SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-27376
---------------
ELCOM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3175156
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 OCEANA WAY
NORWOOD, MASSACHUSETTS 02062
(781) 440-3333
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
The registrant had 30,902,000 shares of common stock, $.01 par value,
outstanding as of July 31, 2002.
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2001
(audited) and June 30, 2002 (unaudited) .......................2
Consolidated Statements of Operations and Other
Comprehensive Income (Loss) - Three and Six Month Periods
Ended June 30, 2001 and 2002 (unaudited) ......................3
Consolidated Statements of Cash Flows - Six Month Periods
Ended June 30, 2001 and 2002 (unaudited) ......................4
Notes to Consolidated Financial Statements (unaudited) ........5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...............................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........14
Part II - OTHER INFORMATION
Item 1. None.
Item 2. None.
Item 3. None.
Item 4. Submission of Matters to a Vote of Security Holders.................15
Item 5. None.
Item 6. Exhibits and Reports on Form 8-K....................................15
Signature ...................................................................16
1
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December June 30,
31, 2001 2002
-------- ---------
ASSETS (audited) (unaudited)
CURRENT ASSETS:
Cash and cash equivalents (including restricted
cash of $125 at December 31, 2001 and June 30, 2002) $ 10,813 $ 5,058
-------- ---------
Accounts receivable:
Trade 440 905
Other 60 --
-------- ---------
500 905
Less-Allowance for doubtful accounts 10 28
-------- ---------
Accounts receivable, net 490 877
Prepaids and other current assets 303 511
Current assets of discontinued operations 3,509 495
-------- ---------
Total current assets 15,115 6,941
-------- ---------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software 23,671 17,583
Land, buildings and leasehold improvements 1,425 1,426
Furniture, fixtures and equipment 3,784 3,608
-------- ---------
28,880 22,617
Less -- Accumulated depreciation and amortization 23,129 19,581
-------- ---------
5,751 3,036
OTHER ASSETS 88 71
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS 598 116
-------- ---------
$ 21,552 $ 10,164
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,483 $ 397
Deferred revenue 203 1,308
Accrued expenses and other current liabilities 4,375 1,807
Current portion of capital lease obligations 451 395
Current liabilities of discontinued operations 3,495 1,291
-------- ---------
Total current liabilities 10,007 5,198
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 274 100
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS 37 --
-------- ---------
Total liabilities 10,318 5,298
-------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; Authorized
-- 10,000,000 shares -- Issued and
outstanding - none -- --
Common stock, $.01 par value; Authorized
-- 100,000,000 shares -- issued --
31,406,796 and 31,432,546 shares 314 314
Additional paid-in capital 114,514 114,817
Accumulated earnings (deficit) (98,363) (105,705)
Treasury stock, at cost -- 530,709 shares (4,712) (4,712)
Accumulated other comprehensive income (loss) (519) 152
-------- ---------
Total stockholders' equity 11,234 4,866
-------- ---------
$ 21,552 $ 10,164
======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
2
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2001 2002 2001 2002
-------- --------- --------- ---------
Net sales $ 231 $ 1,334 $ 515 $ 1,933
Cost of sales 603 427 617 520
-------- --------- --------- ---------
Gross profit (loss) (372) 907 (102) 1,413
Operating Expenses:
Selling, general and administrative 6,545 3,186 14,058 7,147
Research and development 188 286 320 661
Asset impairment charges -- -- 664 338
-------- --------- --------- ---------
Total operating expenses 6,733 3,472 15,042 8,146
-------- --------- --------- ---------
Operating profit (loss) (7,105) (2,565) (15,144) (6,733)
-------- --------- --------- ---------
Interest expense (166) (16) (200) (38)
Interest income and other, net 61 8 236 24
-------- --------- --------- ---------
Net income (loss) from continuing operations (7,210) (2,573) (15,108) (6,747)
-------- --------- --------- ---------
Discontinued operations:
Net income from discontinued operations,
net of tax, U.K. 688 -- 1,576 --
Net income (loss) from discontinued operations,
net of tax, U.S. 589 (86) 772 (1,507)
Gain on sale of assets -- 232 -- 912
-------- --------- --------- ---------
Net income (loss) (5,933) (2,427) (12,760) (7,342)
Foreign currency translation adjustment, net of tax: 9 1,002 191 670
-------- --------- --------- ---------
Other comprehensive income (loss) $ (5,924) $ (1,425) $ (12,569) $ (6,672)
======== ========= ========= =========
Basic and diluted net income (loss) per share data:
Continuing operations $ (0.23) $ (0.08) $ (0.49) $ (0.22)
Discontinued operations, U.K. 0.02 -- 0.05 --
Discontinued operations, U.S. 0.02 -- 0.03 (0.05)
Gain on sale of assets -- -- -- 0.03
-------- --------- --------- ---------
Basic and diluted net loss per share $ (0.19) $ (0.08) $ (0.41) $ (0.24)
======== ========= ========= =========
Weighted average number of basic and diluted
shares outstanding 30,935 30,902 30,903 30,900
======== ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
-------------------
2001 2002
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $(15,108) $ (6,747)
Adjustments to reconcile net loss to net
cash provided by (used) in operating
activities --
Depreciation and amortization 2,587 1,691
Asset impairment charge 664 338
(Gain) loss on sale of assets -- 45
Changes in current assets and liabilities:
Accounts receivable (218) (324)
Prepaids and other current assets 85 (211)
Accounts payable 81 (1,049)
Accrued expenses and other current liabilities (124) (1,531)
-------- ---------
Net cash used in continuing operations (12,033) (7,788)
-------- ---------
Net cash provided by discontinued operations, U.K. 1,980 --
-------- ---------
Net cash provided by discontinued operations, U.S. 24,480 (344)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software (530) (12)
Change in deferred costs and other assets -- 19
Proceeds from sale of assets -- 5
-------- ---------
Net cash provided by investing activities (530) 12
-------- ---------
Net cash provided by discontinued operations, U.K. 400 --
-------- ---------
Net cash provided by discontinued operations, U.S. (125) 1,950
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations and debt (739) (259)
Exercise of common stock options 290 --
-------- ---------
Net cash used in financing activities (449) (259)
-------- ---------
Net cash used in discontinued operations, U.K. (607) --
-------- ---------
Net cash used in discontinued operations, U.S. (22,114) --
-------- ---------
FOREIGN EXCHANGE EFFECT ON CASH (443) 674
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,441) (5,755)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 32,313 10,813
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,872 $ 5,058
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 475 $ 37
======== =========
Income taxes paid $ 82 $ 15
======== =========
The accompanying notes are an integral part of
these consolidated financial statements.
