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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 JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-27376
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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 30,901,837 shares of common stock, $.01 par value,
outstanding as of August 11, 2003.
INDEX
Part I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2002
and June 30, 2003 (unaudited).................................................2
Consolidated Statements of Operations and Other Comprehensive
Income (Loss) - Three and Six Month Periods
Ended June 30, 2002 and 2003 (unaudited)......................................3
Consolidated Statements of Cash Flows - Six Month Period Ended
June 30, 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..................................................................8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................15
ITEM 4. CONTROLS AND PROCEDURES...............................................................15
Part II - OTHER INFORMATION
ITEM 1. NONE.
ITEM 2. NONE.
ITEM 3. NONE.
ITEM 4. NONE.
ITEM 5. RECENT SALE OF UNREGISTERED SECURITIES................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................16
SIGNATURES AND CERTIFICATIONS...........................................................................17
1
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
DECEMBER 31, JUNE 30,
2002 2003
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,302 $ 572
------------- --------------
Accounts receivable:
Trade 239 434
Other 109 --
------------- --------------
348 434
Less- Allowance for doubtful accounts (28) (18)
------------- --------------
Accounts receivable, net 320 416
------------- --------------
Prepaid expenses and other current assets 205 397
Current assets of discontinued operations (Note 5) 238 31
------------- --------------
Total current assets 3,065 1,416
------------- --------------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software 17,741 17,931
Land, buildings and leasehold improvements 1,333 1,333
Furniture, fixtures and equipment 3,544 3,544
------------- --------------
22,618 22,808
Less- Accumulated depreciation and amortization (20,772) (21,560)
------------- --------------
1,846 1,248
------------- --------------
OTHER ASSETS 113 72
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS (Note 5) 106 --
------------- --------------
TOTAL ASSETS $ 5,130 $ 2,736
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 335 $ 665
Loan payable (Note 6) -- 795
Deferred revenue 405 350
Accrued expenses and other current liabilities 2,476 1,597
Current portion of capital lease obligations 275 99
Current liabilities of discontinued operations (Note 5) 41 --
------------- --------------
Total current liabilities 3,532 3,506
------------- --------------
LONG TERM LIABILITIES
Senior Convertible Debentures, net of discount
(includes gross amounts due to related parties of $710) (Note 6) -- 245
------------- --------------
Total long term liabilities -- 245
------------- --------------
TOTAL LIABILITIES 3,532 3,751
============= ==============
STOCKHOLDERS' EQUITY (DEFICIT) :
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 114,817 115,533
Accumulated earnings (deficit) (107,920) (111,244)
Treasury stock, at cost -- 530,709 shares (4,712) (4,712)
Accumulated other comprehensive income (loss) (901) (906)
------------- --------------
Total stockholders' equity (deficit) 1,598 (1,015)
------------- --------------
$ 5,130 $ 2,736
============= ==============
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,
------------------------------- -------------------------------
2002 2003 2002 2003
------------- ---------------- -------------- --------------
Net Sales
License and associated fees $ 851 $ 371 $ 1,387 $ 781
Professional services 483 160 546 419
------------- ---------------- -------------- --------------
Total Net Sales 1,334 531 1,933 1,200
Cost of sales 427 135 520 329
------------- ---------------- -------------- --------------
Gross profit (loss) 907 396 1,413 871
Operating Expenses:
Selling, general and administrative 3,186 2,457 7,147 4,807
Research and development 286 68 661 127
Asset impairment charges -- -- 338 --
------------- ---------------- -------------- --------------
Total operating expenses 3,472 2,525 8,146 4,934
------------- ---------------- -------------- --------------
Operating profit (loss) (2,565) (2,129) (6,733) (4,063)
------------- ---------------- -------------- --------------
Interest expense (16) (34) (38) (41)
Interest income and other, net 8 (23) 24 (19)
------------- ---------------- -------------- --------------
