,
equipment and software ................................ $ -- $ 777
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<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 September 30, 1999, and the results of operations for the
three and nine month periods, and cash flows for the nine month periods ended
September 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. Basic EPS excludes dilution and is
computed by dividing income (loss) 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 1998 and 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 net loss per share were calculated as follows (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1998 1999 1998 1999
---------- -------- --------- --------
Basic and Diluted
Net loss........................ $(15,036) $ (7,485) $(13,149) $(31,672)
========= ========= ========= =========
Weighted average shares
outstanding................... 27,356 27,944 27,322 27,690
========= ========= ========= =========
Basic and diluted net
loss per share................ $ (0.55) $ (0.27) $(0.48) $(1.14)
========= ========= ========= =========
Diluted net loss per share in the 1998 and 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 1998 three and nine month periods, a net total of 570,000 shares
and 813,000 shares, respectively, covered by options would have been dilutive,
and 7,488,000 shares and 5,778,000 shares, respectively, covered by options and
warrants with per share exercise prices ranging from $2.55 to $8.80, and $4.50
to $8.80, respectively, would not have been dilutive. Based on the average
market price of the Company's common shares in the 1999 three and nine month
periods, a net total of 2,113,000 shares and 1,792,000 shares, respectively,
covered by options would have been dilutive, and 3,865,000 shares and 4,658,000
shares, respectively, covered by options and warrants with per share exercise
prices ranging from $4.63 to $8.80, and $4.06 to $8.80, respectively, would not
have been dilutive.
5
<PAGE>
3. Industry Segment And Geographic Data
Substantially all of the Company's material operations are associated
with the computer and peripherals remarketer industry, and it therefore 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 three and nine month periods ended September 30, 1998 and 1999 are as
follows (in thousands):
United United
Three Months Ended States Kingdom Consolidated
September 30, 1998
- ------------------------
Net sales............... $121,481 $ 73,512 $194,993
========= ========= =========
Net income (loss)....... $(14,238) $ (798) $(15,036)
========= ========= =========
Nine Months Ended
September 30, 1998
- -------------------------
Net sales............... $344,350 $232,469 $576,819
========= ========= =========
Net income (loss)...... $(11,859) $ (1,290) $(13,149)
========= ========= =========
Three Months Ended
September 30, 1999
- -------------------------
Net sales................ $ 60,489 $ 30,837 $ 91,326
========= ========= =========
Net income (loss).... $ (6,486) $ (999) $ (7,485)
========= ========= =========
Nine Months Ended
September 30, 1999
- -------------------------
Net sales................ $238,008 $178,218 $416,226
========= ========= =========
Net income (loss)........ $ (8,819) $(22,853) $(31,672)
========= ========= =========
4. Asset Impairment, Restructuring and Other Related Charges
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 seven month period ended July 31, 1999 (excluding the asset
impairment charge described below). The Company recorded total revenues related
to its United Kingdom operations of $178 million in the first nine months of
1999, $232 million in the first nine months 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 Internet
Procurement Manager, elcom.com's Internet-
6
<PAGE>
based and remotely-hosted 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 retained
substantially all other balance sheet assets and liabilities of the disposed
businesses. Accordingly, the Company is responsible for the current costs of
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 $6.8 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 (after giving effect to the $22.6 million write-off in the second
quarter) was written off in conjunction with recording the sale transaction in
the third quarter of 1999.
In August and September, 1998, the Company's senior management approved
restructuring plans related to its Elcom Systems, Inc. subsidiary, its Elcom
Services Group Inc. government and educational sales operations and
consolidation of its customer support personnel in the U.S. This restructuring
entailed a workforce reduction of approximately 35 of the Company's U.S.
employees. A total pre-tax charge of $12.3 million for this restructuring was
taken which was comprised of $0.9 million in severance costs, $1 million of
estimated liabilities related to acquitting the Company's responsibilities
concerning certain existing technology licenses, a $10 million write down to
estimated fair market value of certain unrealizable intangible assets related to
prior U.S. acquisitions, and $0.4 million of other charges.
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 computer and business products, primarily PCs and
associated peripherals, in December 1993 through a separate subsidiary using its
electronic commerce 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. ("Elcom Services
Group") to its customers and by various marketing efforts, including the
expansion of its direct sales force nationwide, and by the acquisition of six
computer products remarketers. To date, the Company's net sales have been
derived substantially from the sale of computer products by the Company's
wholly-owned subsidiary, Elcom Services Group 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,
elcom.com, inc. ("elcom.com"), licenses its PECOS technologies, including its
recently introduced Internet-based and remotely-hosted automated procurement
system, and provides implementation and consulting services. In March, 1999,
elcom.com commenced operating an Internet on-line storefront selling computers
and related products. Since then, elcom.com has added auction capabilities to
its Internet site, launched an office supplies product line and plans to
introduce other business-oriented products in the future.
