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, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-27376
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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 30,706,357 shares of common stock, $.01 par value,
outstanding as of April 30, 2000.
<PAGE>
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999
and March 31, 2000 (unaudited)..............................2
Consolidated Statements of Operations and Other Comprehensive
Income (Loss) - Three Month Periods
Ended March 31, 1999 and 2000 (unaudited)...................3
Consolidated Statements of Cash Flows - Three Month Periods
Ended March 31, 1999 and 2000 (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 ...........................................................14
EXHIBITS
Exhibit 27 Financial Data Schedule
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<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, March 31,
1999 2000
---------- ----------
<S> <C> <C>
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 34,159 $ 38,672
Accounts receivable:
Trade .......................................................... 45,571 43,903
Other .......................................................... 8,321 11,325
---------- ----------
53,892 55,228
Less - Allowance for doubtful accounts ......................... 3,838 4,023
---------- ----------
Accounts receivable, net ................................... 50,054 51,205
Inventory ......................................................... 1,462 2,351
Prepaids and other current assets ................................. 1,221 2,837
---------- ----------
Total current assets ....................................... 86,896 95,065
---------- ----------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software .................................... 24,730 25,956
Land, buildings and leasehold improvements ........................ 2,710 2,733
Furniture, fixtures and equipment ................................. 5,755 5,788
---------- ----------
33,195 34,477
Less - Accumulated depreciation and amortization .................. 22,230 23,602
---------- ----------
10,965 10,875
---------- ----------
OTHER ASSETS ........................................................ 178 624
---------- ----------
$ 98,039 $ 106,564
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit ................................................... $ 29,870 31,507
Accounts payable .................................................. 12,440 20,300
Accrued expenses and other current liabilities .................... 8,230 9,561
Current portion of capital lease obligations ...................... 311 247
---------- ----------
Total current liabilities .................................. 50,851 61,615
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION ................... 260 237
---------- ----------
Total liabilities .......................................... 51,111 61,852
---------- ----------
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 -- 29,128,585 and 31,097,237 shares .................. 291 311
Additional paid-in capital ........................................ 106,111 114,541
Accumulated earnings (deficit) .................................... (58,730) (66,297)
Treasury stock, at cost -- 257,739 and 395,324 shares ............ (1,282) (4,452)
Accumulated other comprehensive income ............................ 538 609
---------- ----------
Total stockholders' equity ................................. 46,928 44,712
---------- ----------
$ 98,039 $ 106,564
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
----------------------
1999 2000
---------- ----------
<S> <C> <C>
Net sales ....................................................................... $ 174,353 $ 80,191
Cost of sales ................................................................... 157,179 73,779
---------- ----------
17,174 6,412
---------- ----------
Expenses:
Selling, general and administrative ........................................... 17,069 13,653
Research and development ................................................... 351 456
---------- ----------
Total expenses .................................................................. 17,420 14,109
---------- ----------
Operating loss .................................................................. (246) (7,697)
Interest expense ................................................................ (1,195) (280)
Interest income and other, net .................................................. 489 410
---------- ----------
Loss before income taxes ........................................................ (952) (7,567)
Provision for income taxes ...................................................... 503 --
---------- ----------
Net loss ........................................................................ $ (1,455) $ (7,567)
========== ==========
Basic and diluted net loss per share ............................................ $ (0.05) $ (0.25)
========== ==========
Basic and diluted weighted average shares outstanding ........................... 27,412 29,711
========== ==========
Other Comprehensive Income (Loss), Net of Tax:
Net loss ........................................................................ $ (1,455) $ (7,567)
Foreign currency translation adjustments ...................................... (289) 71
========== ==========
Comprehensive loss .............................................................. $ (1,744) $ (7,496)
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
---------------------
1999 2000
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $ (1,455) $ (7,567)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities --
Depreciation and amortization ................................... 2,214 1,469
Provision for doubtful accounts ................................. 212 270
Other deferred liabilities ...................................... (418) --
Changes in current assets and liabilities
Accounts receivable ........................................... 13,308 (1,617)
Inventory ..................................................... 15,532 (902)
Prepaids and other current assets ............................. (2,888) (1,749)
Accounts payable .............................................. 1,565 7,993
Accrued expenses, other current liabilities and other ......... (24) 1,369
--------- ---------
Net cash provided by (used in) operating activities ........ 28,046 (734)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software ...................... (843) (1,410)
Decrease (increase) in other assets and deferred costs ............ 22 (447)
--------- ---------
Net cash used in investing activities ....................... (821) (1,857)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments (receipts) under lines of credit ..................... (14,328) 1,729
Repayment of capital lease obligations and long-term debt ......... (251) (87)
Exercise of common stock options and warrants ..................... 12 8,450
Purchase of treasury stock ........................................ -- (3,170)
--------- ---------
Net cash provided by (used in) financing activities ......... (14,567) 6,922
--------- ---------
FOREIGN EXCHANGE EFFECT ON CASH ..................................... (86) 182
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 12,572 4,513
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................... 14,315 34,159
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................ $ 26,887 $ 38,672
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ..................................................... $ 1,295 $ 263
========= =========
Income taxes paid ................................................. $ 82 $ 102
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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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, 2000, and the results of operations and cash
flows for the periods ended March 31, 1999 and 2000. 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 as
of and for the year ended December 31, 1999.
