Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the Fiscal Year Ended December 31, 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
registrants principal executive offices)
Securities Registered pursuant to Section 12(b) of the Act:
None
Securities Registered pursuant to Section 12(g) of the Act:
Name of exchange
Title of each class on which registered
------------------- -------------------
Common Stock, $.01 par value NASDAQ
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
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing price of such stock on The Nasdaq Stock
Market on March 19, 2001, was approximately $46,320,000. For purposes of this
disclosure only, the registrant has assumed that its directors, executive
officers, and beneficial owners of 10% or more of the registrants common stock
are affiliates of the registrant.
The registrant had 30,902,000 shares of Common Stock, $.01 par value,
outstanding as of March 19, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for the 2001 annual
meeting of stockholders of Elcom International, Inc. are incorporated by
reference into Part III of this report.
PART I
Item 1. Business
Overview
Elcom International, Inc. (the Company) develops and licenses
remotely-hosted, self-service electronic procurement (eProcurement) and
electronic marketplace (eMarketplace), Internet and intranet-based purchasing
systems which enables the conduct of interactive electronic commerce for
businesses. Over the last seven years, elcom, inc., the Companys eBusiness
technology subsidiary, has developed its PECOS (Personal Electronic Catalog and
Ordering System) technology, which is licensed to companies to enable them to
communicate, market, buy and sell various goods and services electronically over
the Internet or through private networks and eMarketplaces. The Companys PECOS
technology can support large numbers of end-user clients, products, suppliers
and transactions and its transaction server middleware provides a scalable
foundation for robust system performance and high transaction capacity.
The Company also markets and sells value-added services, as well as
computer and business information technology (IT) products to commercial clients
through Elcom Services Group, Inc., its wholly-owned value added remarketer
subsidiary. Elcom Services Group, Inc. commenced operations in December 1993 as
the original proof of concept of the Companys PECOS technology. Elcom Services
Group, Inc., serves its clients using PECOS.web, an Internet-based ordering and
information system.
In addition, the Company operates Starbuyer.com, its owned and operated
business-to-business eMarketplace, and through Elcom Services Group, Inc. in the
United States (U.S.) and Elcom Information Technology Limited in the United
Kingdom (U.K.), uses versions of its PECOS technology, including its
eMarketplace system, to support the sale and marketing of business products,
primarily PC products, to commercial clients which generate substantially all of
the Companys sales.
In January 2001, the Company announced that it had signed an agreement to
outsource its PC product fulfillment, inventory and logistics, and product
configuration for its two subsidiaries in the U.S. (elcom, inc., and Elcom
Services Group, Inc.) to TD Fulfillment Services, L.L.C, a subsidiary of Tech
Data Corporation (Tech Data), one of the worlds largest distributors of
computer-oriented IT products.
Since its inception, the Company has purchased products from distributors,
including Tech Data, and direct from certain manufacturers and, as an authorized
reseller of those products, resold those products to commercial customers.
Because the Company took title to these purchased products, the Company recorded
gross revenues for each sale transaction. Under the outsourcing agreement, Tech
Data has become the Companys logistics and fulfillment outsourcing partner and
will assume virtually all logistics and fulfillment functions, including the
Companys PC product financing in the U.S., allowing the Company to hold
virtually no inventory or product accounts receivable in the U.S. thereby
reducing working capital requirements in the U.S. Under this agreement, Tech
Data will recognize product revenues and own and manage inventory and customer
receivables. The Company will receive transaction-oriented fees related to the
gross profit generated as an agent on each sale, including products sold through
Starbuyer.com. The first live orders processed through this outsourcing
arrangement were recorded in February 2001 and the transition is expected to be
completed by the end of the second quarter of 2001. The Company will continue to
provide its comprehensive suite of professional services and support directly to
its clients, while acting as an agent for IT product sales transactions in the
U.S. In addition, the Company expects inventory and accounts receivable risks to
decrease to virtually nil and expects to realize other cost reductions in the
U.S. due to this outsourcing arrangement. The U.K. business products remarketer
subsidiary is not effected and will continue to own inventory, record gross
revenues on product sales and collect customer receivables.
As a result of this outsourcing arrangement as described herein, the
Companys IT product revenues in the U.S. will begin to reflect increasing
transaction-oriented fees, which are related to the amount of gross profit
generated on IT product sales. When fully transitioned to Tech Data, reported
2
transaction fees, which will be the only revenues recorded on product sales, are
expected to be approximately 6% to 8% of previously reported IT product revenues
in the U.S. Services-oriented revenues will continue to be reported as they have
been historically.
elcom, inc.
The eBusiness subsidiary of the Company, elcom, inc., develops and licenses
remotely-hosted, self-service, Internet and intranet-based purchasing systems,
primarily PECOS Internet Procurement Manager (PECOS.ipm), and PECOS Internet
Exchange Manager (PECOS.iem). The purchasing systems the Company offers include:
eProcurement Systems: PECOS.ipm is based on more than seven years of
eCommerce technology and has been in development for over three years. PECOS.ipm
is a robust and feature-rich Internet-based, remotely-hosted, self-service,
automated procurement system. As a remotely-hosted system, PECOS.ipm allows the
Companys clients to use their intranet/Internet to access the system to identify
and select products, check pricing, automate the internal approval process,
place and track orders through the approval and fulfillment process, and
facilitate invoicing and payment to suppliers. Since it is remotely-hosted,
PECOS.ipm is rapidly deployable and has a minimal impact on a clients computer
system and personnel resources. elcom, inc. acts as its own application service
provider and hosts PECOS.ipm on its own hardware platform giving clients a
single point of contact and responsibility. In addition, PECOS.ipm is
configurable by a client and does not require scripting or consultants to modify
administrative items or approval workflows. PECOS.ipm can operate as a
standalone system without an expensive back-end Enterprise Resource Planning
(ERP) system in place thereby enabling easier implementation. Clients may
integrate their ERP system using data feeds with PECOS.ipm already operating. If
a client wishes, PECOS.ipm may also be installed on-site at a clients facility
on its computers. Further, the Company facilitates supplier catalog loads and
manages catalog content for the client when the system is remotely- hosted.
Version 7.1, a more powerful version of PECOS.ipm, is in final development and
targeted for commercial availability in April/May 2001 for use by large
multi-organizational companies. Version 7.1 contains several features which are
necessary for Elcom Services Group, Inc. to deploy PECOS.ipm to its current or
prospective customers to enable them to purchase IT products. Several aspects of
the PECOS technology were patented in 1998 based on a 1994 patent filing.
eMarketplace Systems: PECOS.iem is the Companys recently announced
eMarketplace system which allows a client to create its own electronic
marketplace, enabling it to act as a market maker for buyers and sellers of
products with transactions and catalog content managed by the Company. Remotely-
hosted by the Company, PECOS.iem allows enterprises to deploy an eMarketplace
that supports buyer and supplier self-enrollment. The Company is currently
adding new functions, such as request for proposal, reverse auctioning, an
automated supplier portal for catalog management, and other features to its next
release targeted for mid-2001.
Further, the Company is in the process of developing eMarketplace World
Network, a global eMarketplace Hub, which is designed to interconnect world-wide
eMarketplaces comprised of industry vertical and geographic trading communities,
allowing eMarketplaces to connect their trading communities so that buyers can
easily review participating eMarketplaces and trade with the suppliers
participating in those eMarketplaces.
Starbuyer.com is the Companys owned and operated eMarketplace in the U.S.
which was developed in 1999 as the proof of concept for the Companys original
eMarketplace technology. Through the Starbuyer eMarketplace, the Company markets
and sells over 200,000 business and IT products, including business and computer
products, office supplies and other commodity-type products necessary for the
day-to-day operation of most businesses. The Company generated $128.2 million in
revenues through Starbuyer.com for the year ended December 31, 2000, compared to
$56.1 million in the prior year. The Company uses its eMarketplace and its PECOS
technology to source and order the majority of its products automatically in the
U.S. Historically, in the U.S., the Company has been linked electronically with
Tech Data and Ingram Micro, the worlds two largest PC product distributors for
IT products. The Companys automated sourcing technology allows it to have
multi-billion dollar on-line "virtual" IT
3
product inventory available to its clients and to offer a very broad selection
of IT products. Historically, the Company has taken title to these products when
shipped by its distribution fulfillment partners and therefore recognized
revenues on those sales. The Company recently announced it has outsourced its
U.S. IT product fulfillment process to Tech Data, one of the largest IT products
distributors in the world. As part of this outsourcing agreement, which went
live in February 2001, the Company has started to pass orders through Tech Data
and expects virtually all IT product orders in the U.S. to be processed through
Tech Data by the end of the second quarter of 2001. Under the outsourcing
agreement, the Company will receive a transaction-oriented fee, which is related
to the gross profit generated on each sale, as agent for each sale.
Starbuyer Gold: In March 2001, the Companys U.K. subsidiary began operation
of its business- to-business Internet-based eMarketplace called Starbuyer Gold,
similar to Starbuyer.com operated by elcom, inc. in the U.S. Starbuyer Gold will
allow the Companys U.K. clients to have new functionality compared to the
PECOS.web technology previously used by the U.K. subsidiary.
Business-to-Business Electronic Commerce Overview
Market Overview. With the widespread implementation of intranets and the
adoption of the Internet as a business communication platform, organizations can
now automate enterprise-wide and inter- organizational commerce activities. The
availability of the Internet as a ubiquitous communications network creates a
significant market opportunity for Internet-based business-to-business
electronic commerce solutions for operating resources.
Internet-based procurement, often referred to as eProcurement, is the
process of buying goods and services from suppliers over the Internet. The
Company believes that the market for eProcurement solutions, which consists of
buy-side software that automates the requisitioning and workflow approval
process, and Internet-based software that enables online transactions in
eMarketplaces, is currently at the beginning of a dramatic growth cycle.
Internet-based automated procurement systems have only been available for
approximately two years and represent a new category of cost reduction and
productivity- enhancing supply chain management systems. As indicated by various
research reports, the marketplace is nascent; however, it is projected that a
substantial percentage of corporations of various sizes and across multiple
industries will adopt some form of eProcurement solution in the next several
years.
Forrester Research estimates that the business-to-business electronic
commerce market will grow from $403 billion in 2000 to $2.7 trillion by 2004.
International Data Corporation (IDC) forecasts that eProcurement and
eMarketplace application license revenues will grow from $770 million in 1999 to
$9.7 billion in 2004. AMR Research predicts that the market for private
exchanges (eMarketplaces) will reach $35 billion by 2005 with a compound average
growth rate of 68%. These research forecasts indicate that adoption of
eProcurement and eMarketplace systems will create a large market opportunity for
solution providers as the market moves from early adopters, currently
characterized primarily by Fortune 1000 companies, to mid-market and mainstream
companies in 2001 and beyond.
Elcom Services Group, Inc.
Elcom Services Group, Inc. (Elcom Services Group), a wholly-owned
subsidiary of the Company, markets and sells business-related products to
commercial clients. Elcom Services Group serves its clients using PECOS.web, an
Internet-based ordering and information system. Elcom Services Group commenced
operations in December 1993 as the original proof of concept of the Companys
technology, and experienced rapid growth through 1997. The Company achieved its
initial growth by offering its PECOS Commerce Manager (PECOS.cm) and PECOS.web
technology to its Elcom Services Group clients and by various marketing efforts,
including direct sales and by the acquisition of six PC remarketers.
In addition to PECOS.web, Elcom Services Group intends to offer Version
7.1, the multi- organizational version of PECOS.ipm, to its clients, which the
Company expects will provide its corporate clients with the ability to
reengineer their internal procurement practices for products and services
purchased from Elcom Services Group. At the clients option, their use of
PECOS.ipm can be expanded to
4
other suppliers, creating an integrated eProcurement system. Although there can
be no assurances as to the ultimate timing or success thereof, the Company
believes that by offering Version 7.1 of PECOS.ipm to existing and prospective
clients, Elcom Services Groups sales force can be empowered with a substantial
competitive differentiator to support efforts to expand sales and increase
penetration of existing clients by providing a robust value-added eProcurement
solution at a significantly reduced cost to clients which also purchase IT
products from Elcom Services Group.
On July 31, 1999, the Company completed the sale of the substantial
majority of its U.K. remarketer group operations, which accounted for
approximately 75% of U.K. revenues in both 1998 and the first seven months of
1999. Generally, the Company sold its U.K. field-based operation, its
professional services organization, its distribution business and certain of its
inventory and fixed assets. The Company retained its U.K. telemarketing group,
which it began to transition to a business to business Internet-based
eMarketplace model in March 2001, similar to that conducted by elcom, inc., in
the U.S. On October 1, 1999, the ownership of the U.K. operations were
transferred from Elcom Services Group to elcom, inc. to help facilitate this
strategy.
Elcom Services Group offers thousands of products manufactured by leading
companies, such as Compaq, IBM, Toshiba and Hewlett-Packard. Historically,
orders placed through PECOS.web for IT products that are in stock generally were
fulfilled automatically from the inventory of one of Elcom Services Groups
Distribution Fulfillment Partners (DFPs), which included Tech Data and Ingram
Micro, Inc., two of the largest PC product distributors in the world (See
Fulfillment and Logistics). Elcom Services Group also offers a wide range of
professional services to its U.S. clients. As described elsewhere herein,
commencing in the first quarter of 2001, Elcom Services Group has outsourced its
product fulfillment process to Tech Data and after the transition is completed,
virtually all U.S. IT product orders will be processed by Tech Data. Elcom
Services Group will receive a transaction-oriented fee as agent for each sale.
Primarily due to declining gross profit margins with certain large
customers and increasing inventory risks in 1999, the Company introduced a
strategy for Elcom Services Group to reduce its revenues and related inventory
exposure by declining to do business with clients that did not pay the Company
on time as per agreements, or demanded pricing which the Company was unwilling
to provide due to many factors, including decreases in marketing development
funding from various manufacturers. This strategy resulted in a significant
decrease in revenues in 2000 and 1999 compared to 1998, but effectively
eliminated a majority of the Companys marginal clients.