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 seven 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 in the United States. The Company also
7
<PAGE>
plans to use the retained business as the platform from which it will market
PECOS Internet Procurement Manager, its Internet-based and remotely-hosted
automated procurement system.
On October 1, 1999, an internal reorganization was accomplished in
which the whole of the ordinary share capital of Elcom International Limited,
the Company's United Kingdom operations, were transferred from Elcom Services
Group, Inc. to elcom.com.
Elcom Services Group, Inc.
Elcom Services Group's revenues and resultant gross profit are affected
by price reductions and decreases in various vendor support programs by computer
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 throughout 1999, now possibly relates to Year 2000 projects
at certain of its customers, which may have caused delays in procuring computers
and related products and professional services, as customers focus on their
management information systems infrastructure. The Company believes that some of
its customers will defer computer purchases until after December 31, 1999
because of Year 2000 concerns, which may adversely impact net sales in the
fourth quarter of 1999. In addition, Elcom Services Group continues to review
the profitability of its large accounts and intends to transition those accounts
to its electronic commerce technology or alternatively, increase pricing to
those customers or assist those customers to purchase elsewhere. 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.
At the end of the fourth quarter of 1998, Elcom Services Group reduced
its work force by 133 positions worldwide and closed six field sales and support
offices in the United States. The workforce reduction was designed to streamline
the Company's sales force and operating infrastructure 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 work force reduction, 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
computer products remarketing and professional services subsidiary. In addition,
beginning in March 1999, elcom.com launched an Internet on-line storefront site,
which can be accessed at www.starbuyer.com where it markets and sells over
62,000 computer products and over 20,000 office supply products to businesses
and consumers, and intends to offer other business-oriented products, 24 hours a
day, seven days a week. elcom.com has commenced a branding and marketing
campaign in the fourth quarter of 1999 and intends to become a leading supplier
of multiple commodity-type products to businesses through this site. 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 generation of
the Company's PECOS technology was launched, PECOS Internet Procurement Manager
("PECOS.ipm"), an Internet and browser-based automated procurement system.
elcom.com offers 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 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
8
<PAGE>
("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 as it transitioned from its older
PECOS.cm technology. On a standalone basis, for the nine months ended September
30, 1999 and 1998, elcom.com reported revenues from licenses, including
associated professional services and maintenance fees of approximately $0.8
million and $2.1 million, respectively. In addition, elcom.com's Internet
storefront had product sales of approximately $28.7 million in the nine month
period ended September 30, 1999 (and none in the comparable 1998 period),
substantially all of which was from customers which transitioned from Elcom
Services Group. In total, elcom.com's consolidated gross profit increased from
$1.6 million in the nine month period ended September 30, 1998 to $2.8 million
in the comparable 1999 period. Consequently, because elcom.com's expenses
increased approximately $3.3 million from 1998 to 1999, as the Company continued
to staff the entity to support expected growth of its Internet storefront, its
operating loss increased $2.5 million, to $4.8 million during the nine month
period ended September 30, 1999, versus an operating loss of $2.3 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, primarily for
elcom.com. Wit Capital, which is partially owned by Goldman Sachs, will review
strategic financing options, potential strategic partners, and possible
financing alternatives (including the potential of an initial public offering of
elcom.com).
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'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 on its IT Systems and non-IT Systems have not revealed any substantial
Year 2000 issues, and the Company does not anticipate that the cost to remediate
the minor issues identified will be material. The Company has been assured by
its key electronic trading partners' that their 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 believes that its
PECOS electronic commerce technology applications are Year 2000 compliant.
Results of Operations
Quarter ended September 30, 1999 compared to the quarter ended September 30,
1998.