2. Net Income (Loss) Per Share
Net income (loss) 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 ("EPS"). 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 1999 and 2000, diluted EPS is the same as basic EPS because the Company
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
Basic and Diluted March 31,
---------------------------------------------- ------------------------
1999 2000
---------- ----------
Net loss..................................... $(1,455) $(7,567)
========== ==========
Weighted average shares outstanding.......... 27,412 29,711
========== ==========
Basic and diluted net loss per share......... $(0.05) $ (0.25)
========== ==========
Diluted net loss per share in the 1999 and 2000 periods does not
reflect the dilutive effect of stock options and warrants, as the impact of
including them is antidilutive. Based on the average market price of the
Company's common shares in the 1999 three month period, 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. Based on the average market price of the
Company's common shares in the three month period ended March 31, 2000, a net
total of 6,701,120 shares covered by options would have been dilutive, and
360,401 shares covered by options and warrants with per share exercise prices
ranging from $24.06 to $31.13 would not have been dilutive.
3. Business Segment Information
The Company's operations are classified into two reportable business
segments: elcom.com, inc. the Company's eBusiness technology subsidiary, and
Elcom Services Group, Inc. which markets and sells business-
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related products to commercial customers. The accounting policies for these
segments are consistent with those described in the summary of segment
accounting policies in Form 10-K of the 1999 Annual Report. The Company's
management evaluates segment performance based on net sales and gross profit.
On October 1, 1999, the ownership of the United Kingdom operations were
transferred from Elcom Services Group, Inc. ("Elcom Services Group") to
elcom.com, inc. ("elcom.com"). Segment results for the quarters ending March 31,
1999 and 2000 are as follows (in thousands):
1999 2000
-------- --------
Net Sales
Elcom Services Group ........... $172,067 $ 34,474
elcom.com ...................... 2,286 45,717
-------- --------
Total $174,353 $ 80,191
======== ========
Gross Profit
Elcom Services Group............ $ 16,875 $ 2,133
elcom.com....................... 300 4,279
-------- --------
Total $ 17,175 $ 6,412
======== ========
Segment information as of December 31, 1999 and March 31, 2000 is as
follows (in thousands):
1999 2000
-------- --------
Identifiable Assets
Elcom Services Group............ $ 21,858 $ 21,987
elcom.com....................... 45,154 51,764
Corporate....................... 31,027 32,813
-------- --------
Total $ 98,039 $106,564
======== ========
Substantially all net sales, gross profit and identifiable assets
related to the remarketing of business products, primarily personal computer
products and related services.
The Company operates both in the United States and United Kingdom and
geographic information for the quarters ended March 31, 1999 and 2000 are as
follows (in thousands):
1999 2000
-------- --------
Net Sales
United States................... $ 95,446 $ 63,285
United Kingdom.................. 78,907 16,906
-------- --------
Total $174,353 $ 80,191
======== ========
Gross Profit
United States................... $ 8,737 $ 4,438
United Kingdom.................. 8,437 1,974
-------- --------
Total $ 17,174 $ 6,412
======== ========
Geographic information as of December 31, 1999 and March 31, 2000 is
as follows:
1999 2000
-------- --------
Identifiable Assets
United States................... $ 89,767 $ 82,203
United Kingdom.................. 8,272 24,361
-------- --------
Total $ 98,039 $106,564
======== ========
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 which included its
United Kingdom field-based sales operation, its professional
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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 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 $78.9 million in Q1 1999, and $16.9 million in Q1
2000. The Company has retained its United Kingdom telemarketing group, which it
intends to evolve towards a Internet-based business to business ("B2B") digital
marketplace, similar to Starbuyer.com operated 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 ("PECOS.ipm"),
elcom.com's Internet-based and remotely-hosted automated procurement system. The
acquirer assumed the leases of the Company's United Kingdom facilities in
Langley and Glasgow; however, the Company retained substantially all other
balance sheet assets and liabilities of the disposed businesses.
