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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act.)
Yes No X
--- ---
The registrant had 30,902,000 shares of common stock, $.01 par value,
outstanding as of May 7, 2003.
INDEX
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2002
and March 31, 2003 (unaudited) .................................. 2
Consolidated Statements of Operations and Other Comprehensive
Income (Loss) - Three Month Periods
Ended March 31, 2002 and 2003 (unaudited) ....................... 3
Consolidated Statements of Cash Flows - Three Month Periods Ended
March 31, 2002 and 2003 (unaudited) ............................. 4
Notes to Consolidated Financial Statements (unaudited) .......... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .................................................. 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............. 13
ITEM 4. CONTROLS AND PROCEDURES ................................................ 13
Part II - OTHER INFORMATION
ITEM 1. NONE ...................................................................
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES ................................ 13
ITEM 3. NONE ...................................................................
ITEM 4. NONE ...................................................................
ITEM 5. NONE ...................................................................
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................................... 13
SIGNATURES AND CERTIFICATIONS .................................................. 14
1
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
DECEMBER 31, MARCH 31,
2002 2003
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,302 $ 379
--------- ---------
Accounts receivable:
Trade 239 206
Other 109 50
--------- ---------
348 256
Less-Allowance for doubtful accounts (28) (28)
--------- ---------
Accounts receivable, net 320 228
--------- ---------
Prepaid expenses and other current assets 205 464
Current assets of discontinued operations (Note 5) 238 31
--------- ---------
Total current assets 3,065 1,102
--------- ---------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software 17,741 17,741
Land, buildings and leasehold improvements 1,333 1,333
Furniture, fixtures and equipment 3,544 3,544
--------- ---------
22,618 22,618
Less -- Accumulated depreciation and amortization (20,772) (21,209)
--------- ---------
1,846 1,409
--------- ---------
OTHER ASSETS 113 72
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS (Note 5) 106 --
--------- ---------
$ 5,130 $ 2,583
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 335 $ 515
Deferred revenue 405 251
Accrued expenses and other current liabilities 2,476 1,501
Current portion of capital lease obligations 275 188
Current liabilities of discontinued operations (Note 5) 41 109
--------- ---------
Total current liabilities 3,532 2,564
--------- ---------
Total liabilities 3,532 2,564
--------- ---------
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 -- 31,432,546 shares 314 314
Additional paid-in capital 114,817 114,817
Accumulated earnings (deficit) (107,920) (109,481)
Treasury stock, at cost -- 530,709 shares (4,712) (4,712)
Accumulated other comprehensive income (loss) (901) (919)
--------- ---------
Total stockholders' equity 1,598 19
--------- ---------
$ 5,130 $ 2,583
========= =========
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
MARCH 31,
-----------------------
2002 2003
---- ----
Net Sales:
License and associated fees $ 536 $ 410
Professional Services 63 259
-------- --------
Total Net Sales 599 669
Cost of sales 93 194
-------- --------
Gross profit 506 475
-------- --------
Operating Expenses:
Selling, general and administrative 3,961 2,350
Research and development 375 59
Asset impairment charge 338 --
-------- --------
Total operating expenses 4,674 2,409
-------- --------
Operating loss from continuing operations (4,168) (1,934)
Interest income and other, net 16 4
Interest expense (22) (7)
-------- --------
Net loss from continuing operations before tax (4,174) (1,937)
Income tax benefit -- 492
-------- --------
Net loss from continuing operations (4,174) (1,445)
Discontinued operations:
Net loss from discontinued operations, net of tax (1,420) (116)
Gain on disposal of discontinued operations, net of tax 680 --
-------- --------
Net loss (4,914) (1,561)
Foreign currency translation adjustment, net of tax (300) (18)
-------- --------
Comprehensive loss $ (5,214) $ (1,579)
======== ========
Basic and diluted net income (loss) per share data:
Continuing operations $ (0.14) $ (0.05)
Discontinued operations (0.04) --