Net Sales. Net sales for the quarter ended September 30, 1999 decreased
53% to $91.3 million from $195.0 million in the same period of 1998, a decrease
of $103.7 million. The Company anticipates that revenues of Elcom Services
Group, its traditional full service computer products remarketer, may continue
to decrease as the Company evaluates the profitability of certain customer
accounts, and continues to transition certain 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. Professional services revenues of Elcom Services
Group for the quarter decreased 36% from approximately $9.6 million in 1998 to
$6.1 million in 1999. Net sales in the United States decreased 50% to $60.5
million in the 1999 quarter, from $121.5 million in the quarter ended September
30, 1998. Net sales of the Company's United Kingdom based operations decreased
58% to $30.8 million in the 1999 quarter from $73.5 million in the third quarter
of 1998. The Company believes the
9
<PAGE>
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 purchases of computer 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 computer product demand once
its customers have completed their Year 2000 efforts. Results in the United
Kingdom were effected by the disposal of the substantial majority of its United
Kingdom remarketer operations on July 31, 1999 as well as continued softening in
demand, consistent with a general economic slowdown in 1999 versus 1998.
Gross Profit. Gross profit for the quarter ended September 30, 1999
decreased to $7.7 million from $19.5 million in the 1998 quarter, a decrease of
$11.8 million or 60%. 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 percentage of net sales decreased to
8.5% in the 1999 quarter from 10.0% 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 decrease in the availability of manufacturer rebate and incremental
discount programs. The Company anticipates ongoing pressure on its computer
products 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 ("SG&A") expenses for the quarter ended September 30, 1999
decreased 31.4% to $15.0 million from $21.8 million in the 1998 quarter, a
decrease of $6.8 million. This decrease is primarily attributable to the
restructurings accomplished by the Company in late 1998, 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 and the reduction of SG&A expenses
associated with the disposed United Kingdom operations. The Company intends to
increase its marketing expenditures to support the branding and growth of
elcom.com. As a percentage of sales, SG&A expenses increased to 16.4% for the
quarter ended September 30, 1999, from 11.2% in the 1998 quarter, which reflects
a lower level of net sales in the third quarter of 1999, net of expense
reductions.
Research and Development Expense. Research and development expense
decreased 24.7% from $474,000 in the 1998 quarter to $357,000 in the 1999
quarter. This decrease reflects a transition from product development (in
particular, the newly announced Internet-based and remotely-hosted version of
elcom.com's PECOS technology, PECOS.ipm) to marketing 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 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 remotely-hosted automated procurement system.
Interest Expense. Interest expense for the quarter ended September 30,
1999 decreased to $0.8 million from $2.2 million in the comparable quarter of
1998, a decrease of $1.4 million. Interest expense in both periods 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 September 30, 1999 decreased by $96,000 to $145,000 from $241,000
in the 1998 quarter, reflecting a decrease in interest-earning deposits.
Income Tax Provision (Recovery). The income tax recovery in 1999
primarily relates to the estimated recovery of income taxes by the Company's
United Kingdom based operations, net of certain estimated current state income
taxes payable by the Company. The Company anticipates that its 1999 income
statement will not include a provision for 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
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1998 or 1999 financial statements, and the 1999 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
September 30, 1999 of $7.5 million due to factors described herein.
Nine months ended September 30,1999 compared to the nine months ended September
30, 1998.
Net Sales. Net sales for the nine months ended September 30, 1999
decreased to $416.2 million from $576.8 million in the same period of 1998, a
decrease of $160.6 million, or 28%. The Company anticipates that revenues of
Elcom Services Group, its traditional full service computer products remarketer,
may continue to decrease as the Company evaluates the profitability of certain
customer accounts, and continues to transition certain 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. The Company believes that the
decrease in sales also reflects the continued soft demand of its customers in
the United States. Net sales in the United Kingdom decreased as a result of the
sale of the majority of the United Kingdom remarketer operations on July 31,
1999 and have also softened, consistent with a general economic slowdown in the
United Kingdom in 1999 versus 1998. Net sales in the United States were $238
million in the nine months ended September 30, 1999 versus $344 million in the
nine months ended September 30, 1998, a 31% decrease, which reflects relatively
soft demand of its customers in the United States in the 1999 period, 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 $178 million
in 1999 from $232 million in the 1998 period, a decrease of $54 million or 23%.
Gross Profit. Gross profit for the 1999 period decreased to $41.1
million from $64.2 million in the 1998 period, a decrease of $23.1 million, or
36%. Gross profit, as a percent of net sales decreased from 11.1% in the 1998
period to 9.9% in the 1999 period. 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 1999 period decreased to $47.0 million compared
to $58.7 million for the 1998 period, a decrease of $11.7 million, or 19.9%.
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 as a percentage of net sales for the 1999
period to 11.3%, from 10.2% 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
decreased 14.8% from $1.1 million in the 1998 period to $0.9 million in the 1999
period. This decrease reflects a switch from product development (in particular
the newly announced Internet-based and remotely-hosted version of elcom.com's
PECOS technology, PECOS.ipm) to 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 remotely-hosted automated procurement system.
