SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 30,722,841 shares of common stock, $.01 par value,
outstanding as of July 31, 2000.
<PAGE>
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999
and June 30, 2000 (unaudited)....................................2
Consolidated Statements of Operations and Other Comprehensive
Income (Loss) - Three and Six Month Periods
Ended June 30, 1999 and 2000 (unaudited).........................3
Consolidated Statements of Cash Flows - Six Month Periods Ended
June 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. Submission of Matters to a Vote of Security Holders........14
Item 5. None.
Item 6. Exhibits and Reports on Form 8-K...........................15
Signature ...........................................................16
1
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, June 30,
1999 2000
------------ ----------
ASSETS (unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ......................................... $ 34,159 $ 37,393
Accounts receivable:
Trade .......................................................... 45,571 47,049
Other .......................................................... 8,321 8,124
--------- ---------
53,892 55,173
Less - Allowance for doubtful accounts ......................... 3,838 4,734
--------- ---------
Accounts receivable, net ................................... 50,054 50,439
Inventory ......................................................... 1,462 4,412
Prepaids and other current assets ................................. 1,221 2,493
Total current assets ....................................... --------- ---------
86,896 94,737
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST: --------- ---------
Computer hardware and software .................................... 24,730 27,234
Land, buildings and leasehold improvements ........................ 2,710 2,945
Furniture, fixtures and equipment ................................. 5,755 5,841
--------- ---------
33,195 36,020
Less - Accumulated depreciation and amortization ............... 22,230 24,856
--------- ---------
Property, Equipment, and Software, net ..................... 10,965 11,164
--------- ---------
OTHER ASSETS ........................................................ 178 877
--------- ---------
$ 98,039 $ 106,778
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit ................................................... $ 29,870 $ 40,553
Accounts payable .................................................. 12,440 17,052
Accrued expenses and other current liabilities .................... 8,230 9,024
Current portion of capital lease obligations ...................... 311 182
--------- ---------
Total current liabilities .................................. 50,851 66,811
--------- ---------
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION ................... 260 202
--------- ---------
Total liabilities .......................................... 51,111 67,013
--------- ---------
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 31,109,771 shares .................. 291 311
Additional paid-in capital ........................................ 106,111 114,582
Accumulated earnings (deficit) .................................... (58,730) (70,624)
Treasury stock, at cost -- 257,739 and 395,324 shares ............. (1,282) (4,452)
Accumulated other comprehensive income (loss) ..................... 538 (52)
--------- ---------
Total stockholders' equity ................................. 46,928 39,765
--------- ---------
$ 98,039 $ 106,778
========= =========
</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 Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ........................................... 149,411 $ 83,708 $ 323,764 $ 163,899
Cost of sales ....................................... 135,892 76,074 293,071 149,853
--------- --------- --------- ---------
Gross profit ........................................ 13,519 7,634 30,693 14,046
--------- --------- --------- ---------
Expenses:
Selling, general and administrative ............... 15,370 11,589 32,439 25,242
Research and development .......................... 224 505 575 961
Asset impairment and other related charges ........ 19,504 -- 19,504 --
--------- --------- --------- ---------
Total expenses ...................................... 35,098 12,094 52,518 26,203
--------- --------- --------- ---------
Operating loss ...................................... (21,579) (4,460) (21,825) (12,157)
Interest expense .................................... (877) (429) (2,072) (709)
Interest income and other, net ...................... 130 392 619 802
--------- --------- --------- ---------
Loss before income taxes ............................ (22,326) (4,497) (23,278) (12,064)
Provision (benefit) for income taxes ................ 408 (170) 911 (170)
--------- --------- --------- ---------
Net loss ............................................ $ (22,734) $ (4,327) $ (24,189) $ (11,894)
========= ========= ========= =========
Basic and diluted net loss per share ................ $ (0.82) $ (0.14) $ (0.88) $ (0.39)
========= ========= ========= =========
Basic and diluted weighted average shares outstanding 27,709 30,707 27,561 30,209
========= ========= ========= =========
Other Comprehensive Income (Loss), Net of Tax:
Net loss ............................................ $ (22,734) $ (4,327) $ (24,189) $ (11,894)
Foreign currency translation adjustments .......... (479) (661) (768) (590)
--------- --------- --------- ---------
Comprehensive loss .................................. $ (23,213) $ (4,988) $ (24,957) $ (12,484)
========= ========= ========= =========
</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)
Six Months Ended June 30,
---------------------
1999 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss .......................................................... $(24,189) $(11,894)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities --
Depreciation and amortization ................................... 6,947 2,878
