SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001 or [ ] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 000-27376
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ELCOM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3175156
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
10 OCEANA WAY
NORWOOD, MASSACHUSETTS 02062
(781) 440-3333
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities Registered pursuant to Section 12(b) of the Act:
None
Securities Registered pursuant to Section 12(g) of the Act:
Name of exchange
Title of each class on which registered
- ---------------------------------- ---------------------------------
Common Stock, $.01 par value NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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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]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing price of such stock on The Nasdaq Stock
Market on March 15, 2002, was approximately $25,585,000. 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 30,902,000 shares of Common Stock, $.01 par value,
outstanding as of March 15, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2002 annual
meeting of stockholders of Elcom International, Inc. are incorporated by
reference into Part III of this report.
PART I
Item 1. Business
Overview
On March 29, 2002, Elcom International, Inc. (the "Company") announced that
it was divesting 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"). This will allow the
Company to transition to being a leading provider of remotely-hosted, electronic
procurement ("eProcurement") and electronic marketplace ("eMarketplace")
Internet software solutions (collectively the "Technology Business"). As a
result of this divestiture and the previously completed sale of the Company's
United Kingdom ("U.K.") IT Products business on December 31, 2001, as described
more fully elsewhere herein, commencing with the second quarter of 2002, the
Company will 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 will be from eProcurement and eMarketplace solutions and associated
professional services. As of December 31, 2001, the historical financial
statements present the U.K. IT Products business as a discontinued operation,
and since no decision had been made to divest the U.S. IT Products and services
business at that time, that business is presented as a continuing operation. As
provided by applicable accounting conventions, future financial statements will
present all the IT Products and services business as a discontinued operation,
which will allow a more focused presentation.
As it relates to the Company's principal business going forward, the
Company develops and licenses remotely-hosted, self-service eProcurement and
eMarketplace, Internet and intranet-based purchasing systems. The Company
intends to augment its core eProcurement Marketplace solutions with other
licensed supply chain-oriented systems to enable the conduct of interactive
supply chain automation for businesses. The Company has already licensed a
dynamic trading system platform to provide auction, reverse auction, and other
electronic negotiation, or ("eNegotiation") functions. Since its inception in
1992, elcom, inc., the Company's eBusiness technology subsidiary, has developed
its PECOS(TM) (Professional Electronic Commerce Online System) technology, which
is licensed to companies to enable them to communicate, market, buy and sell
various goods and services electronically over the Internet or through private
networks and eMarketplaces. The Company's PECOS(TM) technology can support large
numbers of end-user clients, products, suppliers and transactions and its
transaction server middleware provides a scalable foundation for robust system
performance and high transaction capacity.
Since 1993, the Company has marketed and sold value-added services and IT
Products to commercial clients through Elcom Services Group, Inc. ("Elcom
Services Group"), its wholly-owned IT Products direct marketing subsidiary.
Elcom Services Group was created in 1993 as the proof of concept of the
Company's original client/server PECOS(TM) technology. Elcom Services Group uses
Starbuyer.com, its owned and operated business-to-business eMarketplace and
PECOS.web, an Internet-based ordering and information system, to support its
clients.
Since 1993, the Company has purchased IT Products from distributors and
directly from certain manufacturers and, as an authorized remarketer of those IT
Products, resold them to commercial customers. As is typical of a reseller of IT
Products, because the Company took title to those purchased IT Products, and
assumed the risks of ownership associated with inventory and accounts
receivable; the Company recorded gross revenues on each sale transaction. In
January 2001, the Company announced that it had signed an agreement to outsource
its IT Product fulfillment, logistics, configuration and distribution in the
U.S. to TD Fulfillment Services, L.L.C., a subsidiary of Tech Data Corporation
("Tech Data"), one of the world's largest distributors of computer-oriented IT
Products. Under that agreement, Tech Data became the Company's fulfillment,
logistics, configuration and distribution outsourcing partner and recognized
gross revenues and owned and managed the inventory and customer receivables.
This outsource agreement allowed the Company to hold virtually no inventory and
substantially reduce its IT Product-related accounts receivables in the U.S.;
thereby significantly reducing inventory risks and working capital requirements.
As a sales agent for Tech Data, the Company received transaction-oriented fees,
which were related to the gross profit generated on each sale transaction. The
first live orders processed through this outsourcing arrangement were recorded
in February 2001 and the transition was completed in July 2001
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with 96% of the Company's U.S. customers transitioning to the new outsourced
model. The Company continued to provide its suite of professional services and
support directly to its clients, while acting as an agent for IT Product sales
transactions in the U.S. The U.K. IT Products remarketer business was not
affected by this arrangement and continued to own inventory, record gross
revenues on IT Product sales and collect customer receivables up until the time
it was sold on December 31, 2001, as described more fully herein.
For IT Products which were sold under the Tech Data agreement, reported
transaction fees were approximately 5% to 6% of the previously reported IT
Product revenues. Services-oriented revenues continued to be reported as they
had been historically. In the third quarter of 2001, the substantial majority of
the Company's U.S. sales orders were processed through the Tech Data agreement.
Due to the Company's transition to the Tech Data outsourcing model and the
resultant reporting of transaction fees rather than gross revenues for the
majority of IT Product sales in the U.S., certain financial comparisons with
prior periods are difficult.
After approximately ten months of preparation and planning, Elcom Services
Group commenced its PECOS.IT initiative in August 2001, as a way to acquire
incremental customers. This initiative involved offering prospective customers
an advanced multi-organizational version of the PECOS(TM) technology, with
functionality that supports complex purchasing of IT Products and services
(PECOS.icm). The Company considered the amount of transaction fees projected to
be generated by a prospective customer through the Company's outsourcing
agreement with Tech Data and, if deemed sufficient, deployed PECOS.icm at little
or no cost to the new customer.
As part of its strategy to transition to a transaction-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, will continue to operate the Company's U.K. Technology Business,
primarily focusing on eProcurement and eMarketplaces in the commercial and
government 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.
To transition to a pure technology based model and because of the continued
low demand for IT Products in the U.S. in 2001, particularly following the
September 2001 terrorist attacks, on March 29, 2002, the Company sold certain
assets that were used in the Company's U.S. IT Products and services activities
to ePlus. The principal assets sold were customer lists, customer contracts and
certain fixed assets. In addition, ePlus acquired a perpetual license for
certain of the Company's sales management software and assumed one of the
Company's property leases. The terms of the sale also provide that the Company
will provide ePlus with up to six months of managed support to transition the IT
Products and services activities to ePlus. 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.
elcom, inc.
The eBusiness technology subsidiary of the Company, elcom, inc., develops
and licenses PECOS(TM) remotely-hosted, self-service, Internet and
intranet-based automated purchasing and marketplace systems. In addition,
through September 30, 2001, elcom, inc. marketed IT Products to U.S. customers
via various implementations of the Company's PECOS(TM) technologies. elcom,
inc.'s IT Product customers were transferred to Elcom Services Group as of
October 1, 2001 and from that date, elcom, inc. ceased to record any IT Product
sales in the U.S. For comparative purposes, the business segment information
contained herein has been presented as if Elcom Services Group had reported all
U.S. IT Product revenues
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and gross profits for all periods presented. The automated purchasing and
marketplace systems the Company offers for licensing include:
PECOS Internet Procurement Manager ("PECOS.ipm") PECOS.ipm is based on nine
years of eCommerce technology development and, as an Internet-based system, has
been in development for approximately four years. PECOS.ipm is a robust and
feature-rich Internet-based, remotely-hosted, automated procurement system. A
basic patent (#5,799,157) covering certain elements of this system was filed in
December 1994 and granted and issued to the Company on August 25, 1998. As a
remotely-hosted system, PECOS.ipm allows the Company's clients to use their
intranet/Internet to access the system to identify and select products, check
pricing, automate the internal approval process and facilitate invoicing and
payment to suppliers. Since it is remotely-hosted, PECOS.ipm is rapidly
deployable and has a minimal impact on a client's computer system and personnel
resources. elcom, inc. acts as its own application service provider and hosts
PECOS.ipm on its own hardware platform, giving clients a single point of contact
and responsibility. In addition, PECOS.ipm is configurable by a client and does
not require scripting or consultants to modify administrative items or approval
workflows. PECOS.ipm can operate as a standalone system without an expensive
back-end Enterprise Resource Planning ("ERP") system in place, thereby enabling
easier implementation. Clients may integrate PECOS.ipm into their ERP system
using data feeds with PECOS.ipm already operating. Further, the Company
facilitates supplier catalog loads and manages catalog content for the client
when the system is remotely-hosted. In 2001, the Company announced two new
releases of its PECOS.ipm software for deployment. Version 7.1, referred to as
the multi-organizational version, was announced in April 2001, and was targeted
for use by large, multi-organizational companies and contained significant
functionality enhancements, such as dynamic documents, eForms and improved
organizational data security. In addition, in late October 2001, the Company
announced version 8.0 of its next generation PECOS(TM) technology. This version
of PECOS(TM) is designed to offer a single solution which includes eProcurement
("buy-side": the capability of a client to order products from its supplier),
ePurchasing ("sell-side": the capability of a client to have its customers make
purchases electronically) and private eMarketplace ("eMarketplace": 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.