Asset Impairment, Restructuring and Other Related Charges. 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
carrying value of related assets and liabilities retained as well as 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. In the
11
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1998 period, the Company recorded a charge of $12.3 million related to a
restructuring of certain of its U.S. operations as further described elsewhere
herein. This restructuring entailed a workforce reduction of approximately 35 of
the Company's U.S. employees resulting in severance costs of $0.9 million, a
write-down to estimated net realizable value of $10 million of unrealizable
intangible assets and $1.4 million in other related expenses and asset
write-downs.
Interest Expense. Interest expense for the nine month period ended
September 30, 1999 decreased to $2.9 million from $6.3 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
nine month period ended September 30, 1999 increased to $764,000 from $637,000
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 (Recovery). 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 recovery in 1998 primarily related to the Company's net
operating loss generated in the third quarter of 1998. The Company anticipates
that its 1999 income statement will not include a provision for United States
federal income taxes, as it has net operating losses which were generated in the
1998 period available to offset any such provision. Such net operating losses
were not benefited in the Company's 1998 or 1999 financial statements, and the
1999 asset impairment charge has not been benefited in the 1999 financial
statements.
Net Income (Loss). The Company reported a net loss for the nine month
period ended September 30, 1999 of $31.7 million compared to a net loss for the
1998 period of $13.1 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 nine months ended
September 30, 1999 was $85.5 million, primarily reflecting the Company's net
loss, adjusted for $31.0 million in depreciation, amortization and asset
impairment charges, a $84.4 million decrease in the level of accounts receivable
and a $33.3 million decrease in the Company's inventory balances in the period,
and was net of a $36.1 million decrease in current liabilities. Net cash used in
investing activities was $2.9 million, consisting primarily of additions to
property, equipment and software. Net cash used in financing activities was
$63.0 million, consisting primarily of a $62.9 million net decrease in
borrowings under the Company's lines of credit.
Net cash provided by operating activities for the nine months ended
September 30, 1998 was $15.4 million and reflected a net increase in current
liabilities of $3.3 million (primarily related to timing of certain payments), a
$18.1 million decrease in inventory, and was net of a $10.7 million increase in
accounts receivable. Net cash used for investing activities was $9.0 million,
consisting primarily of additions to property, equipment and software. Net cash
used in financing activities was $20.0 million, consisting primarily of
repayments under the Company's lines of credit.
At September 30, 1999, the Company's principal sources of liquidity
included cash and cash equivalents of $33.5 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 minus 1%. The
facility was amended in connection with its March 1999 renewal to include
elcom.com 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 (8.75% at September 30, 1999) minus 0.5%, although approximately
one-half of the Company's initial United States borrowings do not bear interest
until
12
<PAGE>
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 third quarter of 1999, is expected to result in an interest
rate increase of 0.25% commencing October 1, 1999. Availability of United States
borrowings is based on DFSC's determination as to eligible accounts receivable
and inventory. As of September 30, 1999, the Company's borrowings from DFSC on
its United States floor plan line of credit were $30.8 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 $49.4 million, as of
September 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 (5.25% at
September 30, 1999) plus 1.25%. As of September 30, 1999, the Company's
borrowings under its United Kingdom DFSC facility were (pound)5.7 million, or
$9.8 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 computer 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 September 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 September 30, 1999, the Company had borrowings aggregating
approximately $40.6 million outstanding under its DFSC borrowing facilities,
which approximated its maximum 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 September 30, 1999, the
Company had no borrowings outstanding from IBMCC on its floor plan line of
credit.
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. These efforts, and the disposal of the substantial majority of the
Company's United Kingdom remarketer operations, have resulted in a decrease in
inventory of $33 million (86%) since December 31, 1998. 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 nine month period in
1998, and there can be no assurance that the Company will purchase the levels of
product necessary to continue to receive these reduced levels of funding support
in the future, or that manufacturers will continue to make such support
available. Reductions in manufacturer funding support 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, resulted
in a further reduction in its inventory position and the Company intends to
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.
13
<PAGE>
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, and
research and development.
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 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.
Seasonality And Impact Of Inflation
In prior years, the Company has not experienced observable seasonality
in its business. Generally, however, sales in the computer products 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
computer product 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 computer products,
corporate demand for and availability of computer products, trends toward
14
<PAGE>
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.
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 September 30, 1999 balances, the Company estimates that a 1%
change in interest rates would have an annual effect of approximately $100,000
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.
