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, 2000
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 30,797,081 shares of common stock, $.01 par value,
outstanding as of October 31, 2000.
<PAGE>
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999
and September 30, 2000 (unaudited).......................... 2
Consolidated Statements of Operations and Other
Comprehensive Income (Loss) - Three and Nine Month
Periods Ended September 30, 1999 and 2000 (unaudited)....... 3
Consolidated Statements of Cash Flows - Nine Month Periods
Ended September 30, 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.....................................................14
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...............................15
Signature ...............................................................15
1
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ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
December 31, September 30,
1999 2000
(unaudited)
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 34,159 $ 34,420
Accounts receivable:
Trade..................................................... 45,571 43,658
Other..................................................... 8,321 7,472
------------ -------------
53,892 51,130
Less - Allowance for doubtful accounts.................... 3,838 4,973
------------ -------------
Accounts receivable, net.............................. 50,054 46,157
Inventory.................................................... 1,462 2,123
Prepaids and other current assets............................ 1,221 2,520
------------ -------------
Total current assets 86,896 85,220
------------ -------------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software............................... 24,730 27,792
Land, buildings and leasehold improvements................... 2,710 2,985
Furniture, fixtures and equipment............................ 5,755 6,492
------------ -------------
33,195 37,269
Less - Accumulated depreciation and amortization.......... 22,230 25,894
------------ -------------
Property, Equipment, and Software, net................ 10,965 11,375
OTHER ASSETS................................................... 178 832
------------ -------------
$ 98,039 $ 97,427
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit.............................................. $ 29,870 $ 32,967
Accounts payable............................................. 12,440 19,866
Accrued expenses and other current liabilities............... 8,230 9,078
Current portion of capital lease obligations................. 311 186
------------ -------------
Total current liabilities 50,851 62,097
------------ -------------
CAPITAL LEASE OBLIGATIONS, NET OF URRENT PORTION............... 260 265
------------ -------------
Total liabilities 51,111 62,362
------------ -------------
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 31,204,103 shares................ 291 312
Additional paid-in capital................................... 106,111 114,204
Accumulated earnings (deficit)............................... (58,730) (74,417)
Treasury stock, at cost -- 257,739 and 409,609 shares........ (1,282) (4,552)
Accumulated other comprehensive income (loss)................ 538 (482)
------------ -------------
Total stockholders' equity 46,928 35,065
------------ -------------
$ 98,039 $ 97,427
============ =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
Three Months Nine Months Ended
Ended September 30, September 30,
---------------------- --------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales........................................ $ 91,326 $ 77,051 $ 415,090 $ 240,950
Cost of sales.................................... 83,606 68,932 376,677 218,785
---------- ---------- ---------- ----------
Gross profit..................................... 7,720 8,119 38,413 22,165
---------- ---------- ---------- ----------
Expenses:
Selling, general and administrative............ 14,972 12,771 47,409 38,013
Research and development....................... 357 583 932 1,544
Asset impairment and other related charges..... - - 19,504 -
---------- ---------- ---------- ----------
Total expenses................................... 15,329 13,354 67,845 39,557
---------- ---------- ---------- ----------
Operating loss................................... (7,609) (5,235) (29,432) (17,392)
Interest expense................................. (790) (433) (2,862) (1,142)
Interest income and other, net................... 145 1,259 764 2,061
---------- ---------- ---------- ----------
Loss before income taxes......................... (8,254) (4,409) (31,530) (16,473)
Provision (benefit) for income taxes............. (769) (616) 142 (786)
---------- ---------- ---------- ----------
Net loss......................................... (7,485) (3,793) (31,672) (15,687)
========== ========== ========== ==========
Basic and diluted net loss per share............. $ (0.27) $ (0.12) $ (1.14) $ (0.52)
========== ========== ========== ==========
Basic and diluted weighted average shares
outstanding.................................... 27,944 30,727 27,690 30,383
========== ========== ========== ==========
Other Comprehensive Income (Loss), Net of Tax:
Net loss......................................... $ (7,485) $ (3,793) $ (31,672) $ (15,687)