PECOS Internet Commerce Manager ("PECOS.icm") is the Company's
eDistribution configuration version of PECOS(TM) that automates the online
selling process from product information through financial settlement. PECOS.icm
supports the sales of virtually any type of product or services, includes
functionality such as electronic catalogs, shopping cart and shopping cart
transfer, access to real time price and availability, product configuration and
credit card processing. PECOS.icm also supports a virtual sourcing engine that
enables the online purchase and/or sale of IT Products without the need to
maintain inventory. Elcom Services Group, the Company's direct marketing
subsidiary, offers a version of PECOS.icm to prospective customers in return for
a portion of their IT Product purchases, creating a major value added
differentiator to acquire new IT Product customers.
In July 2001, the Company announced the availability of an optional dynamic
trading system licensed from a third party, which includes request for proposal,
private reverse auctioning and other features. The Company has also recently
announced the availability of an asset management system and is in discussions
with several other software firms to offer their systems. This addition will
allow the Company to offer a suite of supply chain modules to augment its core
eProcurement and eMarketplace functionality. Further, the Company is in the
process of developing eMarketplace World Network(TM), a global eMarketplace hub,
which is designed to interconnect with world-wide eMarketplaces comprised of
vertical and geographic trading communities within an industry, allowing
eMarketplaces to connect their trading communities so that buyers can easily
review participating eMarketplaces and trade with the suppliers participating in
those eMarketplaces.
Business-to-Business Electronic Commerce Overview
Market Overview. With the widespread implementation of intranets and the
adoption of the Internet as a business communication platform, organizations can
now automate enterprise-wide and inter-
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organizational commerce activities. The availability of the Internet as a
ubiquitous communications network creates a significant market opportunity for
Internet-based business-to-business electronic commerce solutions for operating
resources.
Internet-based procurement, often referred to as eProcurement, is the
process of buying goods and services from suppliers over the Internet. The
Company believes that the market for eProcurement solutions, which is still
emerging and consists of buy-side software that automates the requisitioning and
workflow approval process, and Internet-based software that enables online
transactions in eMarketplaces, is currently at the beginning of a growth cycle.
Internet-based automated procurement systems have only been available for
approximately three years and represent a new category of cost reduction and
productivity-enhancing supply chain management systems. As indicated by various
research reports, the marketplace is nascent; however, it is projected that a
substantial percentage of corporations of various sizes and across multiple
industries will adopt some form of eProcurement solution in the next several
years.
Forrester Research estimates that the business-to-business electronic
commerce market will grow from $403 billion in 2000 to $2.7 trillion by 2004.
International Data Corporation ("IDC") forecasts that eProcurement and
eMarketplace application license revenues will grow from $770 million in 1999 to
$9.7 billion in 2004. Gartner Group has forecasted the market for eProcurement
license revenues to grow $2.6 billion by 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 2002 and beyond.
Elcom Services Group
The IT Products and services business has at various times during the
Company's history been divided and accounted for between Elcom Services Group
and elcom, inc. From October 1, 2001, all of the U.S. IT Products and services
business previously undertaken by elcom, inc., was transferred to Elcom Services
Group and, accordingly, prior period segment financial information presented
herein has been restated to reflect all of the U.S. IT Products and services
business as flowing through Elcom Services Group. As more fully described above,
on December 31, 2001, the Company divested its U.K. IT Products business and on
March 29, 2002, the Company sold certain assets of the U.S. IT Products and
services business such that, from March 29, 2002, the Company has effectively
exited the IT Products and services business and will focus on its Technology
Business. However, since the Company's various IT Products and services
businesses were owned by the Company throughout 2001, they are important
historically and help explain the evolution of the Company, therefore, the
following IT Products and services business description is provided.
Elcom Services Group, the Company's direct marketer, which, prior to the
divestiture of that business in March 2002, marketed and sold IT Products and
professional services to business clients. Elcom Services Group served its
clients using various versions of the Company's PECOS(TM) technology, including
Starbuyer.com, PECOS.web and more recently, PECOS.icm. Elcom Services Group
commenced operations in December 1993 as the original proof of concept of the
Company's technology, and experienced rapid growth through 1997. The Company
achieved its initial growth by offering its client/server PECOS Commerce Manager
("PECOS.cm") and PECOS.web technology to its Elcom Services Group clients and by
various marketing efforts, including direct sales, and by the acquisition of six
PC remarketers.
Primarily due to declining gross profit margins with certain large
customers and changes in manufacturer policies which increased inventory risks
starting in 1999, the Company introduced a strategy for Elcom Services Group to
reduce its revenues and related inventory exposure by declining to do business
with clients that did not pay the Company on time as per agreements, or demanded
pricing which the Company was unwilling to provide due to many factors,
including decreases in marketing development funding from various manufacturers.
This strategy resulted in a significant decrease in revenues over the last three
years, but effectively eliminated a majority of the Company's marginal clients.
5
After approximately ten months of preparation and planning, Elcom Services
Group commenced its PECOS.IT initiative in August 2001, as a way to acquire
incremental customers. This initiative involved offering prospective customers
PECOS.icm, an advanced multi-organizational version of the PECOS(TM) technology,
with functionality that supports complex purchasing of IT Products and services.
The Company considered the amount of transaction fees projected to be generated
by a prospective customer through the Company's outsourcing agreement with Tech
Data and, if deemed sufficient, deployed PECOS.icm at little or no cost to the
new customer.
On October 1, 2001, as part of the Company's ongoing strategy, the U.S. IT
Product business conducted by elcom, inc., including Starbuyer.com, was
transferred to Elcom Services Group to separate the companies into two distinct
models, one a pure technology company and the other an IT Products remarketer.
For comparative purposes, the business segment information disclosed herein, has
been presented as if all of the U.S. IT Products revenues and gross profit were
recorded by Elcom Services Group for all periods presented.
In order to allow the Company to transition more fully to a license and
transaction fee model, on December 31, 2001, the Company sold substantially all
of the assets and liabilities of the Company's U.K. 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, as a
result of which the Company recorded a pre-tax gain of approximately $2.7
million. The results of operations of the U.K. reseller business have been
classified as discontinued operations for all periods presented. See Note 9 to
the consolidated financial statements. In the U.K., the Company continues to
operate Elcom Systems Limited, the Company's U.K. technology business, which is
primarily focusing on eProcurement marketplaces in the commercial and government
sectors. The Company believes it will begin expanding this operation during 2002
as the Scottish Executive (Government of Scotland) and other licenses have begun
generating technology-related revenues.
On March 29, 2002, the Company announced that it was transitioning to be a
leading provider of remotely-hosted, eProcurement and eMarketplace Internet
software solutions, collectively the Technology Business, by the divestiture of
certain assets associated with its U.S. IT Products and services business to
ePlus. As a result of this divestiture and the previously completed sale of the
Company's U.K. IT Products business on December 31, 2001, commencing with the
second quarter of 2002 the Company will cease to record any revenues from the
sale of IT Products and associated services. From the second quarter of 2002,
the Company's sole source of revenue will be from eProcurement and eMarketplace
solutions and associated professional services.