Provision for doubtful accounts ................................. 2,130 990
Asset impairment and other related charges ...................... 19,504 --
Other deferred liabilities ...................................... (418) --
Changes in current assets and liabilities
Accounts receivable ........................................... 24,838 (2,212)
Inventory ..................................................... 20,278 (3,007)
Prepaids and other current assets ............................. (1,046) (1,932)
Accounts payable .............................................. (5,731) 5,260
Accrued expenses and other current liabilities ................ (6,470) 949
-------- --------
Net cash provided by (used in) operating activities ........ 35,843 (8,968)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software ...................... (2,075) (3,203)
Decrease (increase) in other assets and deferred costs ............ 36 (700)
-------- --------
Net cash used in investing activities ....................... (2,039) (3,903)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) receipts under lines of credit ..................... (20,450) 11,159
Repayment of capital lease obligations ............................ (506) (187)
Exercise of common stock options and warrants ..................... 801 8,491
Purchase of treasury stock ........................................ -- (3,170)
-------- --------
Net cash provided by (used in) financing activities ......... (20,155) 16,293
-------- --------
FOREIGN EXCHANGE EFFECT ON CASH ..................................... (461) (188)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 13,188 3,234
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................... 14,315 34,159
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................ $ 27,503 $ 37,393
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ..................................................... $ 882 $ 680
======== ========
Income taxes paid ................................................. $ 445 $ 102
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
4
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Elcom
International, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company as of June 30, 2000, and the results of operations and cash flows
for the periods ended June 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.
<TABLE>
Basic and diluted net loss per share were calculated as follows (in
thousands, except per share amounts):
Three Months Ended Six Months Ended
Basic and Diluted June 30, June 30,
----------------------------------------- -------------------- ---------------------
1999 2000 1999 2000
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net loss ................................ $(22,734) $(4,327) $(24,189) $(11,894)
======== ======= ========= =========
Weighted average shares outstanding...... 27,709 30,707 27,561 30,209
======== ======= ========= =========
Basic and diluted net loss per share..... $ (0.82) $ (0.14) $ (0.88) $ (0.39)
======== ======= ========= =========
</TABLE>
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 six month periods ended June 30, 1999,
a net total of 2,628,709 and 1,713,467 shares, respectively, covered by options
would have been dilutive, and 2,078,211 and 5,859,049 shares, respectively,
covered by options and warrants with per share exercise prices ranging from
$5.22 to $8.80, and $3.81 to $8.80, respectively, would not have been dilutive.
Based on the average market price of the Company's common shares in the three
and six month periods ended June 30, 2000, a net total of 3,398,837 and
5,745,610 shares, respectively, covered by options would have been dilutive, and
903,480 and 435,671 shares, respectively, covered by options and warrants with
per share exercise prices ranging from $7.19 to $31.13, and $15.25 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.com, inc. ("elcom.com"), 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 were transferred from Elcom Services Group to elcom.com. The segment
results for Elcom Services Group partially reflect lower sales due to the sale
of the United Kingdom business in July 1999, more fully described herein.
The Company operates both in the United States and United Kingdom and
geographic information for the quarters ended June 30, 1999 and 2000 and six
months ending June 30, 1999 and 2000 were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1999 2000 1999 2000
--------- -------- -------- --------
Net Sales
United States ......... $ 82,072 $ 65,846 $177,518 $129,131
United Kingdom ........ 67,339 17,862 146,246 34,768
-------- -------- -------- --------
Total $149,411 $ 83,708 $323,764 $163,899
======== ======== ======== ========
Gross Profit
United States ......... $ 8,823 $ 5,689 $ 17,560 $ 10,127
United Kingdom ........ 4,696 1,945 13,133 3,919
-------- -------- -------- --------
Total $ 13,519 $ 7,634 $ 30,693 $ 14,046
======== ======== ======== ========
Segment results for the quarters ending June 30, 1999 and 2000 and the six
months ending June 30, 1999 and 2000 were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
Net Sales
Elcom Services Group ........... $134,985 $ 31,974 $307,052 $ 66,448
elcom.com ...................... 14,426 51,734 16,712 97,451
-------- -------- -------- --------
Total $149,411 $ 83,708 $323,764 $163,899
======== ======== ======== ========
Gross Profit
Elcom Services Group ........... $ 12,588 $ 3,006 $ 29,463 $ 5,139
elcom.com ...................... 931 4,628 1,230 8,907
-------- -------- -------- --------
Total $ 13,519 $ 7,634 $ 30,693 $ 14,046
======== ======== ======== ========
Identifiable asset segment information as of December 31, 1999 and June 30,
2000 was as follows (in thousands):
1999 2000
------- --------
Identifiable Assets
Elcom Services Group ........... $21,858 $ 18,401
elcom.com ...................... 45,154 56,507
Corporate ...................... 31,027 31,870
------- --------
Total $98,039 $106,778
======= ========
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.com's segment information.