Gain on disposal of discontinued operations 0.02 --
-------- --------
Basic and diluted net loss per share $ (0.16) $ (0.05)
======== ========
Weighted average number of basic and diluted shares outstanding 30,898 30,902
======== ========
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)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (4,174) $(1,445)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 883 437
Asset impairment charge 338 --
Changes in current assets and liabilities:
Accounts receivable, net (1,137) 92
Prepaid expenses and other current assets (145) (259)
Accounts payable (922) 180
Deferred Revenue 1,676 (154)
Accrued expenses and other current liabilities (1,004) (975)
-------- -------
Net cash used in operating activities from continuing operations (4,485) (2,124)
Net cash provided by (used in) discontinued operations (559) 159
-------- -------
Net cash used in operating activities (5,044) (1,965)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in other assets -- 41
-------- -------
Net cash provided by investing activities from continuing operations -- 41
Net cash provided by discontinued operations 1,448 106
-------- -------
Net cash provided by investing activities 1,448 147
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations and debt (142) (87)
-------- -------
Net cash used in financing activities from continuing operations (142) (87)
-------- -------
FOREIGN EXCHANGE EFFECT ON CASH 124 (18)
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,614) (1,923)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,813 2,302
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,199 $ 379
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 21 $ 7
======== =======
Income taxes paid $ 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"). 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 that business has been presented under the financial
reporting requirements for discontinued operations for all applicable 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 March 31, 2003, and the results of operations and cash flows for
the three-month periods ended March 31, 2002 and 2003. 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, 2002.
2. STOCK BASED COMPENSATION
The Company applies SFAS No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS no. 148, Accounting for Stock Based Compensation Transition
and Disclosure, an amendment to FASB Statement No. 123, which requires entities
to recognize as expense over the vesting period the fair value of stock-based
awards on the date of grant or measurement date. 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.
Had compensation cost for awards under the Stock Option Plans (including
shares converted from the elcom, inc. plan) been determined based on the fair
value method set forth in SFAS No. 123, the effect on the Company's net loss and
per share amounts would have been as follows (in thousands, except per share
data):
Three Months Ended March 31
2002 2003
---- ----
Net Loss, as reported $(4,914) $(1,561)
Less: Compensation expense for
option awards determined under fair
value based method, net of tax effects (668) (309)
------- -------
Pro forma net loss $(5,582) $(1,870)
======= =======
Net loss per share:
As reported - basic and diluted $ (0.16) $ (0.05)
Pro forma - basic and diluted $ (0.18) $ (0.06)
5
3. NET LOSS PER SHARE
Basic net income (loss) per share (EPS) is calculated by dividing net loss
by the weighted average number of shares of common stock outstanding during the
period. Diluted EPS is calculated by dividing net income (loss) by the weighted
average number of shares outstanding plus the dilutive effect, if any, of the
outstanding stock options and warrants using the "treasury stock" method. During
periods of net loss, diluted net loss per share does not differ from basic net
loss per share since potential shares of common stock from stock options and
warrants are anti-dilutive and therefore are excluded from the calculation.
Based on the average market price of the Company's common stock in the
three-month period ended March 31, 2002, a net total of 451,334 shares covered
by options, if exercised, would have been dilutive, and 9,316,955 shares covered
by options and warrants with per share exercise prices ranging from $1.28 to
$28.71 would have been anti-dilutive. Based on the average market price of the
Company's common stock in the three-month period ended March 31, 2003, a net
total of 226,145 shares covered by options would have been dilutive, and
12,082,763 shares covered by options and warrants with per share exercise prices
ranging from $0.20 to $24.06 would have been anti-dilutive.