Net loss from continuing operations before tax (2,573) (2,186) (6,747) (4,123)
Income tax benefit -- -- -- 492
------------- ---------------- -------------- --------------
Net loss from continuing operations (2,573) (2,186) (6,747) (3,631)
Discontinued operations
Net income (loss) from discontinued operations,
net of tax (86) 423 (1,507) 307
Gain on sale of assets 232 -- 912 --
------------- ---------------- -------------- --------------
Net income (loss) (2,427) (1,763) (7,342) (3,324)
Foreign currency translation adjustment,
net of tax 314 13 14 (5)
------------- ---------------- -------------- --------------
Other comprehensive income (loss) $ (2,113) $ (1,750) $ (7,328) $ (3,329)
============= ================ ============== ==============
Basic and diluted net income (loss) per share data:
Continuing operations $ (0.08) $ (0.07) $ (0.22) $ (0.12)
Discontinued operations -- .01 (0.05) .01
Gain on sale of assets -- -- 0.03 --
------------- ---------------- -------------- --------------
Basic and diluted net loss per share $ (0.08) $ (0.06) $ (0.24) $ (0.11)
============= =============== ============== ==============
Weighted average number of basic and diluted
shares outstanding 30,902 30,902 30,900 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)
Six Months Ended
June 30,
--------------------------------
2002 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (6,747) $ (3,631)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities -
Depreciation and amortization 1,691 800
Asset impairment charge 338 --
Loss on sale of assets 45 --
Changes in current assets and liabilities:
Accounts receivable (324) (96)
Prepaid expenses and other current assets (211) (192)
Accounts payable (1,049) 330
Deferred revenue (999) (55)
Accrued expenses and other current liabilities 125 (879)
------------- --------------
Net cash used in continuing operations (7,131) (3,723)
------------- --------------
Net cash provided by (used in) discontinued operations (344) 579
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software (12) (190)
Change in deferred costs and other assets 19 41
Proceeds from sale of assets 5 --
------------- --------------
Net cash provided by (used in) investing activities 12 (149)
------------- --------------
Net cash provided by discontinued operations 1,950 --
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations and debt (259) (176)
Proceeds from Loan Senior Payable -- 795
Proceeds from issuance of convertible debentures -- 949
------------- --------------
Net cash provided by (used in) financing activities (259) 1,568
------------- --------------
FOREIGN EXCHANGE EFFECT ON CASH 17 (5)
------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,755) (1,730)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,813 2,302
------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,058 $ 572
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 37 $ 12
============= ==============
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 have been presented under the financial
reporting requirements for discontinued operations for all applicable periods
resented. Certain amounts from prior periods have been reclassified to conform
to the current period presentation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of June 30, 2003, and the results of operations and cash flows for
the three-month and six-month periods ended June 30, 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 Six Months Ended
June 30 June 30
------------------------ ------------------------
2002 2003 2002 2003
------- ------- ------- -------
Net loss, as reported $(2,427) $(1,763) $(7,342) $(3,324)
Less: Compensation expense for
option awards determined under fair
value based method, net of tax effects (1,342) (475) (2,010) (784)
------- ------- ------- -------
Pro forma net loss $(3,769) $(2,238) $(9,352) $(4,108)
======= ======= ======= =======
Net loss per share:
As reported - basic and diluted $ (0.08) $ (0.06) $ (0.24) $ (0.11)
Pro forma - basic and diluted $ (0.12) $ (0.07) $ (0.30) $ (0.13)
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. Fully diluted EPS is calculated by dividing net income (loss) by the
weighted average number of shares outstanding plus the dilutive effect, if any,
of outstanding stock options and warrants using the "treasury stock" method and
the dilutive effect of convertible debt outstanding using the "if converted"
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. Common Stock issuable upon conversion of the Company's Senior
convertible debentures totaling 7,569,705 shares were excluded from the fully
diluted earnings per share calculation because their impact was antidilutive.