15
<PAGE>
Part II - Other Information
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 in the United States. The Company
also plans to use the retained business as the platform from which it will
market PECOS Internet Procurement Manager, its Internet-based, remotely-hosted
automated procurement system. The Company filed a Current Report on Form 8-K
concerning this transaction dated July 31, 1999, which was filed on August 13,
1999.
On September 3, 1999, the Audit Committee of the Board of Directors of
the Company commenced soliciting proposals for the year-end audit of its
calendar 1999 consolidated financial statements. The Company solicited a
proposal from four independent accounting firms, including Arthur Andersen LLP
who had been previously engaged by the Company as its principal auditor. The
Audit Committee took this action to ensure that the Company would continue to
receive the best possible audit services at a competitive price. On October 19,
1999 the Audit Committee met and voted to not engage Arthur Anderson LLP to act
as the independent accountants for calendar 1999. The Audit Committee voted to
offer the engagement to KPMG LLP as its new independent accountants on October
19, 1999. The Company filed a current Report on Form 8-K concerning this matter
dated October 19, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.42 Wit Capital Corporation engagement letter.
27 Financial Data Schedule.
(b) Report on Form 8-K
On July 14, 1999 the Company filed a Current Report on Form 8-K, dated
July 9, 1999, relating to the letter of intent covering the sale of the
substantial majority of the United Kingdom remarketer operation as
described elsewhere herein.
On August 13, 1999, the Company filed a Current Report on Form 8-K,
dated July 31, 1999, relating to the completion of the sale of a
majority of its United Kingdom remarketer operation. The Company filed
with its Current Report an unaduited pro forma consolidated balance
sheet as of June 30, 1999 and unaudited pro forma consolidated
statement of operation for the year ended December 31, 1998 and the six
month period ended 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: November 15, 1999 By: /s/ Peter A. Rendall
-------------------------------
Peter A. Rendall
Chief Financial Officer
16
CONFIDENTIAL Exhibit 10.42
July 8, 1999
Mr. Robert J. Crowell
Chairman and Chief Executive Officer
Elcom International, Inc.
10 Oceana Way
Norwood, MA 02062
Dear Mr. Crowell:
The purpose of this letter ("Agreement") is to confirm the engagement of Wit
Capital Corporation ("Wit Capital") to act as its financial advisor and as
exclusive placement agent to Elcom International, Inc. and subsidiaries
("Company") in connection with a proposed private placement of up to $15 million
or more ("Placement") of the equity or equity-related securities ("Securities")
of the Company or the Company's wholly-owned subsidiary, elcom.com
("Subsidiary").
1. In connection with its engagement, as requested by the Company Wit Capital
shall:
i. review with the Company its strategic alternatives relating to its
Internet activities, including evaluating selected strategic partners;
ii. assist and advise with respect to the form and structure of any
transaction;
iii. review the business and operations of the Company and Subsidiary
including its historical and projected financial condition;
iv. assist the Company in the drafting, preparation and distribution of an
offering memorandum ("Memorandum") and other related documentation
(together with the Memorandum, "Offering Materials") describing the
Company or the Subsidiary and the terms of the Placement;
v. assist the Company in formulating a marketing strategy for the
Securities and in developing the process thereof; vi. assist the
Company in identifying and contacting prospective purchasers of the
Securities; vii. advise the Company as to the strategy and tactics of
negotiations with such prospective purchasers and, if requested by the
Company, participate in such negotiations;
viii.advise the Company as to the timing and structure of the Placement;
ix. assist in the drafting of an S-1 when deemed appropriate; and
x. provide such other financial advisory services as are customary for
similar transactions and as may be mutually agreed upon by the Company
and Wit Capital.
2. It is expressly understood and acknowledged that Wit Capital's engagement
hereunder does not constitute any commitment, express or implied, on the
part of Wit Capital to purchase or place the Securities and that the
Placement will be made by Wit Capital on a "best efforts" basis.