Products and Pricing
Products. The Company offers over 200,000 products from thousands of
manufacturers. Historically, the substantial majority of business products
offered by the Company were purchased primarily from DFPs in both the U.S. and
U.K. The Company provides clients with a large selection of IT products,
including personal computer systems, monitors, printers, peripherals, software
together with office supplies, and a broad range of professional services. The
Company markets products sold by many brand name manufacturers including:
PERSONAL COMPUTERS
Compaq IBM Apple
NEC Gateway Toshiba
Hewlett-Packard Dell Panasonic
PRINTERS
Hewlett-Packard Canon Lexmark
Epson Tektronics
PERIPHERALS
NEC Sony Cisco
Intel Xircom Kingston
Viewsonic 3Com Iomega
5
Hewlett-Packard Golden Ram Seagate
Citrix Digi International
SOFTWARE
Microsoft Lotus Corel
Seagate Novell Symantec
Adobe IBM
OFFICE SUPPLIES
Papermate 3M GBC
Avery Acco Smead
Sparco Hammermill Okidata
Historically in the U.S., the Company established electronic purchasing and
supply relationships with Tech Data, Ingram Micro, SP Richards and Digital
River, as well as traditional relationships with several other large, national
IT product suppliers. The Companys purchasing relationships with DFP suppliers
are pursuant to industry-standard arrangements with negotiated pricing based on
either a percentage of all orders being offered electronically to a supplier or
anticipated volume levels, with payment generally being made through existing
floor plan financing arrangements. As described herein, the Company recently
announced that it has outsourced its U.S. IT product fulfillment process to Tech
Data, including Tech Data owning and managing accounts receivable and inventory,
thereby reducing the Companys working capital requirements. As part of this
outsourcing agreement, which went live in February, 2001, the Company has
started to pass IT product orders through Tech Data and expects virtually all IT
product orders to be processed through Tech Data by mid-2001. Under the
outsourcing agreement, the Company will receive a transaction-oriented fee which
will be related to the gross profit generated on each IT products sale, as agent
for each sale.
Pricing. The Company believes that its IT product pricing is generally
competitive with other remarketers. The Company typically offers larger
corporate clients a greater discount than other clients, reflecting the
economies of a higher level of purchases by such clients. The Company uses a
proprietary, customized and automated pricing system for its clients through
PECOS.webs, and Starbuyer.coms back- end server systems, which supports and
tracks a variety of pricing methodologies, including the ability to provide
customized pricing for each client, by product. In addition, the Company
believes that PECOS.ipm, its remotely-hosted automated procurement system, is
competitively priced compared to license fees charged by other eProcurement
software providers.
Professional Services
elcom, inc.s professional services group offers various consulting and
supplier services to its clients. These services range from implementation of
PECOS.ipm and training, to interfacing data from PECOS.ipm into back-end ERP
systems. Suppliers are also offered services associated with catalog content and
categorization, loading procedures and automated data update methodologies.
Elcom Services Group offers a wide range of professional services in the
U.S., including advising on project and roll-out management, providing on-site
engineers for network integration and systems support, responsive Help desk and,
on a subcontractor basis, break/fix services. The Company also offers national
dispatch service for warranty and repair contracts. Elcom Services Groups
service-oriented revenues decreased in 2000 to approximately $12.5 million, from
$26 million in 1999, primarily reflecting the sale of the Companys U.K. services
business.
Fulfillment and Logistics
United States. As described herein, the Company is outsourcing its IT
product logistics, distribution and fulfillment process to Tech Data. Under this
arrangement, the Company will receive transaction-oriented fees by acting as a
sales agent for Tech Data. Until the transition to Tech Data is complete in the
second quarter of 2001, the Company will continue to source products from a
number of DFPs, including Tech Data, Ingram Micro, S.P. Richards and Digital
River.
6
United Kingdom. The Company sources the majority of its business products
from a number of distributors and manufacturers, including C2000 (Tech Data),
IBM and Toshiba.
PC Configuration Capabilities. For computer systems that require
configuration, the Company operates two primary configuration facilities in the
U.S. and one in the U.K. The configuration services are offered generally on a
fee basis and currently are performed in the U.S. by Elcom Services Group at its
Canton, MA and Irvine, CA facilities. The outsourcing of the Companys U.S. IT
product fulfillment and logistics process to Tech Data will also include the
Companys PC configuration capabilities. As a result, the Company will not renew
its Irvine, CA facility lease and anticipates sub-leasing its Canton, MA
facility. In the U.K., the Company maintains a product distribution and
configuration facility in Slough, Berkshire.
Management Information Systems
In the U.S., the Company licenses and utilizes software from Oracle
Corporation and other software firms for its Management Information System (MIS)
to allow management to monitor and manage the Company. The MIS system
incorporates modules supporting general ledger, accounts payable, purchasing,
accounts receivable, inventory and order entry. The Companys MIS design is a
unique implementation of Oracle software applications that have been and
continue to be enhanced to provide functionality not found in the standard
system, including the ability to:
- Accept electronically delivered sales orders such as PECOS, EDI, and
XML orders, as well as converted quotations;
- automatically source product from the Companys or its principal DFPs
inventories based on variable parameters; and
- automatically create purchase orders, electronically transmit them and
electronically confirm shipments by DFPs to enable invoicing or
anticipate receipt as the case may be.
The Companys operations are dependent in part upon its ability to protect
its MIS network infrastructure in its Norwood, MA and Slough, U.K. facilities
against damage from physical break-ins, natural disasters, operational
disruptions and other events. The Company operates a redundant Internet access
system for the U.S. with data centers in Norwood, MA and Irvine, CA. The Company
has 24x7 physical security at its Norwood data center. To protect the Companys
data and provide service if both data centers were to become inoperative, the
Company is in the process of negotiating a disaster-recovery system agreement
with a major computer and services company. Although the Company believes that
its technology and operating systems will be adequate for its current needs,
such MIS systems will undoubtedly require some ongoing investments to modify and
enhance them as the Company evolves.
Marketing and Sales
The Company uses its direct and telemarketing sales forces in the U.S. and
U.K. to market products and technology to targeted business, education, and
corporate accounts. As of December 31, 2000, the Company employed approximately
95 sales representatives, account executives and related support personnel to
service client accounts. Of these 95 sales personnel, 67 are employees of elcom,
inc., 27 in the U.S. and 40, including telephone-based sales personnel, in the
U.K. Elcom Services Group employs 28 in the U.S.
As of December 31, 2000, the Companys sales and support personnel operated
from Field Support and Sales Offices (FSSOs) in six metropolitan areas in the
U.S., as well as three locations in the U.K., and one in each of India, South
Africa and Brazil. The Companys primary locations and FSSOs are listed below:
7
United States
-------------------
- - Norwood, MA (Boston)(Headquarters) - San Diego, CA
- - New York City, NY - Stamford, CT
- - Bristol, PA (Philadelphia) - Edison, NJ
United Kingdom
-------------------
- - Basingstoke, Hampshire - Slough, Berkshire
- - Redditch, Worcestershire (being
relocated to Birmingham in 2001)
Other International Locations
-------------------
- - New Delhi, India
- - Parkview, South Africa
- - Rio de Janeiro, Brazil
Subsequent to December 31, 2000, the Company commenced discussions with two
companies whereby those companies, as System Sales Partners (which confers them
the right to remarket PECOS. ipm), may assume the Companys FSSOs and personnel
based in India and South Africa.
Corporate Accounts. The Companys primary target group for IT product sales
are corporations that wish to purchase IT products in an efficient manner.
Corporate accounts typically employ purchasing agents or buyers with
above-average product knowledge who view most IT products as commodities.
Business accounts targeted by the Company range from divisions of large
corporations to businesses with as few as fifty employees. These companies also
will be targeted clients for Version 7.1, the multi- organization version of
PECOS.ipm, the Companys remotely-hosted automated procurement system. The
Company markets its products and service through field sales efforts,
telemarketing, and system sales partners. The Companys telemarketing staff,
operating from certain of its U.S. and U.K. locations, introduce the Company to
targeted companies. The Company has two types of field sales executives. Some
are dedicated to managing corporate accounts with their day-to-day IT product
purchasing requirements. Other field sales personnel are dedicated to selling
the Companys PECOS technologies. In addition to using field sales personnel to
sell the Companys PECOS technologies, the Company has a number of systems sales
partners who provide leads, and in some cases, manage the complete sales
process. Client support representatives and entry-level corporate sales
representatives provide day-to-day administrative and operational support in
order to maximize the selling time of the sales force.
Educational and Governmental Accounts. The Companys government and
education sales operations is based in Bristol, Pennsylvania and have
concentrated on building educational-based sales by focusing on providing
Windows and Intel-based (Wintel) solutions to the education market in the U.S.
Client and Technical Services
The Company provides a wide range of client service and technical support,
including nationwide toll-free pre-sale and post-sale telephone-based support.
The Company believes that maintaining a direct client and technical support link
with its clients is an important competitive factor and promotes client
satisfaction. In addition, certain manufacturers require their remarketers to
provide certain levels of technical support as an ongoing condition to authorize
remarketers to sell their products. The Company is not outsourcing its customer
support functions and will continue to directly support its IT product customers
and technology clients.
8
Product Warranty and Service Policies
In addition to providing its clients with manufacturers warranties, the
Company offers its clients certain return privileges for products which have not
been used or were damaged. Typically, such products can be returned to the
Company within a certain time for a refund or credit. The Company believes that
its product return policies are competitive with those offered by other
remarketers. Historically, product returns generally have not represented a
material exposure to the Company. Typically, manufacturer warranties are
included as part of, and are packaged with, the product. When available from
manufacturers, the Company also offers on-site and extended-term warranty and/or
service policies as ancillary products available for sale through the PECOS.web
or the Starbuyer eMarketplace. In addition to the Companys telephone-based
technical support and manufacturer programs, the Company offers a full range of
on-site and depot warranty and post-warranty service options in the U.S.,
generally through nationwide outsourcing agreements with third party service
providers. Historically, product returns were centralized at Elcom Services
Groups facilities, where the various tasks were performed that are necessary to
either return products to inventory, to one of the Companys DFPs or to a
manufacturer for credit, or to liquidate non-returnable items. In the U.S., the
product returns process will be transitioned to Tech Data in accordance with the
outsourcing agreement described herein.
Competition
eBusiness Systems Marketplace. The market for eProcurement and eMarketplace
solutions is relatively new and evolving rapidly. The Company expects
competition in this market to intensify in the future. Among other factors,
before licensing an eBusiness system, the Company believes potential clients
consider the cost of the system compared to the level of features and functions
available in electronic commerce applications and the cost to acquire, implement
and maintain the system, as well as the length of time to implement a system
and, as applicable, integrate it with a companys existing computer system. The
Company competes with vendors of prepackaged electronic commerce software,
vendors of software tools for developing electronic commerce applications and
systems integrators. The Companys competitors include Ariba, Inc., Commerce One,
Inc., Clarus Corporation, Oracle Corporation, and PurchasePro.com, Inc. The
Company anticipates future competition from other emerging and established
companies, possibly including Microsoft Corp., IBM, and SAP AG, all of which
have announced products or alliances to offer Internet-based electronic
commerce. The Companys potential competitors also include systems integrators
such as Electronic Data Systems (EDS) and a number of EDI solution vendors,
including Sterling Commerce, Inc. (SBC).
Certain of these and other competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company and thus may have more extensive sales or distribution networks and
may be able to develop or respond more quickly to new or changing opportunities,
technologies and client requirements. Also, many current and potential
competitors have greater name recognition and more extensive client bases that
could be leveraged, thereby gaining market share to the Companys detriment. Such
competitors may be able to undertake more extensive promotional activities,
adopt more aggressive pricing policies and offer more attractive terms to
purchasers than the Company and to bundle their products in a manner that may
discourage users from purchasing products offered by the Company. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to enhance their products.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. There can be no
assurance that the Company will be able to compete effectively with competitors
or that the competitive pressures faced by the Company will not have an adverse
effect on the Companys business, results of operations and/or financial
condition.
IT Products Marketplace. The Company has invested substantial effort and
capital to develop and implement its proprietary PECOS.web and Starbuyer front-
and back-end systems, as well as for the associated hardware and electronic
links with its primary DFPs. The overall market of companies which sell IT
products is highly fragmented and both subsidiaries operate in an extremely
competitive environment which is continuously evolving and subject to rapid
technological change. Of the more than 10,000 total outlets, the Company
believes that there are more than 1,000 significant IT product
9
remarketers of various types in the U.S. and U.K. A prospective purchaser of PC
products has the option to purchase directly from a manufacturer (e.g., IBM,
Compaq, Dell Computer Corp.), from a major remarketer (e.g., CompuCom Systems,
Inc.), from a computer mail order company (e.g., CDW Computer Centers, Inc.,
Micro Warehouse Inc.), from a systems integrator (e.g., EDS), from computer
superstores (e.g., CompUSA Inc.), from Internet-based companies (e.g. Insight
Enterprises, Inc.), from electronics superstores and from local computer stores,
among others. The Company competes with all of these entities for the sale of
its IT products. Each of these entities in the PC distribution channel competes
on a wide variety of capabilities including price, delivery performance, breadth
of products, services offered, overall convenience and in some cases,
specialized and distinct capabilities. The advent and expansion of Internet-
based sales companies has added substantial additional pressure to price
competition in the marketplace and has continued to exacerbate gross profit
pressures. Certain of the companies noted above and other potential competitors
have substantially greater financial, technical and marketing resources than the
Company and greater name recognition and more extensive client bases.
Intellectual Property
The Companys success and ability to compete are dependent, in part, upon
its proprietary technology. While the Company relies to a certain extent on
trademark, trade secret, patent and copyright law to protect its technology, the
Company believes that factors such as the technological and creative skills of
its personnel, new product developments, frequent product enhancements, name
recognition and reliable product availability and distribution are of equal
importance for establishing and maintaining a competitive position. Although the
Company has received a patent on certain, specific aspects of its PECOS
technology, there can be no assurance that other entities will not develop, or
have not developed, technologies that are similar or superior to the Companys
technology. The source code for the Companys proprietary software also is
protected both as a trade secret and as an unregistered copyrighted work.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use some portions of the Companys products or technology
without authorization, or to develop similar technology independently. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries.