6
<PAGE>
Identifiable asset geographic information as of December 31, 1999 and June
30, 2000 was as follows:
1999 2000
-------- --------
Identifiable Assets
United States......... $ 89,767 $ 83,266
United Kingdom........ 8,272 23,512
-------- --------
Total $ 98,039 $106,778
======== ========
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 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 and other
related charges described below). The Company recorded total revenues related to
its United Kingdom operations of $146.2 million in the six months ended June 30,
1999, and $34.8 million in the six months ended June 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.com in the United States. The Company is also
using the retained business as a platform to 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 two quarters of 2000, $0.9 million of
the remaining accrual was utilized for costs primarily related to accounts
receivable. At June 30, 2000, approximately $0.2 million of the accrual relating
to lease termination remains. This accrual is expected to be fully utilized
during 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 to prove and
use its technology in December 1993 by selling computer and business products,
primarily PCs and associated peripherals, using its electronic commerce software
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 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, as a proof of concept to develop digital
marketplace enabling technology by selling business products. Since then,
7
<PAGE>
elcom.com has added auction capabilities to Starbuyer.com, 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 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.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.
elcom.com, inc.
elcom.com is the eBusiness technology 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 www.starbuyer.com, its B2B digital
marketplace, from which elcom.com markets and sells over 250,000 business
products manufactured by numerous suppliers to companies 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 Internet-based digital marketplace in April 1999. The Company expects to
expand its customer base and encourage repeat transactions 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 staffing 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") 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.
Starbuyer.com, elcom.com's digital marketplace in the United States
generated product sales of approximately $33.6 million for the quarter ended
June 30, 2000 compared to $14.2 million in the comparable quarter in 1999. In
total, elcom.com's consolidated gross profit from United States operations for
the quarter ended June 30, 2000 was $2.7 million compared to $0.9 million in the
1999 quarter. elcom.com's United States operating expenses increased by
approximately $4.9 million for the quarter ended June 30, 1999 compared to the
quarter ended June 30, 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 $3.2 million, to $4.4 million during the quarter ended June 30, 2000,
versus an operating loss of $1.2 million for the quarter ended June 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 in Q3 or Q4, 2000. In the quarter ended June 30,
2000, the United Kingdom generated revenues of $17.9 million.
In addition, for the quarter ended June 30, 2000, elcom.com reported
revenues from licenses, including associated professional services and
maintenance fees of approximately $0.2 and signed four license agreements. At
June 30, 2000, the Company has recorded deferred revenues of $0.4 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 (usually large) commercial customers which
typically require specialized services.
8
<PAGE>
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 and planned decrease in revenues in 1999 and
2000 compared to 1998, but has effectively eliminated the 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 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
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 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.
Engagement of Wit Capital Corporation
On July 19, 1999, the Company announced the engagement of Wit Soundview
Group, Inc. ("Wit") 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 completed an equity placement with an
investor introduced by Wit, the terms of the engagement called for Wit 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. The Company consummated an equity placement in
December 1999 (described more fully below) and, accordingly, the Company issued
warrants to Wit 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, which is
partially owned by Goldman Sachs, continues to review strategic financing
options, potential strategic partners, and possible financing alternatives,
including the potential of an initial public offering, and possible subsequent
spin-off of elcom.com's ownership, to the Company's stockholders.
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 Wit. Under the terms
of the agreement 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 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 warrants held by Wit.
The Equity Line 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
Equity Line allows the Company to set a minimum price that the common stock sold
must be purchased at, during
9
<PAGE>
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.
The Equity Line will be in effect for a period of 18 months, ending in
December 2001. The Company may, at its option, terminate this 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 June 30, 2000 compared to the quarter ended June 30, 1999.