Elcom Services Group has historically marketed thousands of products
manufactured by leading companies, such as Compaq, IBM, Toshiba and
Hewlett-Packard. Historically, orders placed through PECOS.web or Starbuyer.com
for IT Products that were in stock generally were fulfilled automatically from
the inventory of one of Elcom Services Group's Distribution Fulfillment Partners
("DFPs"), which included Tech Data and Ingram Micro, Inc., two of the largest IT
Product distributors in the world. Elcom Services Group also offered a range of
professional services to its U.S. clients. As described elsewhere herein,
commencing in the first quarter of 2001, Elcom Services Group outsourced its IT
Product fulfillment process to Tech Data. Under the Tech Data agreement, Elcom
Services Group received a transaction-oriented fee as agent for each sale,
rather than recording gross revenues.
Products and Pricing
Products. elcom, inc., develops and licenses its PECOS(TM) remotely-hosted,
self-service, Internet and web-based automated purchasing and marketplace
systems. The Company also offers a dynamic trading system from a third party.
Prior to the divestiture of the IT Products and services businesses, the
Company offered approximately 130,000 IT Products from thousands of
manufacturers. Historically, the substantial majority of IT Products offered by
the Company were purchased from DFPs in both the U.S. and U.K. The
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Company provided clients with a large selection of IT Products, including
personal computer systems, monitors, printers, peripherals and software,
together with a broad range of professional services.
Pricing. The Company believes that PECOS(TM), including its remotely-hosted
automated eProcurement and eMarketplace system(s), is competitively priced
compared to license fees charged by other eProcurement software providers.
Prior to the divestiture of the IT Products and services businesses, the
Company believes that its IT Product pricing was generally competitive with
other remarketers. The Company typically offered larger corporate clients a
greater discount than other clients, reflecting the economies of a higher level
of purchases by such clients. The Company used a proprietary, customized and
automated pricing system for its clients through various versions of the
Company's PECOS(TM) technologies and back-end server systems, which supports and
tracks a variety of pricing methodologies, including the ability to provide
customized pricing for each client, by product.
Professional Services
elcom, inc.'s professional services group offers various consulting and
supplier services to its clients. These services range from implementation of
PECOS.ipm and training, to interfacing data from PECOS.ipm into back-end ERP
systems. Suppliers are also offered services associated with catalog content and
categorization, loading procedures and automated data update methodologies.
Elcom Services Group offered a wide range of professional services in the
U.S., including advising on project and roll-out management, providing on-site
engineers for network integration and systems support, responsive "Help" desk
and, on a subcontractor basis, break/fix services. The Company also offered
national dispatch service for warranty and repair contracts.
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 MIS design is a
unique implementation of Oracle software applications that have been and
continue to be enhanced to provide functionality not found in the standard
system, including the ability to:
- Accept electronically delivered sales orders such as PECOS(TM), EDI,
and XML orders, as well as converted quotations; and
- automatically create purchase orders, electronically transmit them and
electronically confirm shipments by DFPs to enable invoicing or
anticipate receipt as the case may be.
The 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.
The Company operates a redundant Internet access system for the U.S. with data
centers in Norwood, MA and San Diego, CA. The Company has 24x7 physical security
at its Norwood data center. To protect the Company's data and provide service if
both data centers were to become inoperative, the Company has a
disaster-recovery system agreement with a major computer and services company.
Although the Company believes that its technology and operating systems will be
adequate for its current needs, such MIS systems will undoubtedly require some
ongoing investments to modify and enhance them as the Company evolves.
Marketing and Sales
Prior to the divestiture of the IT Products and services businesses, the
Company historically used direct and telemarketing sales forces in the U.S. and
U.K. to market IT Products and services to targeted business, education, and
corporate accounts. As of December 31, 2001, the Company employed
7
approximately 50 sales representatives, account executives and related support
personnel to service client accounts. As described elsewhere herein, the Company
sold its U.K. IT Products remarketing business on December 31, 2001 and its U.S.
IT Products remarketing business on March 29, 2002.
As of December 31, 2001, the Company's sales and support personnel operated
from Field Support and Sales Offices ("FSSO's") in four metropolitan areas in
the U.S., as well as one location in the U.K. and one in South Africa. The
Company's primary locations and FSSO's are listed below:
UNITED STATES
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Norwood, MA (Boston Headquarters and FSSO)
San Diego, CA (FSSO)
Edison, NJ (FSSO)
Bristol, PA (FSSO and Services Business)
INTERNATIONAL LOCATIONS
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Slough, Berkshire, U.K.
Parkview, South Africa
Corporate Accounts. The Company's primary target group for IT Product sales
were corporations that wished to purchase IT Products in an efficient manner.
Corporate accounts typically employ purchasing agents or buyers with
above-average product knowledge who view most IT Products as commodities.
Educational and Governmental Accounts. Prior to the divestiture of the IT
Products and services businesses, the Company's government and education sales
operation was based in Bristol, Pennsylvania and has historically concentrated
on building educational-based sales by focusing on providing Windows and
Intel-based ("Wintel") solutions to the education market in the U.S.
Client and Technical Services
Prior to the divestiture of the IT Products and services businesses, the
Company provided a wide range of client service and technical support, including
nationwide toll-free pre-sale and post-sale telephone-based support. The Company
believed that maintaining a direct client and technical support link with its
clients was an important competitive factor and promoted client satisfaction. In
addition, certain manufacturers require their remarketers to provide certain
levels of technical support as an ongoing condition to authorize remarketers to
sell their IT Products. The Company did not outsource its customer support
function to Tech Data under the outsourcing agreement.
Competition
eBusiness Systems Marketplace. The market for eProcurement and eMarketplace
solutions is relatively new and evolving rapidly. The Company expects
competition in this market to intensify in the future. Among other factors,
before licensing an eBusiness system, the Company believes potential clients
consider the cost of the system compared to the level of features and functions
available in electronic commerce ("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., Commerce
One, Inc., and Clarus Corporation. 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
8
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.
IT Products Marketplace. The overall market of companies which sell IT
Products is highly fragmented and the Company operated in an extremely
competitive environment which is continuously evolving and subject to rapid
technological change. A prospective purchaser of IT Products has the option to
purchase directly from a manufacturer (e.g., IBM, Compaq, Dell Computer Corp.),
from a major remarketer (e.g., CompuCom Systems, Inc.), from a computer mail
order company (e.g., CDW Computer Centers, Inc., Micro Warehouse Inc.), from a
systems integrator (e.g., EDS), from computer superstores (e.g., CompUSA Inc.),
from Internet-based companies (e.g. Insight Enterprises, Inc.), from electronics
superstores and from local computer stores, among others. Prior to the
divestiture of the IT Products and services business, the Company competed with
all of these entities for the sale of its IT Products. Each of these entities in
the IT Product distribution channel competes on a wide variety of capabilities
including price, delivery performance, breadth of products, services offered,
overall convenience and in some cases, specialized and distinct capabilities.
The advent and expansion of Internet-based sales companies added substantial
additional pressure to price competition in the marketplace and continued to
exacerbate gross profit pressures. Certain of the companies noted above and
other potential competitors have substantially greater financial, technical and
marketing resources than the Company did before it sold its IT businesses and
greater name recognition and more extensive client bases.
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.
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.
9
Moreover, the applicability to the Internet of existing laws governing issues
such as property ownership, libel and personal privacy is uncertain.
Environmental Matters
Based on the 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, 2001, the Company had a total of 247 personnel,
including 238 salaried and 9 hourly personnel. Subsequent to the sale of certain
assets to ePlus, the Company expects its personnel to number approximately 97
including its U.K. 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.
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, 2001, the Company leased the properties set forth below,
and rented four other FSSOs. The facility leases vary in remaining length, from
6 months to 12 years and, in some cases, include options to extend the lease
terms. See Note 8 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, Boston-area FSSO,
elcom, inc. Headquarters
Canton, Massachusetts 42,800 Elcom Services Group Headquarters
(U.S., East Coast)
Canton, Massachusetts 84,000 Elcom Services Group Configuration and (U.S.,
East Coast) Distribution
Bristol, Pennsylvania 35,000 Elcom Services Group Administrative and FSSO
In addition, the Company has operating leases in the U.K., which were
assumed by Elcom Information Technology Limited as part of the purchase of the
U.K. remarketer business on December 31, 2001 and are included as sublease
income. See Notes (8) and (9). Negotiations are currently underway with the
landlords of those properties to transfer those leases to Elcom Information
Technology Limited.