4. 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.S. IT
Products and services business ("IT Products"), the Company separately disclosed
that business segment in its business segment footnote. The Company operates
both in the U.S. and U.K. and geographic financial information for the quarters
ended March 31, 2002 and 2003, was as follows (in thousands):
QUARTER ENDED
MARCH 31,
-------------------
2002 2003
---- ----
Net sales from continuing operations:
U.S $ 285 $ 316
U.K 314 353
------- -------
Net Sales $ 599 $ 669
======= =======
Operating loss from continuing operations:
U.S $(3,653) $(1,626)
U.K (515) (308)
------- -------
Operating loss $(4,168) $(1,934)
======= =======
DECEMBER 31, MARCH 31,
2002 2003
------- -------
Identifiable assets from continuing operations:
U.S $ 4,311 $ 2,218
U.K 475 333
------- -------
Identifiable assets $ 4,786 $ 2,551
======= =======
5. DISCONTINUED OPERATIONS
On March 29, 2002, the Company sold certain 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 was subsequently assigned to ePlus). ePlus also
assumed certain related liabilities of the Company, including liabilities
related to employee compensation and liabilities under
6
assigned contracts. In addition, ePlus acquired certain of the Company's
software and a perpetual non-exclusive 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 $.6 million was
held in escrow and subsequently released in its entirety. 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 three-month periods ended March 31, 2002 and
2003 were as follows (in thousands):
QUARTER ENDED
MARCH 31,
-------------------
2002 2003
---- ----
Net sales from discontinued operations $ 4,842 $--
======= -----
Gross profit from discontinued operations $ 1,678 $--
======= =====
Net loss from discontinued operations $(1,420) $(116)
======= =====
Gain on disposal of U.S. discontinued
operations $ 680 $--
======= =====
6. SUBSEQUENT EVENTS
On April 3, 2003, the Company signed an agreement with Cap Gemini Ernst &
Young UK Plc ("CGEY") whereby CGEY would advance $980,000 in license fees to the
Company. The Company believes this license fee(s) will become due during 2003
via its contract with CGEY for the Scottish Executive. To date, the Company has
received approximately $600,000 and expects the entire amount to be disbursed to
the Company by June 30, 2003. Each payment is contingent upon the Company
providing assistance to CGEY to set up a duplicate back-up system in Toronto,
Canada in order for CGEY to be able to provide Disaster Recovery and Business
Continuity Services for Elcom's clients and the Scottish Executive. These
Services would be made available to Elcom's clients for a fee and would provide
a back-up system to allow CGEY to provide Business Continuity Services to host,
operate and manage Elcom's eProcurement system if Elcom were unable to do so for
any reason. If the Company does not generate this fee by the end of 2003, the
Company will agree on a repayment plan with CGEY. In addition, on April 25,
2003, the Company closed a private placement of ten-year 10% Senior Convertible
Debentures (the "Debentures") generating net cash proceeds of approximately
$700,000. Both outside institutional and accredited investors participated in
the Offering, with the majority of the investment made by three of Elcom's
senior executive team and one of its directors.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops and licenses remotely-hosted, self-service
eProcurement and eMarketplace, Internet and intranet-based purchasing systems
which automate many supply chain and financial settlement functions associated
with procurement. The Company has licensed a dynamic trading system platform to
provide auction, reverse auction, and other electronic negotiation, or
"eNegotiation" functions and markets an asset management system, both from third
party companies. Since its inception in 1992, elcom, inc., the Company's
eBusiness technology subsidiary, has developed its PECOS(TM) (Professional
Electronic Commerce Online System) technology options (which automate many
supply chain and financial settlement functions associated with procurement).
The Company's PECOS(TM) 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
7
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 ten
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
intranet/Internet 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 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 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 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 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, 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.
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 introduced in April 2002 and
includes robust support for procurement card technology and automated financial
settlement. Version 9.0 will be available during summer 2003 and includes
enhanced functionality such as the ability to edit and change orders in process.
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 sale 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.
DIVESTED IT PRODUCTS AND SERVICES BUSINESS
Prior to the divestiture of the IT Products and services business in the
U.S. on March 29, 2002, the Company had historically marketed 130,000 IT
Products manufactured by leading manufacturers such as Compaq, IBM, Toshiba and
Hewlett-Packard to commercial, educational and government accounts. 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 and eMarketplace
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 income taxes, impairment of long-lived assets,
software development costs 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 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:
8
(i) Income Taxes:
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 2003 will result in an overall
operating 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.