3. As compensation for Wit Capital's services hereunder, the Company hereby
agrees to pay Wit Capital a monthly retainer fee (the "Retainer Fee")
payable in cash in an amount of $40,000 per month for three (3) months and
a placement fee ("Placement Fee"). The first month's Retainer Fee is due
and payable promptly in cash upon signing of this letter and subsequent
payments are due one and two months thereafter. The Retainer Fee shall be
credited against any Placement Fee. The Company hereby agrees to pay Wit
Capital a Placement Fee in cash of seven percent (7%) of the gross proceeds
of all Securities sold in the Placement (whether in a single transaction or
a series of transactions), but in no event less than $700,000. The Company
targets a minimum capital raise of $10 million. Additionally, upon closing
of the Placement, Wit Capital shall receive
<PAGE>
warrants to purchase one percent (1%) of the Company's fully-diluted, as
calculated by the Treasury Method, common stock ("Equity Fee") from the
Company at the same price at which the Securities are sold in the
Placement. The warrants will contain customary terms and conditions,
including weighted-average anti-dilution protection. In the event that the
Placement is in equity securities of the Subsidiary, Wit Capital shall
receive warrants to purchase one percent (1%) of the Subsidiary's
fully-diluted, as calculated by the Treasury Method, common stock from the
Company at the price at which the Securities are sold in the Placement. The
warrants shall contain customary terms and conditions, including
weighted-average anti-dilution protection. The Company agrees that
provision for payment of the Placement Fee will be included in a
subscription agreement or similar document.
Notwithstanding the foregoing, if the Company receives a signed term sheet
for financing from Softbank Technology Ventures ("Softbank") within 30 days
from the date hereof, and such financing is completed within 45 days from
the date hereof, then the cash portion of Wit Capital's Placement Fee shall
be reduced to $50,000, and the warrant portion reduced to 0.8% of the
Company or Subsidiary, but all other fees and expenses, shall remain
unchanged. If the Company receives a signed term sheet from Softbank within
the aforementioned 30 day period and desires to proceed towards a financing
from Softbank, Wit Capital shall suspend further financing activities until
the financing is completed, abandoned or the 45 day period elapses.
In the event that the Company determines not to pursue the Placement, as
compensation for its strategic advisory services hereunder, Wit shall
receive 80% of the Equity Fee with the exercise price fixed at the market
value of the Company at that date.
4. Wit Capital shall have a right of first refusal during the term of this
Agreement and for a period of twelve (12) months thereafter to act as the
Company's exclusive placement agent in connection with any private
placement of equity securities, or a merger or acquisition transaction
(together, "Financing") that may be undertaken by the Company, on terms and
conditions customary for Wit Capital for similar transactions.
Additionally, during the term of this Agreement and for a period of twelve
(12) months thereafter, Wit Capital shall have the right to participate as
co-manager in any public offering ("Public Offering") and the Company will
use its best efforts to ensure that Wit has the right to directly place at
least 20% of the Company's securities offered and to receive at least 30%
of the total underwriter fees for such Public Offering. Wit Capital shall
have the exclusive right to electronically distribute shares in connection
with such Public Offering. Any such Financing or Public Offering shall be
subject to, among other things, the following conditions: (i) satisfactory
completion of due diligence, (ii) the execution of an underwriting,
placement or similar agreement containing terms and conditions in Wit
Capital's customary form, (iii) satisfactory market conditions, (iv) the
absence of adverse changes to the Company's business or financial
condition, (v) satisfactory completion of the offering or filing process,
including completion of offering materials in form and substance
satisfactory to Wit Capital, and (vi) approval of Wit Capital's internal
commitment committee.
It is further agreed that if the Company determines not to proceed with the
Placement as a result of a sale of the Company or of any of the Company's
subsidiaries (excluding any UK subsidiaries), then Wit Capital shall
receive a fee at the closing of such sale equal to one percent (1%) of the
gross proceeds (including without limitation, cash, stock, assumption of
debt, or any other economic benefit) of such sale, but in no event less
than $700,000. Such fee shall include compensation for any related fairness
opinion required by the Company. For purposes of this Agreement, a sale of
the Company or of any subsidiary shall mean a transfer or disposition of
50% or more of the beneficial ownership or the sale of all, or
substantially all of the assets of the Subsidiary thereof.
5. In addition to any fees that may be payable to Wit Capital hereunder (and
regardless of whether a Placement occurs), the Company hereby agrees, from
time to time upon request, to reimburse Wit Capital promptly for all
2
<PAGE>
reasonable travel, reasonable legal fees and expenses and other normal
out-of-pocket expenses (all subject to pre-approval by the Company)
incurred in performing its services hereunder.
6. The term of Wit Capital's engagement hereunder shall commence on the date
hereof and continue until the earlier of the consummation of the Placement
or twelve (12) months from the date hereof, unless extended by mutual
written consent or earlier terminated by either party upon 30 days' prior
written notice; provided, however, that no such expiration or termination
shall affect the indemnification, contribution and confidentiality
obligations of the Company, the right of Wit Capital to receive any fees
payable hereunder or fees that have accrued prior to such termination, or
the right of Wit Capital to receive reimbursement for its out-of-pocket
expenses as described above.