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
recorded an asset impairment charge of $19.5 million in the second quarter of
1999 which included a reduction of the carrying value of its United Kingdom
assets to estimated net realizable value and an accrual of approximately $3.3
million primarily related to lease termination costs, severance and accounts
receivable. Additionally, expenses of $3.1 million were recorded against gross
profit to reflect a reduction in inventory valuation and returns estimates. The
Company had $25.7 million of goodwill reflected on its balance sheet associated
with the United Kingdom operations which was impaired and incorporated in the
$19.5 million charge. In the third and fourth quarters of 1999, $2.2 million of
costs primarily related to lease termination, severance and accounts receivable
were incurred and charged against the $3.3 million accrual. At December 31,
1999, approximately $1.1 million of this accrual remained on the balance sheet
to be utilized in 2000. During the first quarter of 2000, $0.6 million of the
remaining accrual was utilized for costs primarily related to accounts
receivable. At March 31, 2000, $0.5 million of this accrual remains on the
balance sheet and is expected to be utilized by the third quarter of 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The Company was founded in 1992 as Elcom Systems, Inc., as a developer
of electronic commerce software. The Company formed another company which, to
prove and use its technology, commenced selling computer and business products,
primarily PCs and associated peripherals, using its electronic commerce
software, in December 1993 and experienced rapid growth for several years. The
Company achieved its growth by using its proprietary PECOS procurement
application and by offering the use of PECOS through 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, substantially all of the Company's net sales have been
derived from the sale of business and computer products in the United States and
United Kingdom, to business and corporate customers. In addition, the Company,
through elcom.com, licenses its PECOS technologies, including PECOS.ipm, its
recently introduced Internet-based and remotely-hosted automated procurement
system, and provides implementation and consulting services. In March 1999,
elcom.com commenced operating Starbuyer.com, its Internet B2B digital
marketplace, to sell business products. Since then, elcom.com has added auction
capabilities to its Internet site, launched office supplies and software product
lines 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, professional
services organization, distribution business, and certain inventories 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 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 B2B digital marketplace similar to Starbuyer.com which
is operated by elcom.com in the United States. The Company also plans to expand
its direct sales force and use the United Kingdom telemarketing group to market
PECOS.ipm.
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elcom.com, inc.
elcom.com is the eBusiness subsidiary of the Company that develops and
primarily licenses Internet-based, remotely-hosted applications (automated
procurement and digital marketplace systems).
In March 1999, elcom.com launched its B2B digital marketplace
www.starbuyer.com, from which elcom.com markets and sells over 250,000 business
products manufactured by numerous suppliers to corporations in a "24x7"
environment. elcom.com 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. elcom.com added auction capabilities to
its site as part of its Internet-based digital marketplace in April 1999. 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 incremental customers. To
accomplish this, elcom.com plans to increase its sales and marketing
expenditures in future periods.
Beginning in the latter half of 1998, the Company shifted its focus
from marketing its PECOS Commerce Manager ("PECOS.cm") technology to investing
in the development of PECOS Procurement Manager ("PECOS.PM"), its intranet-based
automated procurement management system and more recently, to PECOS.ipm, its
remotely-hosted automated procurement system. During 1999, the Company focused
primarily on fully developing PECOS.ipm for commercial launch as it transitioned
from its older PECOS.cm technology, thereby negatively affecting
technology-based revenues during this product transition period. On a
stand-alone basis, for the quarter ended March 31, 2000, the United States
operations of elcom.com, complying with appropriate revenue recognition rules,
reported revenues from licenses, including associated professional services and
maintenance fees of approximately $0.1 million compared to $0.2 million in the
comparable quarter in 1999. In addition, elcom.com's digital marketplace in the
United States generated product sales of approximately $28.6 million for the
quarter ended March 31, 2000 compared to $2.0 million in the comparable quarter
in 1999. In total, elcom.com's consolidated gross profit from United States
operations for the quarter ended March 31, 2000 was $2.3 million compared to
$0.3 million in the 1999 quarter. elcom.com's United States operations expenses
increased approximately $4.8 million from March 31, 1999 to March 31, 2000, as
the Company continued to staff the entity to support expected growth of its
digital marketplace and invested in marketing for PECOS.ipm. Consequently, the
operating loss from United States operations increased $2.6 million, to $4.0
million during the quarter ended March 31, 2000, versus an operating loss of
$1.4 million for the quarter ended March 31, 1999.