(ii) Impairment of Long-Lived Assets:
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 net 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 a good faith
estimate based on industry trends and reference to market rates and
transactions.
(iii) Revenue Recognition:
Revenue consists principally of fees for licenses of the Company's
software products, maintenance, hosting, consulting, and training. The
Company recognizes revenue using the residual method in accordance with
Statement of Position ("SOP") 97-2, Software Revenue Recognition, as
amended by SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions. Under the residual
method, revenue is recognized in a multiple element arrangement in which
Company-specific objective evidence of fair value exists for all of the
undelivered elements in the arrangement, but does not exist for one or
more of the delivered elements in the arrangement. Company-specific
objective evidence of fair value of maintenance and other services is
based on our customary pricing for such maintenance and/or services when
sold separately. We sell our professional services separately on a
time-and-materials basis and at times without a software license, and we
have established Company-specific objective evidence on this basis.
Company-specific objective evidence for maintenance is determined based
upon either the renewal rates when maintenance is sold separately or the
option price for annual maintenance renewals included in the underlying
customer contract. At the outset of the arrangement with the customer, we
defer revenue for the fair value of its undelivered elements (e.g.,
maintenance, consulting, and training) and recognize revenue for the
remainder of the arrangement fee attributable to the elements initially
delivered in the arrangement (i.e., software product) when the basic
criteria in SOP 97-2 have been met. If such evidence of fair value for
each element of the arrangement does not exist, all revenue from the
arrangement is deferred until such time as evidence of fair value does
exist or until all elements of the arrangement are delivered. If evidence
of fair value does not exist for maintenance and/or hosting and there are
no other undelivered elements, all revenue is recognized ratably over the
maintenance period or hosting term. Changes to the elements of a software
arrangement, the ability to identify which company-specific objective
evidence and the fair value of the respective elements could materially
impact the amount of earned and deferred revenue.
Under SOP 97-2, revenue attributable to an element in a customer
arrangement is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable,
collection of the resulting receivable is probable, and the arrangement
does not require services that are essential to the functionality of the
software. Our ability to estimate whether the collection of the resulting
receivable is probable could materially impact the amount of revenue we
record.
Our arrangements generally do not include acceptance clauses. However, if
an arrangement includes an acceptance provision, acceptance occurs upon
the earlier of receipt of a written customer acceptance or expiration of
the acceptance period. Our arrangements generally do not provide for a
right of return, and historically product returns have not been
significant.
Deferred revenue includes amounts received from customers for which
revenue has not been recognized that generally result from deferred
maintenance and support, hosting, consulting or training services not yet
rendered and license revenue deferred until all requirements under SOP
97-2 are met. Deferred
9
revenue is recognized upon delivery of our product, as services are
rendered, or as other requirements requiring deferral under SOP 97-2 are
satisfied.
(iv) Software Development Costs:
We account for software development costs in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed. SFAS No.
86 specifies that costs incurred internally in creating a computer
software product should be charged to expense when incurred as research
and development costs until technological feasibility has been established
for the product. Once technological feasibility is established, all
development costs should be capitalized until the product is available for
general release to customers. For new versions of our products we
typically achieve technological feasibility far enough in advance of
general release to warrant the capitalization of subsequent development
costs. Judgment is required in determining when the technological
feasibility of a product is established and in estimating the life of the
product for which the capitalized costs will be amortized.
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.
RESULTS OF OPERATIONS
Quarter ended March 31, 2003 compared to the quarter ended March 31, 2002.
The results of operations for the divested U.S. IT Products and services
business has been presented as discontinued operations for all applicable
periods presented.
Net Sales. Net sales for the quarter ended March 31, 2003 increased to
$669,000 compared to $599,000 from the same period of 2002, an increase of
$70,000, or 11.7%. Professional Services fees in the U.S. and U.K. increased by
$197,000, which more than offset a decrease in License and associated fees of
$126,000. License and associated fees decreased primarily due to slower than
anticipated activity associated with the Scottish Executive. License and
associated fees include License fees, annual fees and joining fees. Annual fees,
joining fees and user fees are recorded ratably over twelve months. Maintenance
fees are included in License and associated fees because they are not material
at this time.
