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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-27376
---------------
ELCOM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3175156
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
10 OCEANA WAY
NORWOOD, MASSACHUSETTS 02062
(781) 440-3333
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of exchange
Title of each class on which registered
------------------- -------------------
Common Stock, $.01 par value OTCBB
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act.)
Yes No X
--- ---
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the closing price of such stock on the OTCBB on March
3, 2003, was approximately $3,300,000. For purposes of this disclosure only, the
registrant has assumed that its directors, executive officers, and beneficial
owners of 10% or more of the registrant's common stock are affiliates of the
registrant.
The registrant had approximately 30,902,000 shares of Common Stock,
$.01 par value, outstanding as of March 3, 2003.
PART I
ITEM 1. BUSINESS
OVERVIEW
As discussed further herein, on December 31, 2001, the Company divested
itself of its U.K. IT Products business and on March 29, 2002, the Company
divested itself of its U.S. IT Products and services business. The divestiture
of these businesses has allowed the Company to complete its transition to being
a provider of remotely-hosted, eProcurement and eMarketplace ("eSourcing")
Internet- and intranet-based software solutions, which automate many supply
chain and financial settlement functions associated with procurement. As a
result of these divestitures, commencing in the second quarter of 2002, the
Company did not record any revenues arising from the sale of IT Products and
associated services. From the second quarter of 2002, the Company's sole source
of revenue has been the licensing of eSourcing solutions and associated
professional services. See "Risk Factors Related to Liquidity." As provided by
applicable accounting conventions, the U.S. IT Products and services business
and the U.K. IT Products business have been presented as discontinued operations
for all periods presented.
As it relates to the Company's eSourcing business, the Company intends
to augment its core eProcurement Marketplace solutions with other licensed
supply chain-oriented systems to enable the conduct of interactive procurement
and financial settlement. The Company has licensed a dynamic trading system
platform to provide auction, reverse auction, and other electronic negotiation,
or eNegotiation, functions and also markets an asset management system, both
from third parties. Since its inception in 1992, elcom, inc., the Company's
eSourcing subsidiary, has developed its PECOS(TM) (Professional Electronic
Commerce Online System) system, which automates many supply chain and financial
settlement functions associated with procurement. The Company's PECOS(TM)
solution can support large numbers of end-user clients, products, suppliers and
transactions and its transaction server middleware provides a scalable
foundation for robust system performance and high transaction capacity. The
eProcurement and eMarketplace systems the Company offers for licensing include:
PECOS INTERNET PROCUREMENT MANAGER ("PECOS.ipm") 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
Internet/intranet to access the system to identify and select products, check
pricing, automate the internal approval process and facilitate invoicing and
payment to suppliers. Since it is 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 automated
financial settlement functions (including support for procurement card
technology), PECOS.ipm can operate as a standalone system without an expensive
back-end enterprise resource planning, or ERP, system in place, thereby enabling
rapid deployment and easier implementation for clients. Clients may integrate
PECOS.ipm into their ERP system using simple data feeds. Further, the Company
facilitates supplier catalog loads and manages catalog content for the client
when the system is remotely-hosted. Since October 2001, the Company has been
marketing version 8.0 of its PECOS(TM) technology, which is designed to offer a
single solution for robust eProcurement functionality, including "buy-side",
which is the capability of a client to order products from its supplier,
ePurchasing functionality, including "sell-side", which is the capability of a
client to have its customers make purchases electronically, and private
eMarketplace functionality, including "eMarketplace", which is the capability
for a client to offer an eMarketplace to both buy and sell products in a
"community" of users which may include both suppliers and customers. In
addition, version 8.0 offers enhanced multi-organizational, multi-lingual and
multi-currency capabilities as well as dynamic documents, eForms and improved
organizational data security. The multi-organizational capabilities are critical
for large organizations which require each sub-entity of an organization to have
its
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own approval rules, catalog access, report generation, and the ability to
maintain the confidentiality of other entities' data. This same capability could
allow large eMarketplaces to be formed. Version 8.5, which was announced in May
2002 and implemented in the third quarter of 2002, includes robust support for
procurement card technology and automated financial settlement.
PECOS INTERNET COMMERCE MANAGER ("PECOS.icm") is the Company's
eDistribution configuration version of PECOS(TM) that automates the online
selling process from product information through financial settlement. PECOS.icm
supports the sales of virtually any type of product or service, and includes
functionality such as electronic catalogs, shopping cart and shopping cart
transfer, real time price and availability access, 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.
The Company also offers an optional dynamic trading system licensed
from a third party, which includes request for proposal, private reverse
auctioning and other features. In addition, the Company offers an asset
management system and is in discussions with several other software firms to
offer their systems. These additions would allow the Company to offer a suite of
supply chain modules to augment its core eSourcing functionality. Further, in
conjunction with the Commonwealth British Council (U.K.), the Company has
developed eMarketplace World Network(TM), a global eMarketplace hub, which is
designed to interconnect with world-wide eMarketplaces comprised of vertical and
geographic trading communities within an industry, allowing eMarketplaces to
connect their trading communities so that buyers can easily review participating
eMarketplaces and trade with the suppliers participating in those eMarketplaces.
The Commonwealth British Council is responsible for marketing this eMarketplace.
Prior to the divestiture of the IT Products business in the U.K. on
December 31, 2001 and the IT Products and services business in the U.S. on March
29, 2002, the Company had historically marketed 130,000 IT Products to
commercial, educational and governmental accounts via several electronic
methodologies. Throughout 2001, the overall decline in economic activity, as
well as capital and discretionary spending by the Company's customer base,
significantly decreased sales and resultant profitability from this business
line. Demand for IT Products was further impacted by the events of September
11th and their aftermath. Even though the demand for IT Products was weak
throughout 2001, the Company demonstrated success in acquiring incremental
customers beginning in the middle of 2001 by offering PECOS.icm to new customers
at no charge in return for a portion of their IT Products spending, which
generated transaction-oriented fees for the Company as a sales agent of Tech
Data Corporation ("Tech Data"). However, the decline in demand from existing IT
Products customers and the uncertainty surrounding the overall economy caused
the Company to carefully review its business operations. In order to reduce
operational and financial risks and properly align the Company's operations with
the economic environment, the Company decided to exit the IT Products and
services business to reduce costs and allow the Company to focus exclusively on
its core eSourcing technology.
As part of its strategy to reduce cash outlays and to transition to a
pure technology-based model, on December 31, 2001, the Company sold
substantially all of the assets and liabilities of its U.K. IT Products
remarketing business to AJJP Limited, a company formed by certain members of the
former U.K. IT Products remarketing business. AJJP Limited subsequently changed
its name to Elcom Information Technology Limited. Elcom Systems Limited, an
indirect U.K. subsidiary of the Company, continues to operate the Company's U.K.
technology business, primarily focusing on eSourcing in the commercial and
governmental sectors. As a result of the sale of the U.K. IT Products
remarketing business, the consolidated financial statements, including the
results of operations and selected financial data contained herein, have been
presented as if the U.K. IT Product remarketing business were a discontinued
operation for all periods presented. Accordingly, the results of operations of
the business, including revenues, gross profit and expenses, are reported as a
single line item below net income (loss) from continuing operations for all
periods presented.
The final transition to a pure technology based model was completed on
March 29, 2002, at which point the Company sold certain assets that were used in
the Company's U.S. IT Products and services activities to ePlus Technology, Inc.
("ePlus"). The principal assets sold were customer lists, customer
3
contracts and certain fixed assets. In addition, ePlus acquired a perpetual
license for certain of the Company's software and assumed one of the Company's
property leases in San Diego, California. The terms of the sale also provided
for a cash payment and that the Company support ePlus with managed services to
transition the IT Products and services activities to ePlus, including use of
certain of the Company's leased facilities. The Company ceased providing managed
services to ePlus in February 2003. 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. Accordingly, the results of operations of the business,
including revenues, gross profit and expenses are reported as a single line item
below net income (loss) from continuing operations for all periods presented.
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE OVERVIEW
Forrester Research estimates that the business-to-business electronic
commerce market will grow from $403 billion in 2000 to $2.7 trillion by 2004.
Gartner Group has forecasted the market for eProcurement license revenues to
grow from $0.7 billion in 2002 to $1.1 billion in 2005. These research forecasts
indicate that adoption of eProcurement and eMarketplace systems will create a
large market opportunity for solution providers as the market moves from early
adopters, currently characterized primarily by Fortune 1000 companies, to
mid-market and mainstream companies in 2003 and beyond.
PRODUCTS AND PRICING
Products. The Company develops and licenses its PECOS(TM)
remotely-hosted, self-service, Internet and web-based automated purchasing and
marketplace systems, as described above. The Company also offers a dynamic
trading system and asset management system from third parties.
Pricing. The Company believes that PECOSTM, including its
remotely-hosted automated eProcurement and eMarketplace system(s), is
competitively priced compared to license fees charged by other eProcurement
software providers.
PROFESSIONAL SERVICES
elcom, inc.'s professional services group offers various consulting and
supplier services to its clients. These services range from implementation of
PECOS.ipm and training, to interfacing data from PECOS.ipm into back-end ERP
systems. Suppliers are also offered services associated with catalog content and
categorization, loading procedures and automated data update methodologies.
MANAGEMENT INFORMATION SYSTEMS
In the U.S., the Company licenses and utilizes software from Oracle
Corporation and other software firms for its Management Information System
("MIS") to allow management to monitor and manage the Company. The Company's MIS
incorporates modules supporting general ledger, accounts payable, purchasing,
accounts receivable, inventory and order entry.
The Company's operations are dependent in part upon its ability to
protect its MIS network infrastructure in its Norwood, MA facility against
damage from physical break-ins, natural disasters, operational disruptions and
other events. To protect the Company's data and provide service if the Company's
data center were to become inoperative, the Company has a disaster-recovery
system agreement with a major computer and services company.
SALES AND MARKETING
As of December 31, 2002, the Company's sales and support personnel
operated from two locations, Norwood, MA (U.S.A.) and Slough (U.K.). The Company
markets and sells its eSourcing solutions primarily through its indirect sales
channels. The Company utilizes technical professionals who create
organization-specific proposals, presentations and demonstrations that address
the specific needs of
4
each potential client. In 2002, the Company limited its marketing activities,
including activities related to its channel partners, in response to the cost
containment measures undertaken by the Company.
CUSTOMER SERVICE AND SUPPORT
The Company believes that customer satisfaction is essential for its
long-term success and offers comprehensive customer assistance programs. The
Company's technical support provides response to and resolution of customer
technical inquiries and is available to clients by telephone, over the web or by
electronic mail. The Company uses a customer service automation system to track
each customer inquiry until it is resolved.
COMPETITION
The market for eSourcing solutions is relatively new and evolving
rapidly. The Company expects competition in this market to intensify in the
future. Among other factors, before licensing an eBusiness system, the Company
believes potential clients consider the cost of the system compared to the level
of features and functions available in electronic commerce ("eCommerce")
applications and the cost to acquire, implement and maintain the system, as well
as the length of time to implement a system and, as applicable, integrate it
with a company's existing computer system. The Company competes with vendors of
prepackaged eCommerce software, vendors of software tools for developing
eCommerce applications and systems integrators. The Company's competitors
include Ariba, Inc. and Commerce One, Inc. The Company anticipates future
competition from other emerging and established companies, including Oracle,
IBM, and SAP AG, all of which have announced products or alliances to offer
Internet-based eCommerce. The Company's potential competitors also include
systems integrators such as Electronic Data Systems (EDS) and a number of EDI
solution vendors.
Certain of these and other competitors have longer operating histories
and most have significantly greater financial, technical, marketing and other
resources than the Company and thus may have more extensive sales or
distribution networks and may be able to develop or respond more quickly to new
or changing opportunities, technologies and client requirements. Also, many
current and potential competitors have greater name recognition and more
extensive client bases that could be leveraged, thereby gaining market share to
the Company's detriment. Such competitors may be able to undertake more
extensive promotional activities, adopt more aggressive pricing policies and
offer more attractive terms to purchasers than the Company and to bundle their
products in a manner that may discourage users from purchasing products offered
by the Company. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to enhance their products. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. There can be no assurance that the Company will be
able to compete effectively with competitors or that the competitive pressures
faced by the Company will not have an adverse effect on the Company's business,
results of operations and/or financial condition.
INTELLECTUAL PROPERTY
The Company's success and ability to compete are dependent, in part,
upon its proprietary technology. While the Company relies to a certain extent on
trademark, trade secret, patent and copyright law to protect its technology, the
Company believes that factors such as the technological and creative skills of
its personnel, new product developments, frequent product enhancements, name
recognition and reliable product availability and distribution are of equal
importance for establishing and maintaining a competitive position. Although the
Company has received a patent on certain, specific aspects of its PECOS(TM)
technology, there can be no assurance that other entities will not develop, or
have not developed, technologies that are similar or superior to the Company's
technology. The source code for the Company's proprietary software also is
protected both as a trade secret and as an unregistered copyrighted work.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use some portions of the Company's products or technology
without authorization, or to develop similar technology independently. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries.
5
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce between PCs, among local area networks or on the Internet. However,
due to the increasing popularity and use of PCs and the Internet, it is possible
that additional laws and regulations may be adopted with respect thereto,
covering issues such as user privacy, pricing and characteristics, taxation of
Internet sales and quality of products and services. The adoption of any such
laws or regulations may decrease the growth of eCommerce and/or the Internet,
which could in turn decrease the demand for the Company's products and increase
the Company's cost of doing business or otherwise have an adverse effect on the
Company's business, operating results or financial condition. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel and personal privacy is evolving.
ENVIRONMENTAL MATTERS
Based on the Company's experience to date, the cost of compliance with
environmental matters has been immaterial and the Company believes that it is in
material compliance with applicable environmental laws and regulations.
PERSONNEL
As of December 31, 2002, the Company had a total of 57 personnel. The
Company's personnel are not represented by any labor union and the Company
believes that its personnel relations are good. The Company's future success
depends, in significant part, upon the continued service of its key technical
and senior management personnel and its continuing ability to attract and retain
highly qualified technical and managerial personnel. Competition for highly
qualified personnel is intense and there can be no assurance that the Company
can retain its key managerial and technical personnel or that it will be able to
attract or retain additional highly qualified technical and managerial personnel
in the future. As of March 2, 2003, the Company employed 48 personnel in the
U.S. and U.K.
COMPANY TRADE NAMES AND TRADEMARKS
The Company has referred to a variety of other entities and products in
this Annual Report on Form 10-K, certain of which are tradenames or trademarks.
Such tradenames or trademarks are the property of the respective companies
owning such tradenames and trademarks.
ITEM 2. PROPERTIES
As of December 31, 2002, the Company leased the properties set forth
below. The facility leases vary in remaining length, from two months to four
years. See Note (6) to the consolidated financial statements, included elsewhere
in this Annual Report on Form 10-K.
APPROXIMATE
SQUARE
LOCATION FOOTAGE USE
--------------------------------------------------------------------------------------------------------
Norwood, Massachusetts 36,000 Corporate Headquarters and elcom, inc. Headquarters
Canton, Massachusetts 84,000 Property sublet to a third party through remaining lease term
Canton, Massachusetts 42,800 Vacant property, lease term ends March 13, 2003
New York 5,570 Property sublet to a third party through remaining lease term
6
Effective December 4, 2002, the landlord for the 42,800 square foot
Canton location and the Company executed an agreement to terminate the lease,
provided the Company delivers to landlord a notice of its election to so
terminate the lease within a certain period of time (the "Canton Lease
Termination Agreement"). From and after the lease termination date until the
earlier of the date the landlord sells the premises or the another tenant takes
possession of the premises, the Company continues to be obligated to pay taxes
under such lease and maintain the premises and insurance on the premises. In
early February 2003, the Company received notice from the landlord that the
Company was in breach of the lease for failure to timely pay rent for the month
of February and real estate taxes previously billed to the Company. Such amounts
are less than $40,000 in the aggregate. The landlord has indicated that it is
reserving all its rights and remedies under the lease. Such rights include, but
are not limited to, landlord's election to require the Company to pay liquidated
damages for the unexpired term of the rental or other payments named in the
lease. On March 5, 2003, Company provided landlord with notice, pursuant to the
Canton Lease Termination Agreement that Company is terminating the lease
effective March 13, 2003.
In February 2003, the Company received notice that it was in default
under the terms and conditions of the lease for the New York premises. The
notice stated that the Company had failed to pay the landlord rent and
additional rent of approximately $53,000. In the event that Company fails to
cure such default, upon the exercise of landlord's rights under the lease for
the New York premises, landlord could elect to terminate the lease. Pursuant to
such lease, Company would continue to be obligated to pay any and all rent and
additional rent for the original term of the lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various claims, disputes and other
proceedings relating to former employees and other matters arising in the normal
course of its business. In the opinion of management, the outcome of these
matters will not have a material adverse effect on the consolidated financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Prior to August 11, 2002, the Company's Common Stock was listed on the
Nasdaq National Market. From August 11, 2002 to January 15, 2003, the Company's
Common Stock was listed on the Nasdaq SmallCap Market. Since January 16, 2003,
the Company's Common Stock commenced trading on Nasdaq's Over The Counter
Bulletin Board, ("OTCBB") under the symbol ELCO. As of December 31, 2002, there
were approximately 338 stockholders of record of the Company's Common Stock.
This number does not reflect persons or entities who hold their stock in nominee
or "street name" through various brokerage firms which persons or entities are
estimated by the Company to be in excess of 16,000 as of December 31, 2002. The
high and low closing sales prices reported by the Nasdaq National Market or
Nasdaq SmallCap Market for each of the quarters in the two year period ended
December 31, 2002 are set forth in the table below. For the period from January
1, 2003 to March 5, 2002, such high and low closing sales prices (bid quotations
beginning January 16, 2003) were $0.24 and $0.07, respectively. The
over-the-counter market bid quotations reflect inter-dealer prices, without
retail mark-up, mark-downs, or commissions and may not represent actual
transactions.
7
2002 2001
--------------------------- ----------------------------
Quarter Ended High Low High Low
-----------------------------------------------------------------------------------
March 31, $1.680 $0.870 $5.125 $1.719
June 30, $0.850 $0.370 $2.850 $1.531
September 30, $0.690 $0.180 $1.730 $0.910
December 31, $0.440 $0.160 $1.950 $1.240
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently does not anticipate paying any dividends in the
foreseeable future. Any payment of future dividends will be at the discretion of
the Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the Company's Board of Directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES
None
EQUITY COMPENSATION PLAN INFORMATION
See Item 12 for the disclosure required by Item 201(d) of Regulation
S-K.
8
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company for the years ended December 31, 1998 through December 31, 2002 and
at the end of each of those years. The historical financial data for the years
ended 2000, 2001 and 2002 is derived from the Consolidated Financial Statements
of the Company audited by KPMG LLP included within this Form 10-K. The
historical financial data for 1998 is derived from the Consolidated Financial
Statements of the Company audited by Arthur Andersen LLP and the historical data
for 1999 is derived from the consolidated financial statements of the Company
audited by KPMG LLP, not included in this Form 10-K. This information should be
read in conjunction with the Company's Consolidated Financial Statements and
related Notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", which are included elsewhere in
this Annual Report. As discussed more fully herein, for all periods presented,
the results of operations of the U.K. IT Products business disposed of in
December 2001 and the U.S. IT Products and services business have been accounted
for within discontinued operations. The results of operations from the U.K. IT
Products business sold in July 1999 are included in continuing operations for
all periods presented.