4
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Elcom
International, Inc. and its wholly- owned subsidiaries (collectively, the
"Company"). As discussed further in Note 4, on December 31, 2001, the Company
sold substantially all of the assets and liabilities of its United Kingdom
("U.K.") information technology remarketer business. In addition, on March 29,
2002, the Company sold certain assets and liabilities of its United States
("U.S.") information technology remarketer business. The results of operations
for those businesses have been presented under the financial reporting
requirements for discontinued operations for all periods presented.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of June 30, 2002, and the results of operations for the three and
six-month periods ended June 30, 2001 and 2002, and cash flows for the six-month
periods ended June 30, 2001 and 2002. All significant intercompany accounts and
transactions have been eliminated. The results of operations for these periods
are not necessarily comparable to, or indicative of, results of any other
interim period or for the year as a whole. Certain financial information that is
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the U.S., but which is not required for interim
reporting purposes, has been omitted. For further information, reference should
be made to the consolidated financial statements and accompanying notes included
in the Company's Annual Report on Form 10-K as of and for the year ended
December 31, 2001.
2. Net Loss Per Share
Net loss per share is based on the weighted average number of shares of
common and common equivalent stock outstanding during each period presented,
calculated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share ("EPS"). Basic EPS excludes dilution and is
computed by dividing income (loss) available to common stockholders by the
weighted average number of shares of common stock outstanding during the period.
Diluted EPS gives effect to all potential shares of common stock outstanding
during the period. In 2001 and 2002, diluted EPS is the same as basic EPS
because the Company reported a net loss, in which case the impact of including
potential common stock is anti-dilutive and, thus, are not included in the
determination of per share calculations.
Basic and diluted net loss per share from continuing operations were
calculated as follows (in thousands, except per share amounts):
Quarter Months Ended Six Months Ended
June 30, June 30,
Basic and Diluted ------------------- --------------------
- ----------------------------------------------------- 2001 2002 2001 2002
-------- --------- --------- ---------
Net loss from continuing operations $ (7,210) $ (2,573) $ (15,108) $ (6,747)
======== ========= ========= =========
Weighted average shares outstanding 30,935 30,902 30,903 30,900
======== ========= ========= =========
Basic and diluted net loss per share from
continuing operations $ (0.23) $ (0.08) $ (0.49) $ (0.22)
======== ========= ========= =========
Based on the average market price of the Company's common stock in the
quarter ended June 30, 2001, a net total of 1,208,336 shares covered by options,
if exercised, would have been dilutive, and 7,600,181 shares covered by options
and warrants with per share exercise prices ranging from $2.20 to $28.71 would
have been anti- dilutive. Based on the average market price of the Company's
common stock in the quarter ended June 30, 2002, a net total of 943,701 shares
covered by options would have been dilutive, and 10,110,896 shares covered by
options and warrants with per share exercise prices ranging from $0.74 to $28.71
would have been anti-dilutive.
Based on the average market price of the Company's common shares
in the six-month period ended June 30, 2001, a net total of 1,596,327 shares
covered by options, if exercised, would have been dilutive, and 7,801,198 shares
covered by options and warrants with per share exercise prices ranging from
$2.50 to $28.71 would have
5
been anti-dilutive. Based on the average market price of the Company's common
shares in the six-month period ended June 30, 2002, a net total of 1,185,188
shares covered by options would have been dilutive, and 10,076,260 shares
covered by options and warrants with per share exercise prices ranging from
$1.07 to $28.71 would have been anti-dilutive.