Foreign currency translation adjustments....... 344 (430) (425) (1,020)
---------- ---------- ---------- ----------
Comprehensive loss............................... $ (7,141) $ ( 4,223) $ (32,097) $ ( 16,707)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
-------------------------------
1999 2000
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................... $ (31,672) $ (15,687)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities --
Depreciation and amortization.............................. 11,338 4,378
Provision for doubtful accounts............................ 5,309 2,864
Asset impairment and other related charges................. 19,504 -
Other deferred liabilities................................. (418) -
Loss (Gain) on sale of assets.............................. 88 (742)
Changes in current assets and liabilities
Accounts receivable...................................... 84,381 (94)
Inventory ............................................... 33,272 (729)
Prepaids and other current assets........................ (276) (1,881)
Accounts payable......................................... (30,232) 7,900
Accrued expenses and other current liabilities........... (5,860) 1,095
------------ -------------
Net cash provided by (used in) operating activities... 85,434 (2,896)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software................. (3,134) (4,835)
Cash proceeds on sale of assets.............................. 17 798
Decrease (increase) in other assets and deferred costs....... 212 (655)
------------ -------------
Net cash used in investing activities (2,905) (4,692)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) receipts under lines of credit..... .......... (62,876) 3,518
Repayment of capital lease obligations....................... (1,095) (267)
Exercise of common stock options and warrants................ 1,069 7,809
Purchase of treasury stock................................... (100) (3,270)
Sale of common stock......................................... - 320
------------ -------------
Net cash provided by (used in) financing activities........ (63,002) 8,110
------------ -------------
FOREIGN EXCHANGE EFFECT ON CASH................................ (370) (261)
------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 19,157 261
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................. 14,315 34,159
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................... $ 33,472 $ 34,420
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ............................................. $ 2,977 $ 1,120
============ =============
Income taxes paid.......................................... $ 235 $ 164
============ =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred for the purchase of
equipment................................................ $ - $ 147
============ =============
</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. Certain amounts in prior periods have been reclassified to conform
to the current year presentation. 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, 2000, and the results of operations
and cash flows for the periods ended September 30, 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 respective 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 Nine Months Ended
Basic and Diluted September 30, September 30,
------------------------ ---------------------- ---------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
Net loss................ $ (7,485) $ (3,793) $ (31,672) $ (15,687)
========== ========== ========== ==========
Weighted average shares
outstanding........... 27,944 30,727 27,690 30,383
========== ========== ========== ==========
Basic and diluted net
loss per share........ $ (0.27) $ (0.12) $ (1.14) $ (0.52)
========== ========== ========== ==========
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 three and nine month periods ended September 30,
1999, a net total of 2,113,000 and 1,792,000 shares, respectively, covered by
options would have been dilutive, and a net total of 3,865,000 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. Based on the average market price of the Company's common
shares in the three and nine month periods ended September 30, 2000, a net total
of 2,610,000 and 5,193,000 shares, respectively, covered by options would have
been dilutive, and a net total of 1,284,000 and 594,000 shares, respectively,
covered by options and warrants with per share exercise prices ranging from
$5.97 to $31.13, and $12.63 to $31.13, respectively, would not have been
dilutive.
5
<PAGE>
3. Business Segment Information
The Company's operations are classified into two reportable business
segments: elcom, inc., the Company's eBusiness technology subsidiary, and Elcom
Services Group, Inc. ("Elcom Services Group"), which markets and sells
business-related products to commercial customers. The accounting policies for
these segments are consistent with those described in the summary of segment
accounting policies in the 1999 Annual Report on Form 10-K. 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 was transferred
from Elcom Services Group to elcom, inc. The segment results for Elcom Services
Group partially reflect lower sales due to the sale of a substantial majority of
the Company's United Kingdom group operations in July 1999, more fully described
herein.