Gross Profit. Gross profit for the quarter ended March 31, 2003 decreased
to $475,000 from $506,000 in the comparable 2002 quarterly period, a decrease of
$31,000 or 6.1%. This decrease is as a result of lower, but higher margin
License and associated fees, offset by higher, but lower margin, Professional
Services fees.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the quarter ended March 31, 2003 was
$2,350,000 compared to $3,961,000 in the 2002 quarter, a decrease of $1,611,000
or 40.7%. Throughout 2002 and the first quarter of 2003, the Company implemented
cost containment measures designed to align its SG&A expenses with lower than
anticipated revenues primarily resulting from the weak economy. Those measures
included personnel reductions throughout most functional and corporate areas. In
total, the number of personnel was reduced by 46 when comparing the number of
personnel, which were included in continuing operations, at March 31, 2003 to
March 31, 2002. That reduction in personnel resulted in a decrease in
compensation expense in the first quarter of 2003 of approximately $870,000 when
compared to the first quarter of 2002. In addition, the Company reduced its
expenditures related to facilities and telecommunication costs by approximately
$83,000 in the first quarter of 2003 compared to the first quarter of 2002. The
Company's first quarter SG&A expenses were also reduced by the reversal of a
franchise tax accrual of $506,000 as payment was no longer deemed probable as a
result of a settlement with the Inland Revenue (U.K.).
Research and Development Expense. Research and development expense for the
quarters ended March 31, 2003 and 2002 were $59,000 and $375,000, respectively.
Asset Impairment Charge. In the quarter ended March 31, 2003, the Company
did not record any asset impairment charges. In the comparable quarter of 2002,
the Company recorded an asset impairment charge of $338,000 related to the
impairment of software initially purchased to augment the Company's PECOS
technology.
10
Operating Loss from Continuing Operations. The Company reported an
operating loss from continuing operations of $1,934,000 for the quarter ended
March 31, 2003 compared to $4,168,000 reported in the comparable quarter of
2002, a decrease of $2,234,000 or 53.6%. This smaller operating loss from
continuing operations in the first quarter of 2003 compared to the 2002 quarter
was due to reduction in selling, general and administrative ("SG&A") expenses
and the reversal of a franchise tax accrual of $506,000 as payment was no longer
deemed probable as a result of a settlement with the Inland Revenue (U.K.). A
significant portion of the decline in SG&A resulted from the Company's on-going
cost containment measures designed to realign its infrastructure costs to
reflect lower than anticipated license revenue due to the weak economy while
being able to support growing demand for professional services. Reductions in
personnel resulted in a decrease in compensation expense in the first quarter of
2003 of approximately $870,000 when compared to the first quarter of 2002. In
addition, the Company reduced its expenditures related to facilities and
telecommunication costs by approximately $83,000 in the first quarter of 2003
compared to the first quarter of 2002.
Interest Income and Other, Net. Interest income and other, net, for the
quarter ended March 31, 2003 decreased to $4,000 from $16,000 in the comparable
2002 quarter.
Interest Expense. Interest expense for the quarter ended March 31, 2003
was $7,000 compared to $22,000 as of March 31, 2002 which was specifically
related to interest paid on capital leases.
Income Tax Benefit. In 2003 the company reported a tax benefit of $492,000
from the reversal of other tax accruals as payment was deemed no longer
probable.
Net Loss from Continuing Operations. The Company's net loss from
continuing operations for the quarter ended March 31, 2003 was $1,445,000, a
decrease of $2,729,000 or 65.4% from the comparable quarterly loss in 2002 of
$4,174,000, primarily due to the reduction of SG&A expenses and the reversal of
various tax accruals of $998,000.
Net Loss From Discontinued Operations. The net loss from discontinued
operations in the quarter ended March 31, 2002 was $1,420,000 compared to a net
loss from discontinued operations in the quarter ended March 31, 2003 of
$116,000. As the Company's U.S. IT Products and services business was sold on
March 29, 2002, the Company expects this cost to diminish.