Elcom Services Group, Inc.
Elcom Services Group markets and sells business-related products and
professional services to commercial customers.
The Company introduced a strategy for Elcom Services Group in early
1999 to reduce its revenues and related inventory exposure by declining to do
business with customers that do not pay the Company on time as per agreements,
or demanded pricing which the Company would not provide due to many factors,
including decreases in marketing development funding from various manufacturers.
This has resulted in a significant decrease in revenues in 1999 and 2000
compared to 1998, but has effectively eliminated the majority of the Company's
marginal customers.
Elcom Services Group's revenues and resultant gross profit are affected
by price reductions and decreases in various vendor inventory and other support
programs offered by computer manufacturers. These cutbacks have been substantial
over the last several years, and most particularly over the last year, resulting
in a corresponding decrease in gross margin. Manufacturers' price reductions
require Elcom Services Group to 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. The Company experienced substantial difficulties and inefficiencies
with the implementation of its Oracle-based systems which significantly impacted
operations, logistics, fulfillment and resultant profitability from 1997 through
1999. Further, the Company experienced a softening of demand from its customers
that began in September of 1998, which, at that time, the Company attributed to
the Asian financial crisis and related uncertainties in worldwide financial
markets, that impacted some of the Company's customers capital spending
programs. The Company believes that the relatively soft demand,
8
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which continued during 1999, possibly related to Year 2000 projects at certain
of its customers, may have caused delays in procuring computers and related
products and professional services, as customers focused on their management
information systems infrastructure. Elcom Services Group's gross margins may
vary from 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.
Engagement of Wit Capital Corporation
On July 19, 1999, the Company announced the engagement of Wit Capital
Corporation ("Wit Capital") as its investment bank and strategic advisor for the
purpose of assisting the Company in evaluating strategic options for itself and
for elcom.com. In the event the Company completes an equity placement with an
investor introduced by Wit Capital, the terms of the engagement call for Wit
Capital to receive Elcom International, Inc. warrants equal to 1% of the
Company's fully-diluted (as calculated by the Treasury Method) common stock and
a placement fee of $700,000. In accordance with the Wit Agreement, the Company
issued warrants to Wit Capital to purchase 353,418 shares of the Company's
common stock at $28.71 per common share. The warrants expire on December 30,
2002. Wit Capital, which is partially owned by Goldman Sachs, continues to
review strategic financing options, potential strategic partners, and possible
financing alternatives.
On December 30, 1999, the Company signed a structured Equity Line
Flexible Financing Agreement ("Equity Line") with Cripple Creek Securities LLC
("Cripple Creek"), which was introduced to the Company by Wit Capital. Under the
terms of the agreement, upon effectiveness of the registration statement filed
to register these shares the Company may sell up to $50 million of Common Stock
over an 18 month period. The Company has reserved 750,000 shares for issuance
pursuant to the warrants that may be issuable to Cripple Creek in connection
with the Equity Line financing. On January 14, 2000, the Company filed a
registration statement on Form S-3 with the Securities and Exchange Commission
for the registration of 2,853,418 shares of Common Stock, which consists of
2,500,000 shares of Common Stock issuable under the Equity Line and 353,418
shares of Common Stock issuable upon exercise of warrants held by Wit Capital,
the Company's financial advisor.
The agreement provides that the Company, at its option, may sell up to
$10 million of common stock during each monthly investment period. Cripple Creek
may require the Company to sell additional shares of Common Stock to it, up to
an amount equal to the amount the Company decided to sell during such investment
period, but no less than $1 million at a price equal to 100% of the lowest
volume-weighted average sale price during the five days immediately preceding
the notice of purchase delivered to the Company by Cripple Creek. The agreement
allows the Company to set a minimum price that the common stock sold under the
Equity Line must be purchased at, during any particular investment period. The
Company also will issue to Cripple Creek, warrants to purchase 15,000 shares of
common stock, for each $1 million of common stock sold by the Company, provided
that warrants to acquire at least a minimum total of 150,000 (100,000 under
certain circumstances) will be issuable upon termination of the Equity Line. The
exercise price of the warrants will equal 120% of the average price paid by
Cripple Creek for the common stock purchased under the Equity Line. The Company
is not obligated to sell any minimum amount of common stock under the Equity
Line.