The Company operates both in the United States and United Kingdom and
geographic information for the periods were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
Net Sales
United States............. $ 60,490 $ 54,655 $ 238,008 $ 183,786
United Kingdom............ 30,836 22,396 177,082 57,164
---------- ---------- ---------- ----------
Total $ 91,326 $ 77,051 $ 415,090 $ 240,950
========== ========== ========== ==========
Gross Profit
United States............. $ 4,532 $ 5,511 $ 22,092 $ 15,638
United Kingdom............ 3,188 2,608 16,321 6,527
---------- ---------- ---------- ---------
Total $ 7,720 $ 8,119 $ 38,413 $ 22,165
========== ========== ========== =========
Segment results for the periods were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
Net Sales
Elcom Services Group...... $ 79,009 $ 25,757 $ 386,061 $ 92,205
elcom, inc................ 12,317 51,294 29,029 148,745
---------- ---------- ---------- ----------
Total $ 91,326 $ 77,051 $ 415,090 $ 240,950
========== ========== ========== ==========
Gross Profit
Elcom Services Group...... $ 5,916 $ 3,087 $ 35,379 $ 8,226
elcom, inc................ 1,804 5,032 3,034 13,939
---------- ---------- ---------- ----------
Total $ 7,720 $ 8,119 $ 38,413 $ 22,165
========== ========== ========== ==========
Identifiable asset segment information as of December 31, 1999 and
September 30, 2000 was as follows (in thousands):
1999 2000
---------- ----------
Identifiable Assets
Elcom Services Group.............................. $ 21,858 $ 15,773
elcom, inc........................................ 45,154 55,460
Corporate......................................... 31,027 26,194
---------- ----------
Total $ 98,039 $ 97,427
========== ==========
Substantially all net sales, gross profit and identifiable assets
relate to the remarketing of business and computer products, primarily personal
computer products and related services. Licensing and other technology revenues
are included in elcom, inc.'s segment information.
6
<PAGE>
Identifiable asset geographic information as of December 31, 1999 and
September 30, 2000 was as follows (in thousands):
1999 2000
---------- ----------
Identifiable Assets
United States..................................... $ 89,767 $ 68,986
United Kingdom.................................... 8,272 28,441
---------- ---------
Total $ 98,039 $ 97,427
========== ==========
4. Asset Impairment 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 services
organization, its distribution business, and specified inventory and fixed
assets. The disposed operations 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 and other
related charges described below). The Company recorded total revenues related to
its United Kingdom operations of $177.1 million in the nine months ended
September 30, 1999, and $57.2 million in the nine months ended September 30,
2000. The Company has retained its United Kingdom telemarketing group, which it
intends to transition to an Internet-based business to business ("B2B") digital
marketplace, similar to Starbuyer.com operated by elcom, inc. in the United
States. The Company also is using the retained business as a platform to market
PECOS Internet Procurement Manager ("PECOS.ipm"), elcom, inc.'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 operations.
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. As of September 30, 2000, this accrual has been fully
utilized.
The sale of the United Kingdom remarketer group operations required
that the Company place funds in escrow totaling (pound sterling) 500,000
(approximately $754,000), for a period of one year. In the third quarter of
2000, the purchaser of the remarketer group operations released all of the funds
held in escrow. Accordingly, the Company realized a gain of $754,000, which is
included in interest income and other, net on the consolidated statement of
operations and other comprehensive income (loss).
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 in December
1993 to prove and use its technology by selling computer and business products,
primarily PCs and associated peripherals, using its electronic commerce software
and it 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
7
<PAGE>
customers. In addition, the Company, through elcom, inc., offers its PECOS
technologies for license, including PECOS Internet Procurement Manager
("PECOS.ipm"), its Internet-based and remotely-hosted automated procurement
system, and as of October 3, 2000, PECOS Internet Exchange Manager
("PECOS.iem"), Version 2.0 of its digital marketplace enabling technology. The
Company also provides implementation and consulting services to its customers.