10
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. During 2001, the Company commenced an action against a software
supplier to recover its acquisition costs and other expenses incurred in the
purchase of certain software technology. In the opinion of management, the
outcome of this matter 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
A special meeting of the Company's stockholders was held on December 19,
2001. Two matters specified in the Company's Notice of Special Meeting of
Stockholders Proxy Statement dated November 15, 2001, a copy of which has been
previously filed with the Securities and Exchange Commission, were considered,
voted upon and approved by the stockholders. The specific results of the voting
on the two matters are as follows:
Proposal I:
The Company's stockholders approved and adopted 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, by the following vote:
For Against Abstain
---------- --------- ---------
26,517,666 1,145,171 84,856
Proposal II:
The Company's stockholders approved, for the purpose of complying with
Nasdaq Marketplace Rule 4350(i)(1)(D) (or any similar amended, revised or
alternative rule), the potential issuance and sale in a private placement of up
to $25 million of equity securities which, by their terms, may represent twenty
percent or more of the issued and outstanding shares of the Company's Common
Stock (or securities convertible into Common Stock, including the issuance of
any securities upon conversion thereof) and/or twenty percent or more of the
Company's voting power outstanding prior to such issuance, by the following
vote:
For Against Abstain
---------- --------- ---------
11,266,957 1,696,698 93,075
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company's Common Stock trades on the Nasdaq National Market(R) under
the symbol ELCO. As of December 31, 2001, there were approximately 275
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 20,000 as of December 31, 2001. The high and low
closing sales prices reported by the Nasdaq National Market for each of the
quarters in the two year period ended December 31, 2001 are set forth in the
table below. For the period from January 1, 2002 to March 15, 2002, such high
and low closing sales prices were $1.50 and $.93, respectively.
11
2001 2000
-------------------- ---------------------
Quarter Ended High Low High Low
--------------------------------------------------------------------------
March 31, $5.125 $1.719 $35.438 $14.063
June 30, $2.850 $1.531 $14.375 $4.250
September 30, $1.730 $0.910 $7.000 $4.438
December 31, $1.950 $1.240 $4.875 $1.219
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
The Company issued warrants to purchase 145,200 and 4,800 shares of common
stock to Cripple Creek on December 3, 2001. The warrants were issued pursuant to
the Structured Equity Line Flexible Financing Agreement ("Equity Line"), dated
as of December 30, 1999 (described elsewhere herein), which was terminated on
November 29, 2001. The warrants to purchase 145,200 and 4,800 shares are
currently exercisable and have an exercise price of $1.81 and $6.30,
respectively. The warrants expire on December 2, 2006. Exemption from
registration for the issuance of the warrants is claimed pursuant to Section (2)
of the Securities Act of 1933, as amended.
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data for the
Company for the years ended December 31, 1997 through December 31, 2001 and at
the end of each of those years. The historical financial data for 1999, 2000 and
2001 is derived from the Consolidated Financial Statements of the Company
audited by KPMG LLP. The historical financial data for 1997 to 1998 is derived
from the Consolidated Financial Statements of the Company audited by Arthur
Andersen LLP. This information should be read in conjunction with the 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. The data for
the periods presented are not necessarily comparable because of various
write-offs and write-downs in 1998 and 1999 and acquisitions consummated at
various times during the periods presented and the transition of the U.S. IT
Products business to Tech Data in 2001. In addition, for all periods presented,
the results of operations of the U.K. IT Products business, described in more
detail elsewhere herein, have been accounted for within discontinued operations
as a result of the sale of the business on December 31, 2001.
12
Years ended December 31,
--------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Net sales $ 568,367 $ 530,585 $ 411,751 $ 235,997 $ 62,221
========== ========== ========== ========== ==========
Gross profit $ 66,594 $ 50,931 $ 35,396 $ 22,031 $ 15,090
========== ========== ========== ========== ==========
Selling, general and administrative
expenses $ 54,128 $ 57,666 $ 52,885 $ 42,719 $ 36,633
========== ========== ========== ========== ==========
Research and development expenses $ 1,275 $ 1,178 $ 1,343 $ 1,695 $ 1,089
========== ========== ========== ========== ==========
Asset impairment, restructuring and
other related charges $ -- $ 12,892 $ 10,057 $ -- $ 1,776
========== ========== ========== ========== ==========
Operating profit (loss) $ 11,191 $ (20,805) $ (28,889) $ (22,383) $ (24,408)
Interest and other income (expense), net (977) (5,371) (2,143) 1,035 (151)
---------- ---------- ---------- ---------- ----------
Income profit (loss) before income taxes 10,214 (26,176) (31,032) (21,348) (24,559)
Income tax expense (benefit) 2,307 186 (965) (642) --
---------- ---------- ---------- ---------- ----------
Net income (loss) from continuing
operations, net of tax 7,907 (26,362) (30,067) (20,706) (24,559)
Net income (loss) from discontinued
operations 2,389 802 (12,471) 952 1,942
Gain from discontinued operations, net of
tax -- -- -- -- 2,738
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 10,296 $ (25,560) $ (42,538) $ (19,754) $ (19,879)
========== ========== ========== ========== ==========
Basic net income (loss) per share for
continuing operations $ 0.29 $ (0.97) $ (1.08) $ (0.68) $ (0.79)
Basic net income (loss) per share for
discontinued operations 0.09 0.03 (0.45) 0.03 0.06
Basic net income per share from gain of
discontinued operations -- -- -- -- 0.09
---------- ---------- ---------- ---------- ----------
Basic net income (loss) per share $ 0.38 $ (0.94) $ (1.53) $ (0.65) $ (0.64)
========== ========== ========== ========== ==========
Basic weighted average shares outstanding 26,937 27,322 27,846 30,487 30,912
========== ========== ========== ========== ==========
Diluted net income (loss) per share for
continuing operations $ 0.27 $ (0.97) $ (1.08) $ (0.68) $ (0.79)
Diluted net income (loss) per share for
discontinued operations 0.08 0.03 (0.45) 0.03 0.06
Diluted net income per share from gain
of discontinued operations -- -- -- -- 0.09
---------- ---------- ---------- ---------- ----------
Diluted net income (loss) per share $ 0.35 $ (0.94) $ (1.53) $ (0.65) $ (0.64)
========== ========== ========== ========== ==========
Diluted weighted average shares
outstanding 29,461 27,322 27,846 30,487 30,912
========== ========== ========== ========== ==========
Years ended December 31,
--------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
CONSOLIDATED BALANCE SHEET DATA
OF CONTINUING OPERATIONS:
Current assets $ 223,185 $ 198,801 $ 69,003 $ 55,575 $ 15,115
========== ========== ========== ========== ==========
Total assets $ 210,676 $ 230,962 $ 77,886 $ 67,991 $ 21,552
========== ========== ========== ========== ==========
Current liabilities $ 158,979 $ 155,228 $ 34,302 $ 33,519 $ 10,007
========== ========== ========== ========== ==========
Long-term liabilities, net of current
portion $ 3,133 $ 905 $ 260 $ 813 $ 311
========== ========== ========== ========== ==========
Stockholders' equity $ 110,303 $ 85,017 $ 46,928 $ 30,601 $ 11,234
========== ========== ========== ========== ==========
Total liabilities and stockholders' equity $ 272,415 $ 241,150 $ 132,601 $ 64,933 $ 21,552
========== ========== ========== ========== ==========
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
The Company's focus has evolved to developing and licensing eProcurement
and eMarketplace, Internet and intranet-based purchasing systems, which enable
the conduct of interactive eCommerce for businesses. The Company also offers a
dynamic trading system licensed from a third party. The Company was founded in
1992 as Elcom Systems, Inc., and over the last eight years, elcom, inc., the
Company's eBusiness technology subsidiary, has developed its PECOS(TM)
technology, which is licensed to companies to enable them to market, buy and
sell various goods and services electronically over the Internet.
13
Since 1993, the Company has marketed and sold value-added services and
computer-oriented IT Products to commercial clients through Elcom Services
Group, its direct marketing subsidiary using various versions of its PECOS(TM)
technology. The Company achieved its early growth by offering the use of
PECOS(TM) to prospective customers and by various marketing efforts, including
the expansion of its direct sales force nationwide, and by the acquisition of
six VAR's during 1994 to 1996. In addition, in the U.S., the Company operated
Starbuyer.com, its owned and operated business-to-business eMarketplace.