7. If within the twelve (12) month period following the termination of this
Agreement, securities similar to those described in the Offering Materials
are sold by the Company through a private placement to investors to which
Wit has introduced the Company and with which Wit has had material
discussions, then Wit shall be entitled to receive the Placement Fee
specified herein.
8. The Company agrees to indemnify Wit Capital and related persons in
accordance with the indemnification provisions attached hereto as Annex A,
which are incorporated herein in their entirety by reference.
9. a. The Company recognizes and confirms that Wit Capital in acting
pursuant to this Agreement will be using information provided by
others, including, without limitation, information provided by or on
behalf of the Company, and that Wit Capital does not assume
responsibility for and may rely, without independent verification, on
the accuracy and completeness of any such information. The Company
hereby warrants that the Memorandum and the other Offering Materials,
and any other information relating to the Company or the Placement,
will not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements contained
therein, in the light of circumstances under which they were made, not
misleading. The Company agrees to provide Wit Capital with (i) prompt
notice of any material development affecting the Company or the
occurrence of any event or other change known to the Company that
could result in the Memorandum or the other Offering Materials
containing an untrue statement of a material fact or omitting to state
any material fact necessary to make the statements contained therein,
in the light of the circumstances under which they were made, not
misleading, (ii) copies of any financial reports as soon as reasonably
practicable and (iii) such other information concerning the business
and financial condition of the Company as Wit Capital may from time to
time reasonably request. The Company and Wit Capital will have the
right to approve the Memorandum and the other Offering Materials and
other written communications furnished by or on behalf of the Company
in connection with the Placement, and the Company will cause to be
furnished to Wit Capital and the purchasers of the Securities, on the
closing date of the Placement, copies of such opinions of counsel and
such other documents, letters, certificates and opinions as Wit
Capital or the purchasers may reasonably request in form and substance
reasonably satisfactory to Wit Capital and its counsel or the
purchasers and their counsel. The Company shall have the right to
approve a list of companies which Wit Capital targets as a prospective
investor.
b. Except as contemplated by the terms hereof or as required by
applicable law, regulation or legal process, Wit Capital shall keep
confidential all material non-public information provided to it by the
Company, and shall not disclose such information to any third party
without the Company's written consent, other than to such of its
employees and advisors as Wit Capital determines have a need to know.
c. The Company agrees that any information or advice (whether written or
oral) rendered by Wit Capital or its representatives in connection
with this Agreement is solely for the confidential use of the Company
and, except as otherwise required by applicable law, regulation or
legal process, the Company will not, and will
3
<PAGE>
not permit any third party to, disclose or otherwise refer to such
advice or information in any manner without Wit Capital's prior
written consent except for any related fairness opinion rendered by
Wit Capital, which may be reproduced only in its entirety without the
written consent of Wit Capital.
10. Neither Wit Capital nor the Company has taken, and neither will take, any
action, directly or indirectly, that may cause the Placement to fail to be
entitled to exemption from registration under the U.S. federal securities
laws or applicable state securities or "blue sky" laws. Wit Capital shall
not offer the Securities in any jurisdiction without pre-clearing such
offer with the Company. The Company shall be responsible for all filing and
other fees and expenses related to U.S. federal securities laws and "blue
sky" laws, including its attorneys' fees.
11. This Agreement shall be governed by and construed in accordance with the
laws of the State of New York, regardless of the laws that might otherwise
govern under applicable principles of conflicts of law thereof. The Company
hereby expressly and irrevocably agrees and consents that any action, suit
or proceeding arising out of or relating to this Agreement and the
transactions contemplated hereby may be instituted in any state or federal
court sitting in the City of New York, State of New York and, by execution
of this Agreement, the Company expressly waives any objection which it may
have now or hereafter to the venue or jurisdiction of any such action, suit
or proceeding and irrevocably submits to the jurisdiction of any such court
in any such action, suit or proceeding. The Company and Wit Capital agree
to waive trial by jury in any action, proceeding or counterclaim brought by
or on behalf of either party with respect to any matter whatsoever relating
to or arising out of any actual or proposed Placement, or the engagement of
or performance by Wit Capital hereunder.