In March 1999, elcom, inc. commenced operating Starbuyer.com, its Internet B2B
digital marketplace, as a proof of concept to develop and utilize digital
marketplace enabling technology by selling business products. Since then, elcom,
inc. has added auction capabilities to Starbuyer.com, and added office supplies
and software product lines.
On July 31, 1999, the Company completed the sale of the substantial
majority of its United Kingdom 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
operations 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 and other related charges). The
Company 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, inc. 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.
elcom, inc.
elcom, inc. (formerly elcom.com, inc.) is the eBusiness technology
subsidiary of the Company that develops and offers for license, the Company's
Internet-based, remotely-hosted applications (automated procurement and digital
marketplace systems).
Beginning in the latter half of 1998, the Company shifted its focus from
marketing its PECOS Commerce Manager ("PECOS.cm") client/server "sell-side"
system 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.
In March 1999, elcom, inc. launched its Starbuyer.com Internet B2B digital
marketplace,from which elcom, inc. markets and sells over 200,000 business
products manufactured by numerous suppliers to companies in a "24x7"
environment. elcom, inc. 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, inc. added auction capabilities to
its Internet-based digital marketplace in April 1999. In addition to the
Company's decision to not conduct business with marginal customers, as described
herein, the Company made Starbuyer.com available to Elcom Services Group's
customer base and, for those customers who wished to purchase products as
users/members of the Starbuyer.com digital marketplace and at their request, the
Company transitioned their accounts to elcom, inc., which accordingly increased
elcom, inc's. revenues. This transition included setting up customers on
separate systems used by elcom, inc., including the Starbuyer.com digital
marketplace which the Company believes represents a more efficient methodology
for transactions with customers. The Company expects to expand its customer base
and encourage repeat transactions through various marketing programs including
telemarketing, promotional campaigns and strategic alliances intended to provide
access to incremental customers. To accomplish this, elcom, inc. plans to
continue to increase its sales staffing and marketing expenditures in future
periods.
Starbuyer.com, elcom, inc.'s digital marketplace in the United States,
generated product sales and related service revenues of approximately $28.5
million for the quarter ended September 30, 2000 compared to $11.9 million in
the comparable quarter in 1999.
In total, elcom, inc.'s consolidated gross profit from United States
operations for the quarter ended September 30, 2000 was $2.4 million compared to
$1.8 million in the 1999 quarter. elcom, inc.'s United States operating expenses
increased by approximately $3.2 million for the quarter ended September 30, 2000
compared to the quarter ended September 30, 1999, as the Company continued to
staff the entity to support expected growth of its business segments.
Consequently, the operating loss generated by elcom, inc.'s
8
<PAGE>
United States operations increased by $2.6 million, to $4.8 million during the
quarter ended September 30, 2000, versus an operating loss of $2.2 million for
the quarter ended September 30, 1999. The Company's United Kingdom telemarketing
group, which uses PECOS.web as its eBusiness system for its clients, is intended
to form the basis of the United Kingdom's digital marketplace, which is expected
to become operational over the next two quarters. In the quarter ended September
30, 2000, the United Kingdom generated revenues of $22.4 million and gross
profit of $2.6 million.
On October 3, 2000, the Company announced Version 2.0 of PECOS Internet
Exchange Manager ("PECOS.iem"), the Company's second generation digital
marketplace enabling technology. The Company has started to market this
technology to power eMarketplaces and expects its first (external) marketplace
to become operational with the Commonwealth British Council at
cbcmarketplace.com. The Company's strategy is to become a leader in the area of
enabling and remotely-hosting digital marketplaces using this technology.
The Company's prospective customer/client list is expanding and as more and
more customers become aware of the advantages of the Company's remotely-hosted
systems, the Company expects to increase the number of licenses signed.
For the quarter ended September 30, 2000, elcom, inc. reported revenues
from licenses, including associated professional services and maintenance fees
of approximately $0.4 million. At September 30, 2000, the Company has recorded
deferred revenues of $0.2 million on its balance sheet related to PECOS.ipm
license sales.