On July 31, 1999, the Company completed the sale of the substantial
majority of its U.K. remarketer group operations, which accounted for
approximately 75% of U.K. revenues in both 1998 and the first seven months of
1999. These operations are included in the financial statements as continuing
operations. Generally, the Company sold its U.K. field-based operations, its
professional services organization, its distribution business and certain of its
inventory and fixed assets. The Company retained its U.K. telemarketing group,
which it began to transition to a business-to-business Internet-based
eMarketplace model in March 2001, similar to that conducted by the Company in
the U.S. through Starbuyer.com, the Company's owned and operated eMarketplace.
On October 1, 1999, the ownership of the U.K. operations was transferred from
Elcom Services Group to elcom, inc. to help facilitate this strategy.
In January 2001, the Company announced that it had signed an agreement to
outsource its U.S. IT Product fulfillment, distribution, logistics and product
configuration to Tech Data. Since its inception, the Company had purchased IT
Products from distributors, including Tech Data, and directly from certain
manufacturers and, as an authorized remarketer of those products, resold those
products to commercial customers. Because the Company took title to those
purchased IT Products and assumed risks of ownership associated with inventory
and accounts receivable, the Company recorded gross revenues for each sale
transaction. Under the outsourcing agreement, Tech Data became the Company's
logistics, fulfillment, and distribution outsourcing partner and assumed
virtually all logistics and fulfillment functions, including the Company's IT
Product financing in the U.S., allowing the Company to hold virtually no
inventory or IT Product accounts receivable in the U.S., thereby reducing
associated risks and working capital requirements. Under this agreement, the
Company received transaction fees based on the gross profit associated with each
sale. The transition to the Tech Data outsource agreement commenced in the first
quarter of 2001 and by the third quarter of 2001, the substantial majority of
U.S. IT Product sales were being recorded as transaction fees. Under the Tech
Data agreement, reported transaction fees, which represented the substantial
majority of sales transactions recorded on IT Product sales in the U.S. for the
year ended December 31, 2001, were expected to be approximately 5% to 6% of
previously reported IT Product revenues in the U.S. Due to the Company's
transition to the Tech Data outsourcing model and the resultant reporting of
transaction fees rather than gross revenues on IT Product sales in the U.S.,
certain financial comparisons with prior periods may be difficult.
Since 1993, the substantial majority of the Company's revenues have been
derived from the sale of IT Products and services, and this transition to a pure
Technology Business will have a significant effect on the revenues and cost
basis of the Company going forward. As of December 31, 2001, the historical
financial statements present the U.K. IT Products business as a discontinued
operation, and since no decision had been made to divest the U.S. IT Products
and services business at that time, that business is presented as a continuing
operation. As provided by applicable accounting conventions, future financial
statements will present all of the IT Products and services business as a
discontinued operation, which will allow a more focused presentation of the
historical financial trends of the on-going Technology Business.
elcom, inc.
The eBusiness subsidiary of the Company, elcom, inc., develops and licenses
PECOS(TM) remotely- hosted, self-service, Internet and intranet-based purchasing
systems. Through September 30, 2001, elcom, inc., marketed and sold IT Products
in the U.S. using Starbuyer.com, the Company's owned and operated Internet
eMarketplace. On October 1, 2001, all IT Product sales in the U.S. were recorded
through Elcom Services Group. For comparative purposes, sales of IT Products in
the U.S. have been reclassified as if they had been recorded through Elcom
Services Group for all periods presented. In addition, elcom, inc., owns all of
the U.K. operations. On December 31, 2001, the U.K. IT Products business was
sold and the
14
results of operations from that business have been classified as a discontinued
operation for financial reporting purposes. Accordingly, the results of
operations of elcom, inc., for all periods presented reflect technology-related
revenues only. Technology-related revenues for the year ended December 31, 2001
were $4.3 million compared to $1.1 million recorded in the prior year. The 2001
technology-related revenues included $2.9 million arising from a one-time sale
of certain proprietary software to Elcom Information Technology Limited, the
unrelated company that acquired the U.K. IT Products reseller business. The
gross profit for the year ended December 31, 2001 was $3.1 million compared to
$1.1 million in the prior year, primarily as a result of the one-time sale of
software to Elcom Information Technology Limited. Substantially all the
technology-related revenues and gross profit were recorded in the U.S. in both
2001 and 2000.
Elcom Services Group
Prior to the divestiture of the U.S. IT Products and services business to
ePlus on March 29. 2002, Elcom Services Group was a direct marketer of IT
Products and professional services to business customers. Primarily due to
declining gross profit margins on hardware sales with certain large customers,
changes in certain manufacturer's product return policies, and resultant
increased inventory risks starting in 1999, the Company introduced a strategy to
reduce its revenues and related inventory exposure by declining to do business
with clients that did not pay the Company on time as per agreements, or demanded
pricing which the Company was not willing to provide due to many factors,
including decreases in marketing development funding from various manufacturers.
This strategy resulted in a planned significant decrease in revenues for Elcom
Services Group, which effectively eliminated a majority of the Company's
marginal clients and exposure thereto. The Company's outsourcing agreement with
Tech Data was designed to eliminate virtually all inventory and most accounts
receivable-oriented risks in the U.S.
Historically, Elcom Services Group's revenues and resultant gross profit
have been affected by price reductions and decreases in vendor support programs
offered by computer manufacturers. Consequently, in order to increase gross
profit historically, the Company had to sell incremental amounts of IT Products
to offset such price reductions which amplified the impact on the Company's
gross profit of any slowdown in corporate client demand. These price reductions
and manufacturer cutbacks had been substantial over the last several years. The
Company experienced a softening of demand from its clients in 2000, which
continued throughout 2001, related to many factors, including a slow-down in the
IT Products markets and the general economic downturn, exacerbated by the events
of September 11th, which created further economic uncertainty and a greater
curtailing of capital spending programs across almost every industry. Elcom
Services Group's gross margins have varied from quarter to quarter, depending on
the level of key vendor support programs, including rebates, return policies and
price protection, as well as product mix, pricing strategies and other factors.
In addition, as discussed further elsewhere, the Company outsourced its IT
Product logistics, fulfillment and distribution to Tech Data in early 2001. Due
to the transition to this outsourcing model and the resultant reporting of
transaction fees rather than gross revenues on IT Products, certain financial
comparisons with prior periods may be difficult.
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, 2001:
1999 2000 2001
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Gross profit 8.6% 9.3% 24.3%
Sales, general and administrative expenses 12.8% 18.1% 58.9%
Asset impairment, restructuring and other
related charges 2.4% -- 2.9%
Operating profit (loss) (7.0%) (9.5%) (39.2%)
Interest expense (0.7%) (0.6%) (0.5%)
Income tax expense (benefit) (0.2%) (0.3%) --
Net income (loss) from continuing operations (7.3%) (8.8%) (39.5%)
15
Net income (loss) from discontinued
operations (3.0%) 0.4% 3.1%
Gain on sale of discontinued operations -- -- 4.4%
Net income (loss) (10.3%) (8.4%) (31.9%)
Results of Operations
The results of operations for the U.K. IT Products remarketer business that
was sold on December 31, 2001 has been presented as a discontinued operation for
all periods.
Year ended December 31, 2001 compared to the year ended December 31, 2000.
Net Sales. Net sales for the year ended December 31, 2001 decreased to
$62.2 million from $236.0 million in 2000, a decrease of $173.8 million or
73.6%. The decrease in net sales primarily reflects the significant impact of
the industry-wide slowdown in the U.S. for IT Product sales together with the
planned reduction in revenues attributable to the transition to
transaction-oriented fees in the U.S. under the Tech Data outsourcing agreement
whereby the Company recorded transaction fees rather than gross revenues. U.S.
net sales decreased from $235.9 million to $62.1 million, a decrease of 73.7%,
also due to the reasons described above.
Gross Profit. Gross profit for the year ended December 31, 2001 decreased
to $15.1 million from $22.0 million in 2000, a decrease of $6.9 million or
31.5%. The decrease in gross profit dollars is primarily as a result of the
reduction in the volume of sales in the U.S. from the industry-wide slowdown in
purchasing by the Company's customers. Technology-related gross profit increased
to $3.1 million in 2001 from $1.1 million in 2000, an increase of $2.0 million,
or 178.5%, primarily related to the one-time sale to the acquirer of the U.K. IT
Products reseller business. Gross profit as a percentage of net sales increased
to 24.3% in 2001 from 9.3% in 2000, due to both the effect of recording
transaction-oriented fees under the Tech Data outsourcing program, without
incurring the related cost of sales, thereby positively affecting gross profit
as a percentage of sales, and the increase of gross profit from
technology-related sales.