Net Gain From Disposal of Discontinued Operations. The net gain in the
first quarter of 2002 from the disposal of the U.S. IT Products and services
business to ePlus on March 29, 2002 was $680,000. This gain is net of the
following: cash proceeds of $1,721,000; less a charge related to the fair market
value of the 300,000 warrants issued as part of the transaction of $273,000;
less $72,000 in net book value of fixed assets assumed as part of the sale
transaction; less asset impairment charge of $306,000 related to the write-down
of the net book value of fixed assets not assumed as part of the sale
transaction, and less a restructuring charge of $390,000 related to real estate
leases which became redundant following the sale transaction.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities from continuing operations for the
three month period ended March 31, 2003 was $2,124,000, resulting primarily from
a net loss generated from continuing operations of $1,445,000, together with an
increase in prepaid and other current assets of $259,000, a decrease in accrued
liabilities and deferred revenue of $1,129,000, offset by depreciation expense
of $437,000, an increase in accounts payable of $180,000 and a decrease in
accounts receivable of $92,000. At March 31, 2003, other than financing leases
incurred in the normal course of business, the Company did not have any debt.
At March 31, 2003, the Company's principal sources of liquidity were cash
and cash equivalents of $379,000 (See "Risk Factors Related to Liquidity",
below).
The Company's principal commitments consist of leases on its office
facilities and capital leases.
RISK FACTORS RELATED TO LIQUIDITY
As of March 31, 2003, the Company had $.4 million of cash and, other than
financing leases incurred in the normal course of business, did not have any
debt. The Company has incurred $49.2 million of cumulative net losses for the
three-year period ended December 31, 2002 and incurred a further net loss in the
three-month period ended March 31, 2003 of $1.6 million. The Company believes
that it will continue to incur losses throughout 2003. On
11
April 3, 2003, the Company signed an agreement with Cap Gemini Ernst & Young UK
Plc ("CGEY") whereby CGEY would advance $980,000 in license fees to the Company.
The Company believes this license fee(s) will become due and be paid, offsetting
this advance, during 2003 via its contract with CGEY for the Scottish Executive.
To date, the Company has received approximately $600,000 and expects the entire
amount to be disbursed to the Company by June 30, 2003. If the Company does not
generate this license fee amount by the end of 2003, the Company will agree on a
repayment plan with CGEY. In addition, on April 28, 2003, the Company closed a
private placement of ten-year 10% Senior Convertible Debentures (the
"Debentures") generating net cash proceeds of approximately $700,000. Both
outside institutional and accredited investors participated in the Offering,
with the majority of the investment made by three of Elcom's senior executive
team and one of its directors. In conjunction with the cost containment measures
the Company has taken, and assuming normal collections of accounts receivables
due and forecasted incremental revenues, the Company believes it can support its
operations into the first quarter of 2004 without raising additional capital.
The Company's consolidated financial statements as of December 31, 2002
were prepared under the assumption that the Company will continue as a going
concern for the year ending December 31, 2003. The Company's independent
accountants, KPMG LLP, issued an audit report dated March 7, 2003 that included
an explanatory paragraph expressing substantial doubt regarding the Company's
ability to continue as a going concern 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. Alternatively, the Company may seek to sell certain assets
and/or rights to its technology in certain specific vertical markets and/or
geographic markets. There can be no assurance that the Company will be able to
raise capital or sell certain assets and/or rights to its technology, 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.