Elcom Services Group, Inc.
Elcom Services Group markets and sells business-related products and
professional services to enterprise business customers which typically require
specialized services.
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 have not paid 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 strategy has resulted in a significant and planned decrease in revenues in
2000 compared to 1999, but has effectively eliminated a majority of the
Company's marginal customers and exposure thereto.
Elcom Services Group's revenues and resultant gross profit are affected by
price reductions and decreases in various vendor inventory and reductions in
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 if it is to sustain its level of gross profit dollars. The Company
experienced a softening of demand from its customers that began in the third
quarter 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, 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.
WitSoundview Group, Inc. and Investment Banking Relationship(s)
On July 19, 1999, the Company announced the engagement of WitSoundview
Group, Inc. ("WitSoundview") as its investment bank and strategic advisor for
the purpose of assisting the Company in evaluating strategic options for it and
for elcom, inc. The Company's engagement with WitSoundview has ended and the
Company is currently in discussions with several investment banks regarding an
investment banking engagement with the Company.
9
<PAGE>
Equity Line Flexible Financing Agreement
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 WitSoundview. Under
the terms of the agreement the Company may sell to Cripple Creek 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 May 11, 2000, the
Company's registration statement on Form S-3 with the Securities and Exchange
Commission was declared effective 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 the
warrants held by WitSoundview.
The Equity Line provides that the Company, at its option, may sell up
to $10 million of common stock during each monthly investment period, up to a
maximum aggregate total of $50 million. 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 up to an aggregate, in total, of $50
million. The Equity Line allows the Company to set a minimum price, but not less
than $4 per share, that the common stock sold 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 shares (100,000 shares 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. In September
2000, the Company sold 60,952 shares to Cripple Creek under the equity line for
$320,000.
The Equity Line will be in effect for a period of 18 months, ending in
December 2001. The Company may, at its option, terminate the Equity Line at any
time.
Year 2000 Readiness Disclosure
The Company did not experience any significant problems internally or
with customers, clients or electronic trading partners in connection with Year
2000 compliance.
Results of Operations
Quarter ended September 30, 2000 compared to the quarter ended September 30,
1999.
Net Sales. Net sales for the quarter ended September 30, 2000 decreased
15.6% to $77.1 million from $91.3 million in the same period of 1999, a decrease
of $14.2 million in part due to the sale of a substantial majority of the
Company's United Kingdom group operations in July 1999. Accordingly, net sales
of the Company's United Kingdom based operations decreased from $30.8 million to
$22.4 million in the third quarter of 2000. United States net sales decreased
from $60.5 million to $54.7 million primarily due to Elcom Services Group's
strategy to reduce its exposure to customers that do not pay on time, demand
pricing that negatively impacts margins or would require unacceptable inventory
exposure.
Gross Profit. Gross profit for the quarter ended September 30, 2000
increased to $8.1 million from $7.7 million in the 1999 quarter, an increase of
$0.4 million or 5.2%. The increase in gross profit dollars is primarily a result
of the strategy described above. Gross profit as a percentage of net sales
increased to 10.5% in the 2000 quarter from 8.5% in the 1999 quarter as the
Company sold certain products at higher margins during the most recent quarter.
This increase in gross profit margin was mitigated by a decrease in manufacturer
rebates and discount programs.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the quarter ended September 30, 2000 decreased $2.2
million, or 14.7%, to $12.8 million from $15.0 million in the 1999 quarter. Most
of this decrease reflected the sale of a substantial majority of the Company's
United Kingdom operations in July 1999. Accordingly, as a percentage of sales,
selling, general and administrative expenses for the quarter ended September 30,
2000 remained relatively unchanged compared to the comparable 1999 quarter.
Research and Development Expense. Research and development expense for
the quarters ended September 30, 2000 and 1999 were $0.6 million and $0.4
million respectively, an increase of $0.2 million or 63%. These increased
expenditures reflect the on-going product development of the PECOS technologies.