12. This Agreement (a) incorporates the entire understanding of the parties
with respect to the subject matter hereof and supersedes all previous
agreements should they exist with respect thereto, (b) may not be amended
or modified except in a writing executed by the Company and Wit Capital,
(c) shall be binding upon and inure to the benefit of the Company, Wit
Capital, the Indemnified Parties (as defined in Annex A hereto) and their
respective successors and assigns and (d) may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
Please confirm that the foregoing is in accordance with your understanding of
our agreement by signing and returning to us a copy of this letter.
Very truly yours,
WIT CAPITAL CORPORATION
By: /s/ Charles Hall
Charles Hall
Managing Director
Accepted and agreed to as of the date set forth above:
ELCOM INTERNATIONAL, INC.
By: /s/ Robert J. Crowell
Robert J. Crowell
Chairman and Chief Executive Officer
4
<PAGE>
ANNEX A: Indemnification Provisions
In connection with the engagement of Wit Capital Corporation ("Wit Capital") by
Elcom International, Inc. ("Company") pursuant to a letter agreement dated July
8, 1999 between the Company and Wit Capital, as it may be amended from time to
time ("Agreement"), the Company hereby agrees as follows:
A) The Company agrees to indemnify Wit Capital and/or any controlling person,
partner, director, officer, employee, agent, affiliate or representative of
Wit Capital (hereinafter collectively referred to as the "Indemnified
Parties") and hold each of them harmless against any losses, claims,
damages, judgments, assessments, costs and other liabilities (collectively,
the "Liabilities") and will reimburse each Indemnified Party for all
reasonable fees and expenses (including the reasonable fees and expenses of
their respective attorneys) (collectively, the "Expenses") as they are
incurred in investigating, preparing or defending any claims, actions,
proceedings, investigations (formal or informal), inquiries or threats
thereof to which an Indemnified Party may become subject, arising in any
manner out of or in connection with the rendering of services by Wit
Capital hereunder (including, without limitation, services rendered in
connection with a Placement), unless it is finally judicially determined
that the Liabilities or Expenses arose out of the gross negligence or
willful misconduct of such Indemnified Party, and in case any action shall
be brought against an Indemnified Party with respect to which indemnity may
be sought against the Company, such Indemnified Party shall promptly notify
the Company in writing and the Company shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to such
Indemnified Party and payment of all fees and expenses; provided that
failure to so notify the Company shall not relieve the Company from any
liability which the Company may have on account of this indemnity or
otherwise, except to the extent the Company shall have been materially
prejudiced by such failure.
The Indemnified Parties shall have the right to retain separate counsel,
but the fees and expenses of such counsel shall be at the expense of the
Indemnified Parties, unless (i) the employment of such counsel has been
specifically authorized in writing by the Company, (ii) the Company has
failed to assume the defense and employ counsel as required above, or (iii)
the named parties to any such action (including any impleaded parties)
include both (a) the Indemnified Parties and (b) the Company, and the
Indemnified Parties shall have been advised by counsel that there may be
one or more legal defenses available to the Indemnified Parties which are
different from or additional to those available to the Company (in which
case the Company shall not have the right to assume the defense of such
action on behalf of the Indemnified Parties); it being understood, however,
that the Company shall not, in connection with any one such action or
separate, substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for
the reasonable fees and expenses of more than one separate firm of
attorneys for the Indemnified Parties, which firm shall be designated in
writing by the Indemnified Parties.
For actions brought against the Indemnified Parties for which the Company
has assumed the defense, the Company agrees that it will not enter into a
settlement of any such action without the prior written consent of each of
the Indemnified Parties, which shall not be unreasonably withheld or
delayed.
B) The Company and Wit Capital agree that if any indemnification or
reimbursement sought pursuant to the preceding Paragraph A is finally
judicially determined to be unavailable (except by reason of the gross
negligence or willful misconduct of the Indemnified Parties) then, whether
or not Wit Capital is the person entitled to indemnification or
reimbursement, the Company and Wit Capital shall contribute to the
Liabilities for which such indemnification or reimbursement is held
unavailable in such proportion as is appropriate to reflect (a) the
relative benefits to the Company on the one hand, and Wit Capital on the
other hand, in connection with the transaction to which such
indemnification or reimbursement relates, (b) the relative fault of the
parties, and (c) other equitable considerations; provided, however, that in
no event shall the amount to be contributed by Wit Capital exceed the
amount of fees actually received by Wit Capital for the Placement, as the
case may be.
ELCOM INTERNATIONAL, INC. WIT CAPITAL CORPORATION
By: /s/ Robert J. Crowell By: /s/ Charles Hall
--------------------- --------------------
Robert J. Crowell Charles Hall
Chairman and Chief Executive Officer Managing Director
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