Based on the average market price of the Company's common stock in the
three-month period ended June 30, 2003, a net total of 3,299,195 shares covered
by options, if exercised, would have been dilutive, and 8,530,189 shares covered
by options and warrants with per share exercise prices ranging from $.445 to
$24.06 would have been anti-dilutive. Based on the average market price of the
Company's common stock in the three-month period ended June 30, 2002, a net
total of 943,701 shares covered by options would have been dilutive, 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 stock in the
six-month period ended June 30, 2003, a net total of 2,012,025 shares covered by
options, if exercised, would have been dilutive, and 9,681,794 shares covered by
options and warrants with per share exercise prices ranging from $.22 to $24.06
would have been anti-dilutive. Based on the average market price of the
Company's common stock 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.
4. BUSINESS SEGMENT INFORMATION
The Company's continuing operation is classified as a single business
segment, specifically the development and sale of automated purchasing
("ePurchasing") 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, 2002
and 2003, were as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2002 2003 2002 2003
------- ------- ------- -------
Net sales from continuing operations
U.S $ 282 $ 326 $ 567 $ 642
U.K 1,052 205 1,366 558
------- ------- ------- -------
Net sales 1,334 531 1,933 1,200
======= ======= ======= =======
Operating profit (loss) from continuing operations
U.S $(2,891) $(1,750) $(6,544) $(3,376)
U.K 326 (379) (189) (687)
------- ------- ------- -------
Operating loss (2,565) (2,129) (6,733) (4,063)
======= ======= ======= =======
December 31, June 30,
2002 2003
----------- --------
Identifiable assets from continuing operations
U.S $4,311 $2,185
U.K 475 520
------ ------
Identifiable assets $4,786 $2,705
====== ======
6
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"). The assets sold
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, the buyer of these assets). 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 products and a perpetual
non-exclusive license for certain of the Company's other software products, all
of which had been used in the IT Products and services business. Under the terms
of the sale, this company 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 this company. 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 and six-month
period ended June 30, 2002 and 2003 were as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
2002 2003 2002 2003
------- -------- ------- -------
Net sales from discontinued operations $ 40 $ -- $ 4,882 $ --
======= ======== ======= =======
Gross profit from discontinued operations $ 30 $ -- $ 1,708 $ --
======= ======== ======= =======
Net income (loss) from discontinued operations $ (86) $ 423 $(1,507) $ 307
======= ======== ======= =======
Gain on sale of assets of U.S. discontinued
operations $ 232 $ -- $ 912 $ --
======= ======== ======= =======
6. FINANCING ARRANGEMENTS
a. Senior Convertible Debenture
On April 23, 2003, the Company closed a private placement to accredited
investors of ten-year 10% Senior Convertible Debentures (the
"Debentures"), generating cash proceeds of approximately $949,000. The
financing round included Robert J. Crowell, the Chairman and CEO, John
E. Halnen, the President and COO, William W. Smith, the Vice Chairman
and Director, Andres Escallon, the Chief Technology Officer,
(collectively, the "Inside Investors") and institutional and other
Elcom stockholders (collectively, the "Outside Investors"). Inside
investors are considered related parties, therefore, related parties
invested a total of $710,000 in the Debentures.
The Debentures carry a 10% interest rate, which is payable in cash or
payment-in-kind. Interest is due annually, in arrears, commencing April
23, 2004 and is expected to be paid in kind. The principal amount is
due at maturity, which is April 23, 2013. The Company has accrued
approximately $17,000 in interest expense due under these Debenture
agreements as of June 30, 2003.
The Debentures are collateralized by a security interest in
substantially all of the Company's assets for a two-year period ending
April 22, 2005. They are convertible into common stock of the Company
at a conversion price equal to the average closing price of the
Company's common stock over the 50 trading days ending April 22, 2003,
subject to antidilution clauses. The Debentures are convertible at the
election of the holder at any time commencing on April 22, 2005 through
April 22, 2013. However, if the Company has two sequential quarters of
profitability with respect to continuing operations, the Holder may
convert the Debentures at his option. The
7
The Company recorded a beneficial conversion feature of $716,000 in
conjunction with the issuance of these debentures. This amount will be
amortized as interest expense over the term of the Debentures. At June
30, 2003, the Company has accrued $12,000 as interest expense for this,
resulting in a discount of $704,000. At June 30, 2003, if converted the
debentures would convert into 7,569,705 shares of common stock.
The Company has the right to convert the Debentures upon the occurrence
of the following events:
- A change of control, as defined in the agreement, or
- the Company's option as of April 23, 2007, or
subsequent to this date upon written notice to the
Holder.
The Senior Convertible Debentures will not be registered under the
Securities Act of 1933, as amended, or applicable state securities laws
and may not be offered or sold in the United States absent registration
under the Securities Act of 1933, and applicable state securities laws
or available exemptions from the registration requirements. This
private placement was extended to August 29, 2003 and will terminate on
that date 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.
Robert Crowell invested $300,000 in the Debentures and John Halnen
invested $60,000 in the Debentures. Of these amounts, the Company paid
Robert Crowell $187,000 and John Halnen $60,000 in repayment of a
portion of their salaries which they had voluntarily suspended during
2002 in order to assist the Company in its efforts to retain cash.
Robert Crowell and John Halnen immediately reinvested these proceeds
into their purchase of the Debentures.
b. Loan Payable
On April 3, 2003, the Company signed an agreement whereby Cap Gemini
Ernst and Young UK Plc ("CGEY") agreed to advance (pound)625,000 (approximately
$980,000) to the Company representing an advance of a lump-sum license payment
expected to be paid to the Company later this year under its contract with CGEY
associated with the Scottish Executive. The majority of this amount was received
by June 30, 2003 ($795,000) and is therefore reflected as a loan payable. The
remaining amount ($203,000) was received on July 17, 2003 when the Company
fulfilled its obligations under this agreement. Each payment was 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 ("Services") for Elcom's clients. These Services
will be made available to Elcom's clients and would provide a back-up system to
allow CGEY to provide Business Continuity Services (e.g., to host, operate and
manage) Elcom's ePurchasing system if Elcom were unable to do so for any reason.
If the Company does not generate the license fee amount by the end of 2003, the
Company will agree on a repayment plan with CGEY, including an interest penalty,
the interest is the HSBC base rate plus 2% calculated from the date of the
Advances.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops and licenses remotely-hosted, self-service
ePurchasing 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. 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 performance and high transaction capacity. The
ePurchasing 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
8
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
ePurchasing 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 was recently introduced 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 after the September 11,
2001 terrorist attacks to reduce costs as demand declined and to allow the
Company to focus exclusively on its core ePurchasing 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:
(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.
(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 less
estimated selling costs. The Company's estimates of fair value
represent a good faith estimate based on industry trends and
reference to market rates and transactions.
9
(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 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.
10
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("FAS 150"). This statement
establishes standards for how an issuer classifies and measures, in its
statement of financial position, certain financial instruments with
characteristics of both liabilities and equity. In accordance with the standard,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. FAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
does not expect the provisions of this statement to have a significant impact on
the Company's results of operations or financial position.
COMMITMENTS
The Company's contractual obligations payable or maturing in the follow years
(in thousands):
Payments Due by Period
------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
------- --------- --------- --------- --------
Capital lease obligations $ 99 $ 99 $ -- $ -- $ --
Operating leases 1,894 665 1,229 -- --
Loan Payable 795 795
DEBENTURE 1,900 95 190 190 1,425
------ ------ ------ ------ ------
Total contractual cash obligations $4,688 $1,650 $1,419 $ 190 $1,425
====== ====== ====== ====== ======
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 or variable interest entities.
The Company indemnifies, in the normal course of business and in
virtually all of its agreements and contracts as part of its standard commercial
terms, other parties for legal claims, demands, actions, costs, expenses, due to
any infringement of any intellectual property rights developed and owned by the
Company. The term of these indemnification agreements is generally perpetual.
The maximum potential amount of future payments we could be required to make
under these indemnification agreements is unlimited. We have never incurred
costs to defend lawsuits or settle claims related to these indemnification
agreements. As a result, we believe the estimated fair value of these agreements
is minimal. Accordingly, we have no liabilities recorded for these agreements as
of June 30, 2003.
RESULTS OF OPERATIONS
Quarter ended June 30, 2003 compared to the quarter ended June 30, 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 June 30, 2003 decreased to
$531,000 compared to $1,334,000 from the same period of 2002, a decrease of
$803,000 or 60%. Professional Services fees in the U.S. and U.K. decreased by
$323,000 and License and associated fees decreased by $480,000. License and
associated fees decreased primarily due to revenue recognition of license fees
from the Scottish Executive contract for the quarter ended June 30, 2003
compared to the second quarter of 2002 ($220,000 and $635,000, respectively),
and to slower than anticipated installations of PECOS by Scottish government
agencies. 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. Professional Services decreased
primarily due to slower than anticipated installations of PECOS by Scottish
government agencies.
Gross Profit. Gross profit for the quarter ended June 30, 2003
decreased to $396,000 from $907,000 in the comparable 2002 quarterly period, a
decrease of $511,000 or 56%. This decrease is a result of lower License and
associated fee revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the quarter ended June 30, 2003 was
$2,457,000 compared to $3,186,000 in the 2002 quarter, a decrease of $729,000 or
23%. Throughout 2002 and the first and second quarters of 2003, the Company
continued cost containment measures designed to align its SG&A expenses with
lower than anticipated revenues. Those measures included personnel reductions
throughout most functional and corporate areas. In total, the number of
personnel was reduced by 31 which were included in continuing operations, at
June 30, 2003 compared to June 30, 2002. That reduction in personnel resulted in
a decrease in total compensation expense in the second quarter of 2003 of
approximately $980,000. 2002 expenses were impacted by a Reversal of an accrual
for pension expense which was determined unnecessary.
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Research and Development Expense. Research and development expense for
the quarters ended June 30, 2003 and 2002 were $68,000 and $286,000
respectively. This decrease was due primarily to reductions of personnel.
Operating Loss from Continuing Operations. The Company reported an
operating loss from continuing operations of $2,129,000 for the quarter ended
June 30, 2003 compared to $2,565,000 reported in the comparable quarter of 2002,
a decrease of $436,000 or 17%. The lower operating loss from continuing
operations in the second quarter of 2003 compared to the 2002 quarter was due
primarily to reduction in personnel and related costs partially offset by a
reduction in gross profits. Reductions in personnel resulted in a decrease in
compensation expense in the second quarter of 2003 of approximately $980,000
when compared to the second quarter of 2002.
Interest Expense. Interest expense for the quarter ended June 30, 2003,
was $34,000 compared to $16,000 for the second quarter of 2002. This increase of
$18,000 was related to accrued interest on the Company's ten year 10% Senior
Convertible Debenture $17,000.
Interest Income and Other, Net. Interest income and other, net, for the
quarter ended June 30, 2003 decreased to an expense of $23,000, related to the
settlement of a lawsuit from income of $8,000 in the comparable 2002 quarter.
Net Loss from Continuing Operations. The Company's net loss from
continuing operations for the quarter ended June 30, 2003 was $2,186,000 a
decrease of $387,000, or 15%, from the comparable quarterly loss in 2002 of
$2,573,000, primarily due to the reduction of SG&A and gross profit.
Net Income (Loss) From Discontinued Operations. The net profit from
discontinued operations in the quarter ended June 30, 2003 was $423,000 compared
to a net loss from discontinued operations in the quarter ended June 30, 2002 of
$86,000. The Company expects the costs from discontinued operations to diminish
in future quarters. The net profit from discontinued operations in the 2003
quarter was due to a tax refund in the U.K. related to the sale of the Company's
services business (in the U.K.) in 1999 and a bad debt recovery of $110,000.
Net Gain From Disposal of Discontinued Operations. A net gain of
$232,000 was recorded in the second quarter of 2002 from the disposal of the
U.S. IT Products and services business on March 29, 2002.
Net Loss from Total Operations. The 2003 quarterly net loss from total
operations (including both discontinued and continuing operations) was
$1,763,000 compared to $2,427,000 in the 2002 quarter. Basic and fully diluted
net loss from total operations per share for the second quarter of 2003 was
($0.06), compared with a basic net loss from total operations per share of
($0.08) in the first quarter of 2002.
Six-month period ended June 30, 2003 compared to the six-month period ended June
30, 2002.
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 from continuing operations for the six months
ended June 30, 2003, which represented ePurchasing and eMarketplace technology
license and related services fees, were $1,200,000 compared to $1,933,000 in the
six months of 2002, a decrease of $733,000 or 38%. Professional services fees in
the U.S. and U.K. decreased by $127,000, while license and associated fees
decreased by $606,000. The reduction in License and associated fees can be
attributed to the Company's recognition of lower license fees from the Scottish
Executive contract for the six months ended June 30, 2003 compared to the six
months ended June 30, 2002 ($340,000 and $857,000, respectively), and to slower
than anticipated installations of PECOS by the Scottish Government's agencies
during the first six months of 2003. Professional services decreased primarily
due to slower than anticipated installations of pecos by scottish government
agencies.
Gross Profit (Loss). The Company recorded a gross profit of $0.9
million in the six-month period ended June 30, 2003, compared to a gross profit
of $1.4 million in the six-month period ended June 30, 2002, a decrease of $0.5
million, or 38%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the six month period ended June 30, 2003
decreased to $4.8 million from $7.1 million in the 2002 period, a decrease of
$2.3 million, or 33%. Throughout 2003, the Company has continued to implement
cost containment measures designed to align its SG&A costs with lower than
anticipated license revenues. Additionally, the Company reversed a tax accrual
of $506,000 during the first quarter 2003 as payment was not longer considered
probable based on a settlement with the Inland Revenue Service.
12
Research and Development Expense. Research and development expense for
the six-month periods ended June 30, 2003 and 2002 were $127,000 and $661,000,
respectively. For the 2003 period, research and development expense related to
the development of two versions of the Company's PECOS product. This was
primarily due to reductions of personnel.
Asset Impairment Charges. For the six-month periods ended June 30, 2003
and 2002, the Company recorded asset impairment charges of $0 and $338,000,
respectively. The asset impairment charges in 2002 related to software initially
purchased to augment the Company's PECOS technology.
Interest Expense. Interest expense for the six-month period ending June
30, 2003 was $41,000 compared to $38,000 for the comparable 2002 period. The
increase in interest expense is related to interest of $17,000 accrued for the
Company's ten year 10% Senior Convertible debentures and amortization of the
Debenture discount of $12,000. Interest expense on capital leases decreased by
$29,000 as compared to 2003.
Interest Income and Other, Net. Interest Income and Other, net, for the
six month period ended June 30, 2003 increased to an expense of $19,000 from
income of $24,000 in the comparable 2002 quarter, primarily as a result of
having a lower interest-earning cash balance during for the six-month period
ended June 30, 2003 compared to the same period during 2002 and the settlement
of a lawsuit.
Net Loss from Continuing Operations. The Company generated a net loss
from continuing operations for the six month period ended June 30, 2003 of $3.6
million verses a net loss of $6.7 million for the comparable period of 2002 as a
result of the factors described herein.
Net Income (Loss) From Discontinued Operations. The net income from
discontinued operations for the six month period ended June 30, 2003 was
$307,000 compared to a net loss from discontinued operations for the six month
period ended June 30, 2002 of $1,507,000.
Net Gain From Disposal of Discontinued Operations. The net gain for the
six-month period ended June 30, 2002 from the disposal on March 29, 2002 of the
Company's U.S. IT Products and services business was $912,000. All amounts
related to this sale were recorded in 2002.