3. Business Segment Information
The Company's continuing operation is classified as a single business
segment, specifically the development and sale of automated procurement
("eProcurement") and electronic marketplace ("eMarketplace") Internet-based
software solutions which automate many supply chain and financial settlement
functions associated with procurement. Prior to the divestiture of the U.K.
computer-oriented information technology products ("IT Products") business and
the U.S. IT Products and services business, the Company separately disclosed
that business segment in its business segment footnote. Discontinued operations
represents all of the IT Products and services business for all periods
presented. The Company operates both in the U.S. and U.K. and geographic
financial information for the quarters and six month periods ended June 30, 2001
and 2002, were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2001 2002 2001 2002
-------- --------- --------- ---------
Net sales from continuing operations
U.S. $ 216 $ 282 $ 483 $ 567
U.K. 15 1,052 32 1,366
-------- --------- --------- ---------
231 1,334 515 1,933
Net sales from discontinued operations
U.S. 11,690 40 47,780 4,882
U.K. 23,335 -- 51,178 --
-------- --------- --------- ---------
35,025 40 98,958 4,882
-------- --------- --------- ---------
Net sales $ 35,256 $ 1,374 $ 99,473 $ 6,815
======== ========= ========= =========
Operating profit (loss) from continuing operations
U.S. $ (6,673) $ (2,891) $(13,669) $ (6,544)
U.K. (432) 326 (1,475) (189)
-------- --------- --------- ---------
(7,105) (2,565) (15,144) (6,733)
Operating profit (loss) from discontinued operations
U.S. 533 146 830 (1,257)
U.K. 708 -- 1,669 --
-------- --------- --------- ---------
1,241 146 2,499 (1,257)
-------- --------- --------- ---------
Operating loss $ (5,864) $ (2,419) $(12,645) $ (5,476)
======== ========= ========= =========
December June 30,
31, 2001 2002
-------- ---------
Identifiable assets from continuing operations
U.S. $ 17,173 $ 8,346
U.K. 272 1,207
-------- ---------
17,445 9,553
Identifiable assets from discontinued operations
U.S. 4,107 611
U.K. -- --
-------- ---------
4,107 611
-------- ---------
Identifiable assets $ 21,552 $ 10,164
======== =========
4. Discontinued Operations
On December 31, 2001, the Company sold substantially all of the assets
and liabilities of its U.K. IT Products remarketer business conducted by its
subsidiary, Elcom Holdings Limited to AJJP Limited, a company that was created
by certain members of the former management team of Elcom Holdings Limited.
Immediately upon completion of the sale, AJJP Limited changed its name to Elcom
Information Technology Limited ("EIT"). The assets acquired by EIT included
current assets, fixed assets, rights under certain real property leases (which
were assumed by EIT) and certain contractual rights related to the resale of IT
Products. EIT also assumed certain related liabilities of Elcom Holdings
Limited, including a bank loan, accounts payable, accrued liabilities,
liabilities related to employee compensation and liabilities under assigned
contracts. In addition, EIT employed substantially all of the former employees
of Elcom Holdings Limited. The sale price for the transaction consisted of the
assumption of
6
net liabilities of Elcom Holdings Limited by EIT which, as of December 31, 2001,
was approximately $2.7 million, plus a nominal payment to the Company, as a
result of which the Company recorded a pre-tax gain of $2.7 million in its
fiscal 2001 consolidated financial statements.
On March 29, 2002, the Company sold certain of the assets and
liabilities of its U.S. IT Products and associated services business conducted
by its subsidiary, Elcom Services Group, Inc. ("Elcom Services Group"), to ePlus
Technology, Inc., ("ePlus"). The assets acquired by ePlus included the Company's
customer lists and certain contractual rights related to the resale of IT
Products and services, certain fixed assets and rights under the Company's real
property lease in California (which will be assigned to ePlus). ePlus also
assumed certain related liabilities of the Company, including liabilities
related to employee compensation and liabilities under assigned contracts. In
addition, ePlus acquired certain of the Company's software and a perpetual
license for certain of the Company's other software, all of which had been used
in the IT Products and services business. Under the terms of the sale, ePlus
employed the majority of the former employees of Elcom Services Group. The sale
price for the transaction consisted of cash consideration of $2.15 million, of
which approximately $0.7 million was held in escrow. During the second quarter
of 2002, $0.5 million of the escrow amount was released back to the Company. As
part of the sale transaction, the Company also issued warrants to purchase
300,000 shares of the Company's common stock to ePlus. The warrants are
exercisable after September 29, 2002, have an exercise price of $1.03 and expire
on March 29, 2009.
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the results of operations and balance sheet
information have been prepared under the financial reporting requirements for
discontinued operations, pursuant to which, all historical results of the IT
Products and services business are included in the results of discontinued
operations rather than the results of continuing operations for all periods
presented. The results of discontinued operations for the six-month periods
ended June 30, 2001 and 2002 were as follows (in thousands):
For the
Six Months Ended
June 30,
-------------------
2001 2002
-------- ---------
Net sales from discontinued operations
U.S. $ 47,780 $ 4,882
U.K. 51,178 --
-------- ---------
$ 98,958 $ 4,882
======== =========
Gross profit from discontinued operations
U.S. $ 7,591 $ 1,708
U.K. 6,121 --
-------- ---------
$ 13,712 $ 1,708
======== =========
Net income (loss) from discontinued operations
U.S. $ 772 $ (1,507)
U.K. 1,576 --
-------- ---------
$ 2,348 $ (1,507)
======== =========
Gain on disposal of U.S. discontinued
operations $ -- $ 912
======== =========
As of June 30, 2002 and December 31, 2001, the assets and liabilities
identified as those related to the U.S. IT Products and services business were
recorded as current assets of discontinued operations, non-current assets of
discontinued operations, and current liabilities of discontinued operations; the
cash flows of this business were reported as net cash provided by (used in)
discontinued operations; and the results of operations of this business were
reported as income (loss) from discontinued operations, net of tax. There were
no assets or liabilities related to the discontinued operations of the U.K. IT
Products business since this disposition had occurred on December 31, 2001.