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 in excess of $6 million in revenues for the Company over
the next five years. If the Company, in conjunction with Cap Gemini Ernst &
Young UK Plc, the primary contractor for the Scottish Executive, is unable to
perform under this license, it would have a significant affect on the Company's
financial statements. In January, March and October 2002, the Company invoiced,
and subsequently received, approximately $2.7 million from CGEY as a portion of
the license fees due Elcom from CGEY under Elcom's sub-contractor license with
the Scottish Executive. Much of the January and March amounts were recorded as
deferred revenue. Revenue recognition of the total amount was $222,000,
$518,000, $518,000, and $1,489,000 for each successive quarter of 2002. As the
revenue recognition increased significantly each quarter in 2002, with the final
amount in the fourth quarter including a third payment, Elcom's expected
revenues and financial results in 2003, for each quarter excepting the first
quarter, will be compared to significantly increasing revenues each quarter from
the comparable period in 2002. If the Company is unable, as is expected, to
generate enough incremental revenues in each remaining quarter of 2003, its
reported revenues and financial results for each remaining quarter of 2003 will
be less than some, or all, of each comparable quarter of 2002.
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," "given," "targets," "intends,"
"anticipates," "plans," "projects", "forecasts" 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:
(i) availability and terms of appropriate working capital and/or other financing
to keep the Company operating as a going concern, and the Company's $.4 million
in cash and cash equivalents at March 31, 2003, and its history of ongoing
operating losses; (ii) the overall marketplace and client's acceptance and usage
of eCommerce software systems, including corporate demand therefor, the impact
of competitive technologies, products and pricing, particularly given the
subsequently larger size and scale of certain competitors and potential
competitors, control of expenses, revenue generation by the acquisition of new
customers, the acceptance of the Company's system by individual agencies of the
Scottish Executive (Government of Scotland), and corporate demand for
eProcurement and eMarketplace solutions; (iii) the consequent results of
operations given the aforementioned factors; and (iv) the anticipated
12
requirement of the Company to raise additional working capital to fund
operations beginning in the first quarter of 2004 and the availability of any
such funding to the Company, and other risks detailed from time to time in the
Company's Annual Report on Form 10-K and in its other SEC reports and
statements. The Company assumes no obligation to update any of the information
contained or referenced in this Form 10-Q filing.
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 $919,000. This amount could become more material in the future due to
revenues generated in pounds under the contract with CGEY associated with
the Scottish Executive.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCESSES
Within the 90-day period prior to the filing of this quarterly report (the
"Evaluation Date"), an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and the Vice President, Finance, of the effectiveness of
the design and operation of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation,
the Chief Executive Officer and the Vice President, Finance concluded
that, as of the Evaluation Date, the design and operation of these
disclosure controls and procedures were effective in ensuring that
information required to be disclosed by the Company in reports it files or
submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and
forms.
(b) CHANGE IN INTERNAL CONTROLS
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the Evaluation Date.
PART II - OTHER INFORMATION
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
On April 25, 2003, the Company closed on a private placement of
approximately $950,000 ten-year 10% Senior Convertible Debentures (the
"Debentures") which generated approximately $700,000 in net cash proceeds
to the Company. The Debentures carry a 10% interest rate expected to be
paid "in kind" and are secured by the Company's assets. The Debentures
will convert at a price equal to the average closing price for the fifty
(50) trading day period prior to April 25, 2003 and are not convertible
for two years unless the Company achieves two sequential profitable
quarters. The Debentures may be converted by the Company after four years.
This private placement terminates on May 31, 2003 unless otherwise
extended or earlier terminated by the Company. Exemption from registration
with respect to the Sale of the Debentures is claimed pursuant to Section
4(a) of the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) REPORTS ON FORM 8-K
The Company filed or furnished Current Reports on Form 8-K dated January
1, 2003, April 3, 2003, April 28, 2003, and May 9, 2003.
13
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Elcom International, Inc.
(Registrant)
Date: May 9, 2003 By: /s/ ROBERT J. CROWELL
------------------------------
Robert J. Crowell
Chairman and CEO
14
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Elcom International, Inc.
(Registrant)
Date: May 9, 2003 By: /s/ Neal Dwyer
------------------------------
Neal Dwyer
Vice President, Finance
(Principal Financial Officer)
15
I, Robert J. Crowell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elcom
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Robert J. Crowell
- ------------------------------------
Robert J. Crowell
Chairman and Chief Executive Officer
16
I, Neal Dwyer certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elcom
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Neal Dwyer
- ------------------------
Neal Dwyer
Vice President, Finance
17