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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-27376
---------------
ELCOM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3175156
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
10 OCEANA WAY
NORWOOD, MASSACHUSETTS 02062
(781) 440-3333
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of exchange
Title of each class on which registered
------------------- -------------------
Common Stock, $.01 par value OTCBB
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act.)
Yes No X
--- ---
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the closing price of such stock on the OTCBB on March
3, 2003, was approximately $3,300,000. For purposes of this disclosure only, the
registrant has assumed that its directors, executive officers, and beneficial
owners of 10% or more of the registrant's common stock are affiliates of the
registrant.
The registrant had approximately 30,902,000 shares of Common Stock,
$.01 par value, outstanding as of March 3, 2003.
PART I
ITEM 1. BUSINESS
OVERVIEW
As discussed further herein, on December 31, 2001, the Company divested
itself of its U.K. IT Products business and on March 29, 2002, the Company
divested itself of its U.S. IT Products and services business. The divestiture
of these businesses has allowed the Company to complete its transition to being
a provider of remotely-hosted, eProcurement and eMarketplace ("eSourcing")
Internet- and intranet-based software solutions, which automate many supply
chain and financial settlement functions associated with procurement. As a
result of these divestitures, commencing in the second quarter of 2002, the
Company did not record any revenues arising from the sale of IT Products and
associated services. From the second quarter of 2002, the Company's sole source
of revenue has been the licensing of eSourcing solutions and associated
professional services. See "Risk Factors Related to Liquidity." As provided by
applicable accounting conventions, the U.S. IT Products and services business
and the U.K. IT Products business have been presented as discontinued operations
for all periods presented.
As it relates to the Company's eSourcing business, the Company intends
to augment its core eProcurement Marketplace solutions with other licensed
supply chain-oriented systems to enable the conduct of interactive procurement
and financial settlement. The Company has licensed a dynamic trading system
platform to provide auction, reverse auction, and other electronic negotiation,
or eNegotiation, functions and also markets an asset management system, both
from third parties. Since its inception in 1992, elcom, inc., the Company's
eSourcing subsidiary, has developed its PECOS(TM) (Professional Electronic
Commerce Online System) system, which automates many supply chain and financial
settlement functions associated with procurement. The Company's PECOS(TM)
solution can support large numbers of end-user clients, products, suppliers and
transactions and its transaction server middleware provides a scalable
foundation for robust system performance and high transaction capacity. The
eProcurement and eMarketplace systems the Company offers for licensing include:
PECOS INTERNET PROCUREMENT MANAGER ("PECOS.ipm") is based on ten years
of eCommerce technology development and, as an Internet-based system, has been
in development for approximately five years. PECOS.ipm is a robust and
feature-rich Internet-based, remotely-hosted, automated procurement system. As a
remotely-hosted system, PECOS.ipm allows the Company's clients to use their
Internet/intranet to access the system to identify and select products, check
pricing, automate the internal approval process and facilitate invoicing and
payment to suppliers. Since it is remotely-hosted, PECOS.ipm is rapidly
deployable and has a minimal impact on a client's computer system and personnel
resources. elcom, inc. acts as its own application service provider and hosts
PECOS.ipm on its own hardware platform, giving clients a single point of contact
and responsibility. In addition, PECOS.ipm is configurable by a client and does
not require scripting or consultants to modify administrative items or approval
workflows. Because it has invoicing and receiving functionality and automated
financial settlement functions (including support for procurement card
technology), PECOS.ipm can operate as a standalone system without an expensive
back-end enterprise resource planning, or ERP, system in place, thereby enabling
rapid deployment and easier implementation for clients. Clients may integrate
PECOS.ipm into their ERP system using simple data feeds. Further, the Company
facilitates supplier catalog loads and manages catalog content for the client
when the system is remotely-hosted. Since October 2001, the Company has been
marketing version 8.0 of its PECOS(TM) technology, which is designed to offer a
single solution for robust eProcurement functionality, including "buy-side",
which is the capability of a client to order products from its supplier,
ePurchasing functionality, including "sell-side", which is the capability of a
client to have its customers make purchases electronically, and private
eMarketplace functionality, including "eMarketplace", which is the capability
for a client to offer an eMarketplace to both buy and sell products in a
"community" of users which may include both suppliers and customers. In
addition, version 8.0 offers enhanced multi-organizational, multi-lingual and
multi-currency capabilities as well as dynamic documents, eForms and improved
organizational data security. The multi-organizational capabilities are critical
for large organizations which require each sub-entity of an organization to have
its
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own approval rules, catalog access, report generation, and the ability to
maintain the confidentiality of other entities' data. This same capability could
allow large eMarketplaces to be formed. Version 8.5, which was announced in May
2002 and implemented in the third quarter of 2002, includes robust support for
procurement card technology and automated financial settlement.
PECOS INTERNET COMMERCE MANAGER ("PECOS.icm") is the Company's
eDistribution configuration version of PECOS(TM) that automates the online
selling process from product information through financial settlement. PECOS.icm
supports the sales of virtually any type of product or service, and includes
functionality such as electronic catalogs, shopping cart and shopping cart
transfer, real time price and availability access, product configuration and
credit card processing. PECOS.icm also supports a virtual sourcing engine that
enables the online purchase and/or sale of commodity products, such as IT
Products, without the need to maintain inventory.
The Company also offers an optional dynamic trading system licensed
from a third party, which includes request for proposal, private reverse
auctioning and other features. In addition, the Company offers an asset
management system and is in discussions with several other software firms to
offer their systems. These additions would allow the Company to offer a suite of
supply chain modules to augment its core eSourcing functionality. Further, in
conjunction with the Commonwealth British Council (U.K.), the Company has
developed eMarketplace World Network(TM), a global eMarketplace hub, which is
designed to interconnect with world-wide eMarketplaces comprised of vertical and
geographic trading communities within an industry, allowing eMarketplaces to
connect their trading communities so that buyers can easily review participating
eMarketplaces and trade with the suppliers participating in those eMarketplaces.
The Commonwealth British Council is responsible for marketing this eMarketplace.
Prior to the divestiture of the IT Products business in the U.K. on
December 31, 2001 and the IT Products and services business in the U.S. on March
29, 2002, the Company had historically marketed 130,000 IT Products to
commercial, educational and governmental accounts via several electronic
methodologies. Throughout 2001, the overall decline in economic activity, as
well as capital and discretionary spending by the Company's customer base,
significantly decreased sales and resultant profitability from this business
line. Demand for IT Products was further impacted by the events of September
11th and their aftermath. Even though the demand for IT Products was weak
throughout 2001, the Company demonstrated success in acquiring incremental
customers beginning in the middle of 2001 by offering PECOS.icm to new customers
at no charge in return for a portion of their IT Products spending, which
generated transaction-oriented fees for the Company as a sales agent of Tech
Data Corporation ("Tech Data"). However, the decline in demand from existing IT
Products customers and the uncertainty surrounding the overall economy caused
the Company to carefully review its business operations. In order to reduce
operational and financial risks and properly align the Company's operations with
the economic environment, the Company decided to exit the IT Products and
services business to reduce costs and allow the Company to focus exclusively on
its core eSourcing technology.
As part of its strategy to reduce cash outlays and to transition to a
pure technology-based model, on December 31, 2001, the Company sold
substantially all of the assets and liabilities of its U.K. IT Products
remarketing business to AJJP Limited, a company formed by certain members of the
former U.K. IT Products remarketing business. AJJP Limited subsequently changed
its name to Elcom Information Technology Limited. Elcom Systems Limited, an
indirect U.K. subsidiary of the Company, continues to operate the Company's U.K.
technology business, primarily focusing on eSourcing in the commercial and
governmental sectors. As a result of the sale of the U.K. IT Products
remarketing business, the consolidated financial statements, including the
results of operations and selected financial data contained herein, have been
presented as if the U.K. IT Product remarketing business were a discontinued
operation for all periods presented. Accordingly, the results of operations of
the business, including revenues, gross profit and expenses, are reported as a
single line item below net income (loss) from continuing operations for all
periods presented.
The final transition to a pure technology based model was completed on
March 29, 2002, at which point the Company sold certain assets that were used in
the Company's U.S. IT Products and services activities to ePlus Technology, Inc.
("ePlus"). The principal assets sold were customer lists, customer
3
contracts and certain fixed assets. In addition, ePlus acquired a perpetual
license for certain of the Company's software and assumed one of the Company's
property leases in San Diego, California. The terms of the sale also provided
for a cash payment and that the Company support ePlus with managed services to
transition the IT Products and services activities to ePlus, including use of
certain of the Company's leased facilities. The Company ceased providing managed
services to ePlus in February 2003. The Company also issued warrants to purchase
300,000 shares of the Company's common stock to ePlus. The warrants are
exercisable after September 29, 2002, have an exercise price of $1.03 and expire
on March 29, 2009. Accordingly, the results of operations of the business,
including revenues, gross profit and expenses are reported as a single line item
below net income (loss) from continuing operations for all periods presented.
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE OVERVIEW
Forrester Research estimates that the business-to-business electronic
commerce market will grow from $403 billion in 2000 to $2.7 trillion by 2004.
Gartner Group has forecasted the market for eProcurement license revenues to
grow from $0.7 billion in 2002 to $1.1 billion in 2005. These research forecasts
indicate that adoption of eProcurement and eMarketplace systems will create a
large market opportunity for solution providers as the market moves from early
adopters, currently characterized primarily by Fortune 1000 companies, to
mid-market and mainstream companies in 2003 and beyond.
PRODUCTS AND PRICING
Products. The Company develops and licenses its PECOS(TM)
remotely-hosted, self-service, Internet and web-based automated purchasing and
marketplace systems, as described above. The Company also offers a dynamic
trading system and asset management system from third parties.
Pricing. The Company believes that PECOSTM, including its
remotely-hosted automated eProcurement and eMarketplace system(s), is
competitively priced compared to license fees charged by other eProcurement
software providers.
PROFESSIONAL SERVICES
elcom, inc.'s professional services group offers various consulting and
supplier services to its clients. These services range from implementation of
PECOS.ipm and training, to interfacing data from PECOS.ipm into back-end ERP
systems. Suppliers are also offered services associated with catalog content and
categorization, loading procedures and automated data update methodologies.
MANAGEMENT INFORMATION SYSTEMS
In the U.S., the Company licenses and utilizes software from Oracle
Corporation and other software firms for its Management Information System
("MIS") to allow management to monitor and manage the Company. The Company's MIS
incorporates modules supporting general ledger, accounts payable, purchasing,
accounts receivable, inventory and order entry.