Years ended December 31,
----------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
Net sales $ 82,595 $ 119,858 $ 908 $ 4,163 $ 4,773
=========== =========== =========== =========== ===========
Gross profit $ 11,759 $ 10,517 $ 860 $ 2,908 $ 3,721
=========== =========== =========== =========== ===========
Selling, general and administrative
expenses $ 22,611 $ 29,325 $ 25,694 $ 23,621 $ 12,967
=========== =========== =========== =========== ===========
Research and development expenses $ 1,178 $ 1,343 $ 1,695 $ 1,089 $ 863
=========== =========== =========== =========== ===========
Asset impairment charges $ 3,808 $ 10,057 $ -- $ 1,626 $ 338
=========== =========== =========== =========== ===========
Operating profit (loss) $ (15,838) $ (30,208) $ (26,529) $ (23,428) $ (10,447)
Interest and other income (expense), net 15 (595) 2,032 (34) 578
----------- ------------ ----------- ----------- -----------
Income (loss) before income taxes (15,823) (30,803) (24,497) (23,462) (9,869)
Income tax expense (benefit) 193 (969) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) from continuing
operations (16,016) (29,834) (24,497) (23,462) (9,869)
Net income (loss) from discontinued
operations, U.K. 802 (12,471) 1,594 1,942 --
Net income (loss) from discontinued
operations, U.S. (10,346) (233) 3,149 (1,097) (788)
Gain from discontinued operations,
net of tax -- -- -- 2,738 1,100
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (25,560) $ (42,538) $ (19,754) $ (19,879) $ (9,557)
=========== =========== =========== =========== ===========
Basic and diluted net income (loss)
per share data
Continuing operations $ (0.59) $ (1.07) $ (0.80) $ (0.76) $ (0.32)
Discontinued operations, U.K. 0.03 (0.45) 0.05 0.06 --
Discontinued operations, U.S. (0.38) (0.01) 0.10 (0.03) (0.03)
Disposal of discontinued operations -- -- -- 0.09 0.04
----------- ----------- ----------- ----------- -----------
Basic and diluted net income
(loss) per share $ (0.94) $ (1.53) $ (0.65) $ (0.64) $ (0.31)
=========== =========== =========== =========== ===========
Basic weighted average shares outstanding 27,322 27,846 30,487 30,912 30,901
=========== =========== =========== =========== ===========
December 31,
----------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
CONSOLIDATED BALANCE SHEET DATA
OF CONTINUING OPERATIONS:
Current assets $ 85,698 $ 31,982 $ 24,781 $ 11,606 $ 2,827
=========== =========== =========== =========== ===========
Total assets $ 97,736 $ 39,161 $ 35,687 $ 17,445 $ 4,786
=========== =========== =========== =========== ===========
Current liabilities $ 78,256 $ 5,054 $ 5,544 $ 6,252 $ 3,491
=========== =========== =========== =========== ===========
Long-term liabilities, net of current
portion $ 488 $ 260 $ 726 $ 274 $ --
=========== =========== =========== =========== ===========
Stockholders' equity $ 85,017 $ 46,668 $ 30,954 $ 11,319 $ 1,598
=========== =========== =========== =========== ===========
Total liabilities and stockholders'
equity $ 163,761 $ 51,982 $ 37,224 $ 17,845 $ 5,089
=========== =========== =========== =========== ===========
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
As discussed further herein, on December 31, 2001, the Company divested
itself of its U.K. IT Products business and on March 29, 2002, the Company
divested itself of its U.S. IT Products and services business. The divestiture
of these businesses has allowed the Company to complete its transition to being
a provider of remotely-hosted, eProcurement and eMarketplace ("eSourcing")
Internet- and intranet-based software solutions, which automate many supply
chain and financial settlement functions associated with procurement. As a
result of these divestitures, commencing in the second quarter of 2002, the
Company did not record any revenues arising from the sale of IT Products and
associated services. From the second quarter of 2002, the Company's sole source
of revenue has been the licensing of eSourcing solutions and associated
professional services. As provided by applicable accounting conventions, the
U.S. IT Products and services business and the U.K. IT Products business have
been presented as discontinued operations for all periods presented.
Since its inception in 1992, elcom, inc., the Company's eSourcing
subsidiary, has developed its PECOS(TM) (Professional Electronic Commerce Online
System) system, which automates many supply chain and financial settlement
functions associated with procurement. The Company also offers an optional
dynamic trading system licensed from a third party, which includes request for
proposal, private reverse auctioning and other features. In addition, the
Company offers an asset management system.
Prior to the divestiture of the IT Products business in the U.K. on
December 31, 2001 and the IT Products and services business in the U.S. on March
29, 2002, the Company had historically marketed as many as 130,000 IT Products
to commercial, educational and governmental accounts via several electronic
methodologies. Throughout 2001, the overall decline in economic activity, as
well as capital and discretionary spending by the Company's customer base,
significantly decreased sales and resultant profitability from this business
line. Demand for IT Products was further impacted by the events of September
11th and their aftermath. Even though the demand for IT Products was weak
throughout 2001, the Company demonstrated success in acquiring incremental
customers beginning in the middle of 2001 by offering PECOS.icm to new customers
at no charge in return for a portion of their IT Products spending, which
generated transaction-oriented fees for the Company as a sales agent of Tech
Data. However, the decline in demand from existing IT Products customers and the
uncertainty surrounding the overall economy caused the Company to carefully
review its business operations. In order to reduce operational and financial
risks and properly align the Company's operations with the economic environment,
the Company decided to exit the IT Products and services business to reduce
costs and allow the Company to focus exclusively on its core eSourcing
technology. Sales to one customer comprised 73% of 2002 net sales from
continuing operations and sales to one customer comprised of 69% of 2001 net
sales from continuing operations. No customers individually exceeded 10% of net
sales in 2000.
10
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of net
sales for each of the years in the three-year period ended December 31, 2002:
2000 2001 2002
-------- ------ -------
Net sales 100% 100% 100%
Gross profit 95% 70% 78%
Sales, general and administrative expenses 2,830% 567% 272%
Research and development 187% 26% 18%
Asset impairment charges -- 39% 7%
Operating profit (loss) (2,922)% (563)% (219)%
Interest expense (23)% (3)% (1)%
Interest income and other, net 246% 3% 14%
Net loss from continuing operations (2,698)% (564)% (207)%
Net loss from discontinued operations 522% 20% (17)%
Gain on disposal of discontinued operations -- 66% 23%
RESULTS OF OPERATIONS
The results of operations for the divested U.K. IT Products remarketer
business and the U.S. IT Products and services business have been presented as
discontinued operations for all periods presented.
Year ended December 31, 2002 compared to the year ended December 31, 2001.
Net Sales. Net sales for the year ended December 31, 2002, which
represented eSourcing license and related fees, were $4.8 million compared to
$4.2 million in the year ended December 31, 2001, an increase of $0.6 million or
15%. Net sales in the 2002 fiscal year included $2.8 million in license and $0.5
million in professional service fees related to the Company's government of
Scotland PECOS Internet Procurement Manager system ("Scottish Government
License"). The Scottish Government License agreement was signed in November 2001
and did not impact 2001 financial results. The Scottish Government License is a
license of the PECOS technology granted to Cap Gemini, Ernst & Young with the
right to sub-license the technology to the Scottish Government. At December 31,
2002, the Company had recorded $0.3 million of deferred revenue related to the
Scottish Government License. The Company expects to recognize the majority of
this deferred revenue in its fiscal first and second quarters of 2003. Net sales
in 2001 included $2.9 million arising from a one-time sale of proprietary
software to Elcom Information Technology Limited, an unrelated company that
acquired the U.K. IT Products reseller business.
Gross Profit. The Company recorded gross profit of $3.7 million in the
year ended December 31, 2002, compared to gross profit of $2.9 million in the
year ended December 31, 2001, an increase of $0.8 million, or 28%. Cost of sales
in the 2002 annual period included $423,000 of amortized software costs and
maintenance-related expenses, together with $131,000 of salary-related expenses,
which were incurred in various PECOS implementations. In the comparable 2001
annual period, amortized software costs and maintenance-related expenses
amounted to $446,000 with no significant implementation-related costs.
Selling, General and Administrative Expenses. Total selling, general
and administrative ("SG&A") expenses for the year ended December 31, 2002
decreased to $13.0 million from $23.6 million in 2001, a decrease of $10.7
million, or 45%. Since the middle of 2001, the Company has implemented numerous
cost containment measures designed to better align its SG&A costs with lower
than anticipated license revenues resulting from the weak economy. The principal
reductions in SG&A expenses in 2002 compared to 2001 were comprised of
reductions in personnel and depreciation expenses of approximately $7 million.
11
Research and Development Expense. Research and development expense for
the years ended December 31, 2002 and 2001 were $0.9 million and $1.1 million,
respectively, a decrease of $0.2 million or 21%. The expenditures reflect the
on-going product development of the PECOS(TM) technology prior to reaching
technological feasibility of each new version. The reduction in research and
development expenditures in 2002 compared to 2001 primarily relates to a
reduction in the number of personnel performing research and development
activities. In 2001, the Company capitalized $422,000 and in 2002, $0 was
capitalized.
Asset Impairment Charges. For the years ended December 31, 2002 and
2001 the Company recorded asset impairment charges of $0.3 million and $1.6
million, respectively. The charges relate to previously capitalized software
costs that were acquired to augment the Company's PECOS(TM) technology. The
related software did not perform as anticipated and was never put into
production. The Company recorded the charge in the period it was determined the
Company was going to abandon the use of the software.
Interest Expense. Interest expense for the year ended December 31, 2002
remained consistent at $0.1 million. Interest expense relates to interest paid
on capital leases since the Company had no other borrowings.
Interest Income and Other, Net. Interest income and other, net, for the
year ended December 31, 2002 increased to $0.6 million from $0.1 million in
2001. The 2002 income primarily relates to the receipt of a $650,000 settlement
from a claim the Company had made against one of its software vendors.
Net Income (Loss) From Discontinued Operations. The net loss from
discontinued operations for the year ended December 31, 2002 was $0.8 million
compared to net income from discontinued operation for the year ended December
31, 2001 of $0.8 million. The net income from discontinued operations in 2001
related to the Company's divested U.K. IT Products business, which recorded $1.9
million of net income, offset by $1.1 million of net loss related to the
Company's divested U.S. IT Products and services business. In the 2002 fiscal
year, all of the net loss was derived from U.S. discontinued operations.
Gain (Loss) From Disposal of Discontinued Operations The gain from the
disposal of discontinued operations (net of tax) for the year ended December 31,
2002 was $1.1 million compared to a gain of $2.7 million for the year ended
December 31, 2001. The 2001 gain of $2.7 resulted from the sale of the U.K. IT
Products reseller business. The 2002 gain of $1.1 resulted from the sale of the
Company's U.S. IT Products and service business.
Year ended December 31, 2001 compared to the year ended December 31, 2000.
Net Sales. Net sales for the year ended December 31, 2001 increased to
$4.2 million from $0.9 million in 2000, an increase of $3.3 million or 358%.
This increase was primarily due to the one-time sale of proprietary software in
the amount of $2.9 million to Elcom Information Technology Limited, a company
formed by former members of the Company's U.K. IT Products remarketing business
that acquired such business.
Gross Profit. Gross profit for the year ended December 31, 2001
increased to $2.9 million from $0.9 million in 2000, an increase of $2.0 million
or 238%. The increase in gross profit dollars was primarily a result of the
one-time sale of proprietary software to Elcom Information Technology Limited.
Cost of sales in the 2001 annual period included $446,000 of amortized software
costs and maintenance-related expenses. In the comparable 2000 annual period,
there were no significant amortized software costs.
Selling, General and Administrative Expenses. Total SG&A expenses for
the year ended December 31, 2001 decreased to $23.6 million from $25.7 million
in 2000, a decrease of $2.1 million, or 8.1%. This decrease reflected the
Company's cost containment measures begun in 2001 designed to align its SG&A
costs with lower than anticipated license revenues resulting from the weak
economy.
12
Research and Development Expense. Research and development expense for
the years ended December 31, 2001 and 2000 were $1.1 million and $1.7 million,
respectively, a decrease of $0.6 million or 35.8%. The expenditures reflected
the on-going product development of the PECOS(TM) technology prior to reaching
technological feasibility of each new version. The decrease was due to the
increase in expenditures after reaching technological feasibility, which are
reflected in cost of sales as well as the capitalization of research and
development costs totaling $422,000 in 2001 compared to $470,000 in 2000.
Asset Impairment Charges. For the years ended December 31, 2001 and
2000, the Company recorded asset impairment charges of $1.6 million and $0,
respectively. The $1.6 million charge related to previously capitalized software
that was originally purchased from a third party to augment the Company's
PECOS(TM) technology. The related software did not perform as anticipated and
was never put into production.
Interest Expense. Interest expense for the year ended December 31, 2001
decreased to $0.1 million from $0.2 million in 2000. Interest expense related to
interest paid on capital leases since the Company had no other borrowings. The
decrease is a result of the expiration of capital leases during 2000 and 2001.
Interest Income and Other, Net. Interest income and other, net, for the
year ended December 31, 2001 decreased to $0.1 million from $2.2 million in
2000. This decrease was primarily a result of recording an $0.8 million gain in
2000 on the sale of assets related to the receipt of funds which were being held
in escrow pursuant to the 1999 U.K. remarketer group purchase and sale
agreement.
Net Income (Loss) From Discontinued Operations. Net income from
discontinued operations for the year ended December 31, 2001 was $0.8 million
compared to a net income from discontinued operation for the year ended December
31, 2000 of $4.7 million. The net income from discontinued operations in the
2000 fiscal year related to the Company's divested U.K. IT Products business,
which recorded $1.6 million of net income, and an additional $3.1 million of net
income related to the Company's divested U.S. IT Products and services business.
In 2001, net income from discontinued operations related to the Company's
divested U.K. IT Products business, which recorded $1.9 million of net income
offset by $1.1 million of net loss related to the Company's divested U.S. IT
Products and services business.
Gain (Loss) From Disposal of Discontinued Operations (net of tax). The
gain from the disposal of discontinued operations (net of tax) for the year
ended December 31, 2001 was $2.7 million which resulted from the sale of the
U.K. IT Products reseller business.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities from continuing operations for
the year ended December 31, 2002 was $8.3 million, resulting primarily from a
net loss from continuing operations of $9.9 million, together with a decrease in
accounts payable and accrued liabilities of $2.3 million, an decrease in
accounts receivables and other current assets of $0.3 million, offset by
depreciation of $3.1 million and impairment charges and other items amounting to
$0.3 million. Net cash used in operations may not be indicative of future
results due to the sale of certain operations and the Company's transition to an
eSourcing business. Cash provided by investing activities was primarily
comprised of the cash proceeds received from the sale of the U.S. IT Products
and services business to ePlus of $2.1 million. Other than finance leases
incurred in the normal course of business, the Company did not have any debt as
of December 31, 2002.
At December 31, 2002, the Company's principal sources of liquidity were
cash and cash equivalents of $2.3 million. During fiscal 2002, the Company
significantly reduced its workforce (excluding those employees that transferred
to ePlus as a result of the sale of the U.S. IT Products and services business)
by approximately 90 employees to better align its operating expenses with its
revenue levels. In addition, in the first quarter of 2003, the Company
implemented further personnel and salary reductions in the U.S. and eliminated
certain staff positions in the U.K. The Company continues to explore ways to
eliminate or reduce ongoing expenditures until such time as the Company can
increase its cash sources. (See "Risk Factors Related to Liquidity", below).
13
The Company's principal commitments consist of leases on its office
facilities and capital leases. Although the Company may require ongoing
investments in property, equipment and software, the Company does not expect
these amounts to be material in fiscal 2003.
On December 31, 2001, the Company sold substantially all of the assets
and liabilities of the Company's U.K. IT Products business to AJJP Limited, a
company that was formed by certain members of the former U.K. management team.
The sales price for the transaction consisted of the assumption of approximately
$3 million of net liabilities plus a nominal payment to the Company.
The Company's customer contracts typically contain customary provisions
that indemnify customers for losses that they may incur in the unlikely event
that there is an intellectual infringement claim made against the customer
relating to use of the Company's PECOS products. The Company believes that the
financial risk relating to these provisions are insignificant. The Company
agreed to indemnify ePlus for any claims arising from any actual or alleged
breach of any warranty, representation or covenant contained in the agreement
for the sale of the U.S. IT Products business. Such indemnification obligation
expires on March 29, 2003 and is limited to the purchase price for the U.S. IT
Products business.
RISK FACTORS RELATING TO LIQUIDITY
The Company's consolidated financial statements as of December 31, 2002
have been 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, have issued a report dated March 7, 2003 that included an
explanatory paragraph referring to the Company's significant operating losses
and substantial doubt in its ability to continue as a going concern past April
2003 (See Note (1)(a)) without additional capital becoming available. The
Company's ability to continue as a going concern is dependent upon its ability
to grow revenue, attain further operating efficiencies, attract new sources of
capital or issuance of debt. The Company intends to seek additional capital,
which would result in dilution for its stockholders. There can be no assurance
that the Company will be able to raise capital, or if so, on what terms or what
the timing thereof might be. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As of December 31, 2002, the Company had approximately $2.3 million of
cash and cash equivalents and did not have any outstanding debt except for
capital leases totaling approximately $0.3 million. The Company has incurred
$49.2 million of cumulative net losses for the three-year period ended December
31, 2002. Total stockholders' equity decreased from $11.3 million at December
31, 2001 to $1.6 million at December 31, 2002. Although the Company has recorded
sequentially better operating profits from continuing operations throughout
fiscal 2002, the Company does not expect this trend to continue into fiscal 2003
as the sequential quarterly increases in revenue generated by the Government of
Scotland license maximized in the fourth quarter of 2002. The Company believes
it has sufficient liquidity to fund operations into April 2003 without raising
additional working capital. In the event the Company is unable to generate
license revenues or raise additional working capital from the sale of assets or
by other means, the Company may be forced to seek protection under U.S.
bankruptcy laws.
The Company's contractual obligations payable or maturings 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 $ 288,597 $ 288,597 $ -- $ -- $ --
Operating leases 2,455,305 893,960 1,561,345 -- --
----------- ----------- ----------- ----------- -----------
Total contractual cash obligations $ 2,743,902 $ 1,182,557 $ 1,561,345 $ -- $ --
=========== =========== =========== =========== ===========
14
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, 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) 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 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) 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.
As part of the revenue recognition process significant management
judgments and estimates must be made and used to determine the
revenue recognized in any accounting period. Material differences
may result in the amount and timing of our revenue for any period if
we made different judgments or utilized different estimates.
We recognize 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 the
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
15
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 that 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 if the
collection of the resulting receivable is probable could materially
impact the amount of revenue we record.
Our arrangements do not generally 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
do not generally provide for a right of return, and historically
product returns have not been significant. We provide for sales
return allowances on an estimated basis.
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.
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.
FACTORS AFFECTING FUTURE PERFORMANCE
A significant portion of the Company's revenues from continuing
operations are from license fees derivable from Cap Gemini, Ernst & Young ("Cap
Gemini") under an arrangement that Cap Gemini has with the Scottish Government
executed in November 2001. Through December 31, 2002, the Company has received
$3.8 million in cash under this arrangement, of which $3.5 million has been
recognized as revenue and $300,000 has been deferred. Assuming full
implementation by the Government of Scotland, this arrangement may generate in
excess of $14 million in total revenues over the seven year life of the
16
agreement. Future revenue under this arrangement is contingent on the following
significant factors: the rate of adoption of the Company's eSourcing solution by
the entities within the Scottish Government, renewal by the entities within the
Scottish Government of their rights to use the eSourcing solution, the
procurement of additional services from the Company by entities within the
Scottish Government, Cap Gemini's relationship with the Scottish Government, and
their compliance with the terms and conditions of their agreement with the
Scottish Government and the ability of the Company to perform under its
agreement with Cap Gemini.
If further business fails to develop under this agreement, or if the
Company is unable to perform under this agreement, it would have a material
adverse affect on the Company's future financial results and ability to continue
as a going concern. The Company anticipates that its revenues for the first
quarter of 2003 will be substantially lower than those recorded in the fourth
quarter of 2002 as deferred revenue at December 31, 2002 amounts to $300,000 and
there have been no additional licenses executed by the Scottish Government
through March 13, 2003.
OUTLOOK
As evidenced by the continued reduction in SG&A expenditures in the
fourth quarter of 2002, the Company's implementation of cost containment
programs has significantly reduced its expenses and cash requirements from
previous levels. Although the Company has been able to reduce its operating
expenses going forward, the level of deferred revenue at December 31, 2002 was
significantly less than that recorded at September 30, 2002. As a result, the
Company expects that its operating loss from continuing operations in the first
quarter of 2003 will be higher than that recorded in the fourth quarter of 2002.
Improvements in revenues and operating results from continuing operations in
future periods will not occur without the Company being able to raise additional
working capital in the near future. Specifically, see "Risk Factors Relating to
Liquidity" above.
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K could include forward-looking
statements or information. All statements, other than statements of historical
fact, including, without limitation, those with respect to the Company's
objectives, plans and strategies set forth herein and those preceded by or that
include the words "believes," "expects," "targets," "intends," "anticipates,"
"plans," or similar expressions, are forward-looking statements. Although the
Company believes that such forward-looking statements are reasonable, it can
give no assurance that the Company's expectations are, or will be, correct.
These forward-looking statements involve a number of risks and uncertainties
which could cause the Company's future results to differ materially from those
anticipated, including: (i) availability and terms of appropriate working
capital and/or other financing to keep the Company operating, particularly in
light of the audit opinion from the Company's independent accountants in this
Annual Report on Form 10-K as to the Company's necessity to raise capital to
continue as a going concern past April 2003, the Company's $2.3 million in cash
and cash equivalents at December 31, 2002 and its history of ongoing operating
losses; (ii) the overall marketplace and client's acceptance and usage of
eCommerce software systems, including corporate demand therefore, the impact of
competitive technologies, products and pricing, particularly given the
subsequently larger size and scale of certain competitors and potential
competitors, and control of expenses, revenue growth, corporate demand for
eProcurement and eMarketplace solutions; (iii) the consequent results of
operations given the aforementioned factors; and (iv) the necessity of the
Company to raise additional working capital to fund operations beginning in
April 2003 and the availability of any such funding to the Company and other
risks detailed from time to time in this Annual Report on Form 10-K and in its
other SEC reports and statements, including particularly the Company's "Risk
Factors" contained in the prospectus included as part of the Company's
Registration Statement on Form S-3 filed on June 21, 2002. In the event the
Company is unable to raise additional working capital from additional license
fees for the sale of assets or by other means, the Company may be forced to seek
protection under U.S. bankruptcy laws. The Company assumes no obligation to
update any of the information contained or referenced in this Annual Report on
Form 10-K.
17
ITEM 7A. 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 loss of $901,000. This
amount could become more material in the future due to revenues generated in
pounds under the Scottish Government License.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements beginning on page F-1.
Supplemental earnings (loss) per share and quarterly financial information for
the Company are included in Notes 11 and 12, respectively, of the Notes to
Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The name, age and position of the Company's Executive Officers and
Directors are as follows:
Name Age Position
-------------------------------------------------------------------------------------------------------
Robert J. Crowell 51 Class III Director, Chairman of the Board of Directors and
Chief Executive Officer of the Company
John E. Halnen 36 President and Chief Operating Officer of the Company
Peter A. Rendall 37 Chief Financial Officer and Secretary of the Company
Scott M. Soloway 41 Vice President and General Counsel of the Company
Richard J. Harries, Jr. 62 Class II Director of the Company
John W. Ortiz 79 Class I Director of the Company
William W. Smith 51 Class III Director and Vice Chairman of the Company
A brief resume for each of the Company's Executive Officers and
Directors is set forth below:
Robert J. Crowell, the Company's founder, has been the Chairman of the
Board of Directors and Chief Executive Officer of the Company since its
inception in 1992. Mr. Crowell has founded and managed several companies since
1977. From May 1990 to April 1992, he was the Chairman, and from May 1990 to
January 1992, Chief Executive Officer also, of JWP Information Services, Inc., a
subsidiary of JWP INC. ("JWP"), with approximately $1.4 billion in 1992
revenues. From 1983 to 1990, Mr. Crowell was the Chairman and Chief Executive
Officer of NEECO, Inc. ("NEECO"), a publicly-held national PC reseller which was
acquired by JWP (forming JWP Information Services, Inc.) in May 1990 for
approximately $100 million. From 1977 to 1983, Mr. Crowell founded and managed
New England Electronics Co., Inc. (which was renamed NEECO and became a public
company in 1986), and Microamerica Distributing Co., Inc. ("Microamerica"), a PC
products distributor which Mr. Crowell founded in 1979 as a subsidiary of NEECO.
Microamerica was later spun-off by its acquirer and subsequently merged with
Softsel to form Merisel, then a PC products distributor, now a provider of
18
software license products to resellers. Mr. Crowell also founded Professional
Software, Inc. in 1980, a PC-based word processing and database software company
("Professional Software"), which was sold in 1986. Mr. Crowell holds a Magna Cum
Laude Bachelor of Science degree in Accounting from the University of
Massachusetts and is a Vietnam veteran.
John E. Halnen has been the President of the Company since November 2000
and President and Chief Operating Officer since June 2001. From December 1999
through October 2000, Mr. Halnen was President and Chief Executive Officer of
Elcom Services Group, Inc. From April 1998 through December 1999, Mr. Halnen was
Chief Operating Officer for Elcom Services Group, Inc. From January 1995 through
April 1998, Mr. Halnen served as Vice President of Operations for Elcom Services
Group, Inc. and prior to that time held other positions at Elcom Services Group,
Inc. since joining the organization in October 1992.
Peter A. Rendall has been the Company's Chief Financial Officer since
October 1999. From April 1999 through September 1999, Mr. Rendall was Vice
President of Finance of Elcom Services Group, Inc. From 1996 through March 1999,
Mr. Rendall held the positions of Vice President of Operations and Vice
President of Finance with Logica, Inc., a subsidiary of Logica, plc, a U.K.
publicly-held international software integration services company. Prior to
joining Logica, Mr. Rendall was a senior manager with PriceWaterhouseCoopers, in
their Boston office. Mr. Rendall holds a Bachelor of Science degree in
biochemistry from The University of London, U.K. and is a Chartered Accountant.
Scott M. Soloway has been the Company's Vice President and General
Counsel since May 2001. From March 2000 to the present, Mr. Soloway has been the
Company's General Counsel. From April 1993 to March 2000, Mr. Soloway held
various positions within the legal department of Progress Software Corporation
with his latest position being Senior Counsel. Prior to Progress Software, Mr.
Soloway practiced law for five years with two law firms in Boston,
Massachusetts. Mr. Soloway received his J.D. from Boston University School of
Law, his Masters in City Planning from M.I.T and his B.A. in Government from
Wesleyan University.
Richard J. Harries, Jr., a Director of the Company since December 1993,
rejoined IBM North America as a Business Partner Senior Sales Executive in 1997.
During 1995 and 1996, Mr. Harries was a Director of Sales of the Institute for
Software Advancement. From July 1992 to August 1995, upon retiring from IBM
after twenty-five years of service, Mr. Harries worked as the general manager of
Tascor; was a sales and marketing consultant; and was an independent distributor
for Equinox, Inc. Prior thereto, from 1988 to July 1992, Mr. Harries served as a
National Account Executive for IBM. During his career with IBM, Mr. Harries has
held a number of executive marketing and sales management positions, including
ten years of experience in IBM's National Distribution Division Reseller Channel
where he was responsible for field sales and marketing programs. Mr. Harries
holds a Bachelor of Arts Degree in Political Science and a Master of Arts Degree
in Economics from Boston College.
John W. Ortiz, a Director of the Company since December 1993, is a
retired banking executive at South Shore Bank where he was employed from 1942 to
1989, most recently as Senior Vice President and Group Head of Commercial
Lending. Mr. Ortiz also presided as the president of the New England Chapter of
Robert Morris Associates and as a director of the Massachusetts Higher Education
Loan Corporation at times during his banking career. Mr. Ortiz is a graduate of
Northeastern University's Bachelor of Arts program.
William W. Smith has been Vice Chairman and a Director of the Company
since March 1993. Mr. Smith develops real estate and has been semi-retired since
August 1991. Mr. Smith joined NEECO as a major stockholder in 1978 and served as
Chief Financial Officer until its acquisition by JWP in May 1990.
Mr. Smith continued to serve as Chief Financial Officer of JWP Information
Services, Inc. until December 1990, then he served as a consultant until he
retired in August 1991. Mr. Smith holds a Magna Cum Laude Bachelor of Science
degree in Accounting from the University of Massachusetts and is a Vietnam
veteran.
19
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT:
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Officers and Directors and persons who beneficially own more than ten
percent of a registered class of the Company's equity securities (i.e., the
Common Stock), to file reports of ownership and changes in ownership of such
securities with the Commission. Officers, Directors and greater-than-ten-percent
beneficial owners are required by applicable regulations to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of the forms furnished to the
Company during or with respect to 2002, and written representations from certain
reporting persons, the Company believes that no Officer, Director or
greater-than-ten-percent beneficial owner failed to file on a timely basis
during the year ended December 31, 2002 any report required by Section 16(a) of
the Securities Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual and
long-term compensation for services in all capacities with respect to those
persons (collectively, the "Named Executive Officers") who were (i) the Chief
Executive Officer and (ii) the other executive officers of the Company at the
end of the fiscal year, as well as the individuals that were executive officers
during the year ended December 31, 2002.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION (1) AWARDS
----------------------------- --------------
SHARES OF
COMMON STOCK ALL OTHER
UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION (1) YEAR SALARY BONUS OPTION GRANTS SATION
- ---------------------------------------------------------------------------------------------------------
Robert J. Crowell 2002 $391,731 - 790,000 $503
Chairman of the Board of Directors and 2001 $524,000 - 300,000 $253
Chief Executive Officer of the Company (2) 2000 $525,000 - 498,281 $382
John E. Halnen
President and Chief Operating Officer 2002 $183,461 $56,264 505,000 $22,540
of the Company (3) 2001 $225,000 $75,000 200,000 -
2000 $225,000 $56,000 110,000 -
Peter A. Rendall 2002 $215,077 - 505,000 $570
Chief Financial Officer and Secretary of 2001 $240,000 - 175,000 -
the Company (4) 2000 $220,000 $20,000 214,313 -
Paul J. Mueller 2002 $115,692 - 22,500 -
Vice President of Finance and Treasurer 2001 $163,000 - 52,000 -
of the Company (5) 2000 $103,000 $21,000 65,000 -
Scott M. Soloway
Vice President and General Counsel 2002 $192,000 - 71,000 -
of the Company (6) 2001 $195,000 - 47,000 -
2000 $117,000 $23,000 75,000 -
- ---------------
(1) No Named Executive Officer received perquisites or other personal benefits
in excess of the lesser of $50,000 or 10% of such individual's salary plus
annual bonus unless otherwise indicated herein.
20
(2) The Company and Mr. Crowell entered into an Amended and Restated Employment
Agreement on June 20, 2002. See "--Employment Contracts" , "--Executive
Profit Performance Bonus Plan" and "-- Option Grants in 2002." In December
2001, Mr. Crowell elected to reduce his 2002 annual salary from $525,000 to
$446,250. Subsequent to that date, in April 2002, Mr. Crowell elected to
further reduce his 2002 annual salary by $78,750 to $367,500, resulting in
a total reduction in annual salary of 30%. On January 6, 2003, Mr. Crowell
elected to reduce his fiscal 2003 salary further by $55,125, resulting in
an annual salary of $312,375. All other compensation represents premiums
paid by the Company for Group Term Life Insurance ($503 for 2002), see
"Employment Contracts."
(3) On November 29, 2000, Mr. Halnen was appointed as President of the Company,
and on June 12, 2001, Mr. Halnen also was appointed as Chief Operating
Officer of the Company. In December 2001, Mr. Halnen elected to reduce his
2002 annual salary from $225,000 to $191,250. Subsequent to that date, in
April 2002, Mr. Halnen elected to further reduce his 2002 annual salary by
an additional $11,250 to $180,000. On January 6, 2003, Mr. Halnen elected
to forego his annual bonus opportunity of $75,000 for 2003, resulting in an
annual salary of $180,000. All other compensation represents premiums paid
by the Company for Group Term Life Insurance ($22,540 for 2002), see
"Employment Contracts."
(4) Mr. Rendall joined the Company in April 1999 and was appointed Chief
Financial Officer of Elcom International on October 4, 1999 at an annual
salary of $200,000 and a bonus opportunity of up to $40,000. During 2000,
Mr. Rendall's annual salary was increased to $240,000 with no bonus
opportunity. In April 2002, Mr. Rendall elected to reduce his 2002 annual
salary by $36,000 to $204,000. On January 6, 2003, Mr. Rendall elected to
reduce his salary by a further $24,000 resulting in an annual salary of
$180,000. All other compensation represents premiums paid by the Company
for Group Term Life Insurance ($570 for 2002), see "Employment Contracts."
Mr. Rendall announced his resignation to the Company, effective March 7,
2003. Mr. Rendall submitted a letter to the Chairman and CEO stating that
his departure was to accept another position and, as evidenced by his
certification of this Form 10-K in no way reflected negatively on the
Company.
(5) Mr. Mueller joined the Company on March 6, 2000 at an annual salary of
$125,000 and a bonus opportunity of $25,000. During 2001, Mr. Mueller's
annual salary was increased to $160,000 with no bonus opportunity. As a
result of cost containment measures undertaken by the Company in 2002, Mr.
Mueller's employment was terminated without cause on August 30, 2002.
(6) Mr. Soloway joined the Company on March 29, 2000 at an annual salary of
$150,000 and a bonus opportunity of $30,000. During 2001, Mr. Soloway's
annual salary was increased to $192,000 with no bonus opportunity. On
January 6, 2003, Mr. Soloway elected to reduce his fiscal 2003 salary by
$28,800, resulting in an annual salary of $163,200.
STOCK OPTION PLANS
The Company has adopted the 1995 Non-Employee Director Stock Option
Plan (the "Director Plan"), The Stock Option Plan of Elcom International, Inc.
(the "1993 Stock Option Plan"), The 1995 (Computerware) Stock Option Plan of the
Company (the "Computerware Stock Option Plan"), The 1996 Stock Option Plan of
the Company (the "1996 Stock Option Plan"), The 1997 Stock Option Plan of the
Company (the "1997 Stock Option Plan"), The 2000 Stock Option Plan (the "2000
Stock Option Plan"), The 2001 Stock Option Plan, as amended and restated (the
"2001 Stock Option Plan") and The 2002 Stock Option Plan (the "2002 Stock Option
Plan") (collectively hereinafter the "Stock Option Plans") covering 250,000,
5,000,000, 1,000,000, 2,400,000, 3,000,000, 2,750,000, 2,400,000 and 1,800,000
shares, respectively, of the Company's Common Stock, pursuant to which officers,
employees and directors of the Company, as well as other persons who render
services as independent contractors to the Company, or any of its affiliates,
are eligible to receive incentive stock options ("ISO's") and/or non-qualified
stock options ("NQOptions"). These plans generally operate in the following
manner.
Overview of the Plans. Pursuant to the plans, "key personnel", which
includes employees and outside directors of the Company or any affiliate, as
well as other persons who render services as
20
independent contractors to the Company, or any of its affiliates, who in the
judgment of the Compensation Committee, are important to the successful
operation of the Company or an affiliate, are eligible to receive stock options.
Stock options may include NQOptions, which may be granted to any key personnel,
and/or ISO's, which may only be granted to employees of the Company or a
subsidiary.
The plans are administered by the Compensation Committee of the Board
(the "Committee"), presently comprised of Messrs. Harries, Ortiz and Smith.
Members of the Committee must be persons who qualify as "outside directors"
under Section 162(m) of the Internal Revenue Code and who are "non-employee
directors" under Rule16(b)(3) of the Securities Exchange Act of 1934. Subject to
the terms and conditions of the applicable plan, and in addition to the other
authorizations granted to the Committee under the applicable plan, the Committee
shall have full and final authority in its absolute discretion to (a) select the
optionees to whom options will be granted, (b) determine the number of shares of
Common Stock subject to any option, (c) determine the time when options will be
granted, (d) determine the option price of Common Stock subject to an option,
(e) determine the time when Common Stock subject to an option may be purchased,
(f) prescribe the form of the option agreements governing the options which are
granted under the applicable plan and to set the provisions of such option
agreements as the Committee may deem necessary or desirable provided such
provisions are not contrary to the terms and conditions of the applicable plan,
(g) adopt, amend and rescind such rules and regulations as, in the Committee's
opinion, may be advisable in the administration of the applicable plan, and (h)
construe and interpret the applicable plan, the rules and regulations and the
instruments evidencing options granted under the applicable plan and to make all
other determinations deemed necessary or advisable for the administration of the
applicable plan.
Subject to the approval of the Board of Directors, the Committee may at
any time amend, modify, suspend or terminate any plan. In no event, however,
without the prior approval of the Company's stockholders, shall any action of
the Committee or the Board result in: (a) amending, modifying or altering the
eligibility requirements for those persons eligible for options; (b) increasing
or decreasing, except in the event of stock splits, stock dividends,
combinations, exchanges of shares or similar capital adjustments, the maximum
number of shares for which options may be granted; (c) decreasing the minimum
option price per share at which options may be granted under the applicable
plan; (d) extending either the maximum period during which an option is
exercisable or the date on which the applicable plan shall terminate; or (e)
changing the requirements relating to the Committee; except as necessary to
conform the applicable plan and/or the option agreements to changes in the
Internal Revenue Code or other governing law.
Any decision made or action taken by the Committee in connection with
the administration, interpretation, and implementation of the applicable plan
and of its rules and regulations, shall, to the extent permitted by law, be
conclusive and binding upon all optionees under the applicable plan and upon any
person claiming under or through such an optionee. Neither the Committee nor any
of its members shall be liable for any action taken by the Committee pursuant to
the applicable plan. No member of the Committee shall be liable for the action
of any other Committee member.
In the event of stock splits, stock dividends, combinations, exchanges
of shares or similar capital adjustments, the Compensation Committee must make
an appropriate adjustment in the options granted under the applicable plan, and
the aggregate number of shares reserved for issuance thereunder also shall be
adjusted accordingly. If any option expires without having been fully exercised,
the shares with respect to which such options have not been exercised will be
available for further options as will any shares paid or withheld to satisfy an
optionee's withholding tax or option payment liability.
Subject to certain conditions, the duration of each option granted
under the applicable plan will be determined by the Committee, provided that no
option shall be exercisable later than the tenth anniversary of the date the
option was granted. Each option granted under the applicable plan may be subject
to restrictions with respect to the time and other conditions of exercise as
determined by the Committee.
ISOs granted under the applicable plan are exercisable for a period of
up to ten years from the date of grant at an exercise price that is not less
than the fair market value of the Common Stock on the date of the grant, except
that the term of an ISO granted under the Stock Option Plan to a stockholder
owning more than 10% of the voting power of the Company on the date of grant may
not exceed five years and its
22
exercise price may not be less than 110% of the fair market value of the Common
Stock on the date of the grant. NQOptions may be granted at more or less than
fair market value under the applicable plan. Shares of Common Stock underlying
an option shall be purchased by the optionee (i) giving written notice to the
Company of the optionee's exercise of the option accompanied by full payment of
the purchase price either in cash or, with the consent of the Committee (or as
per the terms of the option agreement), in whole or in part in shares of Common
Stock by delivery to the Company of shares of Common Stock that have been
already owned by the optionee for at least six months, having a fair market
value on the date the option is exercised equal to that portion of the purchase
price for which payment in cash is not made, and (ii) making appropriate
arrangements acceptable to the Company with respect to income tax withholding,
as required, which arrangements may include, at the absolute discretion of the
Committee, in lieu of other withholding arrangements, (a) the Company
withholding from issuance to the optionee such number of shares of Common Stock
otherwise issuable upon exercise of the option as the Company and the optionee
may agree for the minimum required withholding, or (b) the optionee's delivery
to the Company of shares of Common Stock having a fair market value on the date
the option is exercised equal to that portion of the withholding obligation for
which payment in cash is not made. Options granted under the applicable plan are
generally not transferable other than upon an optionee's death, provided that
the Committee has discretion to permit the transferability of NQOptions granted
under the applicable plan to certain parties.
The 2001 Stock Option Plan and The 2002 Stock Option Plan each provide
that an optionee may exercise his or her stock options for up to 180 days
following the date of termination without cause if the option agreement so
provides. Under all other Stock Option Plans, upon an optionee's termination
without cause, unless an option agreement contains differing terms with respect
to vesting and exercisability which supercedes the provisions of the applicable
plan, all unexercisable portions of the optionee's options vest and the optionee
may exercise his or her options for up to 90 days following the date of
termination. Any options that are ISO's must be exercised within 90 days after
such termination, otherwise these options will receive the tax treatment offered
to NQOptions.
The maximum number of options that can be granted to any one
participant during any one fiscal year is 500,000 under the 1993 Stock Option
Plan, 210,000 under the Computerware Stock Option Plan, 300,000 under the 1996
Stock Option Plan, 150,000 under the 1997 Stock Option Plan, 150,000 under the
2000 and 2001 Stock Option Plans, and 250,000 under the 2002 Stock Option Plan.
THE DIRECTOR PLAN. Non-employee Directors are entitled to participate
in the Director Plan, adopted by the Board of Directors in October 1995, and
approved by stockholders in November 1995. A total of 250,000 shares of Common
Stock have been reserved for issuance under the Director Plan. The Director Plan
provides for an automatic grant of an option to purchase 5,000 shares of Common
Stock to each non-employee Director serving as such on October 9, 1995 or for
persons who become a non-employee Director thereafter, on their date of election
or appointment as applicable. Options granted under the Director Plan have a
term of ten years. One-third of the shares subject to each option vest on each
anniversary date of the grant of the option so long as the optionee continues to
serve as a Director on such dates. Of the 250,000 shares of Common Stock
reserved for issuance thereunder, as of December 31, 2002, options covering
10,000 shares of Common Stock have been exercised, and options to acquire an
aggregate of 95,000 shares of Common Stock (74,999 of which were exercisable at
December 31, 2002) were outstanding at exercise prices ranging from $0.20 to
$6.78 per share, and accordingly, as of December 31, 2002 additional options
covering 145,000 shares of Common Stock could be granted under such option plan.
THE 1993 STOCK OPTION PLAN. The 1993 Stock Option Plan was adopted by
the Board of Directors in February 1993, was approved by the Company's
stockholders, and terminated on February 23, 2003. Of the 5,000,000 shares of
Common Stock reserved for issuance thereunder, as of December 31, 2002, options
covering 2,817,497 shares of Common Stock have been exercised, and options to
acquire an aggregate of 2,036,677 shares of Common Stock (1,986,902 of which
were exercisable at December 31, 2002) were outstanding at exercise prices
ranging from $0.11 to $24.0025.
THE COMPUTERWARE STOCK OPTION PLAN. The Computerware Stock Option Plan
was adopted by the Board of Directors in February 1995, was approved by the
Company's stockholders, and terminates on
23
February 5, 2005. Of the 1,000,000 shares of Common Stock reserved for issuance
under the Computerware Stock Option Plan, options to acquire all 1,000,000
shares have been granted at an exercise price of $4.00 per share, 414,000 of
which have been exercised as of December 31, 2002, and 576,000 of which were
exercisable as of December 31, 2002.
THE 1996 STOCK OPTION PLAN. The 1996 Stock Option Plan was adopted by
the Board of Directors in August 1996, was approved by the Company's
stockholders and terminates on August 19, 2006. Of the 2,400,000 shares of
Common Stock reserved for issuance under the 1996 Stock Option Plan, as of
December 31, 2002, options covering 774,040 shares of Common Stock have been
exercised, and options to acquire an aggregate of 1,506,063 shares of Common
Stock (1,030,101 of which were exercisable at December 31, 2002) were
outstanding as of December 31, 2002, at exercise prices ranging from $0.20 to
$22.50 per share, and accordingly, options covering 119,897 shares of Common
Stock may be granted under such option plan.
THE 1997 STOCK OPTION PLAN. The 1997 Stock Option Plan was adopted by
the Board of Directors in April 1997, initially amended in February 1998, and
approved by stockholders at the 1998 Annual Meeting. The 1997 Stock Option Plan
also was amended in March 1999 to increase the shares covered by 1,000,000 (to a
total of 3,000,000 shares) and was approved by the stockholders at the 1999
Annual Meeting. Of the 3,000,000 shares reserved for issuance thereunder, as of
December 31, 2002, options covering 439,504 shares of Common Stock have been
exercised and options to acquire an aggregate of 2,283,245 shares of Common
Stock (1,577,506 of which were exercisable at December 31, 2002) were
outstanding at exercise prices ranging from $0.20 to $5.75 per share, and
accordingly, options covering 277,251 shares of Common Stock may be granted
under such option plan.
THE 2000 STOCK OPTION PLAN. The 2000 Stock Option Plan was adopted by
the Board of Directors in March 2000, was approved by the Company's
stockholders, and terminates on March 21, 2010. Of the 2,750,000 shares of
Common Stock reserved for issuance thereunder, as of December 31, 2002, options
to acquire an aggregate of 2,388,739 were outstanding (1,133,153 of which were
exercisable at December 31, 2002) at exercise prices ranging from $0.22 to
$6.7813 per share, and accordingly, options covering 351,261 shares of Common
Stock may be granted under such option plan.
THE 2001 STOCK OPTION PLAN. The 2001 Stock Option Plan was adopted by
the Board of Directors on November 10, 2000 and was amended and restated to
provide for greater flexibility with respect to option agreement provisions
related to the vesting of options following an optionee's termination of
employment by reason of a termination without cause, and was approved by the
Company's stockholders in May 2001. The 2001 Stock Option Plan terminates on
November 10, 2010. Of the 2,400,000 shares of Common Stock reserved for issuance
thereunder, as of December 31, 2002, options to acquire an aggregate of
1,881,963 shares of Common Stock (1,240,400 of which were exercisable at
December 31, 2002) were outstanding at exercise prices ranging from $0.20 to
$4.7813 per share, and accordingly, options covering 458,087 shares of Common
Stock may be granted under such option plan.
THE 2002 STOCK OPTION PLAN. The 2002 Stock Option Plan was adopted by
the Board of Directors on June 11, 2001 and was approved by the Company's
stockholders on June 12, 2002. The 2002 Stock Option Plan terminates on June 11,
2011. Of the 1,800,000 shares of Common Stock reserved for issuance thereunder,
as of December 31, 2002, options to acquire an aggregate of 1,485,337 shares of
Common Stock (212,972 of which were exercisable at December 31, 2002) were
outstanding at exercise prices ranging from $0.20 to $1.68 per share, and
accordingly, options covering 314,663 shares of Common Stock may be granted
under such option plan.
CHANGE OF CONTROL FEATURE
Generally, all option agreements under the Stock Option Plans,
including those relative to the Named Executive Officers, contain provisions
requiring the cash payment of the value of the options (represented by the
difference between the option exercise price and the then-current fair market
value of the underlying Common Stock), in some instances upon certain defined
changes in control or sales of substantially all of the Company's assets. Such
changes of control also may trigger, in certain cases,
24
acceleration of the exercisability of certain options, which may occur if the
Company is reorganized, consolidated or merged with another company and the
Company is not the surviving company, or if 50% or more of the shares of the
capital stock of the Company which are then issued and outstanding are purchased
by a single person or entity.
OPTION GRANTS IN 2002
Shown below is information relating to grants of stock options pursuant
to the Stock Option Plans during the fiscal year ended December 31, 2002 to the
Named Executive Officers. Such grants also are reflected in the Summary
Compensation Table above.
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
--------------------------------------------------------------- ASSUMED ANNUAL
% OF TOTAL EXERCISE RATES OF STOCK PRICE
NO. OF GRANTED TO OR BASE APPRECIATION FOR THE
SECURITIES EMPLOYEES PRICE OPTION TERM (3)
UNDERLYING IN FISCAL ($ PER GRANT EXPIRATION ---------------------
NAME OPTIONS YEAR SHARE)(1) DATE DATE 5% 10%
- --------------------------------------------------------------------------------------------------------------
Robert J. Crowell (4) 450,000 9.75 $0.445 04/12/02 04/12/12 125,936 319,147
200,000 4.33 $0.490 (2) 04/12/02 04/12/07 27,076 59,830
140,000 3.03 $0.220 (2) 07/26/02 07/26/07 8,509 18,804
John E. Halnen (5) 400,000 8.67 $0.445 04/12/02 04/12/12 111,943 283,686
105,000 2.27 $0.200 07/26/02 07/26/12 13,207 33,469
Peter A. Rendall (6) 400,000 8.67 $0.445 04/12/02 04/12/12 111,943 283,686
105,000 2.27 $0.200 07/26/02 07/26/12 13,207 33,469
Paul J. Mueller (7) 22,500 0.49 $0.445 04/12/02 04/12/12 6,297 15,957
Scott M. Soloway (8) 36,000 0.78 $0.445 04/12/02 04/12/12 10,075 25,532
35,000 0.76 $0.200 07/26/02 07/26/12 4,402 11,156
- ------------------
(1) This price represents the fair market value at the date of grant pursuant
to the terms of the Company's Stock Option Plans, except for (2) below.
(2) This price represents 110% of the fair market value at the date of grant
pursuant to the terms of the Stock Option Plans.
(3) Potential Realizable Value is based on certain assumed rates of
appreciation pursuant to rules prescribed by the Securities and Exchange
Commission (the "Commission"). Actual gains, if any, on stock option
exercises are dependent on the future performance of the stock. There can
be no assurance that the amounts reflected in this table will be achieved.
In accordance with rules promulgated by the Commission, Potential
Realizable Value is based upon the exercise price of the options.
(4) The options granted to Mr. Crowell vest as follows:
(i) the 650,000 options granted on April 12, 2002 vested immediately;
(ii) of the 140,000 options granted on July 26, 2002, 49,000 vest on July
26, 2003 and 91,000 vest on July 26, 2004.
(5) The options granted to Mr. Halnen vest as follows:
(i) the 400,000 options granted on April 12, 2002 vested immediately; and
25
(ii) of the 105,000 options granted on July 26, 2002, 35,000 vest on July
26, 2003 and 65,000 vest on July 26, 2004.
(6) The options granted to Mr. Rendall vest as follows:
(i) the 400,000 options granted on April 12, 2002 vested immediately; and
(ii) of the 105,000 options granted on July 26, 2002, 35,000 vest on July
26, 2003 and 65,000 vest on July 26, 2004.
(7) The 22,500 options granted to Mr. Mueller on April 17, 2002, vested on July
31, 2002 as part of his termination from the Company without cause. The
options were exercisable until February 26, 2003.
(8) The options granted to Mr. Soloway vest as follows:
(i) of the 36,000 options granted on April 12, 2002, 12,600 vest on April
12, 2003 and 23,400 vest on April 12, 2004; and
(ii) of the 35,000 options granted on July 26, 2002, 12,250 vest on July
26, 2003 and 22,750 vest on July 26, 2004.
FISCAL YEAR-END OPTION VALUE TABLE
The following table shows the number of shares of Common Stock acquired
during 2002 by the exercise of options and the related value realized, as well
as the number of shares of Common Stock and values represented by outstanding
stock options held by each of the Named Executive Officers as of December 31,
2002. The value of unexercised in-the-money options at December 31, 2002 is
calculated using $0.215 per share. See note (2) below.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN THE MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 2002 DECEMBER 31, 2002(1)(2)
ACQUIRED ON VALUE -----------------------------------------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------------------------------------------
Robert J. Crowell -- -- 2,638,503 236,383 -- --
John E. Halnen -- -- 979,733 170,766 -- --
Peter A. Rendall -- -- 799,509 249,804 -- --
Scott M. Soloway -- -- 71,950 121,050 -- --
- -------------
(1) Options are "in-the-money" if the fair market value of the Common Stock
exceeds the exercise price.
(2) Represents the total gain which would be realized if all in-the-money
options beneficially held at December 31, 2002 were exercised, determined
by multiplying the number of shares underlying the options by the
difference between the per share option exercise price and $0.215, the
average of the high and low sales prices per share of the Company's Common
Stock on the Nasdaq SmallCap Market on December 31, 2002.
EXECUTIVE PROFIT PERFORMANCE BONUS PLAN
At the Company's 1998 Annual Meeting, the stockholders approved the
Elcom International, Inc. Executive Profit Performance Bonus Plan For Executive
Officers (the "Executive Performance Plan") which was approved by the Board of
Directors in September 1997. The Executive Performance Plan covers, for a fiscal
year, those persons who, on the ninetieth day of that particular fiscal year,
are the executive officers of the Company ("Executive Officers"). As such, the
number of people covered will generally be limited to no more than ten, and in
order to participate in the Executive Performance Plan, the Executive Officer
must be employed as of March 30th of the calendar year and must be awarded a
participation (also by March 30th) by the Compensation Committee of the Board of
Directors (the "Committee").
26
The Executive Performance Plan provides for incentive compensation
payments (limited in amount to the lesser of: (a) two times the executive's base
salary or (b) one million dollars) to be made to covered Executive Officers
based upon the increase in the Company's reported operating income (or reduction
in operating loss) over the prior year. Accordingly, the Board of Directors
believes that the Executive Performance Plan provides a substantial incentive to
those Executive Officers in the best position to affect the Company's operating
performance and that substantial benefits will accrue to the Company from
granting participations in the Executive Performance Plan. Such participations
afford the Executive Officers a substantial incentive to enhance the value of
the Company's Common Stock through their own efforts in improving the Company's
operating results. The granting of participations also is expected to be
instrumental in attracting and retaining key executives. Accordingly, the
Company will, from time to time, grant participations to such Executive Officers
as may be selected to participate in the Executive Performance Plan in
accordance with the terms thereof. Although, the Company's reported operating
profit improved from 2001 to 2002, no payments were made to Executive Officers
for 2002 in respect of the Executive Performance Plan.
The Executive Performance Plan is administered by the Compensation
Committee of the Board, presently comprised of Messrs. Harries, Ortiz and Smith.
Members of the Committee must be persons who qualify as "outside directors"
under Section 162(m) of the Internal Revenue Code and who are "non-employee
directors" under Rule 16(b)(3) of the Securities Exchange Act of 1934.
Through December 31, 2000, the Executive Performance Plan was not
permitted to be terminated or amended in any way that would adversely impact any
current participant, without such participant's written consent. Thereafter, the
Board of Directors or the Committee may amend or terminate the Executive
Performance Plan. The participants have waived participation in the Executive
Performance Plan for calendar year 2002.
The Elcom International, Inc. Key Personnel Profit Performance Plan
(the "Key Personnel Performance Plan"), which is designed to operate in
conjunction with the Executive Performance Plan, is intended to provide a
substantial incentive to key personnel who are not Executive Officers, but who
can, in the performance of their duties, affect the Company's operating results.
The Key Personnel Performance Plan Bonus Pool is limited to that portion of the
20% Bonus Pool (as defined in the Key Personnel Performance Plan) calculated
under the terms of the Executive Performance Plan less payments under the
Executive Performance Plan. Accordingly, the bonus pool available under the Key
Personnel Performance Plan is generally limited to that portion of the 20% Bonus
Pool calculated under the Executive Performance Plan, which is either
unallocated to Executive Officers or is in excess of the payment limitations
under the Executive Performance Plan (the annual payment to any one individual
is limited in amount to the lesser of: (a) two times the executive's base salary
or (b) one million dollars). Thus, based on existing allocations under the
Executive Performance Plan, for 2002 approximately 65% of any Bonus Pool would
have been available for award under the Key Personnel Performance Plan. The
terms and administration of the Key Personnel Performance Plan generally
correspond to those of the Executive Performance Plan, except that in the case
of the Key Personnel Performance Plan, the annual payout to any one participant
is limited to the lesser of $500,000 or two times the participant's base salary.
The Compensation Committee controls participation in the Key Personnel
Performance Plan. No payments were made under the Key Personnel Performance Plan
with respect to the 2002 period.
EMPLOYMENT CONTRACTS
Effective June 1, 1997, the Company entered into an employment
agreement with Mr. Crowell (the "1997 Crowell Agreement") pursuant to which Mr.
Crowell was retained for a term ending May 31, 2000, as the Chairman and Chief
Executive Officer of the Company. The 1997 Crowell Agreement automatically
renews for additional one-year terms unless terminated by either party more than
two months prior to the end of the initial term or any renewal term thereof. As
referenced below, Mr. Crowell and the Company entered into an Amended and
Restated Employment Agreement effective June 20, 2002. Therefore, since no
notice of termination had been given under the 1997 Crowell Agreement, up to
June 20, 2002, Mr. Crowell's employment with the Company was governed by the
1997 Crowell Agreement.
27
Under the 1997 Crowell Agreement, after Mr. Crowell's employment ends, Mr.
Crowell is automatically retained as a consultant for three years (at $125,000
per year) and is precluded from "competing" (as defined therein) against the
Company for a period of three years. The 1997 Crowell Agreement provides that
Mr. Crowell is entitled to participate in all Company compensation plans and
fringe benefit plans, on terms at least as favorable as other executives of the
Company and that Mr. Crowell will have a 35% participation in the Executive
Performance Plan Bonus Pool. The Compensation Committee may still make a
discretionary payment under the Executive Performance Plan to Mr. Crowell for
any current year. Under the 1997 Crowell Agreement, Mr. Crowell also is entitled
to receive annual grants of options under the Company's Stock Option Plans to be
made no later than July of each year in amounts commensurate with Mr. Crowell's
position and performance as determined by the Compensation Committee and on
terms no less favorable than the terms for options granted to other executives.
The options generally will be exercisable within a maximum of one year from date
of grant, and, to the maximum extent allowable, shall be ISO's. All options
which ISO's will have a per share exercise price of 110% of the fair market
value of such shares (so long as Mr. Crowell owns at least 10% of the Company's
outstanding stock) on the date of the grant, and all other options, including
ISO's, if any, granted after he ceases to be a 10% stockholder, will have an
exercise price per share equal to fair market value on the date of grant. If Mr.
Crowell should die, become disabled (as defined) or be terminated other than
"for cause" (as defined), he becomes entitled to receive (i) cash equal to two
times his then annual base salary, payable in 12 equal monthly installments,
(ii) his bonus for that year if such termination occurs after March 1 of the
respective fiscal year, and (iii) all other compensation and benefits to which
he otherwise would have been entitled through the remaining term of the 1997
Crowell Agreement.
Effective June 20, 2002, the Company entered into an Amended and
Restated Employment Agreement with Robert J. Crowell (the "2002 Crowell
Agreement") replacing the 1997 Employment Agreement. Pursuant to the 2002
Crowell Agreement, Mr. Crowell was retained for a term ending June 20, 2006 as
the Chairman and Chief Executive Officer of the Company. During the term, Mr.
Crowell will receive a base salary of $525,000 per year, unless Mr. Crowell
voluntarily agrees to a reduction in his salary, see "Summary Compensation
Table". The 2002 Crowell Agreement provides that Mr. Crowell is entitled to
participate in all Company compensation plans and fringe benefit plans, on terms
at least as favorable as other executives of the Company, and that Mr. Crowell
will have a minimum rate of 50% participation in the Executive Performance Plan
Bonus Pool, see "Executive Profit Performance Bonus Plan". Under the 2002
Crowell Agreement, Mr. Crowell is also entitled to receive an annual option
grant to purchase at least 400,000 shares of the Company's Common Stock under
the Company's Stock Option Plans to be made no later than July of each year. The
options will be exercisable as determined by the Compensation Committee, and, to
the maximum extent allowable, shall be ISO's.
If Mr. Crowell's employment with the Company should terminate because
of a disability (as defined) he becomes entitled to receive (i) a payment equal
to two years' base salary, payable in 24 equal monthly installments, and (ii)
health, dental benefits and group term life insurance for 24 months following
termination of employment with the Company. If Mr. Crowell's employment with the
Company should terminate other than for cause (as defined) or upon Mr. Crowell's
resignation for good reason (as defined) after a change in control (as defined)
he becomes entitled to receive (i) a severance payment equal to 2.99 times his
base salary, payable 50% upon Mr. Crowell executing a release in favor of the
Company and 50% payable in twelve equal monthly installments, (ii) all of Mr.
Crowell's stock options shall become immediately vested and exercisable, and
(iii) health, dental benefits and group term life insurance for a three year
period following termination of employment with the Company. For purposes of
calculating any such payment, Mr. Crowell's base salary shall be calculated
without reference to any voluntary reductions then in effect.
Effective June 20, 2002, the Company entered into an Employment
Agreement with John E. Halnen (the "Halnen Agreement") and an Employment
Agreement with Peter A. Rendall (the "Rendall Agreement"). Together, the Halnen
Agreement and the Rendall Agreement are referred to herein as the "Employment
Agreement". Pursuant to the Halnen Agreement, Mr. Halnen was retained for a term
ending June 20, 2005 as the President and Chief Operating Officer of the
Company. During the term, Mr. Halnen is entitled receive a base salary of
$225,000 per year, unless Mr. Halnen voluntarily agrees to a reduction in his
salary, and shall have the opportunity to receive an annual bonus of up to
$75,000 payable quarterly, see
28
"Summary Compensation Table". Pursuant to the Rendall Agreement, Mr. Rendall was
retained for a term ending June 20, 2005 as the Chief Financial Officer of the
Company. During the term, Mr. Rendall is entitled to receive a base salary of
$240,000 per year, unless Mr. Rendall voluntarily agrees to a reduction in his
salary, see "Summary Compensation Table".
Each Employment Agreement provides that Messrs. Halnen and Rendall are
entitled to participate in all Company compensation plans and fringe benefit
plans, on terms at least as favorable as other executives of the Company, and
that each of Messrs. Halnen and Rendall will have a minimum rate of 25%
participation in the Executive Performance Plan Bonus Pool, see "Executive
Performance Bonus Plan". Under each of the Employment Agreements, Messrs. Halnen
and Rendall also are entitled to receive an annual option grant to purchase at
least 200,000 shares of the Company's common stock under the Company's Stock
Option Plans to be made no later than July of each year. The options will be
exercisable as determined by the Compensation Committee, and, to the maximum
extent allowable, shall be incentive stock options.
If Mr. Halnen's employment with the Company should terminate because of
a disability (as defined) Mr. Halnen shall become entitled to receive (i) a
payment equal to twelve months' base salary, payable in twelve equal monthly
installments, and (ii) health, dental benefits and group term life insurance for
twelve months following termination of employment with the Company. If Mr.
Halnen's employment with the Company should terminate other than for cause (as
defined), Mr. Halnen shall become entitled to receive (i) a severance payment
equal to twelve months' base salary payable in twelve equal monthly installments
or, if, at the time of such termination Mr. Crowell is no longer Chairman and
Chief Executive Officer of the Company, then such severance payment shall be
equal to eighteen months annual compensation (as defined), payable 50% upon Mr.
Halnen executing a release in favor of the Company and 50% payable in twelve
equal monthly installments, and (ii) health, dental benefits and group term life
insurance for twelve months following termination of employment with the
Company. If Mr. Halnen's employment with the Company should terminate other than
for cause (as defined), following a change in control (as defined) Mr. Halnen
shall be entitled to receive (i) a severance payment equal to the greater of his
annual compensation (as defined) for the remainder of the term of the Halnen
Employment Agreement or his annual compensation (as defined) for two years,
payable 50% upon Mr. Halnen executing a release in favor of the Company and 50%
payable in 24 equal monthly installments, (ii) all of Mr. Halnen's stock options
shall become immediately vested and exercisable, and (iii) Mr. Halnen shall
become entitled to receive health, dental benefits and group term life insurance
for 24 months following termination of employment with the Company. For purposes
of calculating any such payment, Mr. Halnen's base salary and annual
compensation shall be calculated without reference to any voluntary reductions
then in effect.
If Mr. Rendall's employment with the Company should terminate because
of a disability (as defined) Mr. Rendall shall become entitled to receive (i) a
payment equal to twelve months' base salary, payable in twelve equal monthly
installments, and (ii) health, dental benefits and group term life insurance for
twelve months following termination of employment with the Company. If Mr.
Rendall's employment with the Company should terminate other than for cause (as
defined) Mr. Rendall shall become entitled to receive (i) a severance payment
equal to twelve months' base salary payable in twelve equal monthly installments
or, if, at the time of such termination Mr. Crowell is no longer Chairman and
Chief Executive Officer of the Company, then such severance payment shall be
equal to eighteen months' base salary, payable 50% upon Mr. Rendall executing a
release in favor of the Company and 50% payable in twelve equal monthly
installments, and (ii) health, dental benefits and group term life insurance for
twelve months following termination of employment with the Company. If Mr.
Rendall's employment with the Company should terminate other than for cause (as
defined) following a change in control (as defined) Mr. Rendall shall be
entitled to receive (i) a severance payment equal to the greater of his base
salary for the remainder of the term of the Rendall Employment Agreement or his
base salary for two years, payable 50% upon Mr. Rendall executing a release in
favor of the Company and 50% payable in 24 equal monthly installments, (ii) all
of Mr. Rendall's stock options shall become immediately vested and exercisable,
and (iii) Mr. Rendall shall become entitled to receive health, dental benefits
and group term life insurance for 24 months following termination of employment
with the Company. For purposes of calculating any such payment, Mr. Rendall's
base salary shall be calculated without reference to any voluntary reductions
then in effect.
29
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following report of the Compensation Committee describes the
philosophy, objectives and components of the Company's executive compensation
programs for 2002 and discusses the determinations concerning the compensation
for the Chief Executive Officer for 2002.
The members of the Compensation Committee are William W. Smith, Richard
J. Harries, Jr., and John W. Ortiz. Each of Messrs. Smith, Harries and Ortiz are
Non-Employee Directors of the Company.
COMPENSATION PHILOSOPHY
In reviewing and overseeing the Company's compensation programs, the
Compensation Committee adheres to a compensation philosophy which provides
executive compensation programs that are designed to: (i) attract and retain key
executives crucial to the long-term success of the Company; (ii) relate to the
achievement of operational and strategic objectives; and (iii) be commensurate
with each executive's performance, experience and responsibilities. In making
its recommendations concerning salaries and awards under compensation plans, the
Committee considers the financial condition and operational performance of the
Company during the prior year, the Company's success in achieving strategic
objectives that may have a long-term beneficial effect on the Company's results
of operations and financial condition, and its assessment of the contributions
of the individual executive officer to the Company's performance and to the
achievement of its strategic objectives. The Committee, however, has not
specifically focused on the compensation levels of executives in peer group
companies in making compensation decisions. The Committee does not rely
extensively on objective criteria in measuring individual performance and its
decisions concerning compensation are primarily based on subjective decisions
concerning the appropriate levels of compensation and are not the result of a
highly formalistic process.
COMPENSATION PROGRAM
As a means of implementing these compensation philosophies and
objectives, the Company's compensation program for executive officers consists
of the following primary elements: salary, participation in the Company's Stock
Option Plans, and participation in the Executive Performance Plan. These
particular elements are further explained below.
Salaries - Salary levels for executive officers reflect the Committee's
subjective judgments of appropriate salaries in light of the duties and
responsibilities inherent in the executives' respective positions. The
particular qualifications of an individual being considered for a position and
his or her level of experience are considered in establishing a salary level
when an individual is first appointed to a given position. The performance and
contribution of the individual to the Company, as well as Company performance,
are the primary criteria influencing salary administration. Salaries of
executive officers are generally reviewed each year. In many instances, the
primary factor in setting salary levels was the Company's desire to provide
compensation in amounts sufficient to induce these individuals to join the
Company.
Stock Options - The Company uses stock options as a long-term incentive
program for executives, management and employees. Stock options are used because
they directly relate the amounts earned by the executive to the amount of
appreciation realized by the Company's stockholders over comparable periods.
Stock options also provide executives with the opportunity to acquire and build
a meaningful ownership interest in the Company. The Committee considers possible
grants of stock options throughout the year. In determining the number of
options awarded to an individual executive, the Committee generally establishes
a level of award based upon the position of the individual and his or her level
of responsibility. The Committee also considers amounts of base salary and/or
bonus payments which executives and other personnel may elect to forgo, in
determining the quantity of options to be granted.
Executive Performance Plan - The Executive Performance Plan reflects
the Committee's desire to provide the Company's executives an opportunity to
earn bonuses based upon actual reported
30
improvements in the Company's performance. Accordingly, the Committee believes
that the Executive Performance Plan provides a substantial incentive to the
executives who are in the best position to affect the Company's operating
performance. The Committee believes that by granting participation in the
Executive Performance Plan, the executives will have a substantial incentive to
enhance the value of the Company's Common Stock through their own efforts in
improving the Company's operating profitability.
Benefit Programs - The executive officers also participate in various
welfare and benefit programs that are generally made available to all salaried
employees. Executive officers also receive certain traditional perquisites,
which are customary for their positions.
CHIEF EXECUTIVE OFFICER COMPENSATION
The compensation arrangements for Mr. Crowell with respect to the 2002
fiscal year were primarily based upon the terms of his employment contracts with
the Company, as described under "Executive Compensation--Employment Contracts."
Pursuant to the 1997 Crowell Agreement, as superceded by the 2002 Crowell
Agreement effective June 20, 2002, Mr. Crowell is entitled to an annual minimum
base salary of $525,000. Mr. Crowell elected to reduce his salary in December
2001 and again in April 2002, resulting in an aggregate decrease of $157,500 (or
30%) from $525,000 to $367,500. On January 6, 2003, Mr. Crowell elected to
reduce his fiscal 2003 salary from $367,500 to $315,375, a decrease of $55,125.
The Compensation Committee did not conduct any official surveys of competitive,
industry or revenue peer groups, but reviewed compensation for Chief Executive
Officers in general and believes that, over the course of negotiation on the
2002 Crowell Agreement, that this annual base salary in 2002 places Mr.
Crowell's compensation in the bottom half of comparable companies' chief
executives.
In addition, the 1997 Crowell Agreement provides that Mr. Crowell is
entitled to participate in all of the other Company compensation plans and
fringe benefit plans, on terms at least as favorable as other executives of the
Company and that he participates in the Executive Performance Plan at a minimum
rate of 35% of any bonus pool generated by such plan. Under the 1997 Crowell
Agreement, Mr. Crowell also is entitled to receive annual grants of options
under the Company's Stock Option Plans in amounts commensurate with Mr.
Crowell's position and performance, as determined by the Compensation Committee
and on terms no less favorable than the terms for options granted to other
executives to be made no later than July of each year, under terms to be
determined by the Compensation Committee and under the 2002 Crowell Agreement,
Mr. Crowell also is entitled to receive annual grants of options under the
Company's Stock Option Plans of no less than 400,000, to be made no later than
July of each year, under terms to be determined by the Compensation Committee.
SECTION 162(m)
Section 162(m) of the Internal Revenue Code (the "Section") disallows a
tax deduction for any publicly traded company for individual compensation
exceeding $1 million in any year for any of the Named Executive Officers, unless
the compensation is performance-based or otherwise meets an applicable
exemption. Since the aggregate compensation of each of the Company's executive
officers is below the $1 million threshold and since the Committee believes that
options granted under the Company's Stock Option Plans will meet the performance
based provisions under the Section, the Committee currently believes that the
Section will not reduce the tax deduction available to the Company for
compensation paid in 2002 to the Company's executive officers.
COMPENSATION COMMITTEE
William W. Smith, Chairman
Richard J. Harries, Jr.
John W. Ortiz
31
INDEPENDENT AUDITORS
KPMG LLP ("KPMG") entered into an engagement letter with the Company in
November 2002 to act as the Company's independent accountants for the current
fiscal year ended December 31, 2002.
The Board of Directors, upon recommendation of the Audit Committee, has
re-appointed KPMG as independent auditors to audit the financial statements of
the Company for the fiscal year ending December 31, 2003. Representatives from
KPMG are expected to be present at the Annual Meeting, will have the opportunity
to make a statement, if they desire to do so, and will be available to respond
to appropriate questions. Fees for services rendered by KPMG for the last two
fiscal years were:
2001 2002
---- ----
(in thousands)
Audit fees $273 $225
Audit related fees 31 22
Tax services 171 85
---- ----
Total fees $475 $332
==== ====
AUDIT FEES
KPMG has billed the Company $225,000 for professional services rendered
for the audit of the Company's annual financial statements for the fiscal year
ended December 31, 2002, the reviews of interim financial statements included in
the Company's Forms 10-Q filed during the fiscal year ended December 31, 2002,
and for consultations relating to accounting matters.
AUDIT RELATED FEES
KPMG has billed the Company $22,000 for audit related fees, for audits
of employee benefit plans and for certain statutory audits in the United
Kingdom.
TAX FEES
KPMG has billed the Company $85,000 for tax planning and preparation
services.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was formed to review, monitor and
approve the compensation and benefits for the Company's executive officers
(including bonuses, if any), administer the Company's stock option plans and
other management compensation plans and make recommendations to the Board of
Directors regarding such matters. No employees or executive officers of the
Company serve on the Committee. The Committee is currently composed of Messrs.
Harries, Ortiz, and Smith. No interlocking relationship exists between the
Company's Board of Directors or Compensation Committee and the board of
directors or compensation committee of any other company.
PERFORMANCE GRAPH
Set forth below is a line graph and a table of the related underlying
data comparing the percentage change in the cumulative total stockholders'
return on the Company's Common Stock against the cumulative total return of the
Total Return Index for The Nasdaq Stock Market - U.S. and Foreign
32
("Nasdaq Total"), and the index for Nasdaq Computer and Data Processing Services
Stocks ("Industry") for the period beginning with the Company's initial public
offering on December 20, 1995 and as of the last trading day on the Nasdaq in
1996, 1997, 1998, 1999, 2000, 2001, and 2002. The Industry index includes all
Nasdaq listed securities with a Standard Industrial Classification (SIC) of 737.
The graph assumes that the value of an investment in the Common Stock of Elcom
International, Inc. at its initial public offering price and each index was $100
on December 20, 1995 and that all dividends, if any were reinvested.
COMPARISON OF THE COMMON STOCK OF ELCOM INTERNATIONAL, INC. ("THE COMPANY"),
THE TOTAL RETURN INDEX FOR THE NASDAQ STOCK MARKET - U.S. AND FOREIGN
("NASDAQ TOTAL"), AND THE INDEX FOR NASDAQ COMPUTER AND DATA PROCESSING
SERVICES STOCKS (SIC CODE 737) ("INDUSTRY")
[GRAPH]
12/20/1995 12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001 12/31/2002
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The Company 100 72 64 18 309 13 13 2
Nasdaq Total 100 126 154 215 401 242 191 134
Industry 100 127 156 279 613 282 227 157
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets out summary stock option plan information as
of December 31, 2002, all of which relates to stock option plans that were
previously approved by shareholders.
Number of securities
remaining available for
Weighted-average future issuance under
Number of securities to exercise price of equity compensation
be issued upon exercise of outstanding plans (excluding
outstanding options options securities reflected in
column (a))
Plan category (a) (b) (c)
- ------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 12,243,524 $ 2.32 1,831,985
Equity compensation plans not
approved by security holders (1) -- -- --
---------- ------ ---------
Total 12,243,524 $ 2.32 1,831,985
---------- ------ ---------
(1) The Company does not maintain equity compensation plans that have not been
approved by its stockholders.
The following table sets forth the beneficial ownership of Common Stock
as of February 24, 2003 by (i) each Director of the Company, (ii) each executive
officer named in the Executive Compensation tables included elsewhere herein,
(iii) all Directors and executive officers as a group, and (iv) each person or
group known by the Company to own beneficially more than 5% of its outstanding
shares of Common Stock. All information with respect to beneficial ownership has
been furnished by the respective Director or executive officer, or by reference
to a public filing, as the case may be. Unless otherwise indicated below, each
stockholder named below has sole voting and investment power with respect to the
number of shares set forth opposite his or its respective name.
NUMBER OF SHARES PERCENTAGE OF
DIRECTORS AND EXECUTIVE OFFICERS AND OTHER BENEFICIAL OWNERS(2) BENEFICIALLY OWNED (1) COMMON STOCK (1)
- --------------------------------------------------------------------------------------------------------------------
CLASS I DIRECTOR - TERM EXPIRES AT THE 2005 ANNUAL MEETING
John W. Ortiz(4) 43,499 *
CLASS II DIRECTOR - TERM EXPIRES AT THE 2003 ANNUAL MEETING
Richard J. Harries, Jr. (4) 41,499 *
CLASS III DIRECTORS - TERM EXPIRES AT THE 2004 ANNUAL MEETING
Robert J. Crowell(3) 6,476,746 19.4%
William W. Smith(4) 36,049 *
NAMED EXECUTIVE OFFICERS
Peter A. Rendall (4) 849,803 2.6%
John E. Halnen (5) 991,033 3.1%
Paul J. Mueller (4) -- --
Scott M. Soloway (4) 93,550 *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (8 PERSONS)(6) 11,170,682 31.3%
OTHER 5% BENEFICIAL OWNERS
James Rousou 1,621,471 5.2%
--------------
* Less than 1%.
34
(1) In accordance with Securities and Exchange Commission rules, each
beneficial owner's holdings have been calculated assuming full exercise of
outstanding options and warrants to acquire Common Stock which are
exercisable by such owner within 60 days after February 24, 2003, while
assuming no exercise of outstanding options and warrants covering Common
Stock held by any other person.
(2) For purposes hereof, the address of the Company's Directors and executive
officers is the same as that of the Company: 10 Oceana Way, Norwood,
Massachusetts 02062.
(3) Mr. Crowell is Chairman of the Board of Directors and Chief Executive
Officer of the Company. Mr. Crowell's Common Stock ownership is comprised
of 3,483,742 shares which he owns directly; 188,401 shares held in a
revocable trust for the benefit of one of Mr. Crowell's daughters, for
which Mr. Crowell serves as Trustee; 121,616 shares held by the Crowell
Educational Foundation with respect to which Mr. Crowell shares the power
to vote and dispose of and 2,682,987 shares which he has the right to
acquire at various prices within 60 days of February 24, 2003 through the
exercise of stock options. See "Executive Compensation - Option Grants in
2002, and Fiscal Year End Option Value Table."
(4) All of the Common Stock beneficially owned by such person is comprised of
shares, which he has the right to acquire at various prices within 60 days
of February 24, 2003 through the exercise of stock options.
(5) Mr. Halnen is President and Chief Operating Officer of the Company. Mr.
Halnen's Common Stock ownership is comprised of 800 shares held in an
Individual Retirement Account and 990,233 shares, which he has the right to
acquire at various prices within 60 days of February 24, 2003 through the
exercise of stock options. See "Executive Compensation - Option Grants in
2002, and Fiscal Year End Option Value Table."
(6) Includes 4,737,620 shares of Common Stock which the Directors and executive
officers of the Company have the right to acquire within 60 days of
February 24, 2003 through the exercise of stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 14. 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 Chief Financial Officer, 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 Chief Financial Officer 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.
35
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following documents are filed as part of this Annual Report on Form 10-K:
(a) (1) Consolidated Financial Statements:
See Index to Consolidated Financial Statements on page F-1.
(2) Consolidated Financial Statement Schedule for each of the
Three Years in the Period Ended December 31, 2002:
Independent Auditors' Report
Schedule II - Valuation and Qualifying Accounts
See Index to Schedule on page S-1.
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and therefore
have been omitted.
(3) Index to Exhibits:
The exhibits filed as part of this Form 10-K are listed on the
Index to Exhibits beginning on page E-1, which Index to Exhibits is incorporated
herein by reference.
(b) Reports on Form 8-K:
The Company filed a Form 8-K on November 18, 2002.
(c) Exhibits:
See Index to Exhibits beginning on page E-1.
-------------------
The Company will provide copies of the Consolidated Financial Statement Schedule
and Index to Exhibits to stockholders upon request. Such request can be made to:
Chief Financial Officer, Elcom International, Inc., 10 Oceana Way, Norwood, MA
02062.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Elcom International, Inc.
(Registrant)
Date: March , 2003 By: /S/ ROBERT J. CROWELL
---------------------------------------
ROBERT J. CROWELL
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/S/ ROBERT J. CROWELL Chairman of the March , 2003
- ---------------------------------------------- Board of Directors
ROBERT J. CROWELL and Chief Executive Officer
(Principal Executive Officer)
/S/ PETER A. RENDALL
- ------------------------------------------ Corporate Executive March , 2003
PETER A. RENDALL Vice President,
Chief Financial Officer,
and Secretary (Principal Financial
and Accounting Officer)
/S/ WILLIAM W. SMITH
Vice Chairman and Director March , 2003
- ---------------------------------------------
WILLIAM W. SMITH
/S/ RICHARD J. HARRIES, JR. Director March , 2003
- --------------------------------------------
RICHARD J. HARRIES, JR.
/S/ JOHN W. ORTIZ Director March , 2003
- ----------------------------------------------
JOHN W. ORTIZ
37
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert J. Crowell, certify that:
1. I have reviewed this annual report on Form 10-K of Elcom International, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 officer 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
functions):
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 officer and I have indicated in this annual
report whether 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: March 7, 2003
/s/ Robert J. Crowell
Robert J. Crowell
Chief Executive Officer
38
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Peter A. Rendall, certify that:
1. I have reviewed this annual report on Form 10-K of Elcom International, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 officer 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
functions):
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 officer and I have indicated in this annual
report whether 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: March 7, 2003
/s/ Peter A. Rendall
Peter A. Rendall
Chief Financial Officer
39
ELCOM INTERNATIONAL, INC.
2002 ANNUAL REPORT ON FORM 10-K
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
2.1 Agreement for the sale and purchase of shares in the capital of Prophet
Group Limited dated December 6, 1996, by and among Lantec (Management)
Limited (a subsidiary of the Registrant) and the Vendors (as defined
therein). (2)
2.2 Agreement for the sale and purchase of shares in the capital of Data
Supplies Limited dated February 21, 1997, by and among Elcom Group
Limited (a subsidiary of the Registrant), the Vendor (as defined
therein) and Mr. Savage. (3)
2.3 Offer for the Sale of Business and Certain Assets of Elcom Holdings
Limited and Elcom Information Technology Limited. (21)
2.4.1 Domain Name Transfer Documents. (21)
2.4.2 Lloyds TSB Novation Agreement. (21)
2.4.3 Property Document. (21)
2.4.4 Elcom Logo License. (21)
2.4.5 Starbuyer Trademark License. (21)
2.5 Asset Purchase and Sale Agreement by and among Elcom Services Group,
Inc., elcom, inc. and Elcom International, Inc. and ePlus Technology,
Inc. dated March 25, 2002. (25)
2.6.1 Amendment to Asset Purchase Agreement. (25)
2.6.2 Managed Services Agreement by and among Elcom Services Group, Inc.,
elcom, inc. and Elcom International, Inc. and ePlus Technology, Inc.
dated March 29, 2002. (25)
2.6.3 Registration Rights Agreement by and between Registrant and Elcom
International, Inc. and ePlus Technology, Inc. dated March 29, 2002. (25)
2.6.4 Warrant by and between Registrant and ePlus Technology, Inc. dated
March 29, 2002. (25)
3.3 Second Restated Certificate of Incorporation of the Registrant. (4)
3.31 Certificate of Amendment of the Registrant. (x)
3.4 By-Laws of the Registrant, amended as of November 6, 1995. (1)
4.4 Specimen certificate of the Registrant's Common Stock. (1)
4.5 Form of 8% Series A Cumulative Convertible Preferred ("Series A") Stock
Purchase Agreement, with attached list of purchasers and number of shares
purchased, as of December 10, 1993. (1)
4.6 Form of Series B Preferred Stock Purchase Agreement for Closings held on
April 15, June 21 and August 11, 1994, with attached list of purchasers
and number of shares purchased. (1)
4.7 Form of Series B Preferred Stock Purchase Agreement for Closings held on
December 30, 1994 and February 6, 1995, with attached list of purchasers
and number of shares purchased. (1)
4.8 Form of Series C Preferred Stock Purchase Agreement for Closings held on
June 22 and June 30, 1995, with attached list of purchasers and number of
shares purchased. (1)
E-1
Exhibit No. Description
- ----------- -----------
4.9 Securities Agreement, dated September 1, 1993, as amended February 1,
1994, by and among the Registrant, Robert J. Crowell, and 19 other listed
purchasers, as of June 2, 1995 (1), and list of other assignees of certain
registration rights thereunder. (11)
4.10 Securities Agreement, dated October 28, 1994, by and among the former
stockholders of CSI and the Registrant. (1)
4.11 Computerware Stockholders' Agreement, dated February 6, 1995, by and among
the Registrant, Robert J. Crowell and the former shareholders of
Computerware. (1)
4.12 Amended and Restated Lantec Stockholders' Agreement, dated April 6, 1996,
by and among the Registrant, Robert J. Crowell and the former shareholders
of Lantec (5) and Renouncement of related Board Observer Right effective
December 16, 1999. (16)
4.13 Form of Lantec Warrant Agreement, dated January 7, 2000, with attached
Second Amended List of Holders of Warrants to Purchase Common Shares of
the Registrant. (16)
4.14 AMA Securities Agreement, dated February 29, 1996, by and among the
Registrant and the former stockholders of AMA (UK) Limited. (7)
4.15 Final Agreement of Settlement and Mutual Release of All Claims and
Demands, dated March 26, 1997, by and among the Registrant and certain of
its subsidiaries, and the Former Shareholders of Computerware Business
Trust. (10)
10.1 Form of Indemnity Agreement for Executive Officers and/or Directors of the
Registrant (1), with attached list of Director and/or Executive Officer
Indemnitees. (13) (*)
10.2 Stock Option Plan of the Registrant dated February 23, 1993, as amended
June 3, 1994 and November 6, 1995. (1) (*)
10.3 1995 (Computerware) Stock Option Plan of the Registrant, dated February 6,
1995 (1), as amended by Amendment No. 1 dated August 19, 1996. (7) (*)
10.4 Lease Agreement for the Registrant's Headquarters, dated July 5, 1993, by
and among Oceana Way Associates and the Registrant (1), and Agreement of
Amendment thereto, dated October 20, 1997 (11), and December 31, 2000.
(19)
10.5 Lease Agreements for Lantec Headquarters, among Allied Dunbar Assurance
PLC to Businessland (UK) Limited and Businessland Inc., dated November 23,
1988, with Licenses to Assign to Lantec Information Services Ltd., and
Supplemental Deed dated November 4, 1993. (1)
10.6 Structured Equity Line Flexible Financing Agreement, dated December 30,
1999, between the Registrant and Cripple Creek Securities, LLC (15),
Amended and Restated Structured Equity Line Flexible Financing Agreement,
dated April 7, 2000 (15), Amendment No. 1 (15), and Amendment No. 2 (17)
10.7 Registration Rights Agreement, dated December 30, 1999, between the
Registrant and Cripple Creek Securities, LLC. (16), and Amended and
Restated Registration Rights Agreement, dated April 7, 2000. (15)
10.8 Form of Warrant and Minimum Commitment Warrant of the Registrant issuable
to Cripple Creek Securities, LLC. (15)
10.9 Warrant Agreement, dated as of December 30, 1999, between the Company and
Wit Capital Corporation. (15)
10.10 Warrant Agreement, dated December 3, 2001, between the Company and Cripple
Creek Securities, LLC. (24)
10.11 Amended Employment Agreement by and between the Registrant and Robert
J. Crowell dated June 1, 1997 (8), and Form of Consulting Agreement
appended thereto as Exhibit A. (9) (*)
E-2
Exhibit No. Description
- ----------- -----------
10.12 Amended Employment Agreement by and between the Registrant and Robert J.
Crowell dated June 1, 1997 (8), and Form of Consulting Agreement
appended thereto as Exhibit A. (9) (*)
10.13 1995 Non-Employee Director Stock Option Plan of the Registrant, dated
October 9, 1995 (1), and Amendment No. 1 thereto. (8) (*)
10.14 The 1996 Stock Option Plan of Elcom International, Inc. (6) (*)
10.15 The 1997 Stock Option Plan of Elcom International, Inc. (8), and
Amendments One and Two thereto. (11) (12) (*)
10.15.1 The 2000 Stock Option Plan of the Registrant. (18)
10.15.2 The 2001 Stock Option Plan of the Registrant. (19)
10.15.3 The 2001 Stock Option Plan of the Registrant, as amended and restated.
(20)
10.15.4 The 2002 Stock Option Plan of the Registrant. (22)
10.16 Elcom International, Inc. Executive Profit Performance Bonus Plan for
Executive Officers dated September 4, 1997. (9)(*)
10.17 Elcom International, Inc. Key Personnel Profit Performance Bonus Plan
dated September 4, 1997. (9) (*)
10.18 Wit Capital Corporation Engagement Letter, dated July 8, 1999. (14)
10.19 Amended and Restated Employment Agreement dated June 20, 2002 by and
between Elcom International, Inc. and Robert J. Crowell. (23)(*)
10.20 Employment Agreement dated June 20, 2002 by and between Elcom
International, Inc. and Peter A. Rendall. (23)(*)
10.21 Employment Agreement dated June 20, 2002 by and between Elcom
International, Inc. and John E. Halnen. (23)(*)
21.1 List of the Registrant's Subsidiaries. (16)
23.1 Consent of KPMG LLP. (x)
- ------------
(1) Previously filed as an exhibit to Registration Statement No. 33-98866 on
Form S-1 and incorporated herein by reference.
(2) Previously filed as an exhibit to Current Report on Form 8-K dated
December 6, 1996 (filed December 19, 1996, file no. 000-27376), and
incorporated herein by reference.
(3) Previously filed as an exhibit to Current Report on Form 8-K dated
February 21, 1997 (filed March 6, 1997, file no. 000-27376), and
incorporated herein by reference.
(4) Previously filed as an exhibit to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 (file no. 000-27376),
and incorporated herein by reference.
(5) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996 (file no. 000-27376), and
incorporated herein by reference.
(6) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, (file no. 000-27376),
and incorporated herein by reference.
E-3
(7) Previously filed as an exhibit to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, and incorporated
herein by reference.
(8) Previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, (file no. 000-27376),
and incorporated herein by reference.
(9) Previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, (file no.
000-27376), and incorporated herein by reference.
(10) Previously filed as an exhibit to Registrant's Current Report on Form
8-K dated March 26, 1997 (filed April 8, 1997, file no. 000-27376),
and incorporated herein by reference.
(11) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1997, and incorporated herein by
reference.
(12) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1998 and incorporated herein by
reference.
(13) Previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, and incorporated herein
by reference.
(14) Previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999, and incorporated
herein by reference.
(15) Previously filed as an exhibit to Registration Statement No. 333-94743
on Form S-3 and incorporated herein by reference.
(16) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1999, and incorporated herein by
reference.
(17) Previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, and incorporated herein
by reference.
(18) Previously filed as an exhibit to Registration Statement No. 333-54852
on Form S-8 and incorporated herein by reference.
(19) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 2000, and incorporated herein by
reference.
(20) Previously filed as an exhibit to Registration Statement No. 333-61316
on Form S-8 and incorporated herein by reference.
(21) Previously filed as an exhibit to Registrant's Current Report on Form
8-K dated December 31, 2001, (filed in January 11, 2002), and
incorporated herein by reference.
(22) Previously filed as an exhibit to Registration Statement No. 333-91488
on Form S-8, and incorporated herein by reference.
(23) Previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (file no. 000-27376),
and incorporated herein by reference.
(24) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 2001, and incorporated herein by
reference.
(25) Previously filed as an exhibit to Current Report on Form 8-K dated
March 29, 2002 (filed April 10, 2002) and incorporated herein by
reference.
(x) Filed herewith.
(*) Management contract or compensatory plan or arrangement.
E-4
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
2002 ANNUAL REPORT ON THE FORM 10-K
INDEX TO SCHEDULE
Page
Reference
---------
Independent Auditors' Report S-2
Schedule II - Valuation and Qualifying Accounts for the Years Ended
December 31, 2000, 2001, and 2002 S-3
S-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Elcom International, Inc.
Under date of March 7, 2003, we reported on the consolidated balance sheets of
Elcom International, Inc. and subsidiaries as of December 31, 2001 and 2002, and
the related consolidated statements of operations and other comprehensive income
(loss), stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2002, which are included in Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedules included in Form 10-K. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements and supplementary information
have been prepared assuming that Elcom International, Inc. will continue as a
going concern. As discussed in Note 1(a) to the consolidated financial
statements, the Company has suffered recurring losses from operations and has an
accumulated deficit that raise substantial doubt about the entity's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1(a). The consolidated financial statements and
supplementary information do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ KPMG
KPMG
Boston, Massachusetts
March 7, 2003
S-2
SCHEDULE II
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001, AND 2002
(IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE
BEGINNING (RECOVERIES, AT END OF
OF PERIOD NET) UTILIZATIONS PERIOD
------------- -------------- ------------- -------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDING
- ----------------------------------
December 31, 2000 $ 3,077 $ 440 $ (1,117) $ 2,400
============= ============= ============= =============
December 31, 2001 $ 2,400 $ (1,283) $ (800)(a) $ 317
============= ============= ============= =============
December 31, 2002 $ 317 $ (236) $ (53) $ 28
============= ============= ============= =============
INVENTORY VALUATION ACCOUNTS
FOR THE YEARS ENDING
- ----------------------------------
December 31, 2000 $ 770 $ (38) $ (383) $ 349
============= ============= ============= =============
December 31, 2001 $ 349 $ (243) $ (1) $ 105
============= ============= ============= =============
December 31, 2002 $ 105 $ -- $ (105) [KPMG - Support]
============= ============= =============
$ --
=============
(a) Includes $580,000, which was sold to AJJP, Limited as part of the U.K.
reseller business sale (See Footnote 7 of the consolidated financial
statements.)
S-3
CONSOLIDATED FINANCIAL STATEMENTS
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
The following consolidated financial statements of Elcom International,
Inc. are included in response to Item 8:
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2001 and 2002 F-3
Consolidated Statements of Operations and Other Comprehensive Income (Loss)
for the years ended December 31, 2000, 2001 and 2002 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 2001 and 2002 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002 F-6
Notes to Consolidated Financial Statements F-7 to F-23
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Elcom International, Inc.:
We have audited the accompanying consolidated balance sheets of Elcom
International, Inc. and subsidiaries as of December 31, 2001 and 2002, and the
related consolidated statements of operations and other comprehensive income
(loss), stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Elcom International,
Inc. and subsidiaries as of December 31, 2001 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1(a) to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1(a). The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
March 7, 2003
F-2
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
2001 2002
------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (including restricted
cash of $125 and $0 at December 31, 2001 and 2002, respectively) $ 10,813 $ 2,302
------------- --------------
Accounts receivable:
Trade 440 239
Other 60 109
------------- --------------
500 348
Less-Allowance for doubtful accounts 10 28
------------- --------------
Accounts receivable, net 490 320
Prepaids and other current assets 303 205
Current assets of discontinued operations (Note 7) 3,509 238
------------- --------------
Total current assets 15,115 3,065
------------- --------------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software 23,671 17,741
Land, buildings and leasehold improvements 1,425 1,333
Furniture, fixtures and equipment 3,784 3,544
------------- --------------
28,880 22,618
Less -- Accumulated depreciation and amortization 23,129 20,772
------------- --------------
5,751 1,846
OTHER ASSETS 88 113
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS (Note 7) 598 106
------------- --------------
$ 21,552 $ 5,130
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations (Note 6) $ 451 $ 275
Accounts payable 1,483 335
Deferred revenue (Note 2) 203 405
Accrued expenses and other current liabilities (Note 3) 4,115 2,476
Current liabilities of discontinued operations (Note 7) 3,670 41
------------- --------------
Total current liabilities 9,922 3,532
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION (Note 6) 274 --
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS 37 --
------------- --------------
Total liabilities 10,233 3,532
------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 5):
Preferred stock, $.01 par value; Authorized -- 10,000,000 shares --
Issued and outstanding - none -- --
Common stock, $.01 par value; Authorized -- 50,000,000 shares in 2001
and 100,000,000 shares in 2002 -- issued -- 31,406,796 and 31,432,546
shares 314 314
Additional paid-in capital 114,514 114,817
Accumulated deficit (98,363) (107,920)
Treasury stock, at cost -- 530,709 shares (4,712) (4,712)
Accumulated other comprehensive loss (434) (901)
------------- --------------
Total stockholders' equity 11,319 1,598
------------- --------------
$ 21,552 $ 5,130
============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
2000 2001 2002
---- ---- ----
Net sales:
License $ 652 $ 3,708 $ 3,256
Professional services 94 161 846
Other 162 294 671
-------------- ------------- --------------
908 4,163 4,773
Cost of sales 48 1,255 1,052
-------------- ------------- --------------
Gross profit 860 2,908 3,721
Operating Expenses:
Selling, general and administrative 25,694 23,621 12,967
Research and development 1,695 1,089 863
Asset impairment charges (Note 8) -- 1,626 338
-------------- ------------- --------------
Total operating expenses 27,389 26,336 14,168
-------------- ------------- --------------
Operating loss (26,529) (23,428) (10,447)
Interest expense (206) (144) (69)
Interest income and other, net 2,238 110 647
-------------- ------------- --------------
Income (loss) before income taxes (24,497) (23,462) (9,869)
Income tax expense (benefit) (Note 10) -- -- --
-------------- ------------- --------------
Loss from continuing operations (24,497) (23,462) (9,869)
Discontinued operations (Note 7):
Net income from discontinued operations, net of tax, U.K. 1,594 1,942 --
Net income (loss) from discontinued operations,
net of tax, U.S. 3,149 (1,097) (788)
Gain on disposal of discontinued operations, net of tax -- 2,738 1,100
-------------- ------------- --------------
Total discontinued operations 4,743 3,583 312
-------------- ------------- --------------
Net loss (19,754) (19,879) (9,557)
Comprehensive income (loss), net of tax: (795) 83 (467)
-------------- ------------- --------------
Comprehensive income (loss) $ (20,549) $ (19,796) $ (10,024)
============== ============= ==============
Basic and diluted net income (loss) per share data:
Continuing operations $ (0.80) $ (0.76) $ (0.32)
Discontinued operations, U.K. 0.05 0.06 --
Discontinued operations, U.S. 0.10 (0.03) (0.03)
Disposal of discontinued operations -- 0.09 0.04
-------------- ------------- -------------
Basic and diluted net loss per share $ (0.65) $ (0.64) $ (0.31)
============= ============= =============
Weighted average number of basic and diluted shares
outstanding 30,487 30,912 30,901
============== ============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
COMMON STOCK
------------------------------ ADDITIONAL
NUMBER $.01 PAR PAID-IN ACCUMULATED
OF SHARES VALUE CAPITAL (DEFICIT)
-------------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 1999 29,128,585 $ 291 $ 106,111 $ (58,730)
Exercise of common stock options 2,017,940 20 8,618 --
Purchase of common stock 60,952 1 319 --
Cost of capital -- -- (852) --
Purchase of treasury stock -- -- -- --
Net loss -- -- -- (19,754)
Cumulative translation adjustment -- -- -- --
-------------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 2000 31,207,477 $ 312 $ 114,196 $ (78,484)
Exercise of common stock options 199,319 2 318 --
Purchase of treasury stock -- -- -- --
Net loss -- -- -- (19,879)
Cumulative translation adjustment -- -- -- --
-------------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 2001 31,406,796 $ 314 $ 114,514 $ (98,363)
Exercise of common stock options 25,750 -- 30 --
Warrants issued in conjunction with
asset sale (Note 7) -- -- 273 --
Net loss -- -- -- (9,557)
Cumulative translation adjustment -- -- -- --
-------------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 2002 31,432,546 $ 314 $ 114,817 $ (107,920)
============== ============ ============= =============
ACCUMULATED
TREASURY OTHER TOTAL
STOCK, COMPREHENSIVE STOCKHOLDERS'
AT COST INCOME (LOSS) EQUITY
------------- -------------- -------------
BALANCE, DECEMBER 31, 1999 $ (1,282) $ 278 $ 46,668
Exercise of common stock options -- -- 8,638
Purchase of common stock -- -- 320
Cost of capital -- -- (852)
Purchase of treasury stock (3,270) -- (3,270)
Net loss -- -- (19,754)
Cumulative translation adjustment -- (795) (795)
------------- -------------- -------------
BALANCE, DECEMBER 31, 2000 $ (4,552) $ (517) $ 30,955
Exercise of common stock options -- -- 320
Purchase of treasury stock (160) -- (160)
Net loss -- -- (19,879)
Cumulative translation adjustment -- 83 83
------------- -------------- -------------
BALANCE, DECEMBER 31, 2001 $ (4,712) (434) $ 11,319
Exercise of common stock options -- -- 30
Warrants issued in conjunction with
asset sale (Note 7) -- -- 273
Net loss -- -- (9,557)
Cumulative translation adjustment -- (467) (467)
------------- -------------- -------------
BALANCE, DECEMBER 31, 2002 $ (4,712) $ (901) $ 1,598
============= ============== =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
2000 2001 2002
-------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (24,497) $ (23,462) $ (9,869)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities --
Depreciation and amortization 4,580 4,903 3,066
Asset impairment -- 1,626 338
Changes in current assets and liabilities:
Accounts receivable 265 (487) 170
Prepaids and other current assets (1,327) 359 98
Accounts payable (648) 152 (1,148)
Deferred revenue (41) 95 202
Accrued expenses and other current liabilities -- 439 (1,125)
-------------- ------------- --------------
Net cash used in continuing operations (21,668) (16,375) (8,268)
-------------- ------------- --------------
Net cash provided by discontinued operations, U.K. 8,612 4,812 --
-------------- ------------- --------------
Net cash provided by (used in) discontinued
operations, U.S. 10,335 25,327 (1,028)
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software (5,758) (596) (13)
Increase (decrease) in other assets and deferred costs (19) -- (25)
-------------- ------------- --------------
Net cash used in investing activities (5,777) (596) (38)
-------------- ------------- --------------
Net cash used in discontinued operations, U.K. (1,028) (521) --
-------------- ------------- --------------
Net cash provided by (used in) discontinued
operations, U.S. (476) (423) 1,650
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations and debt (459) (429) (450)
Exercise of common stock options 8,638 320 30
Issuance of warrants on asset sale -- -- 273
Sales and common stock 320 -- --
Cost of equity line financing agreement (852) -- --
Purchase of treasury stock (3,270) (160) --
-------------- ------------- --------------
Net cash provided by (used in) financing activities 4,377 (269) (147)
-------------- ------------- --------------
Net cash provided by (used in) discontinued
operations, U.K. 5,677 (10,706) --
-------------- ------------- --------------
Net cash used in discontinued operations, U.S. (1,103) (22,832) (213)
-------------- ------------- --------------
FOREIGN EXCHANGE EFFECT ON CASH (795) 83 (467)
-------------- ------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,846) (21,500) (8,511)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 34,159 32,313 10,813
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 32,313 $ 10,813 $ 2,302
============== ============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1,596 $ 642 $ 59
============== ============= ==============
Income taxes paid $ 165 $ 82 $ 15
============== ============= ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Increase in capital lease obligations $ 1,091 $ -- $ --
============== ============= ==============
Disposition of Assets:
Cash proceeds from sale of assets $ 1 $ 2,142
Net book value of assets sold 3,039 1,042
------------- --------------
Gain on sale $ 3,038 $ 1,100
============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Business
Overview
--------
On March 29, 2002, Elcom International, Inc. (the "Company") divested
itself of certain assets associated with its United States ("U.S.")
computer-oriented information technology products ("IT Products") and services
business to ePlus Technology, Inc. ("ePlus"), see Note (7). This allowed the
Company to transition to a leading provider of remotely-hosted, electronic
procurement and electronic marketplace Internet software solutions
(collectively, "eSourcing"). Because of this divestiture, and in conjunction
with the sale of the Company's United Kingdom ("U.K.") IT Products business on
December 31, 2001, as described more fully in Note (7), commencing with the
second quarter of 2002, the Company did not record any revenues arising from the
sale of IT Products and associated services. Subsequent to the sales, the
Company's sole source of revenue was from eSourcing solutions and associated
professional services. As provided by applicable accounting conventions, the
consolidated financial statements present all of the IT Products and services
business as a discontinued operation for all periods presented.
Since its inception in 1992, elcom, inc., the Company's eBusiness
technology subsidiary, has developed its PECOS(TM) (Professional Electronic
Commerce Online System) technology. This technology is licensed to companies to
enable them to communicate, market, buy and sell various goods and services
electronically over the Internet or through private networks and eMarketplaces.
The Company intends to augment its core eSourcing solutions with other licensed
supply chain-oriented systems to enable the conduct of interactive supply chain
automation for businesses. The Company has already licensed from third parties a
dynamic trading system platform to provide auction, reverse auction, and other
electronic negotiation functions and an asset management system.
Liquidity
---------
As of December 31, 2002, the Company had approximately $2.3 million of
cash and cash equivalents and did not have any outstanding debt except for
$275,000 related to capital leases. However, the Company has incurred
significant operating losses, has used cash in operating activities and has an
accumulated deficit, that raise substantial doubt about the Company's ability to
continue as a going concern. The ultimate success of the Company is dependent on
securing adequate financing and developing and marketing its eSourcing solutions
until the Company is operating profitably. The Company currently anticipates
that existing resources will not be sufficient to satisfy contemplated working
capital requirements past April 2003. The Company believes a significant license
fee will be generated in the short term from an existing client, and with that
additional working capital available, possible plans include the sale of
securities in a private placement, potential reductions in workforce to lower
operating expenses and the possible sale of a portion of the Company's assets.
The Company's ability to continue as a going concern is dependent upon
its ability to attract new sources of capital, grow revenue and attain further
operating efficiencies. The Company intends to seek additional capital, which
would result in dilution for its shareholders. However, the accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern and, as such, do not include any adjustments
that may result from the outcome of these uncertainties.
(b) Basis of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. The accounting and reporting
policies of the Company conform with accounting principles generally accepted in
the United States of America. All material intercompany transactions and
balances have been eliminated in consolidation. Certain amounts from prior years
have been reclassified to conform to the current presentation (in particular the
reclassification of the Company's IT Products and services businesses as
discontinued operations).
F-7
(c) Cash and Cash Equivalents
Cash and cash equivalents at December 31, 2001 and 2002 consisted of
$10.7 million and $2.3 million, respectively, of deposits with banks and
financial institutions which were unrestricted as to withdrawal or use and had
original maturities of less than three months. In addition, cash and cash
equivalents at December 31, 2001 included $125,000 that was pledged as
collateral for a letter of credit issued in the ordinary course of business.
Interest earned on all cash and cash equivalents is included in interest income
and other, net in the Consolidated Statements of Operations and Other
Comprehensive Income (Loss).
(d) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and revenue and expenses during the period reported
in the consolidated financial statements and accompanying notes. Actual results
may differ from such estimates.
On an ongoing basis, management evaluates its estimates, including
those related to the allowance for doubtful accounts, the income tax valuation
allowance, (see Note 1(j)), and the impairment of long-lived assets, (see Note
1(g)). The Company maintains allowances for doubtful accounts for estimated
losses resulting from customers that fail to make required payments; however, an
additional allowance may be required if actual results differ from assumptions
made by management. In analyzing the adequacy of the allowance, the Company
considers past experiences with the customers and related payment history, the
viability of the customers' financial condition, and overall historical loss
experience. At a minimum, the Company maintains an allowance for accounts
greater than 90 days past due and an estimate for all other accounts based on
the results of the assumptions previously mentioned.
(e) Prepaids and Other Current Assets
The Company expenses advertising costs as incurred. Company advertising
expenses, which relate to the Company's eSourcing technology product for 2000,
2001, and 2002 totaled $1.9 million, $0.7 million, and $0.3 million,
respectively.
(f) Property, Equipment and Software
Equipment and software are depreciated and amortized on a straight-line
basis over the estimated useful lives of the assets or lease term, which are
three to five years. Buildings are depreciated over a useful life of 50 years.
The capitalized cost of leased equipment and leasehold improvements are
amortized over the shorter of the estimated useful life of the related assets,
or related lease instrument.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, which provides guidance on accounting for such costs.
SOP 98-1 requires computer software costs that are incurred in the preliminary
project stage to be expensed as incurred. Once the capitalization criteria of
SOP 98-1 have been met, directly attributable development costs should be
capitalized. It also provides that upgrade and maintenance costs should be
expensed. The Company's treatment of such costs has historically been consistent
with SOP 98-1, with the costs capitalized being amortized over the expected
useful life of the software, ranging from eighteen months to four years.
During the years ended December 31, 2002, 2001 and 2000, the Company
capitalized approximately $0 million, $0.4 million and $0.5 million,
respectively, under SOP 98-1, which will be amortized over the estimated useful
life of the software developed, which is generally three years. During 2001 and
2002, $1.6 million and $0.3 million, respectively, of software costs previously
capitalized under SOP 98-1 were written off when the Company determined that it
was no longer probable that the development of a project would be completed.
These products were never put into production (see Note 8, below).
In January 2000, the Emergency Issues Task Force ("EITF") issued Issue
No. 00-2, "Accounting for Web Site Development Costs." Issue 00-2 requires that
planning stage costs be expensed as incurred, costs to develop web site
application and infrastructure and graphics, be capitalized once the
capitalization criteria of SOP 98-1 have been met and operating costs such as
training and maintenance be expensed as incurred. The Company's treatment
F-8
of such costs has historically been consistent with EITF 00-02, with the
capitalized costs being amortized over the expected useful life of the software,
ranging from eighteen months to four years.
Expenditures for the research and development of the Company's products
to be marketed are expensed as incurred, except for certain software development
costs. Specifically, costs associated with the development of computer software
are expensed as incurred prior to the establishment of technological feasibility
(as defined by Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed). Costs incurred subsequent to the establishment of technological
feasibility and prior to the general release of the products are capitalized.
The Company capitalized software development costs of $470,000 and $422,000
during the years ended December 31, 2000, and 2001, respectively. There were no
software development costs capitalized during 2002. On December 31, 2001 and
2002, gross capitalized software expense was $892,000. The accumulated
amortization was $470,000 and $892,000 as of December 31, 2001 and December 31,
2002, respectively. All software costs are amortized as a cost of software
distribution either on a straight-line basis, or on the basis of each product's
projected revenues, whichever results in greater amortization, over the
remaining estimated economic life of the product, which is generally estimated
to be eighteen months. The Company assesses the recoverability of capitalized
software costs by comparing the cost capitalized for each product, to the net
of estimated future gross revenues less the estimated future cost of
completing, maintaining, supporting and disposing of the product. No impairment
charges were booked in 2002, 2001 or 2000 in conjunction with the Company's
recoverability assessments.
(g) Impairment of Long Lived Assets
On October 3, 2001, the FASB issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes FASB Statement No.121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS 144 retains
many of the fundamental provisions of SFAS 121. SFAS 144 also supersedes the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("ABP 30"), for the disposal of a segment of a business.
However, it retains the requirement in APB 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. SFAS 144 is effective for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years. The
Company elected to early-adopt the statement as of January 1, 2001.
The Company evaluates for impairment its long-lived assets to be held
and used or to be disposed of other than by sale whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of any asset to future undiscounted net cash
flows expected to be generated by the asset. 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. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amounts of the assets
exceed the fair value of the assets. The Company's estimates of fair value
represent the best estimate based on industry trends and market rates and
transactions. Assets to be disposed of by sale are reported at the lower of the
carrying amount or fair value, less costs to sell, and depreciation of such
assets ceases.
(h) Revenue Recognition
Revenue consists principally of fees for licenses of the Company's
software products, maintenance, hosting, consulting, and training. The Company's
license arrangements provide for an initial fee for use of the Company's
software products in perpetuity. The Company licenses its software in multiple
element arrangements in which the customer purchases a combination of software,
maintenance, 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. At the outset of the arrangement with
the customer, the Company defers revenue for the fair value of its undelivered
elements (e.g., maintenance, consulting, and training) and recognizes revenue
for the remainder of the arrangement fee attributable
F-9
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 that 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.
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. If at the outset of the
customer arrangement, the Company determines that the arrangement fee is not
fixed or determinable or that collection of the resulting receivable is not
probable, revenue is recognized when the arrangement fee becomes due and payable
or when collected, respectively.
The Company's specific policies for recognition of license revenues and
services revenues are as follows:
License Revenue. The Company recognizes revenue from sales of software
licenses to end users upon persuasive evidence of an arrangement, delivery of
the software to a customer, determination that collection of a fixed or
determinable license fee is considered probable, and determination that no
undelivered services are essential to the functionality of the software.
Service Revenue. Maintenance and hosting contracts generally call for
the Company to provide technical support and software updates and upgrades to
customers. Maintenance revenue is recognized ratably over the term of the
maintenance contract, generally on a straight-line basis when all revenue
recognition requirements are met. Other service revenue, primarily training and
consulting, is generally recognized at the time the service is performed and it
is determined that the Company has fulfilled its obligations resulting from the
services contract.
The Company sells both an enterprise and non-enterprise (hosted) model
of PECOS software. In accordance with EITF Issue 00-03, Application of AICPA
Statement of Position 97-2, Software Revenue Recognition, Arrangements That
Include the Right to Use Software Stored on Another Entity's Hardware, in order
for revenue to be recognized, the customer must have the contractual right to
take possession of the software at any time during the hosting period without
significant penalty and it must be feasible for the customer to either run the
software on its own or contract with another party unrelated to the vendor to
host the software. The Company's treatment of software license revenue where the
software is hosted by the Company has historically been consistent with EITF
Issue 00-03.
(i) Foreign Currency Translation
The accounts of the Company's indirect U.K. subsidiaries and branch
offices are translated in accordance with SFAS No. 52, Foreign Currency
Translation. Accordingly, assets and liabilities of the Company's indirect
foreign subsidiaries are translated into U.S. dollars using the exchange rate at
each balance sheet date. Income and expense accounts are translated using an
average rate of exchange during the period. Foreign currency translation
adjustments are accumulated as a separate component of stockholders' equity and
reported as part of other comprehensive income in the statement of operations
and other comprehensive income (loss).
(j) Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the asset and liability method specified by
SFAS No. 109, a deferred tax asset or liability is determined based on the
difference between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the enacted tax rates in effect when these
differences are expected to be secured or settled. The effect on the deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
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 losses will continue throughout 2003,
the Company has recorded a valuation allowance equal to 100% of its net deferred
tax assets. In the event the Company were to determine that it would be able to
realize its deferred tax assets in the future, an adjustment to the valuation
allowance would increase income in the period such determination was made.
F-10
(k) 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 and No. 148.
The Company accounts for non-employee stock-based awards in which goods
or services are the consideration received for the equity instruments issued
based on the fair value of the consideration received or the grant date fair
value of the equity instruments issued, whichever is more reliably measurable.
Had compensation cost for awards under the Stock Option Plans
(including convertible shares from the elcom, inc. plan) been determined based
on the fair value method set forth in SFAS No. 123, the effect on the Company's
net loss and per share amounts would have been as follows:
2000 2001 2002
---------- ---------- -----------
(in thousands, except per share data)
Net loss:
As reported $ (19,754) $ (19,879) $ (9,557)
Pro forma $ (24,626) $ (25,139) $ (13,357)
Net loss per share:
As reported - basic and
diluted $ (0.65) $ (0.64) $ (0.31)
Pro forma - basic and
diluted $ (0.81) $ (0.81) $ (0.43)
The fair value of each option grant was estimated on the grant date
using the Black-Scholes option pricing model with the following weighted average
assumptions:
2000 2001 2002
---------- ---------- ----------
Volatility 115.14% 118.67% 119.00%
Risk-free interest rate 4.98% 4.49% 3.03%
Expected life of options 5 years 5 years 4.5 years
Expected dividend yield 0% 0% 0%
The weighted average fair value of options granted during 2000, 2001,
and 2002 was $3.06, $1.19 and $0.32, respectively.
(l) Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number of
common and common equivalent shares outstanding during each period presented,
calculated in accordance with SFAS No. 128, Earnings Per Share. Basic earnings
per share (EPS) excludes dilution and is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all potential common
shares outstanding during the period. As the Company was in a net loss position
for all periods presented, diluted EPS is the same as basic EPS because the
effect at any potential common stock equivalents would be antidilutive.
(m) Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable and accounts payable. The carrying amounts of
the Company's cash and cash equivalents, accounts receivable and accounts
payable approximate fair value due to the short-term nature of these
instruments. Lines of credit (which
F-11
are reported in discontinued operations) bear interest at variable market rates
and, therefore, the carrying amounts for these instruments approximate fair
value.
(n) Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and displaying comprehensive income and its components. The Company's
comprehensive income consists of net income (loss) and foreign currency
translation adjustments.
(o) Segment Reporting
The Company applies SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for the
reporting of information about operating segments in annual and interim
financial statements. Operating segments are defined as components of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker(s) in deciding how to
allocate resources and in assessing performance. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major clients. The
Company has determined that for all periods presented, there is one operating
segment, that being eSourcing, and there are two geographical areas, U.S. and
U.K.
(p) Recent Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. EITF 94-3 allowed for an exit cost liability to be
recognized at the date of an entity's commitment to an exit plan. SFAS 146 also
requires that liabilities recorded in connection with exit plans be initially
measured at fair value. The provisions of SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
adoption encouraged. The Company will adopt SFAS 146 on January 1, 2003 and does
not expect that the adoption will have a material impact on its financial
position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure in both annual
and interim financial statements. Certain of the disclosure modifications are
required for fiscal years ending after December 15, 2002 and are included in the
notes to these consolidated financial statements.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (the "FIN
45"), which addresses the disclosure to be made by a guarantor in its interim
and annual financial statements about its obligations under guarantees (see Note
6 in these Notes to Consolidated Financial Statements). FIN 45 also requires the
recognition of a liability by a guarantor at the inception of certain
guarantees.
FIN 45 requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, this is the obligation to stand ready
to perform in the event that specified triggering events or conditions occur.
The initial measurement of this liability is the fair value of the guarantee at
inception. The recognition of the liability is required even it is not probable
that payments will be required under the guarantee or if the guarantee was
issued with a premium payment or as part of a transaction with multiple
elements.
As noted above the Company has adopted the disclosure requirements of
the FIN 45 and will apply the recognition and measurement provisions for all
guarantees entered into or modified after December 31, 2002. Subsequent to
December 31, 2002, the Company has not entered into or modified guarantees.
The Company's customer contracts typically contain customary provisions
that indemnify customers for losses that they may incur in the unlikely event
that there is an intellectual infringement claim made against the
F-12
customer relating to use of the Company's PECOS products. The company believes
that the financial risk relating to these provisions are insignificant. The
Company agreed to indemnify ePlus for any claims arising from any actual or
alleged breach of any warranty, representation or covenant contained in the
agreement for the sale of the U.S. IT Products business. Such indemnification
obligation expires on March 29, 2003 and is limited to the purchase price for
the U.S. IT Products business. Management does not believe the amounts are
significant and has not accounted for these amounts in its balance sheet.
(2) DEFERRED REVENUE
Revenue on software license transactions in which there are outstanding
obligations is deferred and recognized once such obligations are fulfilled.
Included in deferred revenue at December 31, 2001 and 2002 was deferred revenue
associated with the Government of Scotland license of $0 and $0.3 million,
respectively. The $0.3 million relates to hosting fees that are released over
the life of the contract.
(3) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
At December 31, 2001, accrued expenses included $0.8 million related to
salary, wages and benefits, $1.1 million related to taxes, $0.6 million related
to financial consulting, and $1.6 million of other accruals. At December 31,
2002, accrued expenses included $0.5 million related to salary, wages and
benefits, $1.0 million related to taxes, $0.6 million related to financial
consulting, $0.2 million related to legal and audit fees, and $0.2 million of
other accruals.
(4) EMPLOYEE BENEFITS
The Company maintains two defined contribution benefit plans, one for
eligible employees in the U.S. and one for eligible employees in the U.K. The
plans contain provisions allowing for discretionary Company contributions.
Discretionary Company contributions to the U.K. defined contribution plan, of
which participating employees are 100% vested, for the years ended December 31,
2000, 2001, and 2002 were $25,000, $42,000, and $46,000, respectively. No
discretionary Company contributions were made to the U.S. defined contribution
plan for any of the periods presented. The Company has no material obligations
for post retirement benefits.
(5) STOCKHOLDERS' EQUITY
(a) Common Stock
On December 19, 2001, the Company's stockholders approved and adopted
an amendment to the Company's Second Restated Certificate of Incorporation in
order to increase the number of authorized shares of the Company's common stock,
par value $0.01 per share (the "Common Stock"), from 50,000,000 to 100,000,000.
On January 4, 2002, the Company filed a Certificate of Amendment to the Amended
and Restated Certificate of Incorporation amending the total number of shares of
authorized common stock to 100,000,000.
(b) Preferred Stock
The Company has authorized 10,000,000 shares of $.01 par value
preferred stock, with the Board of Directors authorized to fix the rights,
privileges, preferences and restrictions of any series thereof as it may
designate.
(c) Stock Options
The Company's Board of Directors has adopted seven stock option plans
and stockholders have approved the adoption of all such stock option plans (the
"Option Plans"). As of December 31, 2002, all Option Plans provided that up to
an aggregate of 18,600,000 incentive stock options (ISOs) and nonqualified
options may be granted to key personnel, directors and consultants of the
Company, as determined by the Compensation Committee of the Board of Directors
(the "Compensation Committee"). Under the terms of the Option Plans, ISOs are
granted at not less than the estimated fair market value of the Company's common
stock on the date of grant and at 110% for shareholders who own more than 10% of
the outstanding shares. The Option Plans also provide that the options are
exercisable on varying dates, as determined by the Compensation Committee for
each plan, and have terms not to exceed 10 years. In addition, the 2001 and 2002
Plans allow for the exercise of vested options for a 180-day period commencing
on the date of employee termination, provided that such termination is without
"cause". Under all other
F-13
Stock Option Plans, upon an optionee's termination without cause, unless an
option agreement contains differing terms with respect to vesting and
exercisability which supercedes the provisions of the applicable plan, all
unexercisable portions of the optionee's options vest and the optionee may
exercise his or her options for up to 90 days following the date of termination.
One of the Option Plans, the 1995 Non-employee Director Stock Option
Plan (the "1995 Non-employee Director Plan") provides for up to 250,000
nonqualified stock options to acquire the Company's common stock to be reserved
for grant to outside directors of the Company. Upon joining the Board of
Directors, any new non-employee director is automatically granted 5,000
nonqualified stock options.
All non-employee directors are granted an additional 10,000
nonqualified stock options annually thereafter, while remaining on the Board of
Directors. The 1995 Nonemployee Director Plan provides that options are granted
at fair market value on the date of grant, vest ratably over three years, and
have terms not to exceed 10 years.
Information relating to the Company Option Plans (including convertible
shares from the elcom, inc. option plan) during each of the years in the
three-year period ended December 31, 2001 is as follows:
WEIGHTED
NUMBER OPTION PRICE AVERAGE
OF SHARES PER SHARE EXERCISE PRICE
---------------- -------------- -----------------
Outstanding, December 31, 1999 8,382,316 $ 0.11 - 31.13 $ 4.08
Granted 5,152,147 1.17 - 24.06 3.72
Terminated (960,120) 1.17 - 21.47 5.05
Exercised (1,350,440) 0.11 - 8.00 4.06
---------------
Outstanding, December 31, 2000 11,223,903 $ 0.11 - 31.13 $ 3.83
Granted 2,872,750 0.85 - 4.78 1.46
Terminated (2,075,421) 1.13 - 31.13 3.71
Exercised (199,319) 1.17 - 3.81 1.63
---------------
Outstanding, December 31, 2001 11,821,913 $ 0.11 - 24.06 $ 3.32
Granted 4,615,850 0.20 - 1.50 0.40
Terminated (4,168,489) 0.20 - 24.06 3.04
Exercised (25,750) 1.23 - 1.63 1.51
---------------
Outstanding, December 31, 2002 12,243,524 $ 0.11 - 24.06 $ 2.32
=============== ============== =============
Exercisable, December 31, 2000 3,759,034 $ 0.11 - 31.13 $ 4.17
=============== ============== =============
Exercisable, December 31, 2001 6,878,007 $ 0.11 - 24.06 $ 3.19
=============== ============== =============
Exercisable, December 31, 2002 7,838,033 $ 0.11 - 24.06 $ 2.66
=============== ============== =============
F-14
The following table summarizes information about stock options
(including convertible options from the elcom, inc. plan) outstanding as of
December 31, 2002:
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
----------------- ------------- ----------------- -------------- ------------- --------------
$ 0.11 76,169 0.15 $ 0.11 76,169 $ 0.11
0.20 - 0.22 948,850 8.83 0.20 -- --
0.39 - 0.49 3,286,800 8.77 0.45 1,654,050 0.45
0.60 - 0.74 50,000 6.61 0.64 -- --
0.85 - 1.17 1,682,150 7.86 1.04 1,424,225 1.04
1.44 - 1.92 1,580,070 7.13 1.69 1,259,867 1.69
2.47 - 3.63 225,900 5.37 3.19 141,575 3.19
3.81 - 5.69 3,455,808 5.59 4.32 2,628,134 4.32
5.75 - 8.00 881,277 5.53 6.52 621,788 6.52
12.63 41,500 6.98 12.63 26,975 12.63
22.50 10,000 7.13 22.50 3,500 22.50
24.06 5,000 7.16 24.06 1,750 24.06
------------- -------------
12,243,524 7,838,033
============= =============
As of December 31, 2002, 14,075,009 shares of common stock have been
reserved for issuance under the Company's stock option plans.
The Company's wholly-owned technology subsidiary, elcom, inc. also
maintains a stock option plan (the "elcom, inc. Plan") pursuant to which two
million shares of its common stock are reserved for issuance. The elcom, inc.
Plan has provisions similar to the Option Plans discussed above. During 2000,
1,740,363 stock options were granted and 31,750 stock options were terminated,
leaving a balance of 1,708,613 outstanding at December 31, 2000. During 2001,
106,000 stock options were granted and 638,313 stock options were terminated,
leaving a balance of 1,176,300 outstanding at December 31, 2001. During 2002,
456,800 stock options were terminated, leaving a balance of 1,130,620
outstanding at December 31, 2002. All stock options were issued at $3.82 and
none were exercisable as of December 31, 2002. In addition, for each elcom, inc.
option granted, the optionee received 0.65 of an option of the Company's common
stock, all of which were included in the Company's SFAS 123 pro forma
calculation. In the event the optionee exercises this Company stock option, the
elcom, inc. stock options automatically terminate.
(d) Warrants
In June 1995, the Company issued warrants to purchase 750,000 shares of
the Company's common stock at $4.75 per share in connection with the purchase of
Lantec. As of December 31, 2002, 82,500 of these warrants are outstanding and
exercisable. The warrants expire in June 2005.
On December 30, 1999, the Company signed a Structured Equity Line
Flexible Financing Agreement (the "Equity Line") with Cripple Creek Securities.
In September 2000, the Company sold 60,952 shares to Cripple Creek under the
Equity Line for $320,000. The Company terminated the Equity Line on November 29,
2001. On December 3, 2001, the Company issued warrants to purchase 145,200 and
4,800 shares of Common Stock to Cripple Creek. The warrants are exercisable,
have an exercise price of $1.81 and $6.30, respectively, and expire on December
2, 2006. The fair market value of the warrants at the date of the grant was
$1.21 and $1.01 per share, respectively, based on the volatility, risk factor
rate and dividend yield noted above, and a contractual life of five years. At
December 31, 2002, all of these warrants are outstanding and exercisable.
On March 29, 2002, the Company 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. The fair market value of the warrants at the date of grant was $0.91
based on the volatility, risk factor rate, dividend yield reflected above and
the contractual life of seven years. See Footnote 7.
F-15
(e) Open Market Stock Purchases
On September 17, 2001, the Company announced that its Board of
Directors had authorized the repurchase of up to 800,000 shares in the aggregate
of the Company's common stock. During 2001, the Company repurchased 121,100
shares of its common stock on the open market at a cost of $160,000. Thereafter,
purchases may be made from time to time in the open market or in privately
negotiated transactions based on then-existing market conditions.
(6) LEASES AND OTHER COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company has entered into capital leases for various software,
furniture, computer, telephone and other equipment. The lease terms range from
three to four years and, upon expiration, all leases provide purchase options at
a nominal price. Property, equipment and software includes assets under capital
leases of $1,545,000 and $1,106,000 and related accumulated amortization of
$732,000 and $934,000 as of December 31, 2001 and 2002, respectively.
Amortization of leased assets is included in depreciation expense.
The Company has entered into operating leases for office and warehouse
space, software, computers, autos and other equipment. The period covered by the
leases ranges from two months to four years. Certain leases for office and
warehouse space require payment by the Company of all related operating expenses
of the building, including real estate taxes and utilities.
Future minimum rental payments under non-cancelable operating leases
and capital leases as of December 31, 2002 are as follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, (IN THOUSANDS) LEASES LEASES
--------------------------------------- ------------- -------------
2003........................................... $ 288,597 $ 893,960
2004........................................... -- 687,962
2005........................................... -- 622,748
2006........................................... -- 250,635
Thereafter..................................... -- --
------------- -------------
Total minimum lease payments................... 288,597 2,455,305
Less - Amounts representing interest....... (14,035) --
Less - minimum sublease income............. -- (717,496)
------------- -------------
Present value of net minimum lease
Payments................................. 274,562 $ 1,737,809
=============
Current portion............................ (274,562)
-------------
Long term portion.............................. $ --
=============
Rent expense for operating leases for each year in the three-year
period ended December 31, 2002 amounted to approximately $1.6 million, $1.3
million, and $0.7 million, respectively.
(b) Employment Contracts and Personnel Expenses
The Company has employment contracts with certain key executives, which
provide for annual salary, incentive payments, and severance arrangements.
The Company's employment contracts with Messrs. Crowell,
Halnen and Rendall each contain post-employment obligations of the Company. Mr.
Crowell's agreement provides that if Mr. Crowell's employment with the Company
should terminate because of a disability (as defined) he becomes entitled to
receive (i) a payment equal to two years' base salary, payable in 24 equal
monthly installments, and (ii) health, dental benefits and group term life
insurance for 24 months following termination of employment with the Company. If
Mr. Crowell's employment with the Company should terminate other than for cause
(as defined) or upon Mr. Crowell's resignation for good reason (as defined)
after a change in control (as defined) he becomes entitled to receive (i) a
severance payment equal to 2.99 times his base salary, payable 50% upon Mr.
Crowell executing a release in favor of the Company and 50% payable in twelve
equal monthly installments, (ii) all of Mr. Crowell's stock options shall become
immediately vested and exercisable, and (iii) health, dental benefits and group
term life insurance for a three
F-16
year period following termination of employment with the Company. For purposes
of calculating any such payment, Mr. Crowell's base salary shall be calculated
without reference to any voluntary reductions then in effect.
Mr. Halnen's agreement provides that if Mr. Halnen's employment with
the Company should terminate because of a disability (as defined) Mr. Halnen
shall become entitled to receive (i) a payment equal to twelve months' base
salary, payable in twelve equal monthly installments, and (ii) health, dental
benefits and group term life insurance for twelve months following termination
of employment with the Company. If Mr. Halnen's employment with the Company
should terminate other than for cause (as defined), Mr. Halnen shall become
entitled to receive (i) a severance payment equal to twelve months' base salary
payable in twelve equal monthly installments or, if, at the time of such
termination Mr. Crowell is no longer Chairman and Chief Executive Officer of the
Company, then such severance payment shall be equal to eighteen months annual
compensation (as defined), payable 50% upon Mr. Halnen executing a release in
favor of the Company and 50% payable in twelve equal monthly installments, and
(ii) health, dental benefits and group term life insurance for twelve months
following termination of employment with the Company. If Mr. Halnen's employment
with the Company should terminate other than for cause (as defined), following a
change in control (as defined) Mr. Halnen shall be entitled to receive (i) a
severance payment equal to the greater of his annual compensation (as defined)
for the remainder of the term of the Halnen Employment Agreement or his annual
compensation (as defined) for two years, payable 50% upon Mr. Halnen executing a
release in favor of the Company and 50% payable in 24 equal monthly
installments, (ii) all of Mr. Halnen's stock options shall become immediately
vested and exercisable, and (iii) Mr. Halnen shall become entitled to receive
health, dental benefits and group term life insurance for 24 months following
termination of employment with the Company. For purposes of calculating any such
payment, Mr. Halnen's base salary and annual compensation shall be calculated
without reference to any voluntary reductions then in effect.
Mr. Rendall's agreement provides that if Mr. Rendall's employment with
the Company should terminate because of a disability (as defined) Mr. Rendall
shall become entitled to receive (i) a payment equal to twelve months' base
salary, payable in twelve equal monthly installments, and (ii) health, dental
benefits and group term life insurance for twelve months following termination
of employment with the Company. If Mr. Rendall's employment with the Company
should terminate other than for cause (as defined) Mr. Rendall shall become
entitled to receive (i) a severance payment equal to twelve months' base salary
payable in twelve equal monthly installments or, if, at the time of such
termination Mr. Crowell is no longer Chairman and Chief Executive Officer of the
Company, then such severance payment shall be equal to eighteen months' base
salary, payable 50% upon Mr. Rendall executing a release in favor of the Company
and 50% payable in twelve equal monthly installments, and (ii) health, dental
benefits and group term life insurance for twelve months following termination
of employment with the Company. If Mr. Rendall's employment with the Company
should terminate other than for cause (as defined) following a change in control
(as defined) Mr. Rendall shall be entitled to receive (i) a severance payment
equal to the greater of his base salary for the remainder of the term of the
Rendall Employment Agreement or his base salary for two years, payable 50% upon
Mr. Rendall executing a release in favor of the Company and 50% payable in 24
equal monthly installments, (ii) all of Mr. Rendall's stock options shall become
immediately vested and exercisable, and (iii) Mr. Rendall shall become entitled
to receive health, dental benefits and group term life insurance for 24 months
following termination of employment with the Company. For purposes of
calculating any such payment, Mr. Rendall's base salary shall be calculated
without reference to any voluntary reductions then in effect.
During 2002, certain employees elected to receive lower salaries while
the Company implemented its cost containment programs. The effect of these
reductions was to reduce the Company's operating cash outflow in 2002 by
$250,000. Upon the occurrence of a change of control or other liquidity event,
the Company may make discretionary payments to these employees in recognition of
past services. No amount has been accrued as of December 31, 2002 due to the
uncertainty associated with the ultimate payment of such amount.
(c) Contingencies
The Company is party to various litigation as both plaintiff and
defendant in cases related to contractual issues, employment matters and issues
arising out of the conduct of its business. The Company believes that, based on
discussions with its counsel, the estimable range of loss, if any, is not
material in relation to the consolidated financial statements.
(7) DISCONTINUED OPERATIONS
On December 31, 2001, the Company sold substantially all of the assets
and liabilities of the Company's United Kingdom information technology
remarketer business conducted by its subsidiary, Elcom Holdings Limited
F-17
("Holdings"), to AJJP Limited, a company organized under the laws of the U.K.,
pursuant to an agreement between Holdings, Elcom Information Technology Limited
(a subsidiary of the Company) and AJJP Limited. AJJP Limited has been formed by
certain members of the former management team of Holdings. Immediately upon
completion of the sale, AJJP Limited changed its name to Elcom Information
Technology Limited ("EIT") and the Company's subsidiaries changed their names.
The assets acquired by EIT included current assets, fixed assets,
rights under certain real property leases (which were assumed by EIT) and
certain contractual rights (collectively, the "Assets") related to the resale of
information technology products. EIT also assumed certain related liabilities of
Holdings, including a bank loan, accounts payable, accrued liabilities,
liabilities related to employee compensation and liabilities under assigned
contracts (collectively with the Assets, the "Business"). In addition, EIT
employed substantially all of the former employees of Holdings. The sale price
for the Business consisted of the assumption of net liabilities of Holdings by
EIT which, as of December 31, 2001, was approximately $3.0 million, plus a
nominal payment to the Company, made on December 31, 2001, of approximately one
dollar, as a result of which the Company recorded a pre-tax gain of $3.0
million.
In addition to the sale of the Business, elcom, inc., the Company's
U.S. technology company, sold to EIT the U.K. versions of PECOS.web and
StarbuyerGold software technology for use by EIT in the U.K. and Ireland in
connection with the business. elcom, inc. also licensed certain proprietary
software to EIT to enable EIT to utilize PECOS.web and StarbuyerGold. As a
result of these transactions, EIT paid technology-related fees of approximately
$2.9 million in the aggregate, which were recorded as license sales in the
fourth quarter of 2001. Other than as described above, and the arrangements
described below between EIT and Elcom Systems Limited, there are no material
ongoing relationships between the Company, EIT and Elcom Systems Limited.
On March 29, 2002, the Company sold certain of the assets and
liabilities of its U.S. IT Products and Services business to ePlus. The assets
acquired by ePlus included the Company's customer list 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 assigned contracts. In addition, ePlus acquired certain of the
Company's software and a perpetual license for certain of the Company's other
software, all of which was used in the U.S. IT Products and Services business.
Under the terms of the sale, ePlus agreed to employ the majority of the
Company's employees who were involved in the U.S. IT Products and Services
business. The sale price for the Business consisted of cash consideration of
$2.15 million, of which approximately $0.6 million was held in escrow. The
escrow was released when the Company satisfied certain liabilities, mostly
related to employee commissions, severance and accrued vacation. At December 31,
2002, approximately $10,000 of the escrow amount remained in escrow, all of
which was collected subsequent to December 31, 2002. The Company recorded a net
gain on the sale of $1.1 million.
The Company also performed certain operational and hosting services for
ePlus to facilitate the transition of the Business to ePlus in an efficient and
effective manner. The Company was reimbursed for its costs incurred in the
provision of the Managed Services. The Managed Services include providing
certain facilities for former Company staff now employed by ePlus and hosting of
certain software applications used in the Business. The managed services ended
in February 2003. A total of $522,000 was billed under this program.
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. The fair
market of the warrants (utilizing a Black-Scholes pricing model) was $273,000
and was recorded as an offset to the gain on the sale.
As previously discussed, the Company elected to early-adopt SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" as of January
1, 2001. The results of discontinued operations were as follows (in thousands):
Year ended December 31,
----------------------------------------
2000 2001 2002
---------- ----------- ----------
Revenue $ 317,077 $ 152,127 $ 4,880
Net income (loss) from discontinued operations $ 4,743 $ 845 $ (788)
Gain on disposal of discontinued operations,
net of tax $ -- $ 2,738 $ 1,100
F-18
The assets and liabilities identified as part of the disposed
businesses were recorded as current assets of discontinued operations,
non-current assets of discontinued operations, and current liabilities of
discontinued operations; the cash flows of this business were reported as net
cash provided by (used in) discontinued operations; and the results of
operations of this business were reported as net income (loss) from discontinued
operations, net of tax.
Current assets of discontinued operations consisted of the following
(in thousands):
DECEMBER 31, DECEMBER 31,
2001 2002
----------- -----------
Accounts receivable $ 3,350 $ 174
Inventory 3 --
Prepaids and other current assets 156 64
----------- -----------
$ 3,509 $ 238
=========== ===========
Non-current assets of discontinued operations consisted of the
following (in thousands):
DECEMBER 31, DECEMBER 31,
2001 2002
----------- -----------
Property, plant and equipment $ 477 $ --
Other non-current assets 121 106
----------- -----------
$ 598 $ 106
=========== ===========
Current liabilities of discontinued operations consisted of the
following (in thousands):
DECEMBER 31, DECEMBER 31,
2001 2002
----------- -----------
Accounts payable $ 1,890 $ --
Accrued expenses and other current liabilities 1,780 41
----------- -----------
$ 3,670 $ 41
=========== ===========
(8) ASSET IMPAIRMENT CHARGES
In 2001 and 2002, the Company recorded asset impairment charges of $1.6
million and $0.3 million respectively. These impairment charges relate to
previously capitalized software costs that were acquired to augment the
Company's PECOS technology. These software programs did not perform as expected
and were never installed into production.
F-19
(9) BUSINESS SEGMENT INFORMATION
The Company's continuing operation is classified as a single business
segment, specifically the development and sale of eSourcing Internet-based
software solutions which automate many supply chain and financial settlement
functions associated with procurement. Prior to the divestiture of the U.K. 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 represent 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 years ended December 31, 2000, 2001 and
2002, were as follows (in thousands):
For Years ended December 31,
-------------------------------------------
2000 2001 2002
------------ ------------- --------------
Net sales from continuing operations
U.S. $ 811 $ 4,012 $ 1,100
U.K. 97 151 3,673
------------ ------------- --------------
908 4,163 4,773
Net sales from discontinued operations
U.S. 235,089 58,058 4,880
U.K. 81,988 94,069 --
------------ ------------- --------------
317,077 152,127 4,880
------------ ------------- --------------
Net sales $ 317,985 $ 156,290 $ 9,653
============ ============= ==============
Gross profit (loss) from continuing operations
U.S. $ 798 $ 2,768 1,879
U.K. 62 140 1,842
------------ ------------- --------------
860 2,908 3,721
Gross profit (loss) from discontinued operations
U.S. 21,171 12,182 2,016
U.K. 9,043 11,191 --
------------ ------------- --------------
30,214 23,373 2,016
------------ ------------- --------------
Gross profit (loss) $ 31,074 $ 26,281 $ 5,737
============ ============= ==============
Identifiable assets as of December 31, 2001 and 2002 are as
follows:
Identifiable assets from continuing operations
U.S. $ 17,267 $ 4,300
U.K. 178 475
------------- --------------
17,445 4,775
Identifiable assets from discontinued operations 4,107 355
------------- --------------
$ 21,552 $ 5,130
============= ==============
For 2000, the Company did not have any customer accounts that
represented more than 10% of net sales from continuing operations. During 2001
and 2002, the Company had one client that accounted for approximately 69% and
73%, respectively of net sales from continuing operations.
(10) INCOME TAXES
Income (loss) before provision for income taxes for total operations
consisted of:
2000 2001 2002
------------- ------------- -------------
U.S. $ (20,870) $ (22,362) $ (8,839)
Foreign 330 2,783 (718)
------------- ------------- -------------
$ (20,540) $ (19,579) $ (9,557)
============= ============= =============
F-20
The expense (benefit) for income taxes consisted of (in thousands):
2000 2001 2002
------------- ------------- -------------
Continuing operations
Current tax expense
United States federal $ -- $ -- $ --
State -- -- --
Foreign -- -- --
------------- ------------- -------------
Total current tax expense
(benefit) -- -- --
------------- ------------- -------------
Discontinued operations
Foreign (786) 300 --
------------- ------------- -------------
Expense (benefit) for income taxes $ (786) $ 300 $ --
============= ============= =============
The following table summarizes the significant differences between the
United States federal statutory tax rate and the Company's effective tax rate
for financial statement purposes on continuing operations:
2000 2001 2002
---------- ---------- ----------
Statutory tax rate 34.0% 34.0% 34.0%
State taxes, net of United States federal
tax benefit 2.0 -- --
Valuation reserve provided against
utilization of net operating loss
carryforwards (27.9) (11.9) (34.0)
Non deductible goodwill and other (5.1) (22.1) --
--------- ---------- ----------
3.0% -- --
========== ========== ==========
Deferred tax assets (liabilities) consisted of the following as of
December 31 (in thousands):
2000 2001 2002
----------- ----------- ----------
Deferred tax assets:
Nondeductible reserves $ 272 $ 374 $ 50
Capitalized inventory costs 13 -- --
Accrued expenses 232 198 60
Other temporary differences 1,126 205 77
Depreciation 4,356 5,806 6,070
Foreign net operating loss
carryforwards 942 3,469 3,049
Net federal and state operating
loss carryforwards 36,585 45,199 50,046
----------- ----------- ---------
43,526 55,251 59,352
Valuation allowance (41,655) (52,455) (56,820)
----------- ----------- ---------
Net deferred tax assets 1,871 2,796 2,532
----------- ----------- ---------
Deferred tax liabilities:
Other intangible assets (1,871) (2,796) (2,532)
----------- ----------- ----------
(1,871) (2,796) (2,532)
----------- ----------- ---------
Net deferred taxes $ -- $ -- $ --
=========== =========== =========
F-21
At December 31, 2002, the Company had U.S. federal net operating loss
carryforwards of approximately $113.5 million, which are available to offset
future Federal taxable income. These losses expire during the years 2011 through
2022.
Section 382 of the Internal Revenue Code of 1986 and the Treasury
Regulations promulgated thereunder subjects the prospective utilization of the
net operating losses and certain other tax attributes, such as tax credits, to
an annual limitation in the event of an ownership change. An ownership change
under Sec 382 generally occurs when the ownership percentage of 5-percent
shareholders, in aggregate, change by more than 50 percentage points over a
three-year period. Some of the Company's net operating losses and tax credits
are subject to limitations relative to the losses subject to these limitations
support current availability under Section 382 of all of the Company's net
operating losses and tax credits.
The Company's ability to utilize its net operating loss and general
business tax credit carryforwards may be limited in the future if the Company
experiences an ownership change as a result of future transactions.
At December 31, 2002, the Company had state net operating loss
carryforwards of approximately $120.6 million, which are available to offset
future state taxable income. These losses expire during the years 2002 through
2022.
At December 31, 2002, the Company had foreign net operating loss
carryforwards of approximately $3.0 million, which are available to offset
future foreign taxable income. Generally, these losses may be carried forward
indefinitely.
The valuation allowance increased by $10.8 million and $4.4 million
during the years ended December 31, 2001 and 2002, respectively. The Company
believes that it is more likely than not that the deferred tax assets at
December 31, 2002 will not be realized in the future. The valuation allowance as
of December 31, 2002 includes a tax effect of approximately $12.4 million
attributable to deductions associated with employee stock option plans, the
benefit of which will be recorded as an increase to paid in capital when
realized or recognized.
(11) NET INCOME (LOSS) PER SHARE
Diluted net loss per share in 2000, 2001 and 2002 does not reflect the
dilutive effect of stock options and warrants, as the impact of including them
is antidilutive. Based on the average market price of the Company's common
shares in 2000, 2001, and 2002, the following are the number of potentially
dilutive securities:
POTENTIALLY DILUTIVE SECURITIES
-------------------------------
NUMBER RANGE
OF DILUTIVE OF EXERCISE
YEAR ENDING DECEMBER 31, SECURITIES NUMBER PRICE
----------------------- ------------ ------ -----------
2000 4,945,000 602,000 $ 5.56 - 31.13
===============
2001 1,289,000 7,675,000 $ 10.81 - 31.13
===============
2002 1,092,861 9,844,902 $ 0.74 - 24.06
===============
F-22
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
Certain amounts from prior quarters have been reclassified (in thousands, except
per share data):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------------- -------------- ------------- ------------- --------------
YEAR ENDED DECEMBER 31, 2001
Net sales $ 284 $ 231 $ 444 $ 3,204 $ 4,163
============= ============== ============ ============ =============
Gross profit (loss) $ 270 $ (372) $ 89 $ 2,921 $ 2,908
============= ============== ============= ============= ==============
Operating income (loss) $ (8,039) $ (7,105) $ (7,040) $ (1,244) $ (23,428)
============= ============== ============= ============= ==============
Net income (loss) from continuing
operations $ (7,898) $ (7,210) $ (7,079) $ (1,275) $ (23,462)
============= ============== ============= ============= ==============
Net income (loss) from discontinued
Operations $ 1,071 $ 1,277 $ 333 $ (1,836) $ 845
============= ============== ============= ============= ==============
Gain on disposal of discontinued
operations $ -- $ -- $ -- $ 2,738 $ 2,738
============= ============== ============= ============= ==============
Net income (loss) from total operations $ (6,827) $ (5,933) $ (6,746) $ (373) $ (19,879)
============= ============== ============= ============= ==============
Basic and diluted net income (loss)
per share data:
Loss from continuing operations $ (0.25) $ (0.23) $ (0.23) $ (0.04) $ (0.76)
Income from discontinued operations,
net of tax 0.03 0.04 0.01 (0.06) (0.03)
Income from disposal of discontinued
operations, net of tax -- -- -- 0.09 0.09
------------- -------------- ------------- -------------- --------------
Basic and diluted net loss per share $ (0.22) $ (0.19) $ (0.22) $ (0.01) $ (0.64)
============= ============== ============== ============= =============
Basic and diluted weighted average
shares outstanding 30,871 30,935 30,967 30,874 30,912
============= ============== ============= ============= ==============
YEAR ENDED DECEMBER 31, 2002
Net sales $ 599 $ 1,334 $ 1,155 $ 1,685 $ 4,773
============= ============== ============= ============= ==============
Gross profit $ 506 $ 907 $ 769 $ 1,539 $ 3,721
============= ============== ============= ============= ==============
Operating income(loss) $ (4,168) $ (2,565) $ (2,383) $ (1,331) $ (10,447)
============= ============== ============= ============= ==============
Net income (loss) from continuing
operations $ (4,174) $ (2,573) $ (1,523) $ (1,599) $ (9,869)
============= ============== ============= ============= ==============
Net income (loss) from discontinued
operations $ (1,420) $ (86) $ 87 $ 631 $ (788)
============= ============== ============= ============= ==============
Gain on disposal of discontinued
operations $ 680 $ 232 $ 167 $ 21 $ 1,100
============= ============== ============= ============= ==============
Net income (loss) from total operations $ (4,914) $ (2,427) $ (1,269) $ (947) $ (9,557)
============= ============== ============= ============= ==============
Basic and diluted net income (loss)
per share data:
Loss from continuing operations $ (0.14) $ (0.08) $ (0.05) $ (0.05) $ (0.32)
Income from discontinued operations,
net of tax (0.04) -- -- 0.02 (0.03)
Income from disposal of discontinued
operations, net of tax 0.02 -- 0.01 0.00 0.04
------------- --------------- ------------- ------------- ---------------
Basic and diluted net loss per share $ (0.16) $ (0.08) $ (0.04) $ (0.03) $ (0.31)
============= ============== ============== ============= ==============
Basic and diluted weighted average
shares outstanding 30,898 30,902 30,902 30,902 30,901
============= ============== ============= ============= ==============
F-23