The Equity Line will be in effect for a period of 18 months, beginning
on a date shortly after the Registration Statement is declared effective. The
Company may, at its option, terminate this agreement at any time.
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 full Oracle-based system for the
United Kingdom to the first half of 2001.
The Company's various Year 2000 tests on its IT Systems and non-IT
Systems did not reveal any Year 2000 issues, and the Company did not incur any
material costs related to Year 2000 issues.
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During 1999, the Company continued to enhance its United States and
United Kingdom IT systems. The Company has been assured by its electronic
trading partners that their information systems applications are Year 2000
compliant, 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 has yet to experience
any significant problems internally or with customers, clients or electronic
trading partners in connection with Year 2000 compliance.
The Company operates a fully redundant system with data centers in
Norwood, MA and Irvine, CA, which provide the hosting platform for PECOS.ipm's,
and future digital marketplace clients. The Company is dependent on its IT
system and any problems with its ongoing development and enhancement, or any
interruption in its functional availability may have an adverse effect on sales
to customers and/or customer satisfaction. Although the Company believes that
its technology and operating systems will be adequate for its current needs,
such IT systems will undoubtedly require ongoing investments, modification and
enhancements as these IT systems expand and evolve.
Results of Operations
Quarter ended March 31, 2000 compared to the quarter ended March 31, 1999.
Net Sales. Net sales for the quarter ended March 31, 2000 decreased 54%
to $80.2 million from $174.3 million in the same period of 1999, a decrease of
$94.1 million. Net sales of the Company's United Kingdom based operations
decreased from $78.9 million to $16.9 million in the first quarter of 2000 due
to the sale of the Company's United Kingdom remarketing group operations. United
States net sales decreased from $95.4 million to $63.3 million primarily due to
Elcom Services Group's strategy to decline business with customers that do not
pay on time, demand pricing that negatively impacts margins and requires
unacceptable inventory exposure, offset by an increase in elcom.com revenue due
to increases in automated procurement and digital marketplace revenue.
Gross Profit. Gross profit for the quarter ended March 31, 2000
decreased to $6.4 million from $17.2 million in the 1999 quarter, a decrease of
$10.8 million or 63%. The decrease in gross profit dollars reflects the decrease
in net sales as well as a decrease in the gross profit percentage between the
1999 and 2000 quarters. Gross profit as a percent of net sales decreased to 8%
in the 2000 quarter from 9.9% in the 1999 quarter primarily due to a decrease in
manufacturer rebates and incremental discount programs as well as the disposal
of the higher margin United Kingdom business in July 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the quarter ended March 31, 2000 decreased 20% to
$13.7 million from $17.1 million in the 1999 quarter, a decrease of $3.4
million. As a percentage of sales, selling, general and administrative expenses
increased for the quarter ended March 31, 2000 to 17% from 9.8% in the 1999
quarter primarily due to an increase in personnel costs and marketing costs due
to the increased staffing and branding in elcom.com.
Research and Development Expense. Research and development expense for
the quarters ended March 31, 1999 and 2000 were $0.4 million and $0.5 million
respectively, an increase of 25%. These costs represent expenditures in support
of the Company's PECOS.ipm technology. The Company's research and development
expense is focused on developing incremental functionality and features for its
PECOS.ipm.
Interest Expense. Interest expense for the quarter ended March 31, 2000
decreased to $0.3 million from $1.2 million in the comparable quarter of 1999, a
decrease of $0.9 million. Interest expense in both years reflects floor plan
line of credit borrowings in support of the Company's accounts receivable and
inventory. The reduction in 2000 is reflective of the decrease in the Company's
net sales, improved collections of receivables, and substantially lower
inventory balances versus the 1999 period.
Interest Income and Other, Net. Interest income and other, net, for the
quarter ended March 31, 2000 decreased to $410,000 from $489,000 in the 1999
quarter.
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
10
<PAGE>
Company. Throughout 2000, the Company anticipates it will not provide United
States federal and state income taxes as it is generating net operating losses
and it is more likely than not that these deferred tax assets will not be
realized.
Net Income (Loss). The Company generated a net loss for the quarter
ended March 31, 2000 of $7.6 million as a result of the factors described
herein.