Interest Expense. Interest expense for the quarter ended September 30,
2000 decreased to $0.4 million from $0.8 million in the comparable quarter of
1999, a decrease of $0.4 million, reflecting lower receivable and inventory
financing costs for the reasons described elsewhere herein. Interest expense in
both periods relates to line of credit borrowings and the decrease in the
September 2000 quarter is reflective of the decrease in borrowings under the
Company's lines of credit.
Interest Income and Other, Net. Interest income and other, net, for the
quarter ended September 30, 2000 increased to $1.3 million from $0.1 million in
the 1999 quarter. This increase was primarily a result of recording an $0.8
million gain on the sale of assets related to the receipt of funds held in
escrow when the United Kingdom remarketer group operations were sold and an
increase in interest earning deposits.
Income Tax Provision (Benefit). 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 income tax benefit in 2000 relates to the refund of income
taxes paid in prior years in the United Kingdom.
Net Income (Loss). The Company generated a net loss for the quarter
ended September 30, 2000 of $3.8 million as a result of the factors described
herein.
Nine months ended September 30, 2000 compared to the nine months ended September
30, 1999.
Net Sales. Net sales for the nine months ended September 30, 2000
decreased 42% to $241.0 million from $415.1 million in the same period of 1999,
a decrease of $174.1 million mostly due to the sale of a substantial majority of
the Company's United Kingdom remarketer group operations. Accordingly, net sales
of the Company's United Kingdom based operations decreased from $177.1 million
to $57.2 million in the first nine months of 2000. United States net sales
decreased from $238.0 million to $183.8 million primarily due to Elcom Services
Group's strategy to reduce its exposure to customers that do not pay on time,
demand pricing that negatively impacts margins and/or that require unacceptable
inventory exposure.
Gross Profit. Gross profit for the nine months ended September 30, 2000
decreased to $22.2 million from $38.4 million in the same period of 1999, a
decrease of $16.3 million or 42.3%. The decrease in gross profit dollars is
primarily a result of the decrease in net sales. Gross profit as a percent of
net sales was 9.2% in the first nine months of 2000, which was comparable to the
same period in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended September 30, 2000 decreased
$9.4 million, or 19.8% to $38.0 million from $47.4 million in the same period of
1999 reflecting the sale of a substantial majority of the Company's United
Kingdom group operations in July 1999. As a percentage of net sales, selling,
general and administrative expenses increased for the nine months ended
September 30, 2000 to 15.8% from 11.4% in the same period in 1999, primarily due
to an increase in personnel costs resulting from the increased staffing of
elcom, inc..
Research and Development Expense. Research and development expense for
the nine months ended September 30, 2000 and 1999 were $1.5 million and $0.9
million respectively, an increase of 66%. These increased expenditures reflect
the on-going product development of the Company's PECOS technologies.
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Interest Expense. Interest expense for the nine months ended September
30, 2000 decreased to $1.1 million from $2.9 million in the comparable period of
1999, a decrease of $1.8 million. Interest expense in both years results from
the Company's line of credit borrowings. The reduction in 2000 is reflective of
the decrease in borrowings under the Company's lines of credit.
Interest Income and Other, Net. Interest income and other, net, for the
nine months ended September 30, 2000 increased to $2.0 million from $0.8 million
in the same period in 1999. This increase was primarily the result of the
receipt of the escrow funds described elsewhere herein and an increase in
interest earning deposits.
Income Tax Provision (Benefit). 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 income tax benefit in 2000 relates to the refund of income
taxes paid in prior years in the United Kingdom.
Net Income (Loss). The Company generated a net loss for the nine
months ended September 30, 2000 of $15.7 million as a result of the factors
described herein.