Net Loss from Total Operations. The net loss from total operations
(including both discontinued and continuing operations) for the first six months
of 2003 was $3,324,000, compared to $7,342,000 in the 2002 six month period.
Basic net loss from total operations per share for the six month period of 2003
were ($0.11), compared with a basic and fully diluted net loss from total
operations per share of ($0.24) in the first half of 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of June 30, 2003 were approximately $0.6
million. Although the Company recorded a net loss from total operations of $3.3
million for the six month period ended June 30, 2003, cash and cash equivalents
decreased by only $1.7 million between December 31, 2002 and June 30, 2003. The
principal differences between the net loss and the decrease in cash and cash
equivalents during the period included cash generated via the Company's issuance
of senior convertible debentures in the amount of approximately $0.9 million and
the advance of a license fee (accounted for as a loan) of approximately $0.8
million, and the recording of non-cash expenses of approximately $0.8 million.
At June 30, 2003, the Company's principal sources of liquidity were
cash and cash equivalents of $572,000 (See "Risk Factors Related to Liquidity",
below).
The Company's principal commitments consist of leases on its office
facilities and capital leases and a $795,000 loan payable to CGEY.
13
RISK FACTORS RELATED TO LIQUIDITY
As of June 30, 2003, the Company had $572,000 in cash, and a working
capital deficit of $2.1 million. 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 six-month period ended June 30, 2003 of $3.3
million. The Company believes that it will continue to incur losses throughout
2003. On April 3, 2003, the Company signed an agreement with CGEY whereby CGEY
agreed to 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 this entire amount. If the Company does not generate sufficient
license fee amounts by the end of 2003 as expected, the Company will agree on a
repayment plan with CGEY including an interest penalty which is the HBSC rate
plus 2% calculated from the date of advance. On April 23, 2003, the Company
closed on a private placement of approximately $949,000 of ten-year 10% Senior
Convertible Debentures (the "Debentures"). The Debentures carry a 10% interest
rate expected to be paid "in kind" and are secured by substantially all of the
Company's assets. The Debentures will convert at a per share price equal to the
average closing price for the fifty (50) trading day period prior to April 23,
2003 of $0.125 per share and are not convertible for two years unless the
Company achieves two sequential profitable quarters. The Debentures may be
converted by the Company upon a "change in control" (as defined in the
Debentures) or following April 23, 2007. At June 30, 2003, the Debentures , if
converted, would convert into 7,569,705 shares of common stock. This private
placement was extended to August 29, 2003 and will terminate on that date 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(2) of the Securities Act of 1933, as amended. Inside investors are
considered related parties, therefore, related parties invested a total of
$710,000 in the Debentures.
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. There can be no assurance that the Company will be able to
raise capital and if so, on what terms or what the timing thereof might be. Due
to lower than anticipated revenues and an increase in lease expense due to the
bankruptcy of sub-tenant of one of the Company's facilities, the Company must
raise additional working capital to fund operations during the fourth quarter of
2003. Without such funding, the Company believes it may be forced to curtail
operations and/or seek protection under bankruptcy statutes. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this significant 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 CGEY, the
primary contractor for the Scottish Executive, is unable to perform under this
license, it would have a significant adverse 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. A majority 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 from the
comparable quarterly 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 such comparable quarter of 2002.
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Except for the historical information contained herein, the matters
discussed in this Press Release 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
14
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,
particularly in light of the Company's cash position as of June 30, 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 rate of the Company's system by
individual agencies of the Scottish Executive (Government of Scotland), and
corporate demand for ePurchasing and eMarketplace solutions; (iii) the
consequent results of operations given the aforementioned factors; and (iv) the
necessity for the Company to raise additional working capital to fund operations
during the fourth quarter of 2003 and the availability of any such funding to
the Company. Without such funding, the Company believes it may be forced to
curtail operations and/or seek protection under bankruptcy statutes. Other risks
should be noted as 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
Press Release.