7
Current assets of U.S. discontinued operations at December 31, 2001 and
June 30, 2002 were comprised of the following (in thousands):
December June 30,
31, 2001 2002
-------- ---------
Accounts receivable $ 3,350 $ 397
Inventory 3 --
Prepaids and other current assets 156 98
-------- ---------
$ 3,509 $ 495
======== =========
Non-current assets of U.S. discontinued operations consisted of the
following (in thousands):
December June 30,
31, 2001 2002
-------- ---------
Property, plant and equipment $ 477 $ --
Other non-current assets 121 116
-------- ---------
$ 598 $ 116
======== =========
Current liabilities of U.S. discontinued operations consisted of the
following (in thousands):
December June 30,
31, 2001 2002
-------- ---------
Accounts payable $ 1,890 $ 9
Accrued expenses and other current liabilities 1,605 1,282
-------- ---------
$ 3,495 $ 1,291
======== =========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
As discussed further herein, on December 31, 2001, divested itself of
its U.K. IT Products business and on March 29, 2002, the Company divested itself
of its U.S. IT Products and services business. The divestiture of these
businesses has allowed the Company to complete its transition to being a leading
provider of remotely-hosted, eProcurement and eMarketplace Internet- and
intranet-based software solutions, which automate many supply chain and
financial settlement functions associated with procurement (collectively the
"Service Provider Business"). As a result of these divestitures, commencing in
the second quarter of 2002, the Company does not record any revenues arising
from the sale of IT Products and associated services. From the second quarter of
2002, the Company's sole source of revenue has been the licensing of
eProcurement and eMarketplace solutions and associated professional services. As
provided by applicable accounting conventions, the U.S. IT Products and services
business and the U.K. IT Products business are presented as discontinued
operations.
As it relates to the Company's Service Provider Business going forward,
the Company intends to augment its core eProcurement Marketplace solutions with
other licensed supply chain-oriented systems to enable the conduct of
interactive procurement and financial settlement supply chain solutions for
businesses. The Company has already licensed a dynamic trading system platform
to provide auction, reverse auction, and other electronic negotiation, or
("eNegotiation") functions and represents and also markets an asset management
system from a third party company. Since its inception in 1992, elcom, inc., the
Company's eBusiness solutions subsidiary, has developed its PECOS(TM)
(Professional Electronic Commerce Online System) system, which automate many
supply chain and financial settlement functions associated with procurement. The
Company's PECOS(TM) solution 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 eProcurement and eMarketplace systems the Company
offers for licensing include:
PECOS Internet Procurement Manager ("PECOS.ipm") PECOS.ipm is based on
nine years of eCommerce technology development and, as an Internet-based system,
has been in development for approximately five years. PECOS.ipm is a robust and
feature-rich Internet-based, remotely-hosted, automated procurement system. As a
remotely-hosted system, PECOS.ipm allows the Company's clients to use their
Internet/intranet to access the system to identify and select products, check
pricing, automate the internal approval process and facilitate invoicing and
payment to suppliers. Since it is typically remotely-hosted, PECOS.ipm is
rapidly deployable and has a minimal impact on a client's computer system and
personnel resources. elcom, inc. acts as its own application service
8
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. Because it has invoicing and
receiving functionality and has automated financial settlement functions
(including robust support for procurement card technology), PECOS.ipm can
operate as a standalone system without an expensive back-end Enterprise Resource
Planning ("ERP") system in place, thereby enabling rapid deployment and easier
implementation for clients. Clients may integrate PECOS.ipm into their ERP
system using data feeds with PECOS.ipm already operating. Further, the Company
facilitates supplier catalog loads and manages catalog content for the client
when the system is remotely-hosted. In October 2001, the Company announced
version 8.0 of its next generation PECOS(TM) technology. This version of
PECOS(TM) is designed to offer a single solution which includes robust
eProcurement functionality, including "buy-side", which is the capability of a
client to order products from its supplier, ePurchasing functionality, including
"sell-side", which is the capability of a client to have its customers make
purchases electronically, and private eMarketplace functionality, including
"eMarketplace", which is the capability for a client to offer an eMarketplace to
both buy and sell products in a "community" of users which may include both
suppliers and customers. In addition, version 8.0 offers enhanced
multi-organizational, multi-lingual and multi-currency capabilities as well as
dynamic documents, eForms and improved organizational data security. Version 8.5
was announced in May 2002 and includes robust support for procurement card
technology and automated financial settlement.
PECOS Internet Commerce Manager ("PECOS.icm") is the Company's
eDistribution configuration version of PECOS(TM) that automates the online
selling process from product information through financial settlement. PECOS.icm
supports the sales of virtually any type of product or services, includes
functionality such as electronic catalogs, shopping cart and shopping cart
transfer, access to real time price and availability, product configuration and
credit card processing. PECOS.icm also supports a virtual sourcing engine that
enables the online purchase and/or sale of commodity products, such as IT
Products, without the need to maintain inventory.