Selling, General and Administrative Expenses. Total selling, general and
administrative ("SG&A") expenses for the year ended December 31, 2001 decreased
to $36.6 million from $42.7 million in 2000, a decrease of $6.1 million or
14.2%. SG&A expenses in the U.S. decreased to $34.7 million for the period ended
December 31, 2001 from $40.7 million for the period ended December 31, 2000, a
decrease of $6.1 million or 14.9%, primarily due to cost reductions resulting
from the savings in personnel costs implemented as a result of the outsourcing
agreement with Tech Data. As a percentage of sales, SG&A expenses for the year
ended December 31, 2001 rose to 58.9% compared to 18.1% in 2000, primarily due
to the decrease in net sales in the U.S., and resulting from recording
transaction-oriented fees under the Tech Data agreement.
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 reflect the
on-going product development of the PECOS(TM) technology prior to reaching
technological feasibility of each new version. The decrease is due to the
increase in expenditures after reaching technological feasibility, which are
reflected in cost of sales.
Asset Impairment, Restructuring and Other Related Charges. In 2001, the
Company recorded asset impairment charges of $1.8 million. Approximately $1.6
million of this charge is related to the decreased utility of software acquired
to augment the Company's PECOS(TM) technology and software purchased to be used
for the IT Products business.
Interest Expense. Interest expense for the year ended December 31, 2001
decreased to $0.3 million from $1.3 million in the comparable year of 2000, a
decrease of $1.0 million. Interest expense in both periods result from the line
of credit borrowings.
Interest Income and Other, Net. Interest income and other, net, for the
year ended December 31, 2001 decreased to $0.1 million from $2.4 million in
2000. This decrease was due to lower monthly cash balances and lower U.S.
interest rates in 2001. The Company also recorded an $0.8 million gain on the
sale of assets in 2000.
16
Net Income (Loss) From Continuing Operations. The Company generated a net
loss for the year ended December 31, 2001 of $24.6 million as a result of the
factors described herein.
Net Income (Loss) From Discontinued Operations. Net income from
discontinued operations increased from $1.0 million in the year ended December
31, 2000 to $1.9 million in the year ended December 31, 2001, a 90% increase.
This is primarily due to an increase in IT Product sales of $12.1 million from
the prior year. Net income from discontinued operations represents the net
operating results for the Company's U.K. remarketer operations, which have been
classified as discontinued operations.
Gain (Loss) From Disposal of Discontinued Operations (net of tax). Gain
from the disposal of discontinued operations (net of tax) was $2.7 million in
the year ended December 31, 2001, resulting from the sale of the U.K. IT
Products reseller business.
Year ended December 31, 2000 compared to the year ended December 31, 1999.
Net Sales. Net sales for the year ended December 31, 2000 decreased to
$236.0 million from $411.8 million in 1999, a decrease of $175.8 million or
42.7%. This decrease was primarily due to the sale of a substantial majority of
the Company's U.K. remarketer group operation in July 1999, as well as an
industry-wide slowdown of IT Products sales. U.S. net sales decreased from
$292.5 million to $235.9 million, a decrease of 19.4%, primarily due to an
industry-wide slowdown and continued adherence to the Company's strategy to
reduce its exposure to clients that do not pay on time, demand pricing that
negatively impacts margins or that would require unacceptable inventory
exposure. U.K. sales decreased from $119.3 million to $0.1 million, due to the
sale of the Company's U.K. remarketer group operation in July, 1999. The results
of operations for the substantial majority of the U.K. remarketer group
operations that were sold in 1999 are classified as continuing operations.
Gross Profit. Gross profit for the year ended December 31, 2000 decreased
to $22.0 million from $35.4 million in 1999, a decrease of $13.4 million or
37.8%. The decrease in gross profit dollars is primarily a result of the
decrease in net sales as described above. Gross profit as a percentage of net
sales increased to 9.3% in 2000 from 8.6% in 1999 as the Company reduced its
exposure to clients who demanded pricing that negatively impacted margins. The
increase in gross profit margin was partially offset by a decrease in the
availability of manufacturer rebate and incremental discount programs.
Selling, General and Administrative Expenses. Total SG&A expenses for the
year ended December 31, 2000 decreased to $42.7 million from $52.9 million in
1999, a decrease of $10.2 million or 19.2%. Most of this decrease reflected the
sale of a substantial majority of the Company's U.K. operations in July 1999. As
a percentage of sales, SG&A expenses for the year ended December 31, 2000 rose
to 18.1% compared to 12.8% in 1999 due to a decrease in sales while many
administrative and overhead expenses remained fixed.
Research and Development Expense. Research and development expense for the
years ended December 31, 2000 and 1999 were $1.7 million and $1.3 million,
respectively, an increase of $0.4 million or 26.2%. The expenditures reflected
the increased product development of the PECOS.ipm technology prior to reaching
technological feasibility of each new version.
Interest Expense. Interest expense for the year ended December 31, 2000
decreased to $1.3 million from $2.8 million in the comparable year of 1999, a
decrease of $1.5 million. Interest expense in both periods results from the line
of credit borrowings. The reduction in 2000 has a reflection of a decrease in
average monthly borrowings under the Company's line of credit, partially offset
by an increase in average U.S. interest rates from 8.25% in 1999 to 9.75% in
2000.
Interest Income and Other, Net. Interest income and other, net, for the
year ended December 31, 2000 increased to $2.4 million from $0.6 million in
1999. This increase was primarily a result of recording an $0.8 million gain on
the sale of assets related to the receipt of funds which were being held in
escrow pursuant to the U.K. remarketer group purchase and sale agreement.
Additionally, the Company had an
17
89% increase in average monthly interest earnings due to higher monthly cash
balances and an increase in interest rates in the U.S.
Income Tax Expense (Benefit). The income tax benefit in 1999 primarily
related to the refund of income taxes paid in prior years in the U.K., net of
certain estimated current state income taxes payable by the Company. The income
tax benefit in 2000 related to the refund of income taxes paid in prior years.
Net Income (Loss) For Continuing Operations. The Company generated a net
loss for the year ended December 31, 2000 of $20.7 million as a result of the
factors described herein.
Net Income (Loss) From Discontinued Operations. Net income (loss) from
discontinued operations represents the net operating results for our U.K.
remarketer business, which has been classified as discontinued operations as a
result of the sale of the business on December 31, 2001. Net income (loss) from
discontinued operations increased from a loss of $12.5 million in the year ended
December 31, 1999 to a gain of $1.0 million in the year ended December 31, 2000,
primarily due to a reduction in U.K. SG&A expenses.
Liquidity and Capital Resources
Net cash provided by operating activities from continuing operations for
the year ending December 31, 2001 was $9.1 million, resulting primarily from
$26.2 million generated from the decrease in accounts receivable, (a result of
the transition to the Tech Data model), $5.7 million in non-cash depreciation
and amortization, and $1.8 million from impairment charges, offset by the $24.6
million loss from continuing operations. Net cash provided by operations may not
be indicative of future results due to the sale of certain operations and the
transition to a technology business.
Cash used in financing operations was $23.1 million, which primarily was a
result of the payoff of the Company's line of credit, due to transitioning to
the Tech Data agreement. Cash used in investing activities was primarily $1.0
million for the purchase of property, equipment and software. Net cash used in
discontinued operations was $6.4 million.
At December 31, 2001, the Company's principal sources of liquidity included
cash and cash equivalents of $10.8 million. Cash and cash equivalents include
$125,000 that was pledged as collateral for a Letter of Credit issued in the
ordinary course of business.
In January 2001, the Company outsourced its IT Product fulfillment,
distribution, inventory, logistics, and product configuration in the U.S. to
Tech Data. As a result of this agreement, the Company's working capital
requirements for inventory and accounts receivable in the U.S. were
substantially reduced. Accordingly, the Company notified Deutsche Financial
Services Corporation ("DFSC") of its intent to terminate its DFSC line of credit
in the U.S., and the Company paid off its entire balance with DFSC. The
Company's letter of credit of $15 million that secured the DFSC facility also
expired, and the pledge of $15 million of cash became unrestricted.