Government Regulation
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
between PCs, among local area networks or on the Internet. However, due to the
increasing popularity and use of PCs and the Internet, it is possible that
additional laws and regulations may be adopted with respect thereto, covering
issues such as user privacy, pricing and characteristics, taxation of Internet
sales and quality of products and services. The adoption of any such laws or
regulations may decrease the growth of electronic commerce and/or the Internet,
which could in turn decrease the demand for the Companys products and increase
the Companys cost of doing business or otherwise have an adverse effect on the
Companys business, operating results or financial condition. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel and personal privacy is uncertain.
Environmental Matters
Based on the Companys experience to date, the cost of compliance with
environmental matters has been immaterial and the Company believes that it is in
material compliance with applicable environmental laws and regulations.
Personnel
As of December 31, 2000, the Company had a total of 438 personnel,
including 414 salaried and 24 hourly personnel. The Companys personnel are not
represented by any labor union and the Company believes that its personnel
relations are good. The Companys future success depends, in significant part,
upon the continued service of its key technical and senior management personnel
and its continuing ability
10
to attract and retain highly qualified technical and managerial personnel.
Competition for highly qualified personnel is intense and there can be no
assurance that the Company can retain its key managerial and technical personnel
or that it will be able to attract or retain additional highly qualified
technical and managerial personnel in the future.
Company Trade Names and Trademarks
The Company has referred to a variety of other entities and products in
this Annual Report on Form 10-K, certain of which are tradenames or trademarks.
Such tradenames or trademarks are the property of the respective companies
owning such tradenames and trademarks.
Item 2. Properties
As of December 31, 2000, the Company leased the properties set forth below,
and rented seven other FSSOs. The following leases vary in length remaining,
from 6 months to twelve years and, in some cases, include options to extend the
lease terms (see also Note 8 to the Companys Consolidated Financial Statements,
included elsewhere in this Annual Report on Form 10-K).
APPROXIMATE
SQUARE
LOCATION FOOTAGE USE
- --------------------- ----------------- ----------------------------------
Norwood,
Massachusetts 36,000 Corporate Headquarters, Boston-area
FSSO, elcom, inc. Headquarters
Canton,
Massachusetts 42,800 Elcom Services Group Headquarters
(United States, East Coast)
Canton,
Massachusetts 84,000 Elcom Services Group Configuration
and Distribution
(United States, East Coast)
Irvine,
California 21,000 Elcom Services Group Configuration
and Distribution
(United States, West Coast)
New York 5,570 elcom, inc. FSSO
Bristol,
Pennsylvania 35,000 Elcom Services Group Administrative
and FSSO
Slough, Berkshire (U.K.) 16,657 elcom, inc. (United Kingdom)
Administrative and FSSO
Basingstoke, Hampshire
(U.K.) 6,042 elcom, inc. (United Kingdom) FSSO
Redditch, Worcestershire
(U.K.) 2,416 elcom, inc. (United Kingdom) FSSO
Subsequent to December 31, 2000, as a result of the outsourcing agreement
with Tech Data, as describes herein, the Company will not renew its Irvine, CA
facility lease and anticipates sub-leasing its Canton, MA configuration and
distribution facility.
Subsequent to December 31, 2000, the Company sold its land and building in
Redditch, Worcestershire, U.K. and is relocating to a new FSSO in Birmingham,
U.K.
11
Item 3. Legal Proceedings
The Company is a party to various claims, disputes and other proceedings
relating to former employees and other matters arising in the normal course of
its business. Subsequent to December 31, 2000, the Company commenced an action
against a software supplier to recover its acquisition cost and other expenses
incurred in the purchase of certain software technology. In an unrelated matter,
the Company is disputing a claim made by one of its software consultants for
claimed work which the Company intends to defend. In the opinion of management,
the outcome of these matters will not have a material adverse effect on the
consolidated financial condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Companys Common Stock trades on the Nasdaq National Market? under the
symbol ELCO. As of December 31, 2000, there were approximately 226 stockholders
of record of the Companys Common Stock. This number does not reflect persons or
entities who hold their stock in nominee or street name through various
brokerage firms which persons or entities are estimated by the Company to be in
excess of 20,000 as of December 31, 2000. The high and low closing sales prices
reported by the Nasdaq National Market for each of the quarters in the two year
period ended December 31, 2000 are set forth in the table below. For the period
from January 1, 2001 to March 19, 2001, such high and low closing sales prices
were $5.125 and $1.719, respectively.
Quarter Ended 2000 1999
- ------------------ ----------------------- --------------------------
High Low High Low
-------- -------- -------- -------
March 31, $35.4375 $14.0625 $ 4.0625 $1.5938
June 30, $14.3750 $ 4.2500 $ 7.7500 $2.8750
September 30, $ 7.0000 $ 4.4375 $ 6.3750 $3.7500
December 31, $ 4.8750 $ 1.2188 $36.5000 $4.1563
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently does not anticipate paying any dividends in the
foreseeable future. Any payment of future dividends will be at the discretion of
the Board of Directors and will depend upon, among other things, the Companys
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the Companys Board of Directors deems relevant.
Recent Sales of Unregistered Securities
The Company issued a warrant to purchase 353,418 shares of Common Stock to
Wit Soundview on December 30, 1999. The warrant was issued pursuant to the terms
of a letter agreement, dated July 8, 1999, pursuant to which Wit Soundview
agreed to act as a financial advisor to the Company. In that capacity, Wit
Soundview introduced the Company to Cripple Creek, with whom the Company entered
into the Structured Equity Line Flexible Financing Agreement, dated as of
December 30, 1999 (described elsewhere herein). The warrant is exercisable and
expires on December 30, 2002 and has an exercise price
12
of $28.71 per share. Exemption from registration for the issuance of the warrant
is claimed pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data for the
Company for the years ended December 31, 1996 through December 31, 2000. The
historical financial data for 1999 and 2000 is derived from the Consolidated
Financial Statements of the Company audited by KPMG LLP. The historical
financial data for 1996 to 1998 is derived from the Consolidated Financial
Statements of the Company audited by Arthur Andersen LLP. This information
should be read in conjunction with the Companys Consolidated Financial
Statements and related Notes thereto and with Managements Discussion and
Analysis of Financial Condition and Results of Operations, which are included
elsewhere in this Annual Report. The data for the periods presented are not
necessarily comparable because of various write-offs and write-downs in 1998 and
1999 and acquisitions consummated at various times during the periods presented.
Years ended December 31,
----------------------------------------------------------
1996 1997 1998 1999 2000
--------- ---------- ----------- ---------- ----------
INCOME STATEMENT DATA (1):
Net sales $ 620,115 $ 760,136 $ 763,600 $ 485,828 $ 317,985
Gross profit 70,039 90,394 76,942 43,401 31,074
Selling, general and administrative expenses 57,551 70,200 80,285 63,426 50,864
Research and development expenses 1,200 1,275 1,178 1,343 1,695
Asset impairment, restructuring and other
related charges -- -- 12,892 19,272 --
--------- ---------- ----------- ---------- ----------
Operating profit (loss) 11,288 18,919 (17,413) (40,640) (21,485)
Interest and other income (expense), net (2,303) (4,142) (7,664) (2,221) 945
--------- ---------- ----------- ---------- ----------
Income (loss) before income taxes 8,985 14,777 (25,077) (42,861) (20,540)
Income tax expense (benefit) 3,410 4,489 484 (323) (786)
--------- ---------- ----------- ---------- ----------
Net income (loss) $ 5,575 $ 10,288 $ (25,561) $ (42,538) $ (19,754)
========= ========== =========== ========== ==========
Basic net income (loss) per share $ 0.21 $ 0.38 $ (0.94) $ (1.53) $ (0.65)
Basic weighted average shares outstanding 26,363 26,937 27,322 27,846 30,487
--------- ---------- ----------- ---------- ----------
Diluted net income (loss) per share $ 0.19 $ 0.35 $ (0.94) $ (1.53) $ (0.65)
========= ========== =========== ========== ==========
Diluted weighted average shares
outstanding 29,739 29,461 27,322 27,846 30,487
========= ========== =========== ========== ==========
December 31,
-----------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- -------- --------
CONSOLIDATED BALANCE SHEET DATE (1):
Total current assets $ 210,185 $ 277,806 $ 220,415 $ 86,896 $ 80,679
Total assets 260,769 332,068 261,851 98,039 95,204
Total current liabilities 161,158 218,300 175,929 50,851 63,790
Long-term liabilities, net
of current portion 1,008 3,465 905 260 813
Total stockholders equity 98,603 110,303 85,017 46,928 30,601
(1) The acquisition of AMA was accounted for on a pooling of interests basis.
As a result, the Companys results of operations have been restated back to
the Companys inception to include the results of operations of AMA.
13
Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
The Company was originally founded in 1992 as Elcom Systems, Inc., as a
developer of electronic commerce software. The Company formed another company in
December 1993, which is now known as Elcom Services Group, to prove and use its
technology by selling IT products, primarily PCs and associated peripherals,
using its electronic commerce software and Elcom Services Group experienced
rapid growth for several years. The Company achieved this initial growth by
using its proprietary PECOS procurement application and by offering the use of
PECOS through Elcom Services Group to its clients 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 Companys net sales have been derived from the sale of IT products in the
U.S. and U.K., to business and corporate clients. In addition, the Company,
through elcom, inc., offers licenses of its PECOS technologies, including
PECOS.ipm, its Internet-based and remotely-hosted automated eProcurement system,
and as of October 3, 2000, PECOS.iem, Version 2.0 of its eMarketplace enabling
technology. The Company also provides implementation and consulting services to
its clients. In March 1999, elcom, inc. commenced operating Starbuyer.com, its
first generation Internet business to business eMarketplace, as a proof of
concept to develop and utilize eMarketplace enabling technology by selling IT
products.
On July 31, 1999, the Company completed the sale of the substantial
majority of its U.K. group operations. Generally, the Company sold its U.K.
field-based sales operation, professional services organization, distribution
business, and certain inventories and fixed assets. The disposed operations
accounted for approximately 75% of the Companys U.K. revenues and 67% of its
U.K. operating income in the first seven months of 1999 (excluding the asset
impairment and other related charges). The Company retained its U.K.
telemarketing group as its primary sales force. In March 2001, the U.K. IT
products reseller introduced Starbuyer Gold, an Internet-based eMarketplace
similar to Starbuyer.com in the U.S.
elcom, inc.
elcom, inc. is the eBusiness technology subsidiary of the Company that
develops and licenses the Companys Internet-based, remotely-hosted applications
(eProcurement and eMarketplace 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 and 2000, the Company focused primarily on fully developing PECOS.ipm for
commercial launch as it transitioned from its older PECOS.cm and its PECOS.PM
technology, thereby negatively affecting technology-based revenues during this
product transition period.
In March 1999, elcom, inc. launched its Starbuyer.com Internet
eMarketplace, from which elcom, inc. markets and sells over 200,000 products
manufactured by numerous suppliers to companies in a 24x7 environment. elcom,
inc. intends to become a leading supplier of multiple commodity-type products to
businesses. The Company made Starbuyer.com available to Elcom Services Groups
client base and, for those clients who wished to purchase products as
users/members of the Starbuyer.com eMarketplace and at their request, the
Company transitioned their accounts to elcom, inc., which accordingly increased
elcom, inc.s. revenues. This transition included setting up clients on separate
systems used by elcom, inc., including the Starbuyer.com eMarketplace which the
Company believes represents a more efficient methodology for transactions with
clients. The Company expects to expand its client base and encourage repeat
transactions through various marketing programs, including telemarketing,
promotional campaigns and strategic alliances intended to provide access to
incremental clients.
Starbuyer.com recorded IT product sales and related service revenues of
approximately $128.2 million for the year ended December 31, 2000 compared to
$56.1 million in the year ended December 31, 1999.
14
In total, elcom, inc.s consolidated gross profit from U.S. operations for
the year ended December 31, 2000 was $10.3 million compared to $5.1 million in
the year ended December 31, 1999. elcom, inc.s U.S. operating expenses increased
by approximately $12.0 million from 1999 to 2000 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 U.S. operations
increased by $6.8 million to $17.2 million during the year ended December 31,
2000 versus an operating loss of $10.4 million in 1999. The Companys U.K.
telemarketing group currently uses PECOS.web as its eBusiness system for its
clients. In the first quarter of 2001, the U.K. group launched Starbuyer Gold,
an owned and operated eMarketplace similar to Starbuyer.com, in the U.S. In the
year ended December 31, 2000, the U.K. generated revenues of $82.1 million and
gross profit of $9.1 million.
On October 3, 2000, the Company announced Version 2.0 of PECOS.iem, the
Companys second generation eMarketplace enabling technology. Phase one of its
first (external) eMarketplace became operational with the Commonwealth British
Council at cbcmarketplace.net on March 12, 2001. The Companys strategy is to
become a leader in the area of enabling and remotely-hosting eMarketplaces using
this technology.
During 1999 and 2000, the Company focused primarily on fully developing
PECOS.ipm for commercial launch as it transitioned from its older PECOS.cm and
its PECOS.PM technology, thereby negatively affecting technology-based revenues
during this product transition period.
For the years ended December 31, 2000 and 1999, elcom, inc. reported
revenues from licenses, including associated professional services and
maintenance fees of approximately $1.0 million.
The Companys list of clients and perspective clients is expanding and as
more companies become aware of the advantages of the Companys remotely-hosted
systems, the Company expects to increase the number of licenses signed.
Elcom Services Group, Inc.
Elcom Services Group markets and sells IT products and professional
services to enterprise business clients which typically require specialized
services.
Primarily due to declining gross profit margins with certain large
customers and increasing inventory risks in 1999, the Company introduced a
strategy for Elcom Services Group to reduce its revenues and related inventory
exposure by declining to do business with clients that have not paid the Company
on time as per agreements, or demanded pricing which the Company was not willing
to 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 Companys marginal clients and exposure thereto.