Liquidity and Capital Resources
Net cash used in operating activities for the nine months ended
September 30, 2000 was $2.9 million, which is primarily due to the net loss of
$15.7 million offset by an increase in accounts payable and accrued expenses of
$9.0 million (primarily related to the timing of certain vendor payments), and
non-cash charges of $7.2 million. Net cash used for investing activities was
$4.7 million, consisting primarily of additions to property, equipment and
software of $4.8 million. Net cash provided by financing activities was $8.1
million, primarily due to a $3.5 million increase in the line of credit balance
and $4.5 million provided by the net exercise of stock options and warrants.
At September 30, 2000, the Company's principal sources of liquidity
included cash and cash equivalents of $34.4 million and accounts receivable and
floor plan lines of credit from Deutsche Financial Services Corporation
("DFSC"). As of November 6, 2000, the United States DFSC facility was amended to
provide for a decrease in aggregate borrowings from $50 million to $40 million.
As of April 1, 2000, the interest rate was increased to prime (9.5% at September
30, 2000) plus 0.25%, compared to an interest rate of the prime rate 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 September
30, 2000, the Company's borrowings from DFSC on its United States floor plan
line of credit were $22.8 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. In addition, cash and
cash equivalents of $15 million are pledged to secure a portion of the DFSC
facility.
As of November 6, 2000, the United Kingdom DFSC credit facility was
amended to provide for a decrease in aggregate borrowings from (pound
sterling)12.5 million (or approximately $19.0 million) to (pound sterling)10.0
million (or approximately $14.3 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 (6.0% at September 30, 2000) plus 1.65%. As of September 30, 2000, the
Company's borrowings under its United Kingdom DFSC facility were (pound
sterling)6.9 million, or $10.2 million.
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 (in the United States and the United Kingdom) 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. As
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a result of DFSC's quarterly review of the Company's financial position and
strategy, the Company received a waiver from DFSC concerning the tangible net
worth and net income covenants for the third quarter of 2000. The Company is in
compliance with all other covenants of the facilities as of September 30, 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. The Company has agreed to provide DFSC with a letter of
credit for $15 million, collateralized by the Company's cash, to replace the
existing $15 million pledge, described previously.
As of September 30, 2000, the Company had aggregate borrowings of
approximately $33.0 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, 2000, 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 substantial
decrease in 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 amount of marketing support for those
manufacturers and also impacts the Company's gross profit. The Company intends
to continue to maintain logistical and traditional relationships with selected
distributors and to explore additional methods to reduce any accounts receivable
and/or inventory risks.
On December 30, 1999, the Company entered into an Equity Line with
Cripple Creek. Under the terms of the agreement, the Company may sell up to $50
million of its Common Stock to Cripple Creek over an 18-month period, ending in
December 2001. The Company may, at its option, terminate this agreement at any
time. In conjunction with the Equity Line, on May 11, 2000, the Company's
registration statement on Form S-3 became effective 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 WitSoundview. At September 30, 2000, the Company had sold 60,952 shares
generating $320,000 under this Equity Line.
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 as long as DFSC and its other financing
sources continue to make lines of credit, including the equity line available
through Cripple Creek (which is subject to a minimum price of $4 per share),
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
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of its customer base, the Company's sales have reflected this seasonality in
1999 and the first nine months 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
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, revenue growth, 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 particularly the
Company's "Risk Factors" contained in the prospectus included as part of the S-3
Registration Statement that became effective on May 11, 2000.
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 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, 2000 balances, the Company estimates that a 1% change in
interest rates would have no material effect on income (loss) 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 negative
accumulated amount of $482,000.
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Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.4 Amendment number 7 dated November 6, 2000 to Business Credit
and Security Agreement Dated as of March 1, 1997 among Elcom
Services Group, Inc. and Deutsche Financial Services
Corporation. (x)
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
September 30, 2000.
---------------------------------
(x) Filed herewith.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Elcom International, Inc.
(Registrant)
Date: November 10, 2000 By: /s/ Peter A. Rendall
-------------------------------------
Peter A. Rendall
Chief Financial Officer
(Authorized Officer and Principal Financial
Officer)
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