Net Sales. Net sales for the quarter ended June 30, 2000 decreased 44%
to $83.7 million from $149.4 million in the same period of 1999, a decrease of
$65.7 million mostly due to the sale of a substantial majority of the Company's
United Kingdom remarketing group operations in July 1999. Accordingly, net sales
of the Company's United Kingdom based operations decreased from $67.3 million to
$17.9 million in the second quarter of 2000. United States net sales decreased
from $82.1 million to $65.8 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 or would require unacceptable inventory
exposure, partially offset by an increase in elcom.com revenue due to increases
in digital marketplace revenue.
Gross Profit. Gross profit for the quarter ended June 30, 2000
decreased to $7.6 million from $13.5 million in the 1999 quarter, a decrease of
$5.9 million or 44%. The decrease in gross profit dollars is primarily a result
of the decrease in net sales for the reasons noted above. Gross profit as a
percent of net sales increased to 9.1% in the 2000 quarter from 9.0% in the 1999
quarter as the Company sold certain products at higher margins during the most
recent quarter. This was offset by a decrease in manufacturer rebates and
incremental discount programs and the disposal of the higher margin United
Kingdom operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the quarter ended June 30, 2000 decreased 25% to
$11.6 million from $15.4 million in the 1999 quarter, a decrease of $3.8
million. As a percentage of sales, selling, general and administrative expenses
increased for the quarter ended June 30, 2000 to 13.8% from 10.3% in the 1999
quarter primarily due to an increase in personnel costs from increased staffing
in elcom.com.
Research and Development Expense. Research and development expense for
the quarters ended June 30, 1999 and 2000 were $0.2 million and $0.5 million
respectively, an increase of 125%. These costs represent expenditures in support
of the Company's PECOS.ipm and digital marketplace technology. The Company's
research and development expense is focused on developing incremental
functionality and features for its PECOS.ipm systems.
Interest Expense. Interest expense for the quarter ended June 30, 2000
decreased to $0.4 million from $0.9 million in the comparable quarter of 1999, a
decrease of $0.5 million, reflects lower receivable and inventory financing
costs. Interest expense in both years reflects line of credit borrowings and the
decrease in the June 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 June 30, 2000 increased to $392,000 from $130,000 in the 1999
quarter, due to the increase in interest earning deposits.
10
<PAGE>
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. 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 until the Company generates profits.
Net Income (Loss). The Company generated a net loss for the quarter
ended June 30, 2000 of $4.3 million as a result of the factors described herein.
Six months ended June 30, 2000 compared to the six months ended June 30, 1999.
Net Sales. Net sales for the six months ended June 30, 2000 decreased
49% to $163.9 million from $323.8 million in the same period of 1999, a decrease
of $159.9 million mostly due to the sale of a substantial majority of the
Company's United Kingdom remarketing group operations. Accordingly, net sales of
the Company's United Kingdom based operations decreased from $146.2 million to
$34.8 million in the first six months of 2000. United States net sales decreased
from $177.5 million to $129.1 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 would require unacceptable inventory
exposure, partially offset by an increase in elcom.com revenue due to increases
in automated procurement and digital marketplace revenue.
Gross Profit. Gross profit for the six months ended June 30, 2000
decreased to $14.0 million from $30.7 million in the same period of 1999, a
decrease of $16.7 million or 54%. The decrease in gross profit dollars is
primarily a result of 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 8.6% in the first six months of 2000 from 9.5%
in the same period in 1999 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 six months ended June 30, 2000 decreased 22% to
$25.2 million from $32.4 million in the same period of 1999, a decrease of $7.2
million. As a percentage of sales, selling, general and administrative expenses
increased for the six months ended June 30, 2000 to 15.4% from 10% in the same
period in 1999 primarily due to an increase in personnel costs due to the
increased staffing at elcom.com.
Research and Development Expense. Research and development expense for
the six months ended June 30, 1999 and 2000 were $0.6 million and $1.0 million
respectively, an increase of 67%. 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 and digital marketplace systems.
Interest Expense. Interest expense for the six months ended June 30,
2000 decreased to $0.7 million from $2.1 million in the comparable period of
1999, a decrease of $1.4 million. Interest expense in both years reflects 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
six months ended June 30, 2000 increased to $802,000 from $619,000 in the same
period in 1999.
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. 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.
11
<PAGE>
Net Income (Loss). The Company generated a net loss for the six months
ended June 30, 2000 of $11.9 million as a result of the factors described
herein.
Liquidity and Capital Resources
Net cash used in operating activities for the six months ended June 30,
2000 was $9.0 million, which is primarily due to the net loss of $11.9 million
and an increase of $7.2 million relating to the combined increase in inventory,
prepaids and accounts receivable partially offset by an increase in accounts
payable and other accrued expenses of $6.2 million (primarily related to the
timing of certain vendor payments), and non cash charges of $3.9 million. Net
cash used for investing activities was $3.9 million, consisting primarily of
additions to property, equipment and software of $3.2 million. Net cash provided
by financing activities was $16.3 million, primarily due to an $11.2 million
increase in the line of credit balance and $5.3 million provided by the net
exercise of stock options and warrants.
At June 30, 2000, the Company's principal sources of liquidity included
cash and cash equivalents of $37.4 million and accounts receivable and floor
plan lines of credit from Deutsche Financial Services Corporation ("DFSC"). 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 (9.5% at June 30, 2000) 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 June 30,
2000, the Company's borrowings from DFSC on its United States floor plan line of
credit were $31.5 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.
The Company has a United Kingdom DFSC credit facility which provided
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
$19.0 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 June 30, 2000)
plus 1.65%. As of June 30, 2000, the Company's borrowings under its United
Kingdom DFSC facility were (pound)6.0 million, or $9.1 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. The Company is in compliance
with all covenants of the facilities as of June 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.
As of June 30, 2000, the Company had aggregate borrowings of
approximately $40.6 million outstanding under its DFSC borrowing facilities,
which approximated its maximum availability thereunder.
The Company also has a $5 million floor plan financing agreement with
IBM Credit Corporation ("IBMCC") to support purchases of IBM products. The IBMCC
borrowing facility is secured by the IBM products purchased under the
arrangement and relates to domestic operations only. At June 30, 2000, the
Company had no borrowings outstanding from IBMCC on its floor plan line of
credit.
12
<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 amount of marketing support for those
manufactures and the Company's gross profit. The Company intends to continue to
maintain logistical and traditional relationships with selected distributors.
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 Wit Capital. At June 30, 2000 the Company had not sold any shares of stock
under the 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 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
half 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.
13
<PAGE>
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 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 June 30, 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 negative
accumulated amount of $52,000.
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the Company's stockholders was held on
May 11, 2000. Two matters as specified in the Company's Notice of Annual Meeting
and Proxy Statement dated April 5, 2000, a copy of which has been previously
filed with the Securities and Exchange Commission, were considered, voted upon
and approved by the Company's stockholders. The specific results of the voting
on the two matters are as follows:
Proposal I: The size of the Company's Board of Directors was fixed at
six and Messr. Richard J. Harries, Jr. was elected to the Board
of Directors of the Company, for a term to expire at the 2003
Annual Meeting, by the following vote:
Number of Shares Voted
--------------------------
For Withheld
---------- ----------
Richard J. Harries, Jr. 26,906,060 198,250
14
<PAGE>
Following the meeting, each of Messrs. Crowell, Smith, and Ortiz also
continued as Directors of the Company.
Proposal II: The Company's stockholders ratified and approved the
Company's 2000 Stock Option Plan covering 2,750,000 shares of
Common Stock by the following vote:
Number of Shares Voted
--------------------------------------------------------------------
For Against Abstain
------------------- -------------------- ---------------------
9,669,996 801,859 76,245
For information on how the votes on the above matter have been
tabulated, see the definitive proxy statement referenced above.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.1 Form of Indemnity Agreement for Executive Officers and/or
Directors of the Company (1), with attached list of Director
and/or Executive Officer Indemnitees. (x) (*)
10.4 Amendments numbers 5 (dated February 10, 2000) and 6 (dated June
12, 2000) to Business Credit and Security Agreement Dated as of
March 1, 1997 among Elcom Services Group, Inc. and Deutsche
Financial Services Corporation. (x)
10.5 Amendment No. 2. to Amended and Restated Structured Equity Line
Flexible Financing Agreement. (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
June 30, 2000.
---------------------------------
(1) Previously filed as an exhibit to Registration Statement No. 33-98866 on
Form S-1 and incorporated herein by reference.
(x) Filed herewith.
(*) Management contract or compensatory plan or arrangement.
15
<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: August 11, 2000 By: /s/ Peter A. Rendall
---------------------------------
Peter A. Rendall
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
16