As described elsewhere herein, on December 31, 2001, the Company sold
substantially all of the assets and liabilities of its U.K. IT Products
remarketing business to AJJP Limited. As a result, AJJP assumed the U.K. Lloyds
credit facility. The terms of an agreement with Lloyds provide that AJJP will be
solely entitled to and responsible for the discharge of all rights and
obligations of the Company under a debt purchase agreement. Lloyds will notify
the Company in writing as soon as all debt from any obligations arising prior to
the sale is collected and all obligations referred to are therein discharged.
Since all customer receivables become ineligible for the purpose of serving as
collateral borrowing after 90 days, the Company anticipates receiving a notice
of discharge during the second quarter of 2002.
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. Further, purchases
may be made from time to time in the open market or in privately negotiated
18
transactions based on then-existing market conditions. The common stock
purchased will be used for employee stock option grants and other corporate
purposes.
On December 30, 1999, the Company signed an Equity Line with Cripple Creek
Securities, an investor introduced to the Company by Wit Soundview. 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, in final payment of its obligation to Cripple Creek, the
Company issued warrants to purchase 145,200 and 4,800 shares of common stock to
Cripple Creek. The warrants are currently exercisable, have an exercise price of
$1.81 and $6.30, respectively, and expire on December 2, 2006.
The Company's principal commitments consist of leases on its office
facilities and capital leases. See Note 8 to the consolidated financial
statements. In addition, the Company will require ongoing investments in
property, equipment and software.
Risk Factors
As of December 31, 2001, the Company had approximately $10.8 million of
cash and cash equivalents and did not have any outstanding debt. The Company has
incurred $82.2 million of cumulative net losses for the three-year period ended
December 31, 2001. Total shareholders' equity decreased from $30.6 million at
December 31, 2000 to $11.2 million at December 31, 2001. The Company believes it
will continue to incur losses throughout 2002, and that the Company has
sufficient liquidity to fund operations into the third quarter of 2002 without
the need to raise additional capital.
The Company's consolidated financial statements as of December 31, 2001
have been prepared under the assumption that the Company will continue as a
going concern for the year ending December 31, 2002. The Company's independent
accountants, KPMG LLP, have issued a report dated March 29, 2002 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 through
December 31, 2002 without additional capital becoming available. The Company's
ability to continue as a going concern is dependent upon its ability to grow
revenue, attain further operating efficiencies and attract new sources of
capital. The Company intends to seek additional capital, which would result in
dilution for its shareholders. There can be no assurance that the Company will
be able to raise capital, or if so, on what terms or what the timing thereof
might be. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to bad debts, income taxes, and impairment of long-lived
assets. 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:
The Company maintains allowances for doubtful accounts for estimated losses
resulting from customers that fail to make required payments, however,
additional allowances may be required. In analyzing the adequacy of the
allowance, the Company considers past experiences with the customers and
related payment history, the viability of the customers' financial
condition, and overall historical loss experience. At a minimum, the
Company maintains an allowance for accounts greater than 90 days past due
and an estimate for all other accounts based on the results of the
assumptions previously mentioned.
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
2002, the
19
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.
The Company records impairment losses on long-lived assets to be held and
used or to be disposed of other than by sale when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amount
of those items. The Company's cash flow estimates are made for the
remaining useful life of the assets and are based on historical results
adjusted to reflect the best estimate of future market and operating
conditions. The net carrying value of assets not recoverable is reduced to
fair value. The Company's estimates of fair value represent the best
estimate based on industry trends and reference to market rates and
transactions.
Significant management judgments and estimates must also be made and used
in connection with the revenue recognized in any accounting period. Material
differences may result in the amount and timing of revenue for any period if the
Company's management made different judgments or utilized different estimates.
For most of its transactions, the Company applies the provisions of SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
However, revenues from sales of software are recognized in accordance with AICPA
Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended and
interpreted. The Company recognizes revenue from the sale of hardware and
software products when persuasive evidence of an arrangement exists, the product
has been delivered, the fee is fixed and determinable, and collection of the
resulting receivable is reasonably assured.
Seasonality and Impact of Inflation
Generally, sales in the business and computer products remarketer industry
slow in the summer months and, in the U.S., are stronger in the fourth calendar
quarter and somewhat weaker in the first calendar quarter. Due to its current
size and the nature of its client base, the Company's sales have reflected this
seasonality; however, the Company has now completed its shift in focus to the
licensing of eProcurement and eMarketplace Internet software solutions.
Inflation has been relatively low in recent years and, accordingly, the
Company has not been significantly impacted by the effects of general inflation.
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K could include forward-looking
information. All statements, other than statements of historical fact,
including, without limitation, those with respect to the Company's objectives,
plans and strategies set forth herein and those preceded by or that include the
words "believes," "expects," "targets," "intends," "anticipates," "plans," or
similar expressions, are forward-looking statements. Although the Company
believes that such forward-looking statements are reasonable, it can give no
assurance that the Company's expectations are, or will be, correct. These
forward-looking statements involve a number of risks and uncertainties which
could cause the Company's future results to differ materially from those
anticipated, including: availability and terms of appropriate working capital
and/or other financing, particularly in light of the qualified opinion from the
Company's independent accountants as to the Company's ability to survive as a
going concern absent any such financing; the overall marketplace and client's
acceptance and usage of eCommerce software systems, the impact of competitive
technologies, products and pricing, particularly given the subsequently larger
size and scale of certain competitors and potential competitors; control of
expenses, revenue growth, corporate demand for eProcurement and eMarketplace
solutions; and availability of IT Products, changes in manufacturer policies
reducing price protection, returns and other policies, risks associated with
acquisitions of companies, the consequent results of operations given the
aforementioned factors, and other risks detailed from time to time in this
Annual Report on Form 10-K, the Company's 2000 Annual Report on Form 10-K and in
the Company's other SEC reports and statements, including particularly the
Company's "Risk Factors" contained in the prospectus included as part of the S-3
Registration Statement that became effective on May 11, 2000.
20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates and
exchange rates, which could affect its future results of operations and
financial condition.
The Company's cash and cash equivalents are sensitive to interest rate
fluctuations. Changes in interest rates would result in changes in interest
income resulting from the difference between historical interest rates on these
financial instruments and the interest rates that these variable-rate
instruments may adjust to in the future. Based on December 31, 2001 balances,
the Company estimates that a 1% change in interest rates would have no impact on
income (loss) before income taxes.
The Company's investment in its U.K. subsidiaries is sensitive to
fluctuations in the exchange rate between the U.S. dollar and the U.K. pound
sterling. The effect of such fluctuations is included in accumulated other
comprehensive income in the Consolidated Statements of Stockholders' Equity. To
date, such fluctuations have amounted to an accumulated amount of $(519,000).
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 14 and 15, respectively, of the Notes to Consolidated
Financial Statements.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
No items to report.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning the directors of the Company is set forth in the
definitive Proxy Statement ("the Proxy Statement") to be sent to stockholders in
connection with the Company's 2002 Annual Meeting of Stockholders, under the
heading "Election of Directors", which information is incorporated herein by
reference. Information concerning each executive officer of the Company is set
forth in the Proxy Statement under the heading "Management - Executive
Officers", which information is incorporated herein by reference.
Item 11. Executive Compensation
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation", which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Principal
Stockholders and Management Ownership", which information is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions
The information concerning certain relationships and related transactions is set
forth in the Proxy Statement under the heading "Certain Transactions", which
information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
The following documents are filed as part of this Annual Report on Form
10-K:
(a) (1) Consolidated Financial Statements:
See Index to Consolidated Financial Statements on page F-1.
(2) Consolidated Financial Statement Schedule for each of the Three
Years in the Period Ended December 31, 2001:
Report of Independent Auditors on Supplementary Information
Schedule II - Valuation and Qualifying Accounts
See Index to Schedule on page S-1.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
(3) Index to Exhibits:
The exhibits filed as part of this Form 10-K are listed on the
Index to Exhibits beginning on page E-1, which Index to Exhibits is incorporated
herein by reference.
(b) Reports on Form 8-K:
The Company filed a current Report on Form 8-K, dated November 27,
2001, announcing that Elcom Systems, Limited, its U.K. eBusiness subsidiary, had
been selected by the Scottish Executive to provide an eProcurement system for
the Scottish government's departments and agencies with Cap Gemini Ernst & Young
selected as the primary contractor.