Elcom Services Groups revenues and resultant gross profit are affected by
price reductions and decreases in vendor support programs offered by computer
manufacturers. Consequently, in order to increase gross profit, the Company must
sell incremental amounts of PCs to offset such price reductions which amplifies
the impact of any slowdown in corporate client demand on the Companys gross
profit. Although these manufacturer cutbacks have been substantial over the last
several years, Elcom Services Group has increased its gross profit margin in
2000, primarily due to its aforementioned strategy of declining to do business
with clients that demand unacceptable pricing. 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 clients 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
Companys clients capital spending programs. The Company believes that the
relatively soft demand, which continued during 1999 and 2000 related to many
factors, including Year 2000 concerns as well as a general slow-down seen in the
business PC markets. Elcom Services
15
Groups 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. As a
result of the outsourcing agreement with Tech Data described herein, the
Companys IT product revenues will begin to reflect more transaction-oriented
fees, which are related to the amount of gross profit generated on IT product
sales. When fully transitioned to Tech Data, reported transaction fees, which
will be the only revenues recorded on IT product sales, are expected to be
approximately 6% to 8% of previously reported IT product revenues in the U.S.
Services-oriented revenues will continue to be reported as they have been
historically.
Dresdner Kleinwort Wasserstein Engagement
On January 10, 2001, the Company announced that it has engaged Dresdner
Kleinwort Wasserstein to identify and evaluate options available to the Company
to maximize stockholder value including potential strategic financing
alternatives for elcom, inc.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of net sales
for each of the years in the three-year period ended December 31, 2000:
Year ended December 31,
1998 1999 2000
------ ------ ------
Net sales ......................................... 100% 100% 100%
Gross profit ...................................... 10 9 10
Selling, general and administrative expenses ...... 11 13 16
Asset impairment, restructuring and other related
charges ......................................... 1 4 -
Operating profit (loss) ........................... (2) (8) (7)
Interest expense .................................. 1 1 -
Income tax expense (benefit)....................... - - -
------ ------ ------
Net income (loss) ................................. (3)% (9)% (6)%
====== ====== ======
Results of Operations
Year ended December 31, 2000 compared to the year ended December 31, 1999.
Net Sales. Net sales for the year ended December 31, 2000 decreased to
$318.0 million from $485.8 million in 1999, a decrease of $167.8 million or
34.5%. This decrease was primarily due to the sale of a substantial majority of
the Companys U.K. remarketer group operations in July 1999, as well as an
industry-wide slowdown of PC and related product sales. Largely as a result of
these reasons, sales of the Companys U.K. based operations decreased from $193.3
million to $82.1 million for the year, a 57.5% decrease. U.S. net sales
decreased from $292.5 million to $235.9 million, a decrease of 19.4%, primarily
due to an industry-wide slowdown and continued adherence to the Companys
strategy to reduce its exposure to clients that do not pay on time, demand
pricing that negatively impacts margins or that would require unacceptable
inventory exposure.
Gross Profit. Gross profit for the year ended December 31, 2000 decreased
to $31.1 million from $43.4 million in 1999, a decrease of $12.3 million or
28.4%. The decrease in gross profit dollars is primarily a result of the
decrease in net sales as described above. Gross profit as a percentage of net
sales increased to 9.8% in 2000 from 8.9% in 1999 as the Company reduced its
exposure to clients who demanded pricing that negatively impacted margins. The
increase in gross profit margin was partially offset by a decrease in the
availability of manufacturer rebate and incremental discount programs.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for the year ended December 31, 2000 decreased to $50.9
million from $63.4 million in 1999, a decrease of $12.5 million or 19.8%. Most
of this decrease reflected the sale of a substantial majority of the Companys
U.K. operations in July 1999. As a percentage of sales, selling, general and
administrative expenses for the year ended December 31, 2000 rose to 16.0%
compared to 13.0% in 1999 due to a decrease in sales while
16
many administrative and overhead expenses remained fixed. In the event that the
Companys SG&A expenses are not reduced commensurate lean with the generation of
transaction-oriented fees expected as a result of the Tech Data outsourcing
arrangement, then during the transition period the Companys operating losses may
increase.
Research and Development Expense. Research and development expense for the
years ended December 31, 2000 and 1999 were $1.7 million and $1.3 million,
respectively, an increase of $0.4 million or 26.2%. The expenditures reflect the
on-going product development of the PECOS.ipm technology prior to technological
feasibility.
Interest Expense. Interest expense for the year ended December 31, 2000
decreased to $1.6 million from $3.2 million in the comparable year of 1999, a
decrease of $1.6 million. Interest expense in both periods results from the line
of credit borrowings. The reduction in 2000 is a reflection of the 48% decrease
in average monthly borrowings under the Companys line of credit, partially
offset by an increase in average U.S. interest rates from 8.25% in 1999 to 9.75%
in 2000.
Interest Income and Other, Net. Interest income and other, net, for the
year ended December 31, 2000 increased to $2.5 million from $1.0 million in
1999. This increase was primarily a result of recording an $0.8 million gain on
the sale of assets related to the receipt of funds which were being held in
escrow pursuant to the U.K. remarketer group Purchase and Sale Agreement.
Additionally, the Company had an 89% increase in average monthly interest
earnings due to a higher monthly cash balances and an increase in interest rates
in the U.S during 2000.
Income Tax Expense (Benefit). The income tax benefit in 1999 primarily
relates to the refund of income taxes paid in prior years in the U.K., net of
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 U.K.
Net Income (Loss). The Company generated a net loss for the year ended
December 31, 2000 of $19.8 million as a result of the factors described herein.
Year ended December 31, 1999 compared to the year ended December 31, 1998
Net Sales. Net sales for the year ended December 31, 1999 decreased to
$485.8 million from $763.6 million in the year ended December 31, 1998, a
decrease of $277.8 million or 36.4%. Net sales in the U.S. decreased to $292.5
million in 1999 from $449.8 million in 1998, a 35% decrease. Professional
services revenues of Elcom Services Group for the year increased 0.9% from
approximately $13.1 million in 1998 to $13.2 million in 1999. The Company
experienced substantial difficulties and inefficiencies with its Oracle-based
systems implementation which significantly impacted operations, logistics,
fulfillment and resultant profitability through 1999. The Company believes the
decrease in U.S. sales reflects the continued soft demand, possibly due to
certain of its clients focusing on Year 2000 efforts and possibly deferring
purchases of computer products, as well as a general softening of demand from
its larger clients. The Company believes that there is potential for a rebound
or partial rebound in U.S. computer product demand once its clients have
completed their Year 2000 efforts. The Company introduced a strategy in early
1999 to reduce its revenues and related inventory exposure, by declining to do
business with clients that do not pay the Company on time, or demand pricing
that the Company cannot provide due to many factors, including decreases in
marketing development funding from various manufacturers. This has resulted in a
significant decrease in revenues in 1999 compared to 1998, but has effectively
eliminated the Companys marginal clients.
Net sales of the Companys U.K. based operations decreased to $193.3 million
in 1999 from $313.8 million in 1998, a decrease of 38%. Results in the U.K. were
effected by the disposal of the substantial majority of its U.K. remarketer
operations on July 31, 1999 as well as continued softening in demand, consistent
with a general economic slowdown in 1999 versus 1998 and Year 2000 concerns.
17
Gross Profit. Gross profit for the year ended December 31, 1999 decreased
to $43.4 million from $76.9 million in the year ended December 31, 1998, a
decrease of $33.5 million, or 44%. The decrease in gross profit dollars reflects
the decrease in net sales, as well as a decrease in the gross profit percentage
between 1998 and 1999. Gross profit as a percentage of net sales decreased from
10.1% in 1998 to 8.9% in 1999. The gross profit percentage was higher in 1998
due to direct purchasing programs with certain manufacturers in the U.S. which
have been curtailed by the Company in 1999 due to changes in certain
manufacturers product-distribution policies, as well as a decrease in the
availability of manufacturer rebate and incremental discount programs. The
Company anticipates ongoing pressure on its business computer products gross
margins, the impact of which it intends to mitigate with a more streamlined
corporate infrastructure focused on Internet-based selling, and by leveraging
the Companys electronic commerce experience and software capabilities. The
Company experienced substantial difficulties and inefficiencies with its
Oracle-based systems implementation which significantly impacted operations,
logistics, fulfillment and resultant profitability through 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses for the year ended December 31, 1999 decreased to
$63.4 million from $80.3 million in the year ended December 31, 1998, a decrease
of $16.9 million or 21%. This decrease is primarily attributable to the
restructurings accomplished by the Company in late 1998, a reduction in
amortization expense, net of the cost of the Companys increased investment in
elcom, inc.s infrastructure to support the anticipated future growth of the
Internet-based storefront businesses and the reduction of SG&A expenses
associated with the disposed U.K. operations. The Company intends to continue to
increase its marketing expenditures to support the branding and growth of elcom,
inc.
Overall, SG&A expenses increased as a percentage of net sales for the year
ended December 31, 1999 to 13% from 10.5% in 1998, which primarily results from
a lower level of net sales in 1999, net of expense reductions.
Research and Development Expense. Research and development expense remained
essentially flat in 1999 compared with 1998. The expenditures reflect a
transition from product development (in particular, the recently announced
Internet-based and remotely-hosted version of elcom, inc.s PECOS technology,
PECOS.ipm) to marketing and deployment of the product with clients, the cost of
which is not reflected in research and development expense. The Companys
research and development expense continues to focus on developing incremental
functionality and features for its PECOS product line using Java
programming/code and other tools and techniques. The Company expects to increase
its investments in research and development as it enhances PECOS.ipm, its
remotely-hosted automated procurement system.
Asset Impairment, Restructuring and Other Related Charges. In the second
quarter of 1999, the Company recorded charges of $19.5 million related to the
July 31, 1999 sale of the substantial majority of its U.K. remarketer
operations, as further described elsewhere herein. See Footnote 9 of the
consolidated financial statements.
In the 1998 period, the Company recorded a charge of $12.9 million related
to a restructuring of certain of its U.S. operations as further described
elsewhere herein. See Footnote 9 of the consolidated financial statements.
Interest Expense. Interest expense for the year ended December 31, 1999
decreased to $3.2 million from $8.4 million in 1998. Interest expense in both
periods reflects floor plan line of credit borrowings in support of the Companys
accounts receivable and inventory balances and for 1999 is reflective of the
decrease in the Companys net sales, improved collection of receivables and
substantially lower inventory balances compared with 1998, as well as lower
interest rates in 1999 versus 1998.
Interest Income and Other, Net. Interest income and other, net, for the
year ended December 31, 1999 increased to $1.0 million from $0.7 million in
1998. Other income in the 1999 period includes proceeds of $418,000 resulting
from the lapsing (without exercise) of options sold in 1997 to acquire the
Companys interest in ShopLink.com, inc. ShopLink.com, inc., ceased operations in
late 2000.
18
Income Tax Provision. The income tax recovery in 1999 primarily relates to
the estimated recovery of income taxes by the Companys U.K. based operations,
net of certain estimated current state and federal income taxes payable by the
Company. The Company has net operating loss carryforwards which were not
reflected as a benefit in either the Companys 1998 or 1999 financial statements.
Net Income. The Company reported a net loss of $42.5 million for the year
ended December 31, 1999, versus a net loss of $25.6 million in 1998 as a result
of the asset impairment charge and other factors described herein.
Liquidity and Capital Resources
Net cash used in operating activities for the year ended December 31, 2000
was $1.5 million, which is primarily due to the net loss of $19.8 million and
other cash uses which were partially offset by $6.0 million in depreciation and
amortization, a $4.4 million decrease in accounts receivable and an $8.4 million
increase in accounts payable. Net cash used in investing activities was $7.3
million, consisting primarily of $8.4 million in additions to property,
equipment and software. Net cash provided by financing activities was $9.0
million, including a $3.8 million net increase in borrowings under lines of
credit, and $5.4 million provided by the net exercise of stock options and
warrants and repurchase of treasury stock.
At December 31, 2000, the Companys principal sources of liquidity included
cash and of $32.3 million and accounts receivable and floor plan lines of credit
from Deutsche Financial Services Corporation (DFSC). As of December 31, 2000,
the Company had borrowings aggregating approximately $33.2 million outstanding
under its DFSC borrowing facilities, which approximated its maximum availability
thereunder. For detailed information concerning this line of credit, see Note 5
to the consolidated financial statements.
Cash and cash equivalents of $15 million were pledged as collateral for a
Letter of Credit that secured a portion of the DFSC facility. Subsequent to
December 31, 2000, the pledge and Letter of Credit were reduced to $10 million.
The DFSC lines of credit limit borrowings to defined percentages of
eligible inventory (in the U.S.) and accounts receivable and contain customary
covenants, including financial covenants with respect to the Companys 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 received a
waiver from DFSC concerning certain covenants for 2000.
Subsequent to December 31, 2000, the Company outsourced its IT product
fulfillment, inventory, logistics, and product configuration in the U.S. to Tech
Data. As a result of this agreement, the Companys working capital requirements
for inventory and accounts receivable will be substantially reduced overall,
with the U.S. operations virtually nil and the U.K. operations as described
below. Accordingly, on February 5, 2001, the Company notified DFSC of its intent
to terminate its DFSC line of credit in the U.S. by May 7, 2001. During the
termination period, the DFSC facility provides for aggregate U.S. borrowings of
up to $20 million through April 15, reducing to $10 million through May 7, the
date at which the DFSC line of credit in the U.S. will terminate. Borrowings
under the line of credit will be extinguished by cash received from accounts
receivable balances and, if necessary, cash. As Tech Data will take title to IT
products sold, the Companys revenues will being to reflect more
transaction-oriented fees, which are related to the amount of gross profit
generated on IT product sales. When fully transitioned to Tech Data, reported
transaction fees, which will be the only revenues recorded on product sales, are
expected to be approximately 6% to 8% of previously reported IT product revenues
in the U.S. Services-oriented revenues will continue to be reported as they have
been historically. The Company also anticipates that its SG&A costs will
decrease as a result of the reduction in infrastructure that is required to
support the Tech Data outsource model. The Company will receive
transaction-oriented fees from Tech Data as an agent on each IT product sale
made to clients.
19
Subsequent to December 31, 2000, the Company refinanced its DFSC line of
credit in the U.K. with Lloyds TBS Commercial Finance Limited (Lloyds) under
terms substantially similar to the prior DFSC terms. The Lloyds credit facility
provides for aggregate borrowings of up to 10.0 million (or approximately $14.4
million) in the U.K. Availability is based upon Lloyds determination of
eligibility based on accounts receivable. Amounts outstanding bear interest at
the Base Rate of Lloyds plus 1.5%.
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 U.S. operations only. At December 31, 2000, the
Company had borrowings outstanding of approximately $137,000 from IBMCC on its
floor plan line of credit. These amounts are included in accounts payable in the
consolidated balance sheet.
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 Soundview Group, Inc. (Wit
Soundview). 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 at a price note
less than $4.00 per share commencing June 12, 2000, the date the Company could
first sell Common Stock to Cripple Creek. 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
Companys 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 Wit Soundview.
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, as a test of the process, 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 on
December 2001. The Company may, at its option, terminate the Equity Line at any
time.
The Companys 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 and so long as its
financing sources continue to make lines of credit available. However, there can
be no assurance the Companys lines of credit will continue to be available to
the Company or that replacement financing could be arranged if necessary or that
the Companys stock price will increase to the minimum level of $4.00, at which
point the Company could elect to utilize the Equity Line available from Cripple
Creek as described herein.
20
Seasonality and Impact of Inflation
In prior years, the Company has not experienced seasonality in its
business. Generally, however, sales in the business and computer products
remarketer industry slow in the summer months and, in the U.S., 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 U.K. Due
to its current size and the nature of its client base, the Companys sales have
reflected this seasonality in 1999 and 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 U.S. and the U.K.
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K could include forward-looking
information. All statements, other than statements of historical fact,
including, without limitation, those with respect to the Companys 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 Companys expectations are, or will be, correct. These forward-looking
statements involve a number of risks and uncertainties which could cause the
Companys 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
clients acceptance and usage of electronic commerce software systems, the impact
of competitive technologies, products and pricing, particularly given the
subsequently larger size and scale of certain competitors and potential
competitors; the ability of Tech Data to fulfill its obligations under the
outsourcing arrangements, and the Companys resultant reliance on Tech Data,
customers willingness to transition their IT product purchases to Tech Data,
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
Annual Report on Form 10-K, the Companys 1999 Annual Report on Form 10-K and in
the Companys other SEC reports and statements, including particularly the
Companys Risk Factors contained in the prospectus included as part of the S-3
Registration Statement that became effective on May 11, 2000.
Item 7A. 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 Companys risk associated with inventory
values is discussed elsewhere in this Form 10-K.
The Companys cash and cash equivalents, lines of credit and long term debt
are sensitive to interest rate fluctuations. Changes in interest rates would
result in changes in interest income and interest expense resulting from the
difference between historical interest rates on these financial instruments and
the interest rates that these variable-rate instruments may adjust to in the
future. Based on December 31, 2000 balances, the Company estimates that a 1%
change in interest rates would have no impact on income (loss) before income
taxes.
The Companys investment in its U.K. subsidiaries is sensitive to
fluctuations in the exchange rate between the U.S. dollar and the U.K. pound
sterling. The effect of such fluctuations is included in accumulated other
comprehensive income in the Consolidated Statements of Stockholders Equity. To
date, such fluctuations have amounted to an accumulated amount of $(871,000).
21
Item 8. Financial Statements and Supplementary Data
See the Consolidated Financial Statements beginning on page F-1.
Supplemental earnings (loss) per share and quarterly financial information for
the Company are included in Notes 13 and 14, respectively, of the Notes to
Consolidated Financial Statements.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
No items to report.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information concerning the directors of the Company is set forth in the
definitive Proxy Statement (the Proxy Statement) to be sent to stockholders in
connection with the Companys 2001 Annual Meeting of Stockholders to be held at
Occasions Banquet Facility, under the heading Election of Directors, which
information is incorporated herein by reference. Information concerning each
executive officer of the Company is set forth in the Proxy Statement under the
heading Management - Executive Officers, which information is incorporated
herein by reference.
Item 11. Executive Compensation
The information concerning executive compensation is set forth in the Proxy
Statement under the heading Executive Compensation, which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading Principal
Stockholders and Management Ownership, which information is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions
The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the heading Certain Transactions,
which information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
The following documents are filed as part of this Annual Report on Form
10-K:
(a) (1) Consolidated Financial Statements:
See Index to Consolidated Financial Statements on page F-1.
22
(2) Consolidated Financial Statement Schedule for each of the Three Years
in the Period Ended December 31, 2000:
Reports of Independent Auditors on Supplementary Information
Schedule II - Valuation and Qualifying Accounts
See Index to Schedule on page S-1.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
(3) Index to Exhibits:
The exhibits filed as part of this Form 10-K are listed on the Index to
Exhibits beginning on page E-1, which Index to Exhibits is incorporated herein
by reference.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated January 26, 2001,
regarding the engagement of Dresdner Kleinwort Benson North America LLC (DrKB)
to identify and evaluate options available to the Company to maximize
stockholder value.
(c) Exhibits:
See Index to Exhibits beginning on page E-1.
---------------------------------------------------------------------------
The Company will provide copies of the Consolidated Financial Statement Schedule
and Index to Exhibits to stockholders upon request. Such request can be made to:
Chief Financial Officer, Elcom International, Inc., 10 Oceana Way, Norwood, MA
02062.
23
SIGNATURES
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: March 30, 2001 By: /s/ Robert J. Crowell
Robert J. Crowell
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signatures Title Date
- ------------------------ ---------------------------- --------------
/s/ Robert J. Crowell Chairman of the March 30, 2001
- ---------------------------- Board of Directors
Robert J. Crowell and Chief Executive Officer
(Principal Executive Officer)
/s/ Peter A. Rendall Corporate Executive March 30, 2001
- ---------------------------- Vice President,
Peter A. Rendall Chief Financial Officer
and Secretary (Principal Financial
and Accounting Officer)
/s/ William W. Smith Vice Chairman and Director March 30, 2001
- ----------------------------
William W. Smith
/s/ Richard J. Harries, Jr. Director March 30, 2001
- ----------------------------
Richard J. Harries, Jr.
/s/ John W. Ortiz Director March 30, 2001
- ----------------------------
John W. Ortiz
24
CONSOLIDATED FINANCIAL STATEMENTS
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
The following consolidated financial statements of Elcom International, Inc. are
included in response to Item 8:
Page
Independent Auditors Report F-2
Report of Other Independent Public Accountants F-3
Consolidated Balance Sheets as of December 31, 1999 and 2000 F-4
Consolidated Statements of Operations and Other
Comprehensive Income (Loss) for the years ended
December 31, 1998, 1999 and 2000 F-5
Consolidated Statements of Stockholders Equity for the years
ended December 31, 1998, 1999 and 2000 F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1999 and 2000 F-7
Notes to Consolidated Financial Statements F-8 to F-23
F-1
Independent Auditors' Report
To the Board of Directors and Shareholders of
Elcom International, Inc.
We have audited the accompanying consolidated balance sheets of Elcom
International, Inc. and subsidiaries as of December 31, 1999 and 2000, and the
related consolidated statements of operations and other comprehensive income
(loss), stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Elcom International,
Inc. and subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
February 9, 2001
F-2
REPORT OF OTHER INDEPENDENT PUBLIC ACCOUNTANTS
To Elcom International, Inc.:
We have audited the accompanying consolidated statements of operations and other
comprehensive income, stockholders' equity, and cash flows of Elcom
International, Inc. and Subsidiaries for the year ended December 31, 1998. These
consolidated financial statements are the responsibility of Elcom International,
Inc.s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, based on our audit, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
results of Elcom International, Inc.s operations and its cash flows for the year
ended December 31, 1998, in conformity with generally accepted accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 23, 1999
F-3
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
1999 2000
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (including restricted
cash of $15,000,000 at December 31, 2000) $ 34,159 $ 32,313
--------- ---------
Accounts receivable (Notes 2 and 5):
Trade 45,571 41,311
Other 8,321 5,280
--------- ---------
53,892 46,591
Less-Allowance for doubtful accounts 3,838 2,400
--------- ---------
Accounts receivable, net 50,054 44,191
Inventory (Note 5) 1,462 1,992
Prepaids and other current assets 1,221 2,183
--------- ---------
Total current assets 86,896 80,679
--------- ---------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software 24,730 31,001
Land, buildings and leasehold improvements 2,710 3,026
Furniture, fixtures and equipment 5,755 7,308
--------- ---------
33,195 41,335
Less -- Accumulated depreciation and amortization 22,230 27,182
--------- ---------
10,965 14,153
OTHER ASSETS 178 372
--------- ---------
$ 98,039 $ 95,204
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit (Note 5) $ 29,870 $ 33,241
Accounts payable 12,440 20,237
Accrued expenses and other current liabilities 8,230 9,191
Current portion of capital lease obligations (Note 8) 311 474
Short-term debt (Note 6) -- 647
--------- ---------
Total current liabilities 50,851 63,790
--------- ---------
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION (Note 8) 260 813
--------- ---------
Total liabilities 51,111 64,603
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Note 7):
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 31,207,477 shares 291 312
Additional paid-in capital 106,111 114,196
Accumulated earnings (deficit) (58,730) (78,484)
Treasury stock, at cost -- 257,739 and 409,609 shares (1,282) (4,552)
Accumulated other comprehensive income (loss) 538 (871)
--------- ---------
Total stockholders' equity 46,928 30,601
--------- ---------
$ 98,039 $ 95,204
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
For the years ended December 31,
1998 1999 2000
---------- ---------- ----------
Net sales $ 763,600 $ 485,828 $ 317,985
Cost of sales 686,658 442,427 286,911
---------- ---------- ----------
Gross profit 76,942 43,401 31,074
---------- ---------- ----------
Operating Expenses:
Selling, general and administrative 80,285 63,426 50,864
Research and development 1,178 1,343 1,695
Asset impairment, restructuring and other related charges (Note 9) 12,892 19,272 --
---------- ---------- ----------
Total operating expenses 94,355 84,041 52,559
---------- ---------- ----------
Operating profit (loss) (17,413) (40,640) (21,485)
Interest expense (8,355) (3,174) (1,567)
Interest income and other, net 691 953 2,512
---------- ---------- ----------
Income (loss) before income taxes (25,077) (42,861) (20,540)
Income tax expense (benefit) (Note 11) 484 (323) (786)
---------- ---------- ----------
Net income (loss) $ (25,561) $ (42,538) $ (19,754)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 360 (307) (1,409)
---------- ---------- ----------
Other comprehensive income (loss) $ (25,201) $ (42,845) $ (21,163)
========== ========== ==========
Basic and diluted net income (loss) per share $ (0.94) $ (1.53) $ (0.65)
========== ========== ==========
Basic and diluted weighted average shares outstanding 27,322 27,846 30,487
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except number of shares)
Accumulated
Common Stock Additional Accumulated Treasury Other Total
Number $.01 Par Paid-in Earnings Stock, Comprehensive Stockholders
Of Shares Value Capital (Deficit) At Cost Income (Loss) Equity
---------- -------- ---------- ---------- --------- --------- -----------
BALANCE, DECEMBER 31, 1997 27,218,239 $ 272 $ 100,726 $ 9,369 $ (549) $ 485 $ 110,303
Exercise of common stock options 328,822 3 545 -- -- -- 548
Purchase of treasury stock -- -- -- -- (633) -- (633)
Net loss -- -- -- (25,561) -- -- (25,561)
Cumulative translation adjustment -- -- -- -- -- 360 360
---------- ------- ---------- ---------- --------- --------- -----------
BALANCE, DECEMBER 31, 1998 27,547,061 $ 275 $ 101,271 $ (16,192) $ (1,182) $ 845 $ 85,017
Exercise of common stock options 1,581,524 16 4,840 -- -- -- 4,856
Purchase of treasury stock -- -- -- -- (100) -- (100)
Net loss -- -- -- (42,538) -- -- (42,538)
Cumulative translation adjustment -- -- -- -- -- (307) (307)
---------- ------- ---------- ---------- --------- --------- -----------
BALANCE, DECEMBER 31, 1999 29,128,585 $ 291 $ 106,111 $ (58,730) $ (1,282) $ 538 $ 46,928
Exercise of common stock options 2,017,940 20 8,618 -- -- -- 8,638
Sale of common stock 60,952 1 319 -- -- -- 320
Cost of capital -- -- (852) -- -- -- (852)
Purchase of treasury stock -- -- -- -- (3,270) -- (3,270)
Net loss -- -- -- (19,754) -- -- (19,754)
Cumulative translation adjustment -- -- -- -- -- (1,409) (1,409)
---------- ------- ---------- ---------- --------- --------- -----------
BALANCE, DECEMBER 31, 2000 31,207,477 $ 312 $ 114,196 $ (78,484) $ (4,552) $ (871) $ 30,601
========== ======= ========== ========== ========= ========= ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended December 31,
1998 1999 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (25,561) $ (42,538) $ (19,754)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities --
Gain on sale of fixed assets -- -- (680)
Depreciation and amortization 9,691 16,313 5,976
Restructuring, impairment and other related charges 10,652 19,272 --
Provision for doubtful accounts 4,975 4,626 440
Changes in current assets and liabilities
Accounts receivable 12,266 106,099 4,394
Inventory 20,939 37,418 (590)
Prepaids and other current assets 799 1,313 (926)
Accounts payable 5,860 (35,241) 8,434
Accrued expenses and other current liabilities 1,013 (12,164) 1,160
Decrease in other deferred liabilities (1,795) (418) --
--------- --------- ---------
Net cash provided by (used in) operating activities 38,839 94,680 (1,546)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software (7,284) (5,288) (8,444)
Proceeds from sale of assets -- -- 798
Decrease in other assets and deferred costs 527 194 365
--------- --------- ---------
Net cash used in investing activities (6,757) (5,094) (7,281)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under lines of credit (50,041) (73,523) 3,842
Proceeds from issuance of short-term debt -- -- 1,448
Sale of common stock -- -- 320
Repayment of capital lease obligations and debt (965) (971) (1,176)
Exercise of common stock options 548 4,856 8,638
Cost of equity line financing agreement -- -- (852)
Purchase of treasury stock (633) (100) (3,270)
--------- --------- ---------
Net cash provided by (used in) financing activities (51,091) (69,738) 8,950
--------- --------- ---------
FOREIGN EXCHANGE EFFECT ON CASH 159 (4) (1,969)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (18,850) 19,844 (1,846)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 33,165 14,315 34,159
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,315 $ 34,159 $ 32,313
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 8,232 $ 3,420 $ 1,596
========= ========= =========
Income taxes paid $ 636 $ 258 $ 165
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Increase in capital lease obligations $ 510 $ 480 $ 1,091
========= ========= =========
Disposition of Assets:
Cash proceeds from sale of assets in U.K $ -- $ 18,805 $ --
U.K. net book value of assets sold -- (18,805) --
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Elcom International, Inc. (the Company) develops and licenses automated
procurement software applications which enable the conduct of interactive
electronic commerce and, through its business products remarketing subsidiary,
uses a version of the procurement software technology (primarily the Personal
Electronic Catalog and Ordering System, hereinafter referred to as PECOS), as
well as certain Web-based technologies to support the sale and marketing of
business and PC products, the source of substantially all of the Companys net
sales since inception. elcom, inc., the Companys eBusiness subsidiary, develops
and licenses automated procurement systems and operates a business to business
Internet storefront.
(a) Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. The accounting and reporting
policies of the Company conform with accounting principles generally accepted in
the United States of America. All material intercompany transactions and
balances have been eliminated in consolidation. Certain amounts from prior years
have been restated to conform to the current presentation.
(b) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results may
differ from such estimates.
(c) Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1999 consists of deposits with
banks and financial institutions which are unrestricted as to withdrawal or use
and which have original maturities of three months or less. Cash and cash
equivalents at December 31, 2000 consists of $17.3 million of deposits with
banks and financial institutions which are unrestricted as to withdrawal or use
which have original maturities of three months or less and a restricted deposit
of $15 million which serves as collateral for the letter of credit issued to the
Deutsche Financial Services Corporation (See Note 5). Interest earned on all
cash and cash equivalents is included in interest income and other, net in the
Consolidated Statements of Operations and Other Comprehensive Income (Loss).
(d) Inventory
Inventory consists of purchased personal computer products, peripherals and
accessories available for resale. Inventories are stated at the lower of cost
(first-in, first-out) or market. The Company periodically reviews its inventory
for potential excess, slow-moving, nonsaleable or obsolete inventory.
(e) Prepaids and Other Current Assets
The Company expenses the production costs of advertising the first time the
advertising takes place. In 1999, a branding campaign was launched on behalf of
the Companys PECOS.ipm product. Company advertising expenses for 1998, 1999 and
2000 totaled $0.3 million, $3.8 million and $1.9 million, respectively.
(f) Property, Equipment and Software
Equipment and software are depreciated and amortized on a straight-line
basis over the estimated useful lives of the assets or lease term, which are
three to five years. Buildings are depreciated over a useful life of 50
F-8
years. The capitalized cost of leased equipment and leasehold improvements are
amortized over the shorter of the estimated useful life of the related assets,
or related lease instrument.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use which provides guidance on accounting for such costs.
SOP 98-1 requires computer software costs that are incurred in the preliminary
project stage to be expensed as incurred. Once the capitalization criteria of
SOP 98-1 have been met, directly attributable development costs should be
capitalized. It also provides that upgrade and maintenance costs should be
expensed. The Companys treatment of such costs has historically been consistent
with SOP 98-1, with the costs capitalized being amortized over the expected
useful life of the software, ranging from eighteen months to four years.
In January 2000, the Emergency Issues Task Force (EITF) issued Issue No.
00-2, Accounting for Web Site Development Costs. Issue 00-2 requires that
planning stage costs be expensed as incurred, costs to develop web site
application and infrastructure and graphics, be capitalized or expensed
according to the guidelines in SOP 98-1, and operating costs such as training
and maintenance be expensed as incurred.
Expenditures for the research and development of the Companys products
to be marketed are expensed as incurred, except for certain software development
costs. Specifically, costs associated with the development of computer software
are expensed as incurred prior to the establishment of technological feasibility
(as defined by Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed). Costs incurred subsequent to the establishment of technological
feasibility and prior to the general release of the products are capitalized.
The Company capitalized software development costs of $300,000, $0, and $470,000
during the years ended December 31, 1998, 1999, and 2000, respectively.
(g) Goodwill and Other Intangibles
The excess of the purchase price over the fair value of net assets acquired
in each acquisition accounted for under the purchase method of accounting is
classified as goodwill. Goodwill was being amortized on a straight-line basis
over an estimated useful life of 15 years. Other intangible assets associated
with acquisitions were assigned a five-year life. Amortization of goodwill and
such other intangibles amounted to $3,178,000, $701,000 and $0 for the years
ended December 31, 1998, 1999 and 2000, respectively. See Note (9).
(h) Impairment of Long Lived Assets
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of any asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amounts of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. See Note (9).
(i) Revenue Recognition
(i) Product The Company derives substantially all of its revenue from
sales of personal computer products, peripherals and accessories. The
Company provides for returns as incurred. Revenue from product sales
is recognized upon shipment. The Company records revenue from shipping
in net sales and the associated costs in cost of sales. The Company
records revenue on a gross basis, as the Company acts as principal in
the transaction, takes title to the products, and has the risks and
rewards of ownership, such as the risk of loss for collection,
delivery and returns.
(ii) Consulting Professional services are rendered pursuant to time and
materials based contracts and revenue is recognized when the services
are provided. To date, consulting revenue has not been material to the
Companys operations.
F-9
(iii)Licenses In accordance with the provisions of SOP 97-2, Software
Revenue Recognition, as amended by SOP 98-9, the Company recognizes
revenues from software product licenses when (i) a signed
noncancelable software license exists, (ii) delivery has occurred,
(iii) the Companys fee is fixed or determinable, and (iv)
collectibility is probable. However, if the license agreement contains
performance conditions, the revenue is recognized upon completion of
such conditions. The Company adopted the provisions of SOP 97-2 as of
January 1, 1998. Prior to the adoption, the Company accounted for
software revenues in accordance with SOP 91-1. The adoption of SOP
97-2 did not have a material impact on the Companys financial
condition or results of operations.
In addition to license fees, the Company also recognizes user fees and
maintenance fees from sales of its software products. These fees are
recognized ratably over the terms of the related licenses. To date,
license revenue has not been material to the Companys revenues.
(j) Foreign Currency Translation
The accounts of the Companys indirect U.K. subsidiaries and branch offices
are translated in accordance with SFAS No. 52, Foreign Currency Translation.
Accordingly, assets and liabilities of the Company's indirect foreign
subsidiaries are translated into U.S. dollars using the exchange rate at each
balance sheet date. Income and expense accounts are translated using an average
rate of exchange during the period. Foreign currency translation adjustments are
accumulated as a separate component of stockholders' equity and reported as part
of other comprehensive income in the statement of operations and other
comprehensive income (loss).
(k) Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the asset and liability method specified by
SFAS No. 109, a deferred tax asset or liability is determined based on the
difference between the financial statement and tax bases of assets and
liabilities, as measured by the enacted tax rates in effect when these
differences are expected to reverse. See Note (11).
(l) Stock-Based Compensation
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which requires entities to recognize as expense over the vesting
period the fair value of stock-based awards on the date of grant. For employee
stock-based awards however, SFAS No. 123 allows entities to continue to apply
the provisions of Accounting Principles Board (APB) Opinion No. 25 and provide
pro forma net earnings disclosures as if the fair- value-based method defined in
SFAS No. 123 had been applied. The Company has elected to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the grant date fair value of
the equity instruments issued, whichever is more reliably measurable.
(m) 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 SFAS No. 128, Earnings Per Share. Basic EPS
excludes dilution and is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted EPS gives effect to all potential common shares outstanding
during the period. As the Company was in a net loss position for all periods
presented, diluted EPS is the same as basic EPS because the effect at any
potential common stock equivalents would be antidilutive.
F-10
(n) Fair Value of Financial Instruments
The Companys financial instruments consist mainly of cash and cash
equivalents, accounts receivable, lines of credit, accounts payable and current
debt. The carrying amounts of the Companys cash equivalents, accounts receivable
and accounts payable approximate fair value due to the short-term nature of
these instruments. Lines of credit and long-term debt bear interest at variable
market rates and therefore, the carrying amounts for these instruments
approximate fair value.
(o) Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and displaying comprehensive income and its components. The Companys
comprehensive income consists of net income (loss) and foreign currency
translation adjustments.
(p) Segment Reporting
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, in 1998. This Statement establishes
standards for the reporting of information about operating segments in annual
and interim financial statements and required restatement of prior year
information. Operating segments are defined as components of an enterprise for
which separate financial information is available that is evaluated regularly by
the chief operating decision maker(s) in deciding how to allocate resources and
in assessing performance. SFAS No. 131 also requires disclosures about products
and services, geographic areas and major clients.
(q) Current Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards for derivative financial
instruments and hedging activities related to those instruments, as well as
other hedging activities, and was amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities. Management does
not believe that the Company holds any derivative instruments or engages in
hedging activities. Accordingly, the Company does not expect the adoption of
SFAS No. 133 to have a material impact on its financial position, results of
operations or cash flows. The Company was required to adopt SFAS No. 133 on
January 1, 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
The Company was required to adopt this accounting guidance, as amended by SAB
101A and SAB 101B, no later than the fourth quarter of fiscal year 2000. The
Company has adopted SAB 101 and there was no material impact on the Companys
financial condition, results of operations or cash flows.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation: an Interpretation of APB
Opinion No. 25. This Interpretation clarifies the application of APB No. 25 for
certain issues, including: the definition of an employee, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of modifications to the terms of a previously fixed stock option or
award, and the accounting for an exchange of stock compensation awards in a
business combination. This Interpretation was effective July 1, 2000, but
certain conclusions apply to events occurring after December 15, 1998 or January
12, 2000. To the extent that this Interpretation covered events occurring during
the period after December 15, 1998, or January 12, 2000, but before the
effective date, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000. The Company has adopted the Interpretation
and there was no material impact on its financial position, results of
operations or cash flows.
(2) ACCOUNTS RECEIVABLE
Other accounts receivable consists primarily of receivables from vendors
and manufacturers relative to returned goods and manufacturers rebates.
F-11
(3) ACCRUED EXPENSES
At December 31, 1999, accrued expenses consisted of $2.9 million related to
salaries, wages and employee benefits and $5.3 million related to other
expenses. At December 31, 2000, accrued expenses consisted of $2.8 million
related to salaries, wages and employee benefits and $6.4 million related to
other expenses.
(4) EMPLOYEE BENEFITS
The Company maintains two defined contribution benefit plans, one for
eligible employees in the U.S. and one for eligible employees in the U.K. The
plans contain provisions allowing for discretionary Company contributions.
Discretionary Company contributions to the U.K. defined contribution plan for
the years ended December 31, 1998, 1999 and 2000 were $300,000, $205,000 and
$90,600, respectively. No discretionary Company contributions were made to the
U.S. defined contribution plan for any of the periods presented. The Company has
no material obligations for post retirement benefits.
(5) LINE OF CREDIT
At December 31, 2000, the Companys principal sources of liquidity included
cash and cash equivalents of $32.3 million and accounts receivable and floor
plan lines of credit from Deutsche Financial Services Corporation (DFSC). During
1999, the U.S. DFSC facility was amended in connection with its March 1999
renewal to include elcom, inc. and to provide for aggregate borrowings of up to
$80 million. As of April 1, 1999, the interest rate was increased to prime minus
0.5% and as of April 1, 2000, the interest rate was increased to prime plus
0.25%. As of November 6, 2000, the facility was amended to provide for aggregate
borrowings of up to $40 million in the U.S. Approximately one-half of the
Companys U.S. borrowings do not bear interest until after interest-free periods
of 30 to 60 days have lapsed.
The interest rate at December 31, 2000 was prime (9.5%) plus 0.25%.
Availability of U.S. borrowings is based on DFSCs determination as to eligible
accounts receivable and inventory. As of December 31, 2000, the Companys
borrowings from DFSC on its U.S. floor plan line of credit were $22.1 million.
The U.S. DFSC line of credit is secured primarily by a $15 million Letter of
Credit and by the Companys U.S. inventory and accounts receivable, although
substantially all of the Companys other U.S. assets also are pledged as
collateral on the facility. The Letter of Credit is secured by a pledge of $15
million of cash and cash equivalents.
In December 1997, the Company established a U.K. DFSC credit facility which
provided for aggregate borrowings of up to 30 million. As of November 6, 2000,
the U.K. DFSC credit facility was amended to provide for a decrease in aggregate
borrowings to 10.0 million (or approximately $14.4 million) in the U.K.
Availability of U.K. borrowings is based upon DFSCs determination of eligible
accounts receivable and amounts outstanding bear interest at the Base Rate of
National Westminster Bank plc (6.0% at December 31, 2000) plus 1.65%. As of
December 31, 2000, the Companys borrowings under its U.K. DFSC facility were 7.4
million, or $11.1 million.
The DFSC lines of credit limit borrowings to defined percentages of
eligible inventory (in the U.S.) and accounts receivable and contain customary
covenants, including financial covenants with respect to the Companys net
income, net worth and debt-to-equity ratios, as defined in the agreements, and
customary default provisions related to non-payment of principal and interest,
default under other debt agreements and bankruptcy. After receiving a waiver
from DFSC concerning certain covenants for 2000, the Company is in compliance
with all other covenants of the facility as of December 31, 2000.
As of December 31, 1999 and 2000, the Company had borrowings aggregating
approximately $29.9 million and $33.2 million, respectively, outstanding under
its DFSC borrowing facilities, which approximated its maximum availability
thereunder.
Subsequent to December 31, 2000, the Company outsourced its product
fulfillment, inventory, logistics, and configuration in the U.S. to Tech Data.
As a result of this agreement, the Companys working capital requirements for
inventory and accounts receivable are substantially reduced. Accordingly, on
February 5, 2001, the Company notified DFSC of its intent to terminate the
Business Credit and Security Agreement (Agreement) by May 7, 2001. During the
termination period, the DFSC facility provides for aggregate U.S. borrowings of
up to $20
F-12
million through April 15, reducing to $10 million through May 7, the date at
which the DFSC line of credit in the U.S. will terminate. Borrowings under the
line of credit will be extinguished by cash received from accounts receivable
balances and, if necessary, cash. The Letter of Credit and pledged cash and
equivalents were reduced to $10 million on March 5, 2001.