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. From inception to date, such fluctuations have
amounted to an accumulated amount of $906,000.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCESSES
The Company's Chief Executive Officer and Vice President, Finance
(Certifying Officers) performed an evaluation of the Company's
disclosure controls and procedures. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and
communicated to the issuer's management, including its Chief Executive
Officer and Vice President, Finance, as appropriate, to allow timely
decisions regarding required disclosures.
Based on this evaluation, the Certifying Officers have concluded that
the Company's disclosure controls and procedures are effective as of
June 30, 2003. In addition, there has been no significant change in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
(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 5. RECENT SALES OF UNREGISTERED SECURITIES
On April 23, 2003, the Company closed a private placement of a ten-year
10% Senior Convertible Debentures (the "Debentures") generating cash
proceeds of approximately $949,000 to accredited investors. The
financing round included Robert J. Crowell, the Chairman and CEO, John
E. Halnen, the President and COO, William W. Smith, the Vice Chairman
and Director, Andres Escallon, the Chief Technology Officer, (the
Inside Investors) and institutional and other Elcom stockholders
(Outside Investors).
15
The Debentures carry a 10% interest rate, which is payable in cash or
payment-in-kind. Interest is due annually, in arrears, commencing April
23, 2004 and is expected to be paid in kind. The principal amount is
due at maturity, which is April 23, 2013.
The Debentures are collateralized by a security interest in
substantially all of the Company's assets for a two-year period ending
April 22, 2005. They are convertible into common stock of the Company
at a conversion price equal to the average closing price of the
Company's common stock over the 50 day trading days ending April 22,
2003, subject to antidilution clauses. The Debentures are convertible
at the election of the holder at any time commencing on April 22, 2005
through April 22, 2013 or upon a "change in control" as defined by the
Debentures. However, if the Company has two sequential quarters of
profitability with respect to continuing operations, the Holder may
convert the Debenture at his option.
The Debenture will automatically convert upon the following events:
- Change of control, as defined in the agreement or
- At the Company's option as of April 23, 2007, or
subsequent to this date with ten days notice to the
Holder.
The Senior Convertible Debentures will not be registered under the
Securities Act of 1933, as amended, or applicable state securities laws
and may not be offered or sold in the United States absent registration
under the Securities Act of 1933, and applicable state securities laws
or available exemptions from the registration requirements. This
private placement was extended to August 29, 2003 and will terminate on
that date 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(2) of the Securities Act of
1933, as amended.
Robert Crowell invested $300,000 in the Debentures and John Halnen
invested $60,000 in the Debentures. Of these amounts, the Company paid
Robert Crowell $187,000 and John Halnen $60,000 in repayment of a
portion of their salaries which they had voluntarily suspended during
2002 in order to assist the Company in its efforts to retain cash.
Robert Crowell and John Halnen immediately reinvested these proceeds
into their purchase of the Debentures.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
4.1 Form of 10% Convertible Senior Debentures issued by the
Company on April 23, 2003 to each Debenture Holder
4.2 The Registration Rights Agreement, dated April 23, 2003, among
the Company and each of the Debenture Holders
4.3 The Collateral Agency and Security Agreement, dated April 23,
2003, among the Company, Andres Escallon (the collateral
agent) and each of the Debenture Holders
31.1 Rule 13a-14(a) Certification of the Company's Chief Executive
Officer
31.2 Rule 13a-14(a) Certification of the Company's Principal
Financial Officer
32.1 Section 1350 Certification of the Company's Chief Executive
Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Section 1350 Certification of the Company's Principal
Financial Officer, as adopted 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, with the
Securities and Exchange Commission on April 3, 2003, April 30, 2003,
and May 9, 2003.
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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 14, 2003 By: /s/ Robert J. Crowell
---------------------------------
Robert J. Crowell
Chairman and CEO
17
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 14, 2003 By: /s/ Neal Dwyer
----------------------------------
Neal Dwyer
Vice President, Finance
(Principal Financial Officer)
18