The Company filed a current Report on 8-K, dated November 30, 2001,
announcing the Company had entered into a heads of agreement with a company
(formed by AJJP Limited), the management team of its U.K. information technology
products subsidiary, Elcom Holdings Limited, to sell its U.K. information
technology remarketer business.
(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.
22
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 29, 2002 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 29, 2002
Robert J. Crowell Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
/s/ Peter A. Rendall Corporate Executive March 29, 2002
Peter A. Rendall Vice President,
Chief Financial Officer
and Secretary (Principal Financial
and Accounting Officer)
/s/ William W. Smith Vice Chairman and Director March 29, 2002
William W. Smith
/s/ Richard J. Harries, Jr. Director March 29, 2002
Richard J. Harries, Jr.
/s/ John W. Ortiz Director March 29, 2002
John W. Ortiz
23
CONSOLIDATED FINANCIAL STATEMENTS
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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, 2000 and 2001 F-3
Consolidated Statements of Operations and Other Comprehensive
Income (Loss) for the years ended December 31, 1999, 2000
and 2001 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 2000 and 2001 F-5
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 2000 and 2001 F-6
Notes to Consolidated Financial Statements F-7 to F-24
F-1
Independent Auditors' Report
To the Board of Directors and Shareholders of
Elcom International, Inc.:
We have audited the accompanying consolidated balance sheets of Elcom
International, Inc. and subsidiaries as of December 31, 2000 and 2001, 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, 2001. 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, 2000 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, 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.
As discussed in Note 1(i) to the consolidated financial statements, the Company
changed its method of accounting for the impairment or disposal of long-lived
assets.
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
March 29, 2002
F-2
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
2000 2001
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (including restricted
cash of $15,000 and $125 at December 31, 2000
and 2001, respectively) $ 23,250 $ 10,813
---------- ----------
Accounts receivable (Notes 2 and 5):
Trade 26,466 3,783
Other 4,715 374
---------- ----------
31,181 4,157
Less-Allowance for doubtful accounts 1,856 317
---------- ----------
Accounts receivable, net 29,325 3,840
Inventory (Note 5) 1,276 3
Prepaids and other current assets 1,724 459
Current assets of discontinued operations
(including cash of $9,063 at December 31,
2000) (Note 9) 25,104 --
---------- ----------
Total current assets 80,679 15,115
---------- ----------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software 28,365 27,868
Land, buildings and leasehold improvements 2,132 2,125
Furniture, fixtures and equipment 6,245 5,941
---------- ----------
36,742 35,934
Less -- Accumulated depreciation and amortization 24,698 29,706
---------- ----------
12,044 6,228
OTHER ASSETS 372 209
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS
(Note 9) 2,109 --
---------- ----------
$ 95,204 $ 21,552
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit (Note 5) $ 22,141 $ --
Accounts payable 2,974 3,374
Accrued expenses and other current liabilities 7,283 6,131
Current portion of capital lease obligations
(Note 8) 474 502
Short-term debt (Note 6) 647 --
Current liabilities of discontinued operations
(including lines of credit of $11,100 at
December 31, 2000) (Note 9) 30,271 --
---------- ----------
Total current liabilities 63,790 10,007
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION
(Note 8) 813 311
---------- ----------
Total liabilities 64,603 10,318
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Note 7):
Preferred stock, $.01 par value; Authorized
-- 10,000,000 shares -- Issued and
outstanding - none -- --
Common stock, $.01 par value; Authorized --
50,000,000 and 100,000,000 shares --
issued -- 31,207,477 and 31,406,796 shares 312 314
Additional paid-in capital 114,196 114,514
Accumulated earnings (deficit) (78,484) (98,363)
Treasury stock, at cost -- 409,609 and
530,709 shares (4,552) (4,712)
Accumulated other comprehensive income (loss) (871) (519)
---------- ----------
Total stockholders' equity 30,601 11,234
---------- ----------
$ 95,204 $ 21,552
========== ==========
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,
1999 2000 2001
------------ ---------- ---------
Net sales:
Product related sales $ 410,886 $ 234,885 $ 54,355
License sales 865 1,112 4,277
Transaction fees -- -- 3,589
------------ ---------- ---------
Total net sales 411,751 235,997 62,221
------------ ---------- ---------
Cost of sales
Product related sales 376,355 213,954 45,917
License sales -- 12 1,214
------------ ---------- ---------
Total cost of sales 376,355 213,966 47,131
------------ ---------- ---------
Gross profit 35,396 22,031 15,090
------------ ---------- ---------
Operating Expenses:
Selling, general and administrative 52,885 42,719 36,633
Research and development 1,343 1,695 1,089
Asset impairment, restructuring and other related charges (Note 10) 10,057 -- 1,776
------------ ---------- ---------
Total operating expenses 64,285 44,414 39,498
------------ ---------- ---------
Operating profit (loss) (28,889) (22,383) (24,408)
Interest expense (2,766) (1,334) (296)
Interest income and other, net 623 2,369 145
------------ ---------- ---------
Income (loss) before income taxes (31,032) (21,348) (24,559)
Income tax expense (benefit) (Note 12) (965) (642) --
------------ ---------- ---------
Net income (loss) from continuing operations (30,067) (20,706) (24,559)
Discontinued operations (Note 9):
Net income (loss) from discontinued operations, net of tax (12,471) 952 1,942
Gain (loss) on disposal of discontinued operations, net of tax -- -- 2,738
------------ ---------- ---------
Net income (loss) (42,538) (19,754) (19,879)
Comprehensive loss, net of tax: (307) (1,409) 352
------------ ---------- ---------
Other comprehensive income (loss) $ (42,845) $ (21,163) $ (19,527)
============ ========== =========
Basic and diluted net income (loss) per share data:
Continuing operations $ (1.08) $ (0.68) $ (0.79)
Discontinued operations (0.45) 0.03 0.06
Disposal of discontinued operations -- -- 0.09
------------ ---------- ---------
Basic and diluted net loss per share $ (1.53) $ (0.65) $ (0.64)
============ ========== =========
Weighted average number of basic and diluted shares outstanding 27,846 30,487 30,912
============ ========== =========
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 Accumulated
---------------------- Additional Accumulated Treasury Other Total
Number $.01 Par Paid-in Earnings Stock, Comprehensive Stockholders'
of Shares Value Capital (Deficit) At Cost Income (Loss) Equity
---------- --------- ----------- ------------ ----------- ------------- ----------
BALANCE, DECEMBER 31, 1998 27,547,061 $ 275 $ 101,271 $ (16,192) $ (1,182) $ 845 $ 85,017
Exercise of common stock options 1,581,524 16 4,840 -- -- -- 4,856
Purchase of treasury stock -- -- -- -- (100) -- (100)
Net loss -- -- -- (42,538) -- -- (42,538)
Cumulative translation adjustment -- -- -- -- -- (307) (307)
---------- --------- ----------- ------------ ----------- ------------- ----------
BALANCE, DECEMBER 31, 1999 29,128,585 $ 291 $ 106,111 $ (58,730) $ (1,282) $ 538 $ 46,928
Exercise of common stock options 2,017,940 20 8,618 -- -- -- 8,638
Sale of common stock 60,952 1 319 -- -- -- 320
Cost of capital -- -- (852) -- -- -- (852)
Purchase of treasury stock -- -- -- -- (3,270) -- (3,270)
Net loss -- -- -- (19,754) -- -- (19,754)
Cumulative translation adjustment -- -- -- -- -- (1,409) (1,409)
---------- --------- ----------- ------------ ----------- ------------- ----------
BALANCE, DECEMBER 31, 2000 31,207,477 $312 $ 114,196 $ (78,484) $ (4,552) $ (871) $ 30,601
Exercise of common stock options 199,319 2 318 -- -- -- 320
Purchase of treasury stock (160 -- -- -- -- -- (160)
Net loss -- -- -- (19,879) -- -- (19,879)
Cumulative translation adjustment -- -- -- -- -- 352 352
---------- --------- ----------- ------------ ----------- ------------- ----------
BALANCE, DECEMBER 31, 2001 31,406,796 $ 314 $ 114,514 $ (98,363) $ (4,712) $ (519) $ 11,234
========== ========= ============ ============ =========== ============= ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ELCOM INTERNATIONAL, INC.