Subsequent to December 31, 2000, the Company refinanced its DFSC line of
credit in the U.K. with Lloyds TBS Commercial Finance Limited (Lloyds) under
substantially similar terms. The Lloyds credit facility provides for aggregate
borrowings of up to 10.0 million (or approximately $14.4 million) in the U.K.
Availability is based upon Lloyds determination of eligibility based on accounts
receivable. Amounts outstanding bear interest at the Base Rate of Lloyds plus
1.5%.
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 December 31, 1999 and
December 31, 2000, the Company had $0 and $137,000, respectively, outstanding
from IBMCC on its floor plan line of credit which was included in accounts
payable on the consolidated balance sheet.
(6) SHORT-TERM DEBT
Short-term debt consists of the following (in thousands):
December 31,
1999 2000
---------- ----------
IBM Credit Corporation note for the purchase of
software at a rate of 13.8%, due August 30, 2001
monthly payments of $80 including interest $ -- $ 647
========== ==========
(7) STOCKHOLDERS' EQUITY
(a) Common Stock
The Company has authorized 50,000,000 shares of $.01 par value common
stock.
(b) Preferred Stock
The Company has authorized 10,000,000 shares of $.01 par value preferred
stock, with the Board of Directors authorized to fix the rights, privileges,
preferences and restrictions of any series thereof as it may designate.
(c) Stock Options
The Companys Board of Directors has adopted six stock option plans and
stockholders have approved the adoption of all such stock option plans (the
Option Plans). A seventh option plan (2001 Plan) providing 2,400,000 options has
been approved by the Board of Directors and will be voted on by the stockholders
at the 2001 Annual Meeting. As of December 31, 2000, all Option Plans provided
that up to an aggregate of 16,800,000 incentive stock options (ISOs) and
nonqualified options may be granted to key personnel, directors and consultants
of the Company, as determined by the Compensation Committee of the Board of
Directors (the Compensation Committee). Under the terms of the Option Plans,
ISOs are granted at not less than the estimated fair market value of the
Company's common stock on the date of grant. The Option Plans also provide that
the options are exercisable on varying dates, as determined by the Compensation
Committee for each plan, and have terms not to exceed 10 years. In addition, the
2001 Plan allows for the exercise of options for a 180-day period commencing on
the date of employee termination, provided that the termination is without
cause.
One of the Option Plans, the 1995 Nonemployee Director Stock Option Plan
(the 1995 Nonemployee Director Plan) provides up to 250,000 nonqualified stock
options to acquire the Company's common stock to be reserved for grant to
outside directors of the Company. Upon joining the Board of Directors, any new
nonemployee director is automatically granted 5,000 nonqualified stock options.
All nonemployee directors are granted an
F-13
additional 5,000 nonqualified stock options annually on each June 1 thereafter,
while remaining on the Board of Directors. The 1995 Nonemployee Director Plan
provides that options are granted at fair market value on date of grant, vest
ratably over three years, and have terms not to exceed 10 years.
Information relating to the Company Option plans (including convertible
shares from the elcom, inc. option plan) during each of the years in the
three-year period ended December 31, 2000 is as follows:
Weighted
Number Option Price Average
Of Shares Per Share Exercise Price
---------- -------------- ------------
Outstanding, December 31, 1997 7,730,425 $ 0.11 - 8.80 $ 4.73
Granted 1,691,000 1.28 - 6.22 3.14
Terminated (1,793,489) 1.44 - 7.69 5.30
Exercised (328,822) 0.11 - 5.99 1.67
---------- -------------- ------------
Outstanding, December 31, 1998 7,299,114 $ 0.11 - 8.80 $ 4.40
Granted 4,786,985 1.64 - 31.13 3.42
Terminated (2,122,259) 1.28 - 7.69 4.30
Exercised (1,581,524) 0.11 - 6.75 3.10
---------- -------------- ------------
Outstanding, December 31, 1999 8,382,316 $ 0.11 - 31.13 $ 4.08
Granted 5,152,147 1.17-24.06 3.72
Terminated (960,120) 1.17-21.47 5.05
Exercised (1,350,440) 0.11-8.00 4.06
---------- -------------- ------------
Outstanding, December 31, 2000 11,223,903 $ 0.11-31.13 $ 3.83
========== ============== ============
Exercisable, December 31, 1998 4,538,781 $ 0.11-8.80 $ 4.43
========== ============== ==========
Exercisable, December 31, 1999 3,640,392 $ 0.11-8.80 $ 4.60
========== ============== ==========
Exercisable, December 31, 2000 3,759,034 $ 0.11-31.13 $ 4.17
========== ============== ==========
The following table summarizes information about stock options
(including convertible options from the elcom, inc. plan) outstanding as of
December 31, 2000:
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- -------------- ---------- ---------------- ------------- --------- ---------
$ 0.11 - 0.11 76,169 2.15 0.11 76,169 $ 0.11
0.39 - 0.39 75,800 2.15 0.39 75,800 0.39
1.17 - 1.64 3,080,916 9.18 1.33 366,419 1.64
1.69 - 2.50 420,512 7.56 1.89 291,262 1.83
2.55 - 3.81 1,539,975 8.33 3.69 449,477 3.61
3.86 - 5.75 5,010,240 6.95 4.67 1,840,014 4.44
5.81 - 8.25 780,041 6.21 6.86 627,934 6.95
8.80 - 12.63 139,250 8.27 12.28 31,509 11.10
13.31 - 19.28 46,000 9.22 15.90 300 13.31
20.19 - 24.06 54,000 9.11 22.21 -- --
31.13 1,000 9.00 31.13 150 31.13
---------- --------- ---------
11,223,903 3,759,034 $ 4.17
========== ========= =========
As of December 31, 2000, 12,500,078 shares of common stock have been
reserved for issuance under the Companys stock option plans.
F-14
Had compensation costs for awards under the option plans (including
convertible shares from the elcom, inc. plan) been determined based on the fair
value method set forth in SFAS No. 123, the effect on the Companys net loss and
per share amounts would have been as follows:
1998 1999 2000
------------ ----------- ------------
(in thousands, except per share data)
Net loss:
As reported $ (25,561) $ (42,538) $ (19,754)
Pro forma $ (29,762) $ (45,530) $ (24,626)
Net loss per share:
As reported basic and
diluted $ (0.94) $ (1.53) $ (0.65)
Pro forma basic and
diluted $ (1.09) $ (1.64) $ (0.81)
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option pricing model with the following weighted average
assumptions:
1998 1999 2000
------------ ----------- ------------
Volatility 60.25% 113.71% 115.14%
Risk-free interest rate 5.41% 6.77% 4.98%
Expected life of options 5 years 6 years 5 years
Expected dividend yield 0% 0% 0%
The weighted average fair value per share of options granted during 1998,
1999 and 2000 were $1.76, $2.92 and $3.06, respectively.
The Companys wholly-owned technology subsidiary, elcom, inc. also
maintains a stock option plan (the elcom, inc. Plan) pursuant to which two
million shares of its common stock are reserved for issuance. The elcom, inc.
Plan has provisions similar to the Option Plans discussed above and during 2000,
1,740,363 stock options were granted and 31,750 stock options were terminated,
leaving a balance of 1,708,613 outstanding at December 31, 2000. All stock
options were issued at $3.82 and none were exercisable as of December 31, 2000.
In addition, for each elcom, inc. option granted, optionee receives 0.65 of an
option of the Companys common stock, all of which were included in the Companys
SFAS 123 calculation. In the event the optionee exercises this Company stock
option, the elcom, inc. stock options automatically terminate.
(d) Warrants
In June 1995, the Company issued warrants to purchase 750,000 shares of the
Companys common stock at $4.75 per share in connection with the purchase of
Lantec. As of December 31, 2000, 82,500 of these warrants are outstanding and
exercisable. The warrants expire in June 2005.
On July 19, 1999, the Company announced the engagement of Wit Soundview
Group, Inc. (Wit Soundview) 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 issued warrants to Wit Soundview to purchase 353,418
shares of the Companys common stock at $28.71 for each common share. At December
31, 2000, all of these warrants are outstanding and exercisable. The warrants
expire on December 30, 2002. The fair market value of the warrants at the date
of the grant was $20.31 per share based on the volatility, risk-free rate and
dividend yield noted above and an expected life of three years.
On December 30, 1999, the Company signed a Structured Equity Line Flexible
Financing Agreement (the Equity Line) with Cripple Creek Securities, an investor
introduced to the Company by Wit Soundview. 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 (See Note 7(f)). No warrants
have been issued as of December 31, 2000.
F-15
(e) Open Market Stock Purchase Plan
On May 28, 1998, the Board of Directors of the Company authorized the
purchase of up to an aggregate of 800,000 shares of common stock to be held as
treasury stock targeted specifically for reissuance in connection with
acquisitions. Subject to legal requirements, the purchases may be made from time
to time in the open market based upon then-existing market conditions. During
1998, the Company purchased 180,019 shares of the Companys common stock at an
aggregate cost of $633,000 pursuant to this authorization. No shares were
repurchased pursuant to this plan in 1999 or 2000.
(f ) Structured Equity Line Flexible Financing Agreement
On December 30, 1999, the Company signed the Equity Line with Cripple Creek
Securities LLC (Cripple Creek), which was introduced to the Company by Wit
Soundview. 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 Companys 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 Wit Soundview.
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.
(8) LEASES AND OTHER COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company has entered into capital leases for various software,
furniture, computer, telephone and other equipment. The lease terms range from
three to four years and, upon expiration, all leases provide purchase options at
a nominal price. Property, equipment and software includes assets under capital
leases of $2,342,000 and $2,079,000 and related accumulated amortization of
$1,657,000 and $660,000 as of December 31, 1999 and 2000, respectively.
Amortization of leased assets is included in depreciation expense.
The Company has entered into operating leases for office and warehouse
space, software, computers, autos and other equipment. The period covered by the
leases ranges from 6 months to twelve years. Certain leases for office and
warehouse space require payment by the Company of all related operating expenses
of the building, including real estate taxes and utilities.
F-16
Future minimum rental payments as of December 31, 2000, are as follows:
Capital Operating
Year Ending December 31, (in thousands) Leases Leases
--------------------------------------- -------- --------
2001 ........................................ $ 593 $ 2,213
2002 ........................................ 567 1,983
2003 ........................................ 327 1,699
2004 -- 1,312
2005 -- 1,183
Thereafter ................................... -- 2,540
-------- --------
Total minimum lease payments ................. 1,487 10,930
Less - Amounts representing interest ..... (200) --
Less minimum sublease income ............ -- (1,046)
-------- --------
Present value of net minimum lease
Payments ............................... $ 1,287 $ 9,884
========
Current portion .......................... 474
--------
Long term portion ............................ $ 813
========
Rent expense for operating leases for each year in the three-year period
ended December 31, 2000 amounted to approximately $4.3 million, $3.6 million and
$2.9 million, respectively.
(b) Employment Contracts
The Company has employment contracts with certain key executives which
provide for annual salary, incentive payments, and severance arrangements.
(c) Contingencies
The Company is party to various litigation as both plaintiff and
defendant in cases related to contractual issues, employment matters and issues
arising out of the conduct of its business. The Company believes that, based on
discussions with its counsel, the estimable range of loss, if any, is not
material in relation to the financial statements.
(9) ASSET IMPAIRMENT, RESTRUCTURING AND OTHER RELATED CHARGES
On July 31, 1999, the Company completed the sale of the substantial
majority of its U.K. remarketer group operations which included its U.K.
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 Companys U.K. revenues and 67%
of its U.K. operating income in 1998 and the seven month period ended July 31,
1999 (excluding the asset impairment charge described below). The Company
recorded net sales related to its U.K. operations of $82 million in 2000, $193
million in 1999, and $314 million in 1998. The Company has retained its U.K.
telemarketing group, which it intends to evolve towards a business to business
Internet-based storefront business, similar to Starbuyer.com, the Companys
wholly-owned eBusiness subsidiary in the U.S. The Company also plans to use the
retained business as the platform from which it will market PECOS Internet
Procurement Manager, elcom, inc.s Internet-based and remotely-hosted automated
procurement system. The acquirer assumed the lease of the Companys Langley
facility and the lease of the Companys Glasgow facility; however, the Company
retained substantially all other balance sheet assets and liabilities of the
disposed businesses. Accordingly, the Company was responsible for the current
costs of severance liabilities, and subleasing excess facilities, as well as
realizing inventory and excess fixed assets no longer required to operate the
retained portion of the business.
Based on the sale price of approximately $12 million (excluding inventory
sold of approximately $6.8 million) and the Companys 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 U.K. assets to estimated net realizable
value and the 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 inventory valuation
and returns estimates. The Company had
F-17
$25.7 million of goodwill reflected on its balance sheet associated with the
acquisitions of certain U.K. businesses 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. During
the first two quarters of 2000, $0.9 million of the remaining accrual was
utilized for costs primarily related to accounts receivable. The remaining
balance of $0.2 million was utilized in the second half of 2000 for costs
related to lease termination. As of December 31, 2000, this accrual has been
fully utilized as originally intended by the Company.
In the 1998 period, the Company recorded a charge of $12.9 million related
to a restructuring of certain of its U.S. operations. In August 1998, the
Company restructured Elcom Services Groups education sales operations and in
September consolidated certain of its client support personnel in the U.S.. The
total charge related to the Elcom Services Group restructuring was approximately
$8.1 million, consisting of approximately $.1 million of severance costs, a
write-down of $7.0 million to estimated net realizable value relating to the
impairment of certain intangible assets and approximately $1.0 million in other
related expenses and asset write-downs. The impaired intangible assets generally
consisted of the unamortized goodwill associated with the February 1995
acquisition of Computerware because the Company had determined that there were
no longer any identifiable or significant cash flows specifically associated
with this acquisition, including the non-renewal of the Apple Educational Sales
Agent contract.
In September 1998, the Company restructured elcom, inc., its electronic
commerce technology subsidiary, to serve as an electronic commerce-oriented
systems integration arm of Elcom Services Group. In connection with the elcom,
inc. restructuring, the Company recorded a total charge of approximately $3.7
million, consisting of $0.9 million of severance costs, a write-down of $2.1
million to estimated net realizable value relating to the impairment of certain
intangible assets, and approximately $0.7 million in other estimated expenses
and asset write-downs. The impaired intangible assets generally consisted of the
value assigned to the original client server coding and architecture of various
PECOS technologies, including Commerce Manager, which was no longer competitive
with alternatives then available. The Company has developed and continues to
develop, PECOS.pm in current, state-of- the-art code, especially for use on the
Internet.
In December 1998, the Company streamlined its business model, focusing
primarily on reengineering its sales force and operating infrastructure in a
manner intended to better align the Companys costs with revenues and margin
expected to be generated by the Company. This rightsizing affected 133 positions
worldwide, and the Company recorded a total charge of $1.1 million, primarily
associated with personnel severance and estimated costs related to closing six
U.S. field support and sales offices.
Components of the restructuring charges recorded in 1998, amounts
incurred through December 31, 1999, and adjustments to the charge are as follows
(in thousands):
Amount Balance Amount Balance
1998 Incurred December Incurred Adjustments December
Charge 1998 31, 1998 1999 to Charge 31, 1999
----------------------------------------------------------
Elcom Services
Group
Severance $ 813 $ 93 $ 720 $ 557 $ 163 $ --
Goodwill 6,970 6,970 -- -- -- --
Other 1,302 825 477 456 21 --
------- ------- ------- ------- ------- ---------
Total $ 9,085 $ 7,888 $ 1,197 $ 1,013 $ 184 $ --
elcom, inc
Severance $ 976 $ 212 $ 764 $ 764 $ -- $ --
Intangible
Assets 2,139 2,139 -- -- -- --
Other 692 126 566 518 48 --
------- ------- ------- ------- ------- ---------
Total $ 3,807 $ 2,477 $ 1,330 $ 1,282 $ 48 $ --
------- ------- ------- ------- ------- ---------
Total $12,892 $10,365 $ 2,527 $ 2,295 $ 232 $ --
======= ======= ======= ======= ======= =========
F-19
The excess accrual was reversed to the restructuring and other related
charges line on the statement of operations in 1999.
(10) BUSINESS SEGMENT INFORMATION
The Companys operations are classified into two reportable business
segments: elcom, inc., the Companys eBusiness technology subsidiary that
develops and licenses remotely-hosted, self-service, Internet and intranet-based
purchasing systems, and Elcom Services Group, which markets and sells
business-related products to commercial clients. The accounting policies for the
segments are consistent with those described in the summary of significant
accounting policies. The Companys management evaluates segment performance based
on net sales and gross profit.
On October 1, 1999, the ownership of the U.K. operations were transferred from
Elcom Services Group to elcom, inc. Segment results for 1998, 1999 and 2000
are
as follows (in thousands):
1998 1999 2000
--------- ---------- ----------
Net Sales
Elcom Services Group $ 761,305 $ 412,262 $ 106,699
elcom, inc 2,295 73,566 211,286
elcom, inc. intercompany sales 314 14 --
Elimination (314) (14) --
--------- ---------- ----------
Total $ 763,600 $ 485,828 $ 317,985
========= ========== ==========
Gross Profit
Elcom Services Group $ 75,135 $ 36,488 $ 11,621
elcom, inc 1,807 6,913 19,453
elcom, inc. intercompany sales 146 10 --
Elimination (146) (10) --
--------- ---------- ----------
Total $ 76,942 $ 43,401 $ 31,074
========= ========== ==========
Identifiable Assets
Elcom Services Group $ 245,133 $ 21,858 $ 9,370
elcom, inc 1,846 45,154 62,186
Corporate 14,872 31,027 23,648
--------- ---------- ----------
Total $ 261,851 $ 98,039 $ 95,204
========= ========== ==========
Substantially all net sales and gross profit are related to the remarketing
of personal computer products and related services.
The Company operates both in the U.S. and U.K. and geographic information
is as follows (in thousands):
1998 1999 2000
--------- ---------- ----------
Net Sales
U.S $ 449,844 $ 292,507 $ 235,900
U.K 313,756 193,321 82,085
--------- ---------- ----------
Total $ 763,600 $ 485,828 $ 317,985
========= ========== ==========
Gross Profit
U.S $ 40,537 $ 25,496 $ 21,969
U.K 36,405 17,905 9,105
--------- ---------- ----------
Total $ 76,942 $ 43,401 $ 31,074
========= ========== ==========
Identifiable Assets
U.S $ 151,648 $ 89,767 $ 67,834
U.K 110,203 8,272 27,302
Other foreign locations -- -- 68
--------- ---------- ----------
Total $ 261,851 $ 98,039 $ 95,204
========= ========== ==========
During 2000, the Company had one client that accounted for approximately
14.87% of net sales. For 1998 and 1999 the Company did not have any client
accounts that represent more than 10% of net sales. At December 31, 2000, this
customer accounted for approximately 14% of the Companys trade accounts
receivable balance.
F-19
(11) INCOME TAXES
Income (loss) before income tax expense (benefit) consisted of:
1998 1999 2000
-------- -------- --------
United States $(25,780) $(18,760) $(20,870)
Foreign 703 (24,101) 330
-------- -------- --------
$(25,077) $(42,861) $(20,540)
======== ======== ========
The expense (benefit) for income taxes consisted of (in thousands):
1998 1999 2000
-------- -------- --------
Current tax expense
United States federal $ 190 $ 25 $ --
State 701 742 (642)
Foreign 276 (1,090) (144)
-------- -------- --------
Total current tax expense
(benefit) $ 1,167 $ (323) $ (786)
======== ======== ========
Deferred tax expense (benefit)
United States federal $ (743) $ -- $ --
State (400) -- --
Foreign 460 -- --
-------- -------- --------
Total deferred tax expense
(benefit) $ (683) $ -- $ --
======== ======== ========
Expense (benefit) for income taxes $ 484 $ (323) $ (786)
======== ======== ========
The following table summarizes the significant differences between the
United States federal statutory tax rate and the Companys effective tax rate for
financial statement purposes:
1998 1999 2000
------- ------ ------
Statutory tax rate 34.0% 34.0% 34.0%
State taxes, net of United States federal
tax benefit 0.8 (1.7) 2.1
Foreign taxes (benefit) (0.1) 1.9 0.7
Valuation reserve provided against
utilization of net operating loss
carryforwards (24.3) (20.7) (27.9)
Non deductible goodwill and other (8.5) (12.7) (5.1)
------- ------ ------
1.9% 0.8% 3.8%
======= ====== ======
Deferred tax assets (liabilities) consisted of the following as of
December 31 (in thousands):
1999 2000
---------- ---------
Deferred tax assets:
Nondeductible reserves $ -- $ 272
Capitalized inventory costs 24 13
Accrued expenses 297 232
Other temporary differences 397 1,126
Depreciation 2,362 4,356
Foreign net operating loss carryforwards 1,871 942
Net federal and state operating loss carryforwards 20,399 36,585
---------- ---------
$ 25,350 $ 43,526
========== =========
F-20
Deferred tax liabilities:
Other intangible assets $ (791) $ (1,871)
Catalog costs (184) --
Other temporary differences (337) --
Valuation allowance (24,038) (41,655)
---------- ---------
Net deferred tax liabilities $ -- $ --
========== =========
At December 31, 2000, the Company has U.S. federal net operating loss
carryforwards of approximately $82.7 million, which are available to offset
future Federal taxable income. These losses expire during the years 2010 through
2020.
Section 382 of the Internal Revenue Code of 1986 and the Treasury
Regulations promulgated thereunder subjects the prospective utilization of the
net operating losses and certain other tax attributes, such as tax credits, to
an annual limitation in the event of an ownership change. An ownership change
under Sec 382 generally occurs when the ownership percentage of 5-percent
shareholders, in aggregate, change by more than 50 percentage points over a
three year period. Some of the Company's net operating losses and tax credits
may be subject to these limitations.
The Company's ability to utilize its net operating loss and general
business tax credit carryforwards may be limited in the future if the Company
experiences an ownership change as a result of future transactions.
At December 31, 2000, the Company has state net operating loss
carryforwards of approximately $89.3 million which are available to offset
future state taxable income. These losses expire during the years 2001 through
2020.
At December 31, 2000, the Company has foreign net operating loss
carryforwards of approximately $4.4 million, which are available to offset
future foreign taxable income. Generally, these losses may be carried forward
indefinitely.
The valuation allowance increased by $15.9 million and $17.6 million
during the years ended December 31, 1999 and 2000, respectively. The Company
believes that it is more likely than not that the deferred tax assets at
December 31, 2000 will not be realized in the future. The valuation allowance as
of December 31, 2000 includes a tax effect of approximately $12.2 million
attributable to deductions associated with employee stock option plans, the
benefit of which will be recorded as an increase to paid in capital when
realized or recognized.
(12) RELATED PARTY TRANSACTIONS
On September 30, 1997, the Company sold options to acquire an equity
ownership interest in ShopLink.com, inc. The Company received $418,000 in
payment for the options, which could have been exercised through March 31, 1999
and the $ 418,000 was recorded as other income. ShopLink.com, Inc. ceased
operations in late 2000.
(13) EARNINGS (LOSS) PER SHARE (in thousands, except per share data)
Basic and diluted earnings(loss) per share were calculated as follows:
1998 1999 2000
-------- -------- --------
Net loss $(25,561) $(42,538) $(19,754)
Weighted average shares outstanding 27,322 27,846 30,487
-------- -------- --------
Net loss per share $ (0.94) $ (1.53) $ (0.65)
======== ======== ========
Diluted net loss per share in 1998, 1999 and 2000 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 Companys common shares
in 1998, 1999, and 2000, the following are the number of potentially dilutive
securities:
F-21
Potentially Dilutive Securities
----------------------------------------------
Number Range
Of Dilutive Of Exercise
Year ending December 31, Securities Number Price
------------------------ ----------- ---------- ---------------
1998 917,000 6,963,000 $ 3.72-$8.80
1999 2,788,000 1,780,000 $ 5.56-$31.13
2000 4,945,000 1,440,000 $ 10.81-31.13
F-22
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
Certain amounts from prior quarters have been reclassified (in thousands,
except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
----------- ----------- ----------- --------- ---------
Year Ended December 31, 1999
Net sales $ 174,353 $ 149,411 $ 91,326 $ 70,738 $ 485,828
Gross profit . 17,174 13,519 7,720 4,988 43,401
Operating profit (loss) (246) (21,579) (7,609) (11,206) (40,640)
Net income (loss) $ (1,455) $ (22,734) $ (7,485) $ (10,864) $ (42,538)
Basic and diluted net income (loss) per share. $ (0.05) $ (0.82) $ (0.27) $ (0.38) $ (1.53)
Basic and diluted weighted average shares
outstanding . 27,412 27,709 27,944 28,307 27,846
Year Ended December 31, 2000
Net sales $ 80,191 $ 83,708 $ 77,051 $ 77,035 $ 317,985
Gross profit . 6,412 7,634 8,119 8,909 31,074
Operating profit (loss) (7,697) (4,460) (5,235) (4,093) (21,485)
Net income (loss) $ (7,567) $ (4,327) $ (3,793) $ (4,067) $ (19,754)
Basic and diluted net income (loss) per share. $ (0.25) $ (0.14) $ (0.12) $ (0.13) $ (0.65)
Basic and diluted weighted average shares
outstanding . 29,711 30,707 30,727 30,797 30,487
F-23
Company Confidential
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
2000 ANNUAL REPORT ON THE FORM 10-K
INDEX TO SCHEDULE
Page
Reference
Reports of Independent Auditors on Supplementary Information S-2 to S-3
Schedule II Valuation and Qualifying Accounts for the Years Ended
December 31, 1998, 1999 and 2000 S-4
S-1
Independent Accountants Report on Supplementary Information
The Board of Directors
Elcom International, Inc.
We have audited and reported separately herein on the consolidated financial
statements of Elcom International, Inc. and subsidiaries as of and for the years
ended December 31, 1999 and 2000.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements of Elcom International, Inc. taken as a whole.
The supplementary information included in Schedule II is presented for purposes
of additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
/s/ KPMG
KPMG
Boston, Massachusetts
February 9, 2001
S-2
Report of Other Independent Public Accountants Report
on Supplementary Information
To Elcom International, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated statements of operations and other comprehensive
income, stockholders equity and cash flows for the years ended December 31, 1998
of Elcom International, Inc. and subsidiaries included in this Form 10-K, and
have issued our report thereon dated March 23, 1999. Our audits were made for
the purpose of forming an opinion on the basic consolidated financial statements
referred to above taken as a whole. The schedule listed in the index of this
Form 10-K is the responsibility of Elcom International, Inc.'s management and is
presented for purposes of complying with the Securities and Exchange Commissions
rules and is not part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic consolidated financial statements and, in our opinion, fairly states,
in all material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 23, 1999
S-3
SCHEDULE II
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
For the years ended December 31, 1998, 1999, and 2000
(in thousands)
Balance at Balance
Beginning at End of
Of Period Additions Utilizations Period
---------- ---------- ---------- ----------
Allowance for Doubtful Accounts
For the years ending
- -------------------------------
December 31, 1998 $ 5,474 $ 4,975 $ (3,653) $ 6,796
========== ========== ========== ==========
December 31, 1999 $ 6,796 $ 4,626 $ (8,345) $ 3,077
========== ========== ========== ==========
December 31, 2000 $ 3,077 $ 440 $ (1,117) $ 2,400
========== ========== ========== ==========
Inventory Valuation Accounts
For the years ending
- -------------------------------
December 31, 1998 $ 1,363 $ 1,651 $ (1,022) $ 1,992
========== ========== ========== ==========
December 31, 1999 $ 1,992 $ 1,734 $ (2,956) $ 770
========== ========== ========== ==========
December 31, 2000 $ 770 $ (38) $ (389) $ 349
========== ========== ========== ==========
S-4