Liquidity and Capital Resources
Net cash used in operating activities for the quarter ended March 31,
2000 was $0.7 million, which is primarily due to an increase in accounts payable
and other accrued expenses of $9.4 million (primarily related to the timing of
certain payments), offset by a $4.3 million combined increase in inventory,
prepaids and accounts receivable. Net cash used for investing activities was
$1.9 million, consisting primarily of additions to property, equipment and
software of $1.4 million. Net cash provided by financing activities was $6.9
million, primarily due to $8.5 million provided by the exercise of stock options
and warrants, offset by a $3.2 million increase in treasury stock.
At March 31, 2000, the Company's principal sources of liquidity
included cash and cash equivalents of $38.7 million and accounts receivable and
floor plan lines of credit from Deutsche Financial Services Corporation
("DFSC"). Cash and cash equivalents of $15 million are pledged to secure a
portion of the DFSC facility. As of February 10, 2000, the DFSC facility was
amended to provide for aggregate borrowings of up to $50 million and as of April
1, 2000, the interest rate was increased to prime plus 0.25% compared to an
interest rate of prime through the three months ended March 31, 2000.
Approximately one-half of the Company's United States borrowings do not bear
interest until after interest-free periods of 30 to 60 days have lapsed.
Availability of United States borrowings is based on DFSC's
determination as to eligible accounts receivable and inventory. As of March 31,
2000, the Company's borrowings from DFSC on its United States floor plan line of
credit were $24.8 million. 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.
The Company 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 December 31, 1999. The aggregate borrowing amount was
amended on March 22, 2000 to borrowings of up to (pound)12.5 million, or
approximately $19.9 million. 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 (6%
at March 31, 2000) plus 1.65%. As of March 31, 2000, the Company's borrowings
under its United Kingdom DFSC facility were (pound)4.2 million, or $6.7 million,
which approximated the Company's availability at such time.
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 tangible net worth
covenant, the Company is in compliance with all other covenants of the facility
as of March 31, 2000. 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 March 31, 2000, the Company had aggregate borrowings of
approximately $31.5 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 March 31, 2000, the
Company had no borrowings outstanding from IBMCC on its floor plan line of
credit.
11
<PAGE>
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 substantial
decrease in net inventory over the last 12 months. 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 2000 versus 1999, 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 funding available. Reductions in
manufacturer funding reduce the Company's gross profit. The Company intends to
continue to maintain logistical and traditional relationships with selected
distributors. 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.
On December 30 , 1999, the Company entered into an Equity Line with
Cripple Creek. Under the terms of the agreement, upon effectiveness of the
registration statement filed to register these shares the Company may sell up to
$50 million of its Common Stock to Cripple Creek over an 18 month period.
On January 14, 2000, the Company filed a registration statement on Form
S-3 with the Securities and Exchange Commission for the registration of
2,853,418 shares of Common Stock, which consists of 2,500,000 shares of Common
Stock issuable under the Equity Line and 353,418 shares of Common Stock issuable
upon exercise of warrants held by Wit Capital.
The Equity Line will be in effect for a period of 18 months, beginning
on a date shortly after the Registration Statement is declared effective. The
Company may, at its option, terminate this agreement at any time.
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 Company believes that its cash, cash equivalents and accounts
receivable, together with its existing sources of equity and its liquidity and
cash generated from operations, will be sufficient to meet its working capital
and capital expenditure requirements for the next year, unless management
decides to accelerate spending, and 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.
Seasonality and Impact of Inflation
In prior years, the Company has not experienced observable seasonality
in its business. Generally, however, sales in the business and 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 the first
quarter of 2000 and it is likely that the sales of the Company will continue to
experience some level of 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.
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
12
<PAGE>
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," "targets," "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,
the potential dilutive effect of the Equity Line, the overall marketplace and
customer's acceptance and usage of electronic commerce software systems, 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,
changes in manufacturer policies reducing price protection, returns and other
policies, 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 1999
Annual Report on Form 10-K and in the Company's other SEC reports and
statements, including the Company's prospectus included as part of the S-3
Registration Statement filed on January 14, 2000 as amended from time to time.
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 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, 2000 balances, the Company estimates that a 1% change
in interest rates would have an effect of approximately $0.4 million 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 period effect of such fluctuations is
included in the Consolidated Statements of Operations and Other Comprehensive
Income (Loss). To date, such fluctuations have amounted to a positive
accumulated amount of $609,000.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(27) Financial Data Schedule. (x)
(b) Reports on Form 8-K
There were no reports on From 8-K filed during the three months ended
March 31, 2000.
- ---------------------------------
(x) Filed herewith.
13
<PAGE>
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 , 2000 By: /s/ Peter A. Rendall
--------------------
Peter A. Rendall
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
14
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