In July 2001, the Company announced the availability of an optional
dynamic trading system licensed from a third party, which includes request for
proposal, private reverse auctioning and other features. The Company has also
recently announced the availability of an asset management system and is in
discussions with several other software firms to offer their systems. This
addition will allow the Company to offer a suite of supply chain modules to
augment its core eProcurement and eMarketplace functionality. Further, in
conjunction with the Commonwealth British Council (U.K.), the Company is in the
process of developing eMarketplace World Network(TM), a global eMarketplace hub,
which is designed to interconnect with world-wide eMarketplaces comprised of
vertical and geographic trading communities within an industry, allowing
eMarketplaces to connect their trading communities so that buyers can easily
review participating eMarketplaces and trade with the suppliers participating in
those eMarketplaces.
Divested IT Products and Services Business
Prior to the divestiture of the IT Products business in the U.K. on
December 31, 2001 and the IT Products and services business in the U.S. on March
29, 2002, the Company had historically marketed 130,000 IT Products to
commercial, educational and government accounts via several electronic
methodologies. Throughout 2001, the overall decline in economic activity, as
well as capital and discretionary spending by the Company's customer base,
significantly decreased. Demand for IT Products was further impacted to the
events of September 11th and their aftermath. Even though the demand for IT
Products was weak throughout 2001, the Company demonstrated success in acquiring
incremental customers from the middle of 2001 by offering PECOS.icm to new
customers at no charge, in return for a portion of their IT Products spending,
which generated transaction-oriented fees for the Company as a sales agent of
Tech Data. However, the decline in demand from existing IT Products customers
and the uncertainty surrounding the overall economy caused the Company to
carefully review its business operations in order to reduce operational and
financial risks and properly align the Company's operations with the economic
environment. The Company decided to exit the IT Products and services business
to reduce costs and allow the Company to focus exclusively on its core
eProcurement Marketplace technology.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to bad debts, income taxes, impairment of
long-lived assets, and revenue recognition. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
9
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
The Company believes that the following critical accounting policies
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements:
(i) The Company maintains allowances for doubtful accounts for estimated
losses resulting from customers that fail to make required payments;
however, additional allowances may be required. In analyzing the
adequacy of the allowance, the Company considers past experiences with
the customers and related payment history, the viability of the
customers' financial condition, and overall historical loss experience.
At a minimum, the Company maintains an allowance for accounts greater
than 90 days past due and an estimate for all other accounts based on
the results of the assumptions previously mentioned.
(ii) The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. Based
on the Company's recent losses and belief that 2002 will result in an
overall loss, the Company has recorded a valuation allowance to reduce
its deferred tax assets to $0. In the event the Company were to
determine that it would be able to realize its deferred tax assets in
the future in excess of its net recorded amount, an adjustment to the
deferred tax asset valuation allowance would increase income in the
period such determination was made.
(iii) The Company records impairment losses on long-lived assets to be held
and used or to be disposed of other than by sale when events and
circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of those items. The Company's cash flow
estimates are made for the remaining useful life of the assets and are
based on historical results adjusted to reflect the best estimate of
future market and operating conditions. The net carrying value of assets
not recoverable is reduced to fair value. The Company's estimates of
fair value represent the best estimate based on industry trends and
reference to market rates and transactions.
(iv) Revenues from sales of software are recognized in accordance with AICPA
Statement of Position 97-2, Software Revenue Recognition, as amended and
interpreted. The Company recognizes revenue from the sale of software
products when persuasive evidence of an arrangement exists, the product
has been delivered, the fee is fixed and determinable, and collection of
the resulting receivable is reasonably assured. Material differences may
result in the amount and timing of revenue for any period if the
Company's management made different judgments or utilized different
estimates.
Results of Operations
Quarter ended June 30, 2002 compared to the quarter ended June 30, 2001.
The results of operations for the divested U.K. IT Products remarketing
business and the U.S. IT Products and services business have been presented as
discontinued operations for all periods presented.
Net Sales. Net sales for the quarter ended June 30, 2002, which
represented eProcurement and eMarketplace service provider license and related
fees, were $1.3 million compared to $0.2 million in the comparable quarter of
2001, an increase of $1.1 million or 477%. Net sales in the 2002 quarter
included $0.9 million in license and professional service fees related to the
Company's government of Scotland PECOS Internet Procurement Manager system
("Scottish Government License"). The Scottish Government License agreement was
signed in November 2001 and, hence did not impact the comparable 2001 quarter's
financial results. At June 30, 2002, the Company had recorded $1.3 million of
deferred revenue related to the Scottish Government License, compared to $1.6
million as of March 31, 2002. The Company expects to recognize the majority of
this deferred revenue throughout the remainder of the 2002 fiscal year which, in
combination with its other revenues, is expected to produce higher sequential
quarterly revenues throughout 2002.
Gross Profit (Loss). The Company recorded a gross profit of $0.9 million
in the quarter ended June 30, 2002, compared to a gross loss of $0.4 million in
the quarter ended June 30, 2001, an increase of $1.3 million, or 344%. In the
second quarter of 2001, the revenue generated from technology-related sales was
insufficient to cover cost of sales, which includes the amortization charge for
capitalized software development costs and maintenance costs associated with the
PECOS product. In the quarter ended June 30, 2002, the amortization of
capitalized software and maintenance costs amounted to $198,000, compared to
$577,000 in the comparable quarterly period in
10
2001, a decrease of $379,000. In the second quarter of 2002, net sales
significantly increased, for the factors noted above, which, when combined with
a comparatively lower cost of sales, resulted in a higher gross profit when
compared to the 2001 quarterly period. The reduction in cost of sales quarter
over quarter reflects the various stages of development that the PECOS product
is in during each respective period, in particular, as it relates to allocating
costs of the Company's software development group between cost of sales
(maintenance expense and capitalization of software development costs that
result in amortization charges) and research and development expense.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the quarter ended June 30, 2002 decreased
to $3.2 million from $6.5 million in the 2001 quarter, a decrease of $3.3
million, or 51%. Since the middle of 2001 and into 2002, the Company has
implemented cost containment measures designed to align its SG&A costs with
lower than anticipated license revenues resulting from the weak economy. Those
measures include personnel reductions throughout most functional and corporate
areas. The principal reductions in SG&A expenses in the second quarter of 2002
compared to the second quarter of 2001 were comprised of reductions in personnel
and depreciation expenses of $2.2 million. The Company expects its cost
containment measures implemented in the second quarter of 2002 will result in
annualized cost savings of approximately $1.7 million.
Research and Development Expense. Research and development expense for
the quarters ended June 30, 2002 and 2001 were $286,000 and $188,000,
respectively. The expenditures incurred in the 2002 quarter for research and
development primarily related to developing significant new functionality for
the next generation of PECOS product, version 9.0, which is due to be released
in the second half of 2002.
Interest Expense. Interest expense for the quarter ended June 30, 2002
was $16,000 compared to $166,000 for the quarter ended June 30, 2001. Interest
expense specifically relates to interest paid on capital leases.
Interest Income and Other, Net. Interest income and other, net, for the
quarter ended June 30, 2002 decreased to $8,000 from $61,000 in the comparable
2001 quarter primarily as a result of having a lower interest- earning cash
balance during the 2002 first quarter compared to the 2001 first quarter.
Net Loss from Continuing Operations. The Company generated a net loss
from continuing operations for the quarter ended June 30, 2002 of $2.6 million,
compared to a net loss from continuing operations of $7.2 million in the second
quarter of 2001, as a result of the factors described herein.
Net Income (Loss) From Discontinued Operations. The net loss from
discontinued operations in the three-month period ended June 30, 2002 was $0.1
million compared to a net income from discontinued operation in the three-month
period ended June 30, 2001 of $1.3 million. The net income from discontinued
operations in the 2001 quarterly period, related to the Company's U.K. IT
Products business, which was divested on December 31, 2001, was $0.7 million.
The net income from discontinued operations related to the U.S. IT Products and
services business was $0.6 million for the three month period ended June 30,
2001 compared to a net loss from U.S. discontinued operations of $0.1 million in
the comparable 2002 three month period.
Net Gain From Disposal of Discontinued Operations. The net gain from
disposal of discontinued operations for the quarter ended June 30, 2002 of
$232,000 related to the receipt by the Company of certain amounts related to the
sale of the U.S. IT Products and services business that were previously held in
escrow.
Six-month period ended June 30, 2002 compared to the six-month period ended June
30, 2001.
The results of operations for the divested U.K. IT Products remarketing
business and the U.S. IT Products and services business have been presented as
discontinued operations for all periods presented.
Net Sales. Net sales for the six-month period ended June 30, 2002
increased to $1.9 million from $0.5 million in the same period of 2001, an
increase of $1.4 million, or 275%. Included in the net sales in the 2002 period
were $1.2 million in license and professional service fees related to the
Scottish Government License.
Gross Profit (Loss). The Company recorded a gross profit of $1.4 million
in the six-month period ended June 30, 2002, compared to a gross loss of $0.1
million in the six-month period ended June 30, 2001, an increase of $1.5
million. The increase in gross profit in the six-month period ended June 30,
2002 compared to the comparable 2001 period was due to a combination of
increased net sales in the 2002 period, for the reasons described elsewhere
herein, and a reduction in cost of sales, which includes the amortization charge
for capitalized software development and maintenance costs associated with the
PECOS product. In the six months ended June 30, 2002, the amortization
11
of capitalized software and maintenance costs amounted to $294,000, compared to
$577,000 in the comparable quarterly period in 2001, a decrease of $283,000. The
reduction in cost of sales period over period reflects the various stages of
development that the PECOS product is in during each respective period, in
particular, as it relates to allocating costs of the Company's software
development group between cost of sales (maintenance expense and capitalization
of software development costs that result in amortization charges) and research
and development expense.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the six month period ended June 30, 2002
decreased to $7.2 million from $14.1 million in the 2001 quarter, a decrease of
$6.9 million, or 49%. Throughout 2002, the Company has continued to implement
cost containment measures designed to align its SG&A costs with lower than
anticipated license revenues resulting from the weak economy. Those measures
included personnel reductions throughout most functional and corporate areas.
Research and Development Expense. Research and development expense for
the six-month periods ended June 30, 2002 and 2001 were $661,000 and $320,000,
respectively. For the 2002 period, research and development expense related to
the development of two versions of the Company's PECOS product.
Asset Impairment Charge. For the six-month periods ended June 30, 2002
and 2001, the Company recorded asset impairment charges of $338,000 and
$664,000, respectively. The asset impairment charges relate to software
initially purchased to augment the Company's PECOS technology.
Interest Expense. Interest expense for the six-month period ended June
30, 2002 was $38,000 compared to $200,000 for the comparable 2001 period. The
2002 and 2001 period interest expense is specifically related to capital leases.
Interest Income and Other, Net. Interest income and other, net, for the
six month period ended June 30, 2002 decreased to $24,000 from $236,000 in the
comparable 2001 quarter, primarily as a result of having a lower
interest-earning cash balance during for the six-month period ended June 30,
2002 compared to the same period during 2001.
Net Loss from Continuing Operations. The Company generated a net loss
from continuing operations for the six month period ended June 30, 2002 of $6.7
million as a result of the factors described herein.
Net Income (Loss) From Discontinued Operations. The net loss from
discontinued operations for the six month period ended June 30, 2002 was $1.5
million compared to a net income from discontinued operation in the six month
period ended June 30, 2001 of $2.3 million. Since the Company divested its U.K.
IT Products business on December 31, 2001, no discontinued operations were
recorded for that business in the 2002 period. In the six month period ended
June 30, 2001, the net income from discontinued operations for the U.K. IT
Products business was $1.6 million. The net income from discontinued operations
for the U.S. IT Products and services business was $0.8 million in the six month
period ended June 30, 2001 compared to a net loss from U.S. discontinued
operations of $1.5 million in the comparable 2002 six month period.
Net Gain From Disposal of Discontinued Operations. The net gain for the
six-month period ended June 30, 2002 from the disposal of the Company's U.S. IT
Products and services business to ePlus on March 29, 2002 was $912,000.
Liquidity and Capital Resources
Net cash used in operating activities from continuing operations for the
six month period ended June 30, 2002 was $7.8 million, resulting primarily from
a net loss from continuing operations of $6.7 million, together with a decrease
in accounts payable and accrued liabilities of $2.6 million, increases in
accounts receivables and other current assets of $0.5 million, offset by
depreciation of $1.7 million and impairment charges and other items amounting to
$0.3 million. Net cash provided by operations may not be indicative of future
results due to the sale of certain operations and the Company's transition to an
eProcurement and eMarketplace centric supply chain and financial settlement
services provider business. Cash provided by investing activities was primarily
comprised of the cash proceeds received from the sale of the U.S. IT Products
and services business of $1.9 million. At June 30, 2002, the Company did not
have any debt.
At June 30, 2002, the Company's principal sources of liquidity were cash
and cash equivalents of $5.1 million (See "Risk Factors Related to Liquidity",
below). Cash and cash equivalents include $125,000 that was
12
pledged as collateral to a surety company for certain performance bonds
associated with the discontinued business. Subsequent to June 30, the surety
company took possession of the collateral. The Company is in the process of
having the collateral returned to the Company.
As described elsewhere herein, on December 31, 2001, the Company sold
substantially all of the assets and liabilities of its U.K. IT Products
remarketing business to EIT. As a result, EIT assumed the U.K. Lloyds credit
facility. The terms of an agreement with Lloyds provide that EIT will be solely
entitled to and responsible for the discharge of all rights and obligations of
the Company under a debt purchase agreement. Lloyds will notify the Company in
writing as soon as all debt from any obligations arising prior to the sale is
collected and all obligations referred to are therein discharged. The Company
anticipates receiving a notice of discharge during the third quarter of 2002.
The Company's principal commitments consist of leases on its office
facilities and capital leases. In addition, the Company will require ongoing
investments in property, equipment and software.
Off-Balance Sheet Financings
The Company does not have any off-balance sheet financings. The Company
has no majority-owned subsidiaries that are not included in the financial
statements, nor does it have any interests in or relationships with any special
purpose entities.
Risk Factors Related to Liquidity
As of June 30, 2002, the Company had $5.1 million of cash and cash
equivalents and did not have any outstanding debt. The Company has incurred
$82.2 million of cumulative net losses for the three-year period ended December
31, 2001 and has incurred a further net loss from total operations in the
six-month period ended June 30, 2002 of $7.3 million and anticipates recording a
loss for the full year ending December 31, 2002. In conjunction with the cost
containment measures the Company has taken in 2001 and 2002, and assuming
projected revenues, the Company believes it has sufficient liquidity to fund
operations through the fourth quarter of 2002 without the need to raise
additional capital.
The Company's consolidated financial statements as of December 31, 2001
were prepared under the assumption that the Company will continue as a going
concern for the year ending December 31, 2002. The Company's independent
accountants, KPMG LLP, issued an audit report dated March 29, 2002 that included
an explanatory paragraph expressing substantial doubt regarding the Company's
ability to continue as a going concern through December 31, 2002 without
additional capital becoming available. The Company's ability to continue as a
going concern is dependent upon its ability to generate revenue, attain further
operating efficiencies and attract new sources of capital. The Company is in the
process of seeking additional capital, which would result in dilution for its
shareholders. There can be no assurance that the Company will be able to raise
capital, or if so, on what terms or what the timing thereof might be. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The Company's common stock currently trades on the Nasdaq National
Market. Since April 1, 2002, the closing bid price of the Company's common stock
has not exceeded $1.00 per share. On May 14, 2002, the Company received notice
from Nasdaq that, for continued listing on the Nasdaq National Market, the
Company is required to comply with the $1.00 minimum bid requirement for 10
consecutive trading days by August 12, 2002 or be subject to delisting from the
Nasdaq National Market. Alternatively, the Company had the opportunity of
applying to transfer its common stock to the Nasdaq SmallCap Market. On August
1, 2002, the Company submitted its application to transfer its common stock to
the Nasdaq SmallCap Market. On August 7, Nasdaq approved the Company's
application to list its common stock on the Nasdaq SmallCap Market, effective
August 9, 2002. The Company now has until November 11, 2002 to satisfy the $1.00
minimum bid requirement for 10 consecutive trading days.
13
Factors Affecting Future Performance
A significant portion of the Company's revenues from continuing
operations are from license fees related to the Scottish Executive License. This
license is expected to generate more than $14 million in total revenues for the
Company over seven years. At June 30, 2002, the Company had recorded $1.3
million of deferred revenue related to the Scottish Government License. The
Company expects to recognize the majority of this deferred revenue throughout
the remainder of the 2002 fiscal year which, in combination with its other
revenues, is expected to produce higher sequential quarterly revenues throughout
2002. If the Company is unable to perform under this license, it would have a
significant affect on the Company's future financial results.
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q could include forward-looking
statements or information. All statements, other than statements of historical
fact, including, without limitation, those with respect to the Company's
objectives, plans and strategies set forth herein and those preceded by or that
include the words "believes," "expects," "targets," "intends," "anticipates,"
"plans," or similar expressions, are forward-looking statements. Although the
Company believes that such forward-looking statements are reasonable, it can
give no assurance that the Company's expectations are, or will be, correct.
These forward-looking statements involve a number of risks and uncertainties
which could cause the Company's future results to differ materially from those
anticipated, including: availability and terms of appropriate working capital
and/or other financing, particularly in light of the audit opinion from the
Company's independent accountants in the Company's Annual Report on Form 10-K as
to the Company's necessity to raise capital to continue as a going concern
through December 31, 2002; the overall marketplace and client's acceptance and
usage of eCommerce software systems, including corporate demand therefore, the
impact of competitive technologies, products and pricing, particularly given the
subsequently larger size and scale of certain competitors and potential
competitors, and control of expenses, revenue growth, corporate demand for
eProcurement and eMarketplace solutions; the consequent results of operations
given the aforementioned factors; possibility of delisting of the Company's
common stock from the Nasdaq SmallCap Market as a result of not meeting the
continuing listing requirements, including the failure of the Company to comply
with the $1.00 minimum bid requirements for ten consecutive trading days by
November 11, 2002, and other risks detailed from time to time in the Company's
2001 Annual Report on Form 10-K and in the Company's other SEC reports and
statements, including particularly the Company's "Risk Factors" contained in the
prospectus included as part of the Form S-3 Registration Statement that was
filed with the Securities and Exchange Commission on June 21, 2002.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from exchange rates, which could
affect its future results of operations and financial condition.
The Company's 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 $152,000. This
amount could become more material in the future due to revenues generated in
pounds via the license with the Government of Scotland.
14
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the Company's stockholders was held on June 12,
2002. Two matters specified in the Company's Notice of Annual Meeting and Proxy
Statement dated April 29, 2002, a copy of which has been previously filed with
the Securities and Exchange Commission, were considered, voted upon and approved
by the stockholders. The specific results of the voting on the two matters are
as follows:
Proposal I: The size of the Company's Board of Directors was fixed at six
and Mr. John W. Ortiz was elected to the Board of Directors of
the Company, for a term to expire at the 2005 Annual Meeting, by
the following votes:
Number of Shares Voted
For Withheld
---------- ----------
John W. Ortiz 25,921,063 552,166
For the meeting, each of Messrs. Robert J. Crowell, William W. Smith and
Richard J. Harries, Jr. also continued as Directors of the Company.
Proposal II: The Company's stockholders ratified, approved and adopted The
2002 Stock Option Plan of Elcom International, Inc., covering
1,800,000 shares of Common Stock by the following vote:
For Against Abstain
-------------- ------------- ------------
8,734,854 964,630 272,672
For information on the manner in which the votes on the above matters
were tabulated, see the definitive proxy statement referenced above.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.1 Amended and Restated Employment Agreement between the Registrant
and Robert J. Crowell dated June 20, 2002.
10.2 Employment Agreement between the Registrant and John E. Halnen
dated June 14, 2002.
10.3 Employment Agreement between the Registrant and Peter A. Rendall
dated June 14, 2002.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K (including pro forma
financial statements), on April 10, 2002, regarding the sale of certain
assets and liabilities of the Company's U.S. information technology
remarketer business conducted by its subsidiary, Elcom Services Group,
Inc to ePlus Technology, Inc.
- ---------------------------------
15
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Elcom International, Inc.
(Registrant)
Date: August 8, 2002 By: /s/ Peter A. Rendall
Peter A. Rendall
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
16