The Company's operations are dependent in part upon its ability to
protect its MIS network infrastructure in its Norwood, MA facility against
damage from physical break-ins, natural disasters, operational disruptions and
other events. To protect the Company's data and provide service if the Company's
data center were to become inoperative, the Company has a disaster-recovery
system agreement with a major computer and services company.
SALES AND MARKETING
As of December 31, 2002, the Company's sales and support personnel
operated from two locations, Norwood, MA (U.S.A.) and Slough (U.K.). The Company
markets and sells its eSourcing solutions primarily through its indirect sales
channels. The Company utilizes technical professionals who create
organization-specific proposals, presentations and demonstrations that address
the specific needs of
4
each potential client. In 2002, the Company limited its marketing activities,
including activities related to its channel partners, in response to the cost
containment measures undertaken by the Company.
CUSTOMER SERVICE AND SUPPORT
The Company believes that customer satisfaction is essential for its
long-term success and offers comprehensive customer assistance programs. The
Company's technical support provides response to and resolution of customer
technical inquiries and is available to clients by telephone, over the web or by
electronic mail. The Company uses a customer service automation system to track
each customer inquiry until it is resolved.
COMPETITION
The market for eSourcing solutions is relatively new and evolving
rapidly. The Company expects competition in this market to intensify in the
future. Among other factors, before licensing an eBusiness system, the Company
believes potential clients consider the cost of the system compared to the level
of features and functions available in electronic commerce ("eCommerce")
applications and the cost to acquire, implement and maintain the system, as well
as the length of time to implement a system and, as applicable, integrate it
with a company's existing computer system. The Company competes with vendors of
prepackaged eCommerce software, vendors of software tools for developing
eCommerce applications and systems integrators. The Company's competitors
include Ariba, Inc. and Commerce One, Inc. The Company anticipates future
competition from other emerging and established companies, including Oracle,
IBM, and SAP AG, all of which have announced products or alliances to offer
Internet-based eCommerce. The Company's potential competitors also include
systems integrators such as Electronic Data Systems (EDS) and a number of EDI
solution vendors.
Certain of these and other competitors have longer operating histories
and most have significantly greater financial, technical, marketing and other
resources than the Company and thus may have more extensive sales or
distribution networks and may be able to develop or respond more quickly to new
or changing opportunities, technologies and client requirements. Also, many
current and potential competitors have greater name recognition and more
extensive client bases that could be leveraged, thereby gaining market share to
the Company's detriment. Such competitors may be able to undertake more
extensive promotional activities, adopt more aggressive pricing policies and
offer more attractive terms to purchasers than the Company and to bundle their
products in a manner that may discourage users from purchasing products offered
by the Company. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to enhance their products. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. There can be no assurance that the Company will be
able to compete effectively with competitors or that the competitive pressures
faced by the Company will not have an adverse effect on the Company's business,
results of operations and/or financial condition.
INTELLECTUAL PROPERTY
The Company's success and ability to compete are dependent, in part,
upon its proprietary technology. While the Company relies to a certain extent on
trademark, trade secret, patent and copyright law to protect its technology, the
Company believes that factors such as the technological and creative skills of
its personnel, new product developments, frequent product enhancements, name
recognition and reliable product availability and distribution are of equal
importance for establishing and maintaining a competitive position. Although the
Company has received a patent on certain, specific aspects of its PECOS(TM)
technology, there can be no assurance that other entities will not develop, or
have not developed, technologies that are similar or superior to the Company's
technology. The source code for the Company's proprietary software also is
protected both as a trade secret and as an unregistered copyrighted work.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use some portions of the Company's products or technology
without authorization, or to develop similar technology independently. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries.
5
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce between PCs, among local area networks or on the Internet. However,
due to the increasing popularity and use of PCs and the Internet, it is possible
that additional laws and regulations may be adopted with respect thereto,
covering issues such as user privacy, pricing and characteristics, taxation of
Internet sales and quality of products and services. The adoption of any such
laws or regulations may decrease the growth of eCommerce and/or the Internet,
which could in turn decrease the demand for the Company's products and increase
the Company's cost of doing business or otherwise have an adverse effect on the
Company's business, operating results or financial condition. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel and personal privacy is evolving.
ENVIRONMENTAL MATTERS
Based on the Company's experience to date, the cost of compliance with
environmental matters has been immaterial and the Company believes that it is in
material compliance with applicable environmental laws and regulations.
PERSONNEL
As of December 31, 2002, the Company had a total of 57 personnel. The
Company's personnel are not represented by any labor union and the Company
believes that its personnel relations are good. The Company's future success
depends, in significant part, upon the continued service of its key technical
and senior management personnel and its continuing ability to attract and retain
highly qualified technical and managerial personnel. Competition for highly
qualified personnel is intense and there can be no assurance that the Company
can retain its key managerial and technical personnel or that it will be able to
attract or retain additional highly qualified technical and managerial personnel
in the future. As of March 2, 2003, the Company employed 48 personnel in the
U.S. and U.K.
COMPANY TRADE NAMES AND TRADEMARKS
The Company has referred to a variety of other entities and products in
this Annual Report on Form 10-K, certain of which are tradenames or trademarks.
Such tradenames or trademarks are the property of the respective companies
owning such tradenames and trademarks.
ITEM 2. PROPERTIES
As of December 31, 2002, the Company leased the properties set forth
below. The facility leases vary in remaining length, from two months to four
years. See Note (6) to the consolidated financial statements, included elsewhere
in this Annual Report on Form 10-K.
APPROXIMATE
SQUARE
LOCATION FOOTAGE USE
--------------------------------------------------------------------------------------------------------
Norwood, Massachusetts 36,000 Corporate Headquarters and elcom, inc. Headquarters
Canton, Massachusetts 84,000 Property sublet to a third party through remaining lease term
Canton, Massachusetts 42,800 Vacant property, lease term ends March 13, 2003
New York 5,570 Property sublet to a third party through remaining lease term
6
Effective December 4, 2002, the landlord for the 42,800 square foot
Canton location and the Company executed an agreement to terminate the lease,
provided the Company delivers to landlord a notice of its election to so
terminate the lease within a certain period of time (the "Canton Lease
Termination Agreement"). From and after the lease termination date until the
earlier of the date the landlord sells the premises or the another tenant takes
possession of the premises, the Company continues to be obligated to pay taxes
under such lease and maintain the premises and insurance on the premises. In
early February 2003, the Company received notice from the landlord that the
Company was in breach of the lease for failure to timely pay rent for the month
of February and real estate taxes previously billed to the Company. Such amounts
are less than $40,000 in the aggregate. The landlord has indicated that it is
reserving all its rights and remedies under the lease. Such rights include, but
are not limited to, landlord's election to require the Company to pay liquidated
damages for the unexpired term of the rental or other payments named in the
lease. On March 5, 2003, Company provided landlord with notice, pursuant to the
Canton Lease Termination Agreement that Company is terminating the lease
effective March 13, 2003.
In February 2003, the Company received notice that it was in default
under the terms and conditions of the lease for the New York premises. The
notice stated that the Company had failed to pay the landlord rent and
additional rent of approximately $53,000. In the event that Company fails to
cure such default, upon the exercise of landlord's rights under the lease for
the New York premises, landlord could elect to terminate the lease. Pursuant to
such lease, Company would continue to be obligated to pay any and all rent and
additional rent for the original term of the lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various claims, disputes and other
proceedings relating to former employees and other matters arising in the normal
course of its business. In the opinion of management, the outcome of these
matters will not have a material adverse effect on the consolidated financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Prior to August 11, 2002, the Company's Common Stock was listed on the
Nasdaq National Market. From August 11, 2002 to January 15, 2003, the Company's
Common Stock was listed on the Nasdaq SmallCap Market. Since January 16, 2003,
the Company's Common Stock commenced trading on Nasdaq's Over The Counter
Bulletin Board, ("OTCBB") under the symbol ELCO. As of December 31, 2002, there
were approximately 338 stockholders of record of the Company's Common Stock.
This number does not reflect persons or entities who hold their stock in nominee
or "street name" through various brokerage firms which persons or entities are
estimated by the Company to be in excess of 16,000 as of December 31, 2002. The
high and low closing sales prices reported by the Nasdaq National Market or
Nasdaq SmallCap Market for each of the quarters in the two year period ended
December 31, 2002 are set forth in the table below. For the period from January
1, 2003 to March 5, 2002, such high and low closing sales prices (bid quotations
beginning January 16, 2003) were $0.24 and $0.07, respectively. The
over-the-counter market bid quotations reflect inter-dealer prices, without
retail mark-up, mark-downs, or commissions and may not represent actual
transactions.
7
2002 2001
--------------------------- ----------------------------
Quarter Ended High Low High Low
-----------------------------------------------------------------------------------
March 31, $1.680 $0.870 $5.125 $1.719
June 30, $0.850 $0.370 $2.850 $1.531
September 30, $0.690 $0.180 $1.730 $0.910
December 31, $0.440 $0.160 $1.950 $1.240
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently does not anticipate paying any dividends in the
foreseeable future. Any payment of future dividends will be at the discretion of
the Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the Company's Board of Directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES
None
EQUITY COMPENSATION PLAN INFORMATION
See Item 12 for the disclosure required by Item 201(d) of Regulation
S-K.
8
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company for the years ended December 31, 1998 through December 31, 2002 and
at the end of each of those years. The historical financial data for the years
ended 2000, 2001 and 2002 is derived from the Consolidated Financial Statements
of the Company audited by KPMG LLP included within this Form 10-K. The
historical financial data for 1998 is derived from the Consolidated Financial
Statements of the Company audited by Arthur Andersen LLP and the historical data
for 1999 is derived from the consolidated financial statements of the Company
audited by KPMG LLP, not included in this Form 10-K. This information should be
read in conjunction with the Company's Consolidated Financial Statements and
related Notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", which are included elsewhere in
this Annual Report. As discussed more fully herein, for all periods presented,
the results of operations of the U.K. IT Products business disposed of in
December 2001 and the U.S. IT Products and services business have been accounted
for within discontinued operations. The results of operations from the U.K. IT
Products business sold in July 1999 are included in continuing operations for
all periods presented.
Years ended December 31,
----------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
Net sales $ 82,595 $ 119,858 $ 908 $ 4,163 $ 4,773
=========== =========== =========== =========== ===========
Gross profit $ 11,759 $ 10,517 $ 860 $ 2,908 $ 3,721
=========== =========== =========== =========== ===========
Selling, general and administrative
expenses $ 22,611 $ 29,325 $ 25,694 $ 23,621 $ 12,967
=========== =========== =========== =========== ===========
Research and development expenses $ 1,178 $ 1,343 $ 1,695 $ 1,089 $ 863
=========== =========== =========== =========== ===========
Asset impairment charges $ 3,808 $ 10,057 $ -- $ 1,626 $ 338
=========== =========== =========== =========== ===========
Operating profit (loss) $ (15,838) $ (30,208) $ (26,529) $ (23,428) $ (10,447)
Interest and other income (expense), net 15 (595) 2,032 (34) 578
----------- ------------ ----------- ----------- -----------
Income (loss) before income taxes (15,823) (30,803) (24,497) (23,462) (9,869)
Income tax expense (benefit) 193 (969) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) from continuing
operations (16,016) (29,834) (24,497) (23,462) (9,869)
Net income (loss) from discontinued
operations, U.K. 802 (12,471) 1,594 1,942 --
Net income (loss) from discontinued
operations, U.S. (10,346) (233) 3,149 (1,097) (788)
Gain from discontinued operations,
net of tax -- -- -- 2,738 1,100
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (25,560) $ (42,538) $ (19,754) $ (19,879) $ (9,557)
=========== =========== =========== =========== ===========
Basic and diluted net income (loss)
per share data
Continuing operations $ (0.59) $ (1.07) $ (0.80) $ (0.76) $ (0.32)
Discontinued operations, U.K. 0.03 (0.45) 0.05 0.06 --
Discontinued operations, U.S. (0.38) (0.01) 0.10 (0.03) (0.03)
Disposal of discontinued operations -- -- -- 0.09 0.04
----------- ----------- ----------- ----------- -----------
Basic and diluted net income
(loss) per share $ (0.94) $ (1.53) $ (0.65) $ (0.64) $ (0.31)
=========== =========== =========== =========== ===========
Basic weighted average shares outstanding 27,322 27,846 30,487 30,912 30,901
=========== =========== =========== =========== ===========
December 31,
----------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
CONSOLIDATED BALANCE SHEET DATA
OF CONTINUING OPERATIONS:
Current assets $ 85,698 $ 31,982 $ 24,781 $ 11,606 $ 2,827
=========== =========== =========== =========== ===========
Total assets $ 97,736 $ 39,161 $ 35,687 $ 17,445 $ 4,786
=========== =========== =========== =========== ===========
Current liabilities $ 78,256 $ 5,054 $ 5,544 $ 6,252 $ 3,491
=========== =========== =========== =========== ===========
Long-term liabilities, net of current
portion $ 488 $ 260 $ 726 $ 274 $ --
=========== =========== =========== =========== ===========
Stockholders' equity $ 85,017 $ 46,668 $ 30,954 $ 11,319 $ 1,598
=========== =========== =========== =========== ===========
Total liabilities and stockholders'
equity $ 163,761 $ 51,982 $ 37,224 $ 17,845 $ 5,089
=========== =========== =========== =========== ===========
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
As discussed further herein, on December 31, 2001, the Company divested
itself of its U.K. IT Products business and on March 29, 2002, the Company
divested itself of its U.S. IT Products and services business. The divestiture
of these businesses has allowed the Company to complete its transition to being
a provider of remotely-hosted, eProcurement and eMarketplace ("eSourcing")
Internet- and intranet-based software solutions, which automate many supply
chain and financial settlement functions associated with procurement. As a
result of these divestitures, commencing in the second quarter of 2002, the
Company did not record any revenues arising from the sale of IT Products and
associated services. From the second quarter of 2002, the Company's sole source
of revenue has been the licensing of eSourcing solutions and associated
professional services. As provided by applicable accounting conventions, the
U.S. IT Products and services business and the U.K. IT Products business have
been presented as discontinued operations for all periods presented.
Since its inception in 1992, elcom, inc., the Company's eSourcing
subsidiary, has developed its PECOS(TM) (Professional Electronic Commerce Online
System) system, which automates many supply chain and financial settlement
functions associated with procurement. The Company also offers an optional
dynamic trading system licensed from a third party, which includes request for
proposal, private reverse auctioning and other features. In addition, the
Company offers an asset management system.
Prior to the divestiture of the IT Products business in the U.K. on
December 31, 2001 and the IT Products and services business in the U.S. on March
29, 2002, the Company had historically marketed as many as 130,000 IT Products
to commercial, educational and governmental accounts via several electronic
methodologies. Throughout 2001, the overall decline in economic activity, as
well as capital and discretionary spending by the Company's customer base,
significantly decreased sales and resultant profitability from this business
line. Demand for IT Products was further impacted by the events of September
11th and their aftermath. Even though the demand for IT Products was weak
throughout 2001, the Company demonstrated success in acquiring incremental
customers beginning in the middle of 2001 by offering PECOS.icm to new customers
at no charge in return for a portion of their IT Products spending, which
generated transaction-oriented fees for the Company as a sales agent of Tech
Data. However, the decline in demand from existing IT Products customers and the
uncertainty surrounding the overall economy caused the Company to carefully
review its business operations. In order to reduce operational and financial
risks and properly align the Company's operations with the economic environment,
the Company decided to exit the IT Products and services business to reduce
costs and allow the Company to focus exclusively on its core eSourcing
technology. Sales to one customer comprised 73% of 2002 net sales from
continuing operations and sales to one customer comprised of 69% of 2001 net
sales from continuing operations. No customers individually exceeded 10% of net
sales in 2000.
10
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of net
sales for each of the years in the three-year period ended December 31, 2002:
2000 2001 2002
-------- ------ -------
Net sales 100% 100% 100%
Gross profit 95% 70% 78%
Sales, general and administrative expenses 2,830% 567% 272%
Research and development 187% 26% 18%
Asset impairment charges -- 39% 7%
Operating profit (loss) (2,922)% (563)% (219)%
Interest expense (23)% (3)% (1)%
Interest income and other, net 246% 3% 14%
Net loss from continuing operations (2,698)% (564)% (207)%
Net loss from discontinued operations 522% 20% (17)%
Gain on disposal of discontinued operations -- 66% 23%
RESULTS OF OPERATIONS
The results of operations for the divested U.K. IT Products remarketer
business and the U.S. IT Products and services business have been presented as
discontinued operations for all periods presented.
Year ended December 31, 2002 compared to the year ended December 31, 2001.
Net Sales. Net sales for the year ended December 31, 2002, which
represented eSourcing license and related fees, were $4.8 million compared to
$4.2 million in the year ended December 31, 2001, an increase of $0.6 million or
15%. Net sales in the 2002 fiscal year included $2.8 million in license and $0.5
million in professional service fees related to the Company's government of
Scotland PECOS Internet Procurement Manager system ("Scottish Government
License"). The Scottish Government License agreement was signed in November 2001
and did not impact 2001 financial results. The Scottish Government License is a
license of the PECOS technology granted to Cap Gemini, Ernst & Young with the
right to sub-license the technology to the Scottish Government. At December 31,
2002, the Company had recorded $0.3 million of deferred revenue related to the
Scottish Government License. The Company expects to recognize the majority of
this deferred revenue in its fiscal first and second quarters of 2003. Net sales
in 2001 included $2.9 million arising from a one-time sale of proprietary
software to Elcom Information Technology Limited, an unrelated company that
acquired the U.K. IT Products reseller business.
Gross Profit. The Company recorded gross profit of $3.7 million in the
year ended December 31, 2002, compared to gross profit of $2.9 million in the
year ended December 31, 2001, an increase of $0.8 million, or 28%. Cost of sales
in the 2002 annual period included $423,000 of amortized software costs and
maintenance-related expenses, together with $131,000 of salary-related expenses,
which were incurred in various PECOS implementations. In the comparable 2001
annual period, amortized software costs and maintenance-related expenses
amounted to $446,000 with no significant implementation-related costs.
Selling, General and Administrative Expenses. Total selling, general
and administrative ("SG&A") expenses for the year ended December 31, 2002
decreased to $13.0 million from $23.6 million in 2001, a decrease of $10.7
million, or 45%. Since the middle of 2001, the Company has implemented numerous
cost containment measures designed to better align its SG&A costs with lower
than anticipated license revenues resulting from the weak economy. The principal
reductions in SG&A expenses in 2002 compared to 2001 were comprised of
reductions in personnel and depreciation expenses of approximately $7 million.
11
Research and Development Expense. Research and development expense for
the years ended December 31, 2002 and 2001 were $0.9 million and $1.1 million,
respectively, a decrease of $0.2 million or 21%. The expenditures reflect the
on-going product development of the PECOS(TM) technology prior to reaching
technological feasibility of each new version. The reduction in research and
development expenditures in 2002 compared to 2001 primarily relates to a
reduction in the number of personnel performing research and development
activities. In 2001, the Company capitalized $422,000 and in 2002, $0 was
capitalized.
Asset Impairment Charges. For the years ended December 31, 2002 and
2001 the Company recorded asset impairment charges of $0.3 million and $1.6
million, respectively. The charges relate to previously capitalized software
costs that were acquired to augment the Company's PECOS(TM) technology. The
related software did not perform as anticipated and was never put into
production. The Company recorded the charge in the period it was determined the
Company was going to abandon the use of the software.
Interest Expense. Interest expense for the year ended December 31, 2002
remained consistent at $0.1 million. Interest expense relates to interest paid
on capital leases since the Company had no other borrowings.
Interest Income and Other, Net. Interest income and other, net, for the
year ended December 31, 2002 increased to $0.6 million from $0.1 million in
2001. The 2002 income primarily relates to the receipt of a $650,000 settlement
from a claim the Company had made against one of its software vendors.
Net Income (Loss) From Discontinued Operations. The net loss from
discontinued operations for the year ended December 31, 2002 was $0.8 million
compared to net income from discontinued operation for the year ended December
31, 2001 of $0.8 million. The net income from discontinued operations in 2001
related to the Company's divested U.K. IT Products business, which recorded $1.9
million of net income, offset by $1.1 million of net loss related to the
Company's divested U.S. IT Products and services business. In the 2002 fiscal
year, all of the net loss was derived from U.S. discontinued operations.
Gain (Loss) From Disposal of Discontinued Operations The gain from the
disposal of discontinued operations (net of tax) for the year ended December 31,
2002 was $1.1 million compared to a gain of $2.7 million for the year ended
December 31, 2001. The 2001 gain of $2.7 resulted from the sale of the U.K. IT
Products reseller business. The 2002 gain of $1.1 resulted from the sale of the
Company's U.S. IT Products and service business.
Year ended December 31, 2001 compared to the year ended December 31, 2000.
Net Sales. Net sales for the year ended December 31, 2001 increased to
$4.2 million from $0.9 million in 2000, an increase of $3.3 million or 358%.
This increase was primarily due to the one-time sale of proprietary software in
the amount of $2.9 million to Elcom Information Technology Limited, a company
formed by former members of the Company's U.K. IT Products remarketing business
that acquired such business.
Gross Profit. Gross profit for the year ended December 31, 2001
increased to $2.9 million from $0.9 million in 2000, an increase of $2.0 million
or 238%. The increase in gross profit dollars was primarily a result of the
one-time sale of proprietary software to Elcom Information Technology Limited.
Cost of sales in the 2001 annual period included $446,000 of amortized software
costs and maintenance-related expenses. In the comparable 2000 annual period,
there were no significant amortized software costs.
Selling, General and Administrative Expenses. Total SG&A expenses for
the year ended December 31, 2001 decreased to $23.6 million from $25.7 million
in 2000, a decrease of $2.1 million, or 8.1%. This decrease reflected the
Company's cost containment measures begun in 2001 designed to align its SG&A
costs with lower than anticipated license revenues resulting from the weak
economy.
12
Research and Development Expense. Research and development expense for
the years ended December 31, 2001 and 2000 were $1.1 million and $1.7 million,
respectively, a decrease of $0.6 million or 35.8%. The expenditures reflected
the on-going product development of the PECOS(TM) technology prior to reaching
technological feasibility of each new version. The decrease was due to the
increase in expenditures after reaching technological feasibility, which are
reflected in cost of sales as well as the capitalization of research and
development costs totaling $422,000 in 2001 compared to $470,000 in 2000.
Asset Impairment Charges. For the years ended December 31, 2001 and
2000, the Company recorded asset impairment charges of $1.6 million and $0,
respectively. The $1.6 million charge related to previously capitalized software
that was originally purchased from a third party to augment the Company's
PECOS(TM) technology. The related software did not perform as anticipated and
was never put into production.
Interest Expense. Interest expense for the year ended December 31, 2001
decreased to $0.1 million from $0.2 million in 2000. Interest expense related to
interest paid on capital leases since the Company had no other borrowings. The
decrease is a result of the expiration of capital leases during 2000 and 2001.
Interest Income and Other, Net. Interest income and other, net, for the
year ended December 31, 2001 decreased to $0.1 million from $2.2 million in
2000. This decrease was primarily a result of recording an $0.8 million gain in
2000 on the sale of assets related to the receipt of funds which were being held
in escrow pursuant to the 1999 U.K. remarketer group purchase and sale
agreement.
Net Income (Loss) From Discontinued Operations. Net income from
discontinued operations for the year ended December 31, 2001 was $0.8 million
compared to a net income from discontinued operation for the year ended December
31, 2000 of $4.7 million. The net income from discontinued operations in the
2000 fiscal year related to the Company's divested U.K. IT Products business,
which recorded $1.6 million of net income, and an additional $3.1 million of net
income related to the Company's divested U.S. IT Products and services business.
In 2001, net income from discontinued operations related to the Company's
divested U.K. IT Products business, which recorded $1.9 million of net income
offset by $1.1 million of net loss related to the Company's divested U.S. IT
Products and services business.
Gain (Loss) From Disposal of Discontinued Operations (net of tax). The
gain from the disposal of discontinued operations (net of tax) for the year
ended December 31, 2001 was $2.7 million which resulted from the sale of the
U.K. IT Products reseller business.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities from continuing operations for
the year ended December 31, 2002 was $8.3 million, resulting primarily from a
net loss from continuing operations of $9.9 million, together with a decrease in
accounts payable and accrued liabilities of $2.3 million, an decrease in
accounts receivables and other current assets of $0.3 million, offset by
depreciation of $3.1 million and impairment charges and other items amounting to
$0.3 million. Net cash used in operations may not be indicative of future
results due to the sale of certain operations and the Company's transition to an
eSourcing business. Cash provided by investing activities was primarily
comprised of the cash proceeds received from the sale of the U.S. IT Products
and services business to ePlus of $2.1 million. Other than finance leases
incurred in the normal course of business, the Company did not have any debt as
of December 31, 2002.
At December 31, 2002, the Company's principal sources of liquidity were
cash and cash equivalents of $2.3 million. During fiscal 2002, the Company
significantly reduced its workforce (excluding those employees that transferred
to ePlus as a result of the sale of the U.S. IT Products and services business)
by approximately 90 employees to better align its operating expenses with its
revenue levels. In addition, in the first quarter of 2003, the Company
implemented further personnel and salary reductions in the U.S. and eliminated
certain staff positions in the U.K. The Company continues to explore ways to
eliminate or reduce ongoing expenditures until such time as the Company can
increase its cash sources. (See "Risk Factors Related to Liquidity", below).
13
The Company's principal commitments consist of leases on its office
facilities and capital leases. Although the Company may require ongoing
investments in property, equipment and software, the Company does not expect
these amounts to be material in fiscal 2003.
On December 31, 2001, the Company sold substantially all of the assets
and liabilities of the Company's U.K. IT Products business to AJJP Limited, a
company that was formed by certain members of the former U.K. management team.
The sales price for the transaction consisted of the assumption of approximately
$3 million of net liabilities plus a nominal payment to the Company.
The Company's customer contracts typically contain customary provisions
that indemnify customers for losses that they may incur in the unlikely event
that there is an intellectual infringement claim made against the customer
relating to use of the Company's PECOS products. The Company believes that the
financial risk relating to these provisions are insignificant. The Company
agreed to indemnify ePlus for any claims arising from any actual or alleged
breach of any warranty, representation or covenant contained in the agreement
for the sale of the U.S. IT Products business. Such indemnification obligation
expires on March 29, 2003 and is limited to the purchase price for the U.S. IT
Products business.
RISK FACTORS RELATING TO LIQUIDITY
The Company's consolidated financial statements as of December 31, 2002
have been prepared under the assumption that the Company will continue as a
going concern for the year ending December 31, 2003. The Company's independent
accountants, KPMG LLP, have issued a report dated March 7, 2003 that included an
explanatory paragraph referring to the Company's significant operating losses
and substantial doubt in its ability to continue as a going concern past April
2003 (See Note (1)(a)) without additional capital becoming available. The
Company's ability to continue as a going concern is dependent upon its ability
to grow revenue, attain further operating efficiencies, attract new sources of
capital or issuance of debt. The Company intends to seek additional capital,
which would result in dilution for its stockholders. There can be no assurance
that the Company will be able to raise capital, or if so, on what terms or what
the timing thereof might be. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As of December 31, 2002, the Company had approximately $2.3 million of
cash and cash equivalents and did not have any outstanding debt except for
capital leases totaling approximately $0.3 million. The Company has incurred
$49.2 million of cumulative net losses for the three-year period ended December
31, 2002. Total stockholders' equity decreased from $11.3 million at December
31, 2001 to $1.6 million at December 31, 2002. Although the Company has recorded
sequentially better operating profits from continuing operations throughout
fiscal 2002, the Company does not expect this trend to continue into fiscal 2003
as the sequential quarterly increases in revenue generated by the Government of
Scotland license maximized in the fourth quarter of 2002. The Company believes
it has sufficient liquidity to fund operations into April 2003 without raising
additional working capital. In the event the Company is unable to generate
license revenues or raise additional working capital from the sale of assets or
by other means, the Company may be forced to seek protection under U.S.
bankruptcy laws.
The Company's contractual obligations payable or maturings in the follow
years (in thousands):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------
LESS THAN AFTER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
----------- ----------- ----------- ----------- -----------
Capital lease obligations $ 288,597 $ 288,597 $ -- $ -- $ --
Operating leases 2,455,305 893,960 1,561,345 -- --
----------- ----------- ----------- ----------- -----------
Total contractual cash obligations $ 2,743,902 $ 1,182,557 $ 1,561,345 $ -- $ --
=========== =========== =========== =========== ===========
14
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to income taxes, impairment of long-lived
assets, and revenue recognition. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes that the following critical accounting policies
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements:
(i) The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized.
Based on the Company's recent losses and belief that 2003 will
result in an overall loss, the Company has recorded a valuation
allowance to reduce its deferred tax assets to $0. In the event the
Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset valuation allowance
would increase income in the period such determination was made.
(ii) The Company records impairment losses on long-lived assets to be
held and used or to be disposed of other than by sale when events
and circumstances indicate that the assets might be impaired and the
net undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. The
Company's cash flow estimates are made for the remaining useful life
of the assets and are based on historical results adjusted to
reflect the best estimate of future market and operating conditions.
The net carrying value of assets not recoverable is reduced to fair
value. The Company's estimates of fair value represent a good faith
estimate based on industry trends and reference to market rates and
transactions.
(iii) Revenue Recognition
Revenue consists principally of fees for licenses of the Company's
software products, maintenance, hosting, consulting, and training.
As part of the revenue recognition process significant management
judgments and estimates must be made and used to determine the
revenue recognized in any accounting period. Material differences
may result in the amount and timing of our revenue for any period if
we made different judgments or utilized different estimates.
We recognize revenue using the residual method in accordance with
Statement of Position ("SOP") 97-2, Software Revenue Recognition, as
amended by SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions. Under the
residual method, revenue is recognized in a multiple element
arrangement in which Company-specific objective evidence of fair
value exists for all of the undelivered elements in the arrangement,
but does not exist for one or more of the delivered elements in the
arrangement. Company-specific objective evidence of fair value of
maintenance and other services is based on our customary pricing for
such maintenance and/or services when sold separately. We sell our
professional services separately on a time-and-materials basis and
at times without a software license, and we have established
Company-specific objective evidence on this basis. Company-specific
objective evidence for maintenance is determined based upon the
either the renewal rates when maintenance is sold separately or the
option price for annual maintenance renewals included in the
underlying customer contract. At the outset of the arrangement with
the customer, we defer revenue for the fair value of its undelivered
elements (e.g., maintenance, consulting, and training) and recognize
revenue for the remainder of the arrangement fee attributable to the
elements initially delivered in the arrangement (i.e., software
product) when the basic criteria in
15
SOP 97-2 have been met. If such evidence of fair value for each
element of the arrangement does not exist, all revenue from the
arrangement is deferred until such time that evidence of fair value
does exist or until all elements of the arrangement are delivered.
If evidence of fair-value does not exist for maintenance and/or
hosting and there are no other undelivered elements, all revenue is
recognized ratably over the maintenance period or hosting term.
Changes to the elements of a software arrangement, the ability to
identify which company-specific objective evidence and the fair
value of the respective elements could materially impact the amount
of earned and deferred revenue.
Under SOP 97-2, revenue attributable to an element in a customer
arrangement is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable,
collection of the resulting receivable is probable, and the
arrangement does not require services that are essential to the
functionality of the software. Our ability to estimate if the
collection of the resulting receivable is probable could materially
impact the amount of revenue we record.
Our arrangements do not generally include acceptance clauses.
However, if an arrangement includes an acceptance provision,
acceptance occurs upon the earlier of receipt of a written customer
acceptance or expiration of the acceptance period. Our arrangements
do not generally provide for a right of return, and historically
product returns have not been significant. We provide for sales
return allowances on an estimated basis.
Deferred revenue includes amounts received from customers for which
revenue has not been recognized that generally result from deferred
maintenance and support, hosting, consulting or training services
not yet rendered and license revenue deferred until all requirements
under SOP 97-2 are met. Deferred revenue is recognized upon delivery
of our product, as services are rendered, or as other requirements
requiring deferral under SOP 97-2 are satisfied.
(iv) Software Development Costs
We account for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed. SFAS No. 86 specifies that costs incurred
internally in creating a computer software product should be charged
to expense when incurred as research and development costs until
technological feasibility has been established for the product. Once
technological feasibility is established, all development costs
should be capitalized until the product is available for general
release to customers. For new versions of our products we typically
achieve technological feasibility far enough in advance of general
release to warrant the capitalization of subsequent development
costs. Judgment is required in determining when the technological
feasibility of a product is established and in estimating the life
of the product for which the capitalized costs will be amortized.
OFF-BALANCE SHEET FINANCINGS
The Company does not have any off-balance sheet financings. The Company
has no majority-owned subsidiaries that are not included in the financial
statements, nor does it have any interests in or relationships with any special
purpose entities.
FACTORS AFFECTING FUTURE PERFORMANCE
A significant portion of the Company's revenues from continuing
operations are from license fees derivable from Cap Gemini, Ernst & Young ("Cap
Gemini") under an arrangement that Cap Gemini has with the Scottish Government
executed in November 2001. Through December 31, 2002, the Company has received
$3.8 million in cash under this arrangement, of which $3.5 million has been
recognized as revenue and $300,000 has been deferred. Assuming full
implementation by the Government of Scotland, this arrangement may generate in
excess of $14 million in total revenues over the seven year life of the
16
agreement. Future revenue under this arrangement is contingent on the following
significant factors: the rate of adoption of the Company's eSourcing solution by
the entities within the Scottish Government, renewal by the entities within the
Scottish Government of their rights to use the eSourcing solution, the
procurement of additional services from the Company by entities within the
Scottish Government, Cap Gemini's relationship with the Scottish Government, and
their compliance with the terms and conditions of their agreement with the
Scottish Government and the ability of the Company to perform under its
agreement with Cap Gemini.
If further business fails to develop under this agreement, or if the
Company is unable to perform under this agreement, it would have a material
adverse affect on the Company's future financial results and ability to continue
as a going concern. The Company anticipates that its revenues for the first
quarter of 2003 will be substantially lower than those recorded in the fourth
quarter of 2002 as deferred revenue at December 31, 2002 amounts to $300,000 and
there have been no additional licenses executed by the Scottish Government
through March 13, 2003.
OUTLOOK
As evidenced by the continued reduction in SG&A expenditures in the
fourth quarter of 2002, the Company's implementation of cost containment
programs has significantly reduced its expenses and cash requirements from
previous levels. Although the Company has been able to reduce its operating
expenses going forward, the level of deferred revenue at December 31, 2002 was
significantly less than that recorded at September 30, 2002. As a result, the
Company expects that its operating loss from continuing operations in the first
quarter of 2003 will be higher than that recorded in the fourth quarter of 2002.
Improvements in revenues and operating results from continuing operations in
future periods will not occur without the Company being able to raise additional
working capital in the near future. Specifically, see "Risk Factors Relating to
Liquidity" above.
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K could include forward-looking
statements or information. All statements, other than statements of historical
fact, including, without limitation, those with respect to the Company's
objectives, plans and strategies set forth herein and those preceded by or that
include the words "believes," "expects," "targets," "intends," "anticipates,"
"plans," or similar expressions, are forward-looking statements. Although the
Company believes that such forward-looking statements are reasonable, it can
give no assurance that the Company's expectations are, or will be, correct.
These forward-looking statements involve a number of risks and uncertainties
which could cause the Company's future results to differ materially from those
anticipated, including: (i) availability and terms of appropriate working
capital and/or other financing to keep the Company operating, particularly in
light of the audit opinion from the Company's independent accountants in this
Annual Report on Form 10-K as to the Company's necessity to raise capital to
continue as a going concern past April 2003, the Company's $2.3 million in cash
and cash equivalents at December 31, 2002 and its history of ongoing operating
losses; (ii) the overall marketplace and client's acceptance and usage of
eCommerce software systems, including corporate demand therefore, the impact of
competitive technologies, products and pricing, particularly given the
subsequently larger size and scale of certain competitors and potential
competitors, and control of expenses, revenue growth, corporate demand for
eProcurement and eMarketplace solutions; (iii) the consequent results of
operations given the aforementioned factors; and (iv) the necessity of the
Company to raise additional working capital to fund operations beginning in
April 2003 and the availability of any such funding to the Company and other
risks detailed from time to time in this Annual Report on Form 10-K and in its
other SEC reports and statements, including particularly the Company's "Risk
Factors" contained in the prospectus included as part of the Company's
Registration Statement on Form S-3 filed on June 21, 2002. In the event the
Company is unable to raise additional working capital from additional license
fees for the sale of assets or by other means, the Company may be forced to seek
protection under U.S. bankruptcy laws. The Company assumes no obligation to
update any of the information contained or referenced in this Annual Report on
Form 10-K.
17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from exchange rates, which could
affect its future results of operations and financial condition.
The Company's investment in its U.K. subsidiaries is sensitive to
fluctuations in the exchange rate between the U.S. dollar and the U.K. pound
sterling. The effect of such fluctuations is included in accumulated other
comprehensive income in the Consolidated Statements of Stockholders' Equity. To
date, such fluctuations have amounted to an accumulated loss of $901,000. This
amount could become more material in the future due to revenues generated in
pounds under the Scottish Government License.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements beginning on page F-1.
Supplemental earnings (loss) per share and quarterly financial information for
the Company are included in Notes 11 and 12, respectively, of the Notes to
Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The name, age and position of the Company's Executive Officers and
Directors are as follows:
Name Age Position
-------------------------------------------------------------------------------------------------------
Robert J. Crowell 51 Class III Director, Chairman of the Board of Directors and
Chief Executive Officer of the Company
John E. Halnen 36 President and Chief Operating Officer of the Company
Peter A. Rendall 37 Chief Financial Officer and Secretary of the Company
Scott M. Soloway 41 Vice President and General Counsel of the Company
Richard J. Harries, Jr. 62 Class II Director of the Company
John W. Ortiz 79 Class I Director of the Company
William W. Smith 51 Class III Director and Vice Chairman of the Company
A brief resume for each of the Company's Executive Officers and
Directors is set forth below:
Robert J. Crowell, the Company's founder, has been the Chairman of the
Board of Directors and Chief Executive Officer of the Company since its
inception in 1992. Mr. Crowell has founded and managed several companies since
1977. From May 1990 to April 1992, he was the Chairman, and from May 1990 to
January 1992, Chief Executive Officer also, of JWP Information Services, Inc., a
subsidiary of JWP INC. ("JWP"), with approximately $1.4 billion in 1992
revenues. From 1983 to 1990, Mr. Crowell was the Chairman and Chief Executive
Officer of NEECO, Inc. ("NEECO"), a publicly-held national PC reseller which was
acquired by JWP (forming JWP Information Services, Inc.) in May 1990 for
approximately $100 million. From 1977 to 1983, Mr. Crowell founded and managed
New England Electronics Co., Inc. (which was renamed NEECO and became a public
company in 1986), and Microamerica Distributing Co., Inc. ("Microamerica"), a PC
products distributor which Mr. Crowell founded in 1979 as a subsidiary of NEECO.
Microamerica was later spun-off by its acquirer and subsequently merged with
Softsel to form Merisel, then a PC products distributor, now a provider of
18
software license products to resellers. Mr. Crowell also founded Professional
Software, Inc. in 1980, a PC-based word processing and database software company
("Professional Software"), which was sold in 1986. Mr. Crowell holds a Magna Cum
Laude Bachelor of Science degree in Accounting from the University of
Massachusetts and is a Vietnam veteran.
John E. Halnen has been the President of the Company since November 2000
and President and Chief Operating Officer since June 2001. From December 1999
through October 2000, Mr. Halnen was President and Chief Executive Officer of
Elcom Services Group, Inc. From April 1998 through December 1999, Mr. Halnen was
Chief Operating Officer for Elcom Services Group, Inc. From January 1995 through
April 1998, Mr. Halnen served as Vice President of Operations for Elcom Services
Group, Inc. and prior to that time held other positions at Elcom Services Group,
Inc. since joining the organization in October 1992.
Peter A. Rendall has been the Company's Chief Financial Officer since
October 1999. From April 1999 through September 1999, Mr. Rendall was Vice
President of Finance of Elcom Services Group, Inc. From 1996 through March 1999,
Mr. Rendall held the positions of Vice President of Operations and Vice
President of Finance with Logica, Inc., a subsidiary of Logica, plc, a U.K.
publicly-held international software integration services company. Prior to
joining Logica, Mr. Rendall was a senior manager with PriceWaterhouseCoopers, in
their Boston office. Mr. Rendall holds a Bachelor of Science degree in
biochemistry from The University of London, U.K. and is a Chartered Accountant.
Scott M. Soloway has been the Company's Vice President and General
Counsel since May 2001. From March 2000 to the present, Mr. Soloway has been the
Company's General Counsel. From April 1993 to March 2000, Mr. Soloway held
various positions within the legal department of Progress Software Corporation
with his latest position being Senior Counsel. Prior to Progress Software, Mr.
Soloway practiced law for five years with two law firms in Boston,
Massachusetts. Mr. Soloway received his J.D. from Boston University School of
Law, his Masters in City Planning from M.I.T and his B.A. in Government from
Wesleyan University.
Richard J. Harries, Jr., a Director of the Company since December 1993,
rejoined IBM North America as a Business Partner Senior Sales Executive in 1997.
During 1995 and 1996, Mr. Harries was a Director of Sales of the Institute for
Software Advancement. From July 1992 to August 1995, upon retiring from IBM
after twenty-five years of service, Mr. Harries worked as the general manager of
Tascor; was a sales and marketing consultant; and was an independent distributor
for Equinox, Inc. Prior thereto, from 1988 to July 1992, Mr. Harries served as a
National Account Executive for IBM. During his career with IBM, Mr. Harries has
held a number of executive marketing and sales management positions, including
ten years of experience in IBM's National Distribution Division Reseller Channel
where he was responsible for field sales and marketing programs. Mr. Harries
holds a Bachelor of Arts Degree in Political Science and a Master of Arts Degree
in Economics from Boston College.
John W. Ortiz, a Director of the Company since December 1993, is a
retired banking executive at South Shore Bank where he was employed from 1942 to
1989, most recently as Senior Vice President and Group Head of Commercial
Lending. Mr. Ortiz also presided as the president of the New England Chapter of
Robert Morris Associates and as a director of the Massachusetts Higher Education
Loan Corporation at times during his banking career. Mr. Ortiz is a graduate of
Northeastern University's Bachelor of Arts program.
William W. Smith has been Vice Chairman and a Director of the Company
since March 1993. Mr. Smith develops real estate and has been semi-retired since
August 1991. Mr. Smith joined NEECO as a major stockholder in 1978 and served as
Chief Financial Officer until its acquisition by JWP in May 1990.
Mr. Smith continued to serve as Chief Financial Officer of JWP Information
Services, Inc. until December 1990, then he served as a consultant until he
retired in August 1991. Mr. Smith holds a Magna Cum Laude Bachelor of Science
degree in Accounting from the University of Massachusetts and is a Vietnam
veteran.
19
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT:
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Officers and Directors and persons who beneficially own more than ten
percent of a registered class of the Company's equity securities (i.e., the
Common Stock), to file reports of ownership and changes in ownership of such
securities with the Commission. Officers, Directors and greater-than-ten-percent
beneficial owners are required by applicable regulations to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of the forms furnished to the
Company during or with respect to 2002, and written representations from certain
reporting persons, the Company believes that no Officer, Director or
greater-than-ten-percent beneficial owner failed to file on a timely basis
during the year ended December 31, 2002 any report required by Section 16(a) of
the Securities Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual and
long-term compensation for services in all capacities with respect to those
persons (collectively, the "Named Executive Officers") who were (i) the Chief
Executive Officer and (ii) the other executive officers of the Company at the
end of the fiscal year, as well as the individuals that were executive officers
during the year ended December 31, 2002.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION (1) AWARDS
----------------------------- --------------
SHARES OF
COMMON STOCK ALL OTHER
UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION (1) YEAR SALARY BONUS OPTION GRANTS SATION
- ---------------------------------------------------------------------------------------------------------
Robert J. Crowell 2002 $391,731 - 790,000 $503
Chairman of the Board of Directors and 2001 $524,000 - 300,000 $253
Chief Executive Officer of the Company (2) 2000 $525,000 - 498,281 $382
John E. Halnen
President and Chief Operating Officer 2002 $183,461 $56,264 505,000 $22,540
of the Company (3) 2001 $225,000 $75,000 200,000 -
2000 $225,000 $56,000 110,000 -
Peter A. Rendall 2002 $215,077 - 505,000 $570
Chief Financial Officer and Secretary of 2001 $240,000 - 175,000 -
the Company (4) 2000 $220,000 $20,000 214,313 -
Paul J. Mueller 2002 $115,692 - 22,500 -
Vice President of Finance and Treasurer 2001 $163,000 - 52,000 -
of the Company (5) 2000 $103,000 $21,000 65,000 -
Scott M. Soloway
Vice President and General Counsel 2002 $192,000 - 71,000 -
of the Company (6) 2001 $195,000 - 47,000 -
2000 $117,000 $23,000 75,000 -
- ---------------
(1) No Named Executive Officer received perquisites or other personal benefits
in excess of the lesser of $50,000 or 10% of such individual's salary plus
annual bonus unless otherwise indicated herein.
20
(2) The Company and Mr. Crowell entered into an Amended and Restated Employment
Agreement on June 20, 2002. See "--Employment Contracts" , "--Executive
Profit Performance Bonus Plan" and "-- Option Grants in 2002." In December
2001, Mr. Crowell elected to reduce his 2002 annual salary from $525,000 to
$446,250. Subsequent to that date, in April 2002, Mr. Crowell elected to
further reduce his 2002 annual salary by $78,750 to $367,500, resulting in
a total reduction in annual salary of 30%. On January 6, 2003, Mr. Crowell
elected to reduce his fiscal 2003 salary further by $55,125, resulting in
an annual salary of $312,375. All other compensation represents premiums
paid by the Company for Group Term Life Insurance ($503 for 2002), see
"Employment Contracts."
(3) On November 29, 2000, Mr. Halnen was appointed as President of the Company,
and on June 12, 2001, Mr. Halnen also was appointed as Chief Operating
Officer of the Company. In December 2001, Mr. Halnen elected to reduce his
2002 annual salary from $225,000 to $191,250. Subsequent to that date, in
April 2002, Mr. Halnen elected to further reduce his 2002 annual salary by
an additional $11,250 to $180,000. On January 6, 2003, Mr. Halnen elected
to forego his annual bonus opportunity of $75,000 for 2003, resulting in an
annual salary of $180,000. All other compensation represents premiums paid
by the Company for Group Term Life Insurance ($22,540 for 2002), see
"Employment Contracts."
(4) Mr. Rendall joined the Company in April 1999 and was appointed Chief
Financial Officer of Elcom International on October 4, 1999 at an annual
salary of $200,000 and a bonus opportunity of up to $40,000. During 2000,
Mr. Rendall's annual salary was increased to $240,000 with no bonus
opportunity. In April 2002, Mr. Rendall elected to reduce his 2002 annual
salary by $36,000 to $204,000. On January 6, 2003, Mr. Rendall elected to
reduce his salary by a further $24,000 resulting in an annual salary of
$180,000. All other compensation represents premiums paid by the Company
for Group Term Life Insurance ($570 for 2002), see "Employment Contracts."
Mr. Rendall announced his resignation to the Company, effective March 7,
2003. Mr. Rendall submitted a letter to the Chairman and CEO stating that
his departure was to accept another position and, as evidenced by his
certification of this Form 10-K in no way reflected negatively on the
Company.
(5) Mr. Mueller joined the Company on March 6, 2000 at an annual salary of
$125,000 and a bonus opportunity of $25,000. During 2001, Mr. Mueller's
annual salary was increased to $160,000 with no bonus opportunity. As a
result of cost containment measures undertaken by the Company in 2002, Mr.
Mueller's employment was terminated without cause on August 30, 2002.
(6) Mr. Soloway joined the Company on March 29, 2000 at an annual salary of
$150,000 and a bonus opportunity of $30,000. During 2001, Mr. Soloway's
annual salary was increased to $192,000 with no bonus opportunity. On
January 6, 2003, Mr. Soloway elected to reduce his fiscal 2003 salary by
$28,800, resulting in an annual salary of $163,200.
STOCK OPTION PLANS
The Company has adopted the 1995 Non-Employee Director Stock Option
Plan (the "Director Plan"), The Stock Option Plan of Elcom International, Inc.
(the "1993 Stock Option Plan"), The 1995 (Computerware) Stock Option Plan of the
Company (the "Computerware Stock Option Plan"), The 1996 Stock Option Plan of
the Company (the "1996 Stock Option Plan"), The 1997 Stock Option Plan of the
Company (the "1997 Stock Option Plan"), The 2000 Stock Option Plan (the "2000
Stock Option Plan"), The 2001 Stock Option Plan, as amended and restated (the
"2001 Stock Option Plan") and The 2002 Stock Option Plan (the "2002 Stock Option
Plan") (collectively hereinafter the "Stock Option Plans") covering 250,000,
5,000,000, 1,000,000, 2,400,000, 3,000,000, 2,750,000, 2,400,000 and 1,800,000
shares, respectively, of the Company's Common Stock, pursuant to which officers,
employees and directors of the Company, as well as other persons who render
services as independent contractors to the Company, or any of its affiliates,
are eligible to receive incentive stock options ("ISO's") and/or non-qualified
stock options ("NQOptions"). These plans generally operate in the following
manner.
Overview of the Plans. Pursuant to the plans, "key personnel", which
includes employees and outside directors of the Company or any affiliate, as
well as other persons who render services as
20
independent contractors to the Company, or any of its affiliates, who in the
judgment of the Compensation Committee, are important to the successful
operation of the Company or an affiliate, are eligible to receive stock options.
Stock options may include NQOptions, which may be granted to any key personnel,
and/or ISO's, which may only be granted to employees of the Company or a
subsidiary.
The plans are administered by the Compensation Committee of the Board
(the "Committee"), presently comprised of Messrs. Harries, Ortiz and Smith.
Members of the Committee must be persons who qualify as "outside directors"
under Section 162(m) of the Internal Revenue Code and who are "non-employee
directors" under Rule16(b)(3) of the Securities Exchange Act of 1934. Subject to
the terms and conditions of the applicable plan, and in addition to the other
authorizations granted to the Committee under the applicable plan, the Committee
shall have full and final authority in its absolute discretion to (a) select the
optionees to whom options will be granted, (b) determine the number of shares of
Common Stock subject to any option, (c) determine the time when options will be
granted, (d) determine the option price of Common Stock subject to an option,
(e) determine the time when Common Stock subject to an option may be purchased,
(f) prescribe the form of the option agreements governing the options which are
granted under the applicable plan and to set the provisions of such option
agreements as the Committee may deem necessary or desirable provided such
provisions are not contrary to the terms and conditions of the applicable plan,
(g) adopt, amend and rescind such rules and regulations as, in the Committee's
opinion, may be advisable in the administration of the applicable plan, and (h)
construe and interpret the applicable plan, the rules and regulations and the
instruments evidencing options granted under the applicable plan and to make all
other determinations deemed necessary or advisable for the administration of the
applicable plan.
Subject to the approval of the Board of Directors, the Committee may at
any time amend, modify, suspend or terminate any plan. In no event, however,
without the prior approval of the Company's stockholders, shall any action of
the Committee or the Board result in: (a) amending, modifying or altering the
eligibility requirements for those persons eligible for options; (b) increasing
or decreasing, except in the event of stock splits, stock dividends,
combinations, exchanges of shares or similar capital adjustments, the maximum
number of shares for which options may be granted; (c) decreasing the minimum
option price per share at which options may be granted under the applicable
plan; (d) extending either the maximum period during which an option is
exercisable or the date on which the applicable plan shall terminate; or (e)
changing the requirements relating to the Committee; except as necessary to
conform the applicable plan and/or the option agreements to changes in the
Internal Revenue Code or other governing law.
Any decision made or action taken by the Committee in connection with
the administration, interpretation, and implementation of the applicable plan
and of its rules and regulations, shall, to the extent permitted by law, be
conclusive and binding upon all optionees under the applicable plan and upon any
person claiming under or through such an optionee. Neither the Committee nor any
of its members shall be liable for any action taken by the Committee pursuant to
the applicable plan. No member of the Committee shall be liable for the action
of any other Committee member.
In the event of stock splits, stock dividends, combinations, exchanges
of shares or similar capital adjustments, the Compensation Committee must make
an appropriate adjustment in the options granted under the applicable plan, and
the aggregate number of shares reserved for issuance thereunder also shall be
adjusted accordingly. If any option expires without having been fully exercised,
the shares with respect to which such options have not been exercised will be
available for further options as will any shares paid or withheld to satisfy an
optionee's withholding tax or option payment liability.
Subject to certain conditions, the duration of each option granted
under the applicable plan will be determined by the Committee, provided that no
option shall be exercisable later than the tenth anniversary of the date the
option was granted. Each option granted under the applicable plan may be subject
to restrictions with respect to the time and other conditions of exercise as
determined by the Committee.
ISOs granted under the applicable plan are exercisable for a period of
up to ten years from the date of grant at an exercise price that is not less
than the fair market value of the Common Stock on the date of the grant, except
that the term of an ISO granted under the Stock Option Plan to a stockholder
owning more than 10% of the voting power of the Company on the date of grant may
not exceed five years and its
22
exercise price may not be less than 110% of the fair market value of the Common
Stock on the date of the grant. NQOptions may be granted at more or less than
fair market value under the applicable plan. Shares of Common Stock underlying
an option shall be purchased by the optionee (i) giving written notice to the
Company of the optionee's exercise of the option accompanied by full payment of
the purchase price either in cash or, with the consent of the Committee (or as
per the terms of the option agreement), in whole or in part in shares of Common
Stock by delivery to the Company of shares of Common Stock that have been
already owned by the optionee for at least six months, having a fair market
value on the date the option is exercised equal to that portion of the purchase
price for which payment in cash is not made, and (ii) making appropriate
arrangements acceptable to the Company with respect to income tax withholding,
as required, which arrangements may include, at the absolute discretion of the
Committee, in lieu of other withholding arrangements, (a) the Company
withholding from issuance to the optionee such number of shares of Common Stock
otherwise issuable upon exercise of the option as the Company and the optionee
may agree for the minimum required withholding, or (b) the optionee's delivery
to the Company of shares of Common Stock having a fair market value on the date
the option is exercised equal to that portion of the withholding obligation for
which payment in cash is not made. Options granted under the applicable plan are
generally not transferable other than upon an optionee's death, provided that
the Committee has discretion to permit the transferability of NQOptions granted
under the applicable plan to certain parties.
The 2001 Stock Option Plan and The 2002 Stock Option Plan each provide
that an optionee may exercise his or her stock options for up to 180 days
following the date of termination without cause if the option agreement so
provides. Under all other Stock Option Plans, upon an optionee's termination
without cause, unless an option agreement contains differing terms with respect
to vesting and exercisability which supercedes the provisions of the applicable
plan, all unexercisable portions of the optionee's options vest and the optionee
may exercise his or her options for up to 90 days following the date of
termination. Any options that are ISO's must be exercised within 90 days after
such termination, otherwise these options will receive the tax treatment offered
to NQOptions.
The maximum number of options that can be granted to any one
participant during any one fiscal year is 500,000 under the 1993 Stock Option
Plan, 210,000 under the Computerware Stock Option Plan, 300,000 under the 1996
Stock Option Plan, 150,000 under the 1997 Stock Option Plan, 150,000 under the
2000 and 2001 Stock Option Plans, and 250,000 under the 2002 Stock Option Plan.
THE DIRECTOR PLAN. Non-employee Directors are entitled to participate
in the Director Plan, adopted by the Board of Directors in October 1995, and
approved by stockholders in November 1995. A total of 250,000 shares of Common
Stock have been reserved for issuance under the Director Plan. The Director Plan
provides for an automatic grant of an option to purchase 5,000 shares of Common
Stock to each non-employee Director serving as such on October 9, 1995 or for
persons who become a non-employee Director thereafter, on their date of election
or appointment as applicable. Options granted under the Director Plan have a
term of ten years. One-third of the shares subject to each option vest on each
anniversary date of the grant of the option so long as the optionee continues to
serve as a Director on such dates. Of the 250,000 shares of Common Stock
reserved for issuance thereunder, as of December 31, 2002, options covering
10,000 shares of Common Stock have been exercised, and options to acquire an
aggregate of 95,000 shares of Common Stock (74,999 of which were exercisable at
December 31, 2002) were outstanding at exercise prices ranging from $0.20 to
$6.78 per share, and accordingly, as of December 31, 2002 additional options
covering 145,000 shares of Common Stock could be granted under such option plan.
THE 1993 STOCK OPTION PLAN. The 1993 Stock Option Plan was adopted by
the Board of Directors in February 1993, was approved by the Company's
stockholders, and terminated on February 23, 2003. Of the 5,000,000 shares of
Common Stock reserved for issuance thereunder, as of December 31, 2002, options
covering 2,817,497 shares of Common Stock have been exercised, and options to
acquire an aggregate of 2,036,677 shares of Common Stock (1,986,902 of which
were exercisable at December 31, 2002) were outstanding at exercise prices
ranging from $0.11 to $24.0025.
THE COMPUTERWARE STOCK OPTION PLAN. The Computerware Stock Option Plan
was adopted by the Board of Directors in February 1995, was approved by the
Company's stockholders, and terminates on
23
February 5, 2005. Of the 1,000,000 shares of Common Stock reserved for issuance
under the Computerware Stock Option Plan, options to acquire all 1,000,000
shares have been granted at an exercise price of $4.00 per share, 414,000 of
which have been exercised as of December 31, 2002, and 576,000 of which were
exercisable as of December 31, 2002.
THE 1996 STOCK OPTION PLAN. The 1996 Stock Option Plan was adopted by
the Board of Directors in August 1996, was approved by the Company's
stockholders and terminates on August 19, 2006. Of the 2,400,000 shares of
Common Stock reserved for issuance under the 1996 Stock Option Plan, as of
December 31, 2002, options covering 774,040 shares of Common Stock have been
exercised, and options to acquire an aggregate of 1,506,063 shares of Common
Stock (1,030,101 of which were exercisable at December 31, 2002) were
outstanding as of December 31, 2002, at exercise prices ranging from $0.20 to
$22.50 per share, and accordingly, options covering 119,897 shares of Common
Stock may be granted under such option plan.
THE 1997 STOCK OPTION PLAN. The 1997 Stock Option Plan was adopted by
the Board of Directors in April 1997, initially amended in February 1998, and
approved by stockholders at the 1998 Annual Meeting. The 1997 Stock Option Plan
also was amended in March 1999 to increase the shares covered by 1,000,000 (to a
total of 3,000,000 shares) and was approved by the stockholders at the 1999
Annual Meeting. Of the 3,000,000 shares reserved for issuance thereunder, as of
December 31, 2002, options covering 439,504 shares of Common Stock have been
exercised and options to acquire an aggregate of 2,283,245 shares of Common
Stock (1,577,506 of which were exercisable at December 31, 2002) were
outstanding at exercise prices ranging from $0.20 to $5.75 per share, and
accordingly, options covering 277,251 shares of Common Stock may be granted
under such option plan.
THE 2000 STOCK OPTION PLAN. The 2000 Stock Option Plan was adopted by
the Board of Directors in March 2000, was approved by the Company's
stockholders, and terminates on March 21, 2010. Of the 2,750,000 shares of
Common Stock reserved for issuance thereunder, as of December 31, 2002, options
to acquire an aggregate of 2,388,739 were outstanding (1,133,153 of which were
exercisable at December 31, 2002) at exercise prices ranging from $0.22 to
$6.7813 per share, and accordingly, options covering 351,261 shares of Common
Stock may be granted under such option plan.
THE 2001 STOCK OPTION PLAN. The 2001 Stock Option Plan was adopted by
the Board of Directors on November 10, 2000 and was amended and restated to
provide for greater flexibility with respect to option agreement provisions
related to the vesting of options following an optionee's termination of
employment by reason of a termination without cause, and was approved by the
Company's stockholders in May 2001. The 2001 Stock Option Plan terminates on
November 10, 2010. Of the 2,400,000 shares of Common Stock reserved for issuance
thereunder, as of December 31, 2002, options to acquire an aggregate of
1,881,963 shares of Common Stock (1,240,400 of which were exercisable at
December 31, 2002) were outstanding at exercise prices ranging from $0.20 to
$4.7813 per share, and accordingly, options covering 458,087 shares of Common
Stock may be granted under such option plan.
THE 2002 STOCK OPTION PLAN. The 2002 Stock Option Plan was adopted by
the Board of Directors on June 11, 2001 and was approved by the Company's
stockholders on June 12, 2002. The 2002 Stock Option Plan terminates on June 11,
2011. Of the 1,800,000 shares of Common Stock reserved for issuance thereunder,
as of December 31, 2002, options to acquire an aggregate of 1,485,337 shares of
Common Stock (212,972 of which were exercisable at December 31, 2002) were
outstanding at exercise prices ranging from $0.20 to $1.68 per share, and
accordingly, options covering 314,663 shares of Common Stock may be granted
under such option plan.
CHANGE OF CONTROL FEATURE
Generally, all option agreements under the Stock Option Plans,
including those relative to the Named Executive Officers, contain provisions
requiring the cash payment of the value of the options (represented by the
difference between the option exercise price and the then-current fair market
value of the underlying Common Stock), in some instances upon certain defined
changes in control or sales of substantially all of the Company's assets. Such
changes of control also may trigger, in certain cases,
24
acceleration of the exercisability of certain options, which may occur if the
Company is reorganized, consolidated or merged with another company and the
Company is not the surviving company, or if 50% or more of the shares of the
capital stock of the Company which are then issued and outstanding are purchased
by a single person or entity.
OPTION GRANTS IN 2002
Shown below is information relating to grants of stock options pursuant
to the Stock Option Plans during the fiscal year ended December 31, 2002 to the
Named Executive Officers. Such grants also are reflected in the Summary
Compensation Table above.
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
--------------------------------------------------------------- ASSUMED ANNUAL
% OF TOTAL EXERCISE RATES OF STOCK PRICE
NO. OF GRANTED TO OR BASE APPRECIATION FOR THE
SECURITIES EMPLOYEES PRICE OPTION TERM (3)
UNDERLYING IN FISCAL ($ PER GRANT EXPIRATION ---------------------
NAME OPTIONS YEAR SHARE)(1) DATE DATE 5% 10%
- --------------------------------------------------------------------------------------------------------------
Robert J. Crowell (4) 450,000 9.75 $0.445 04/12/02 04/12/12 125,936 319,147
200,000 4.33 $0.490 (2) 04/12/02 04/12/07 27,076 59,830
140,000 3.03 $0.220 (2) 07/26/02 07/26/07 8,509 18,804
John E. Halnen (5) 400,000 8.67 $0.445 04/12/02 04/12/12 111,943 283,686
105,000 2.27 $0.200 07/26/02 07/26/12 13,207 33,469
Peter A. Rendall (6) 400,000 8.67 $0.445 04/12/02 04/12/12 111,943 283,686
105,000 2.27 $0.200 07/26/02 07/26/12 13,207 33,469
Paul J. Mueller (7) 22,500 0.49 $0.445 04/12/02 04/12/12 6,297 15,957
Scott M. Soloway (8) 36,000 0.78 $0.445 04/12/02 04/12/12 10,075 25,532
35,000 0.76 $0.200 07/26/02 07/26/12 4,402 11,156
- ------------------
(1) This price represents the fair market value at the date of grant pursuant
to the terms of the Company's Stock Option Plans, except for (2) below.
(2) This price represents 110% of the fair market value at the date of grant
pursuant to the terms of the Stock Option Plans.
(3) Potential Realizable Value is based on certain assumed rates of
appreciation pursuant to rules prescribed by the Securities and Exchange
Commission (the "Commission"). Actual gains, if any, on stock option
exercises are dependent on the future performance of the stock. There can
be no assurance that the amounts reflected in this table will be achieved.
In accordance with rules promulgated by the Commission, Potential
Realizable Value is based upon the exercise price of the options.
(4) The options granted to Mr. Crowell vest as follows:
(i) the 650,000 options granted on April 12, 2002 vested immediately;
(ii) of the 140,000 options granted on July 26, 2002, 49,000 vest on July
26, 2003 and 91,000 vest on July 26, 2004.
(5) The options granted to Mr. Halnen vest as follows:
(i) the 400,000 options granted on April 12, 2002 vested immediately; and
25
(ii) of the 105,000 options granted on July 26, 2002, 35,000 vest on July
26, 2003 and 65,000 vest on July 26, 2004.
(6) The options granted to Mr. Rendall vest as follows:
(i) the 400,000 options granted on April 12, 2002 vested immediately; and
(ii) of the 105,000 options granted on July 26, 2002, 35,000 vest on July
26, 2003 and 65,000 vest on July 26, 2004.
(7) The 22,500 options granted to Mr. Mueller on April 17, 2002, vested on July
31, 2002 as part of his termination from the Company without cause. The
options were exercisable until February 26, 2003.
(8) The options granted to Mr. Soloway vest as follows:
(i) of the 36,000 options granted on April 12, 2002, 12,600 vest on April
12, 2003 and 23,400 vest on April 12, 2004; and
(ii) of the 35,000 options granted on July 26, 2002, 12,250 vest on July
26, 2003 and 22,750 vest on July 26, 2004.
FISCAL YEAR-END OPTION VALUE TABLE
The following table shows the number of shares of Common Stock acquired
during 2002 by the exercise of options and the related value realized, as well
as the number of shares of Common Stock and values represented by outstanding
stock options held by each of the Named Executive Officers as of December 31,
2002. The value of unexercised in-the-money options at December 31, 2002 is
calculated using $0.215 per share. See note (2) below.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN THE MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 2002 DECEMBER 31, 2002(1)(2)
ACQUIRED ON VALUE -----------------------------------------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------------------------------------------
Robert J. Crowell -- -- 2,638,503 236,383 -- --
John E. Halnen -- -- 979,733 170,766 -- --
Peter A. Rendall -- -- 799,509 249,804 -- --
Scott M. Soloway -- -- 71,950 121,050 -- --
- -------------
(1) Options are "in-the-money" if the fair market value of the Common Stock
exceeds the exercise price.
(2) Represents the total gain which would be realized if all in-the-money
options beneficially held at December 31, 2002 were exercised, determined
by multiplying the number of shares underlying the options by the
difference between the per share option exercise price and $0.215, the
average of the high and low sales prices per share of the Company's Common
Stock on the Nasdaq SmallCap Market on December 31, 2002.
EXECUTIVE PROFIT PERFORMANCE BONUS PLAN
At the Company's 1998 Annual Meeting, the stockholders approved the
Elcom International, Inc. Executive Profit Performance Bonus Plan For Executive
Officers (the "Executive Performance Plan") which was approved by the Board of
Directors in September 1997. The Executive Performance Plan covers, for a fiscal
year, those persons who, on the ninetieth day of that particular fiscal year,
are the executive officers of the Company ("Executive Officers"). As such, the
number of people covered will generally be limited to no more than ten, and in
order to participate in the Executive Performance Plan, the Executive Officer
must be employed as of March 30th of the calendar year and must be awarded a
participation (also by March 30th) by the Compensation Committee of the Board of
Directors (the "Committee").
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The Executive Performance Plan provides for incentive compensation
payments (limited in amount to the lesser of: (a) two times the executive's base
salary or (b) one million dollars) to be made to covered Executive Officers
based upon the increase in the Company's reported operating income (or reduction
in operating loss) over the prior year. Accordingly, the Board of Directors
believes that the Executive Performance Plan provides a substantial incentive to
those Executive Officers in the best position to affect the Company's operating
performance and that substantial benefits will accrue to the Company from
granting participations in the Executive Performance Plan. Such participations
afford the Executive Officers a substantial incentive to enhance the value of
the Company's Common Stock through their own efforts in improving the Company's
operating results. The granting of participations also is expected to be
instrumental in attracting and retaining key executives. Accordingly, the
Company will, from time to time, grant participations to such Executive Officers
as may be selected to participate in the Executive Performance Plan in
accordance with the terms thereof. Although, the Company's reported operating
profit improved from 2001 to 2002, no payments were made to Executive Officers
for 2002 in respect of the Executive Performance Plan.
The Executive Performance Plan is administered by the Compensation
Committee of the Board, presently comprised of Messrs. Harries, Ortiz and Smith.
Members of the Committee must be persons who qualify as "outside directors"
under Section 162(m) of the Internal Revenue Code and who are "non-employee
directors" under Rule 16(b)(3) of the Securities Exchange Act of 1934.
Through December 31, 2000, the Executive Performance Plan was not
permitted to be terminated or amended in any way that would adversely impact any
current participant, without such participant's written consent. Thereafter, the
Board of Directors or the Committee may amend or terminate the Executive
Performance Plan. The participants have waived participation in the Executive
Performance Plan for calendar year 2002.
The Elcom International, Inc. Key Personnel Profit Performance Plan
(the "Key Personnel Performance Plan"), which is designed to operate in
conjunction with the Executive Performance Plan, is intended to provide a
substantial incentive to key personnel who are not Executive Officers, but who
can, in the performance of their duties, affect the Company's operating results.
The Key Personnel Performance Plan Bonus Pool is limited to that portion of the
20% Bonus Pool (as defined in the Key Personnel Performance Plan) calculated
under the terms of the Executive Performance Plan less payments under the
Executive Performance Plan. Accordingly, the bonus pool available under the Key
Personnel Performance Plan is generally limited to that portion of the 20% Bonus
Pool calculated under the Executive Performance Plan, which is either
unallocated to Executive Officers or is in excess of the payment limitations
under the Executive Performance Plan (the annual payment to any one individual
is limited in amount to the lesser of: (a) two times the executive's base salary
or (b) one million dollars). Thus, based on existing allocations under the
Executive Performance Plan, for 2002 approximately 65% of any Bonus Pool would
have been available for award under the Key Personnel Performance Plan. The
terms and administration of the Key Personnel Performance Plan generally
correspond to those of the Executive Performance Plan, except that in the case
of the Key Personnel Performance Plan, the annual payout to any one participant
is limited to the lesser of $500,000 or two times the participant's base salary.
The Compensation Committee controls participation in the Key Personnel
Performance Plan. No payments were made under the Key Personnel Performance Plan
with respect to the 2002 period.
EMPLOYMENT CONTRACTS
Effective June 1, 1997, the Company entered into an employment
agreement with Mr. Crowell (the "1997 Crowell Agreement") pursuant to which Mr.
Crowell was retained for a term ending May 31, 2000, as the Chairman and Chief
Executive Officer of the Company. The 1997 Crowell Agreement automatically
renews for additional one-year terms unless terminated by either party more than
two months prior to the end of the initial term or any renewal term thereof. As
referenced below, Mr. Crowell and the Company entered into an Amended and
Restated Employment Agreement effective June 20, 2002. Therefore, since no
notice of termination had been given under the 1997 Crowell Agreement, up to
June 20, 2002, Mr. Crowell's employment with the Company was governed by the
1997 Crowell Agreement.
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Under the 1997 Crowell Agreement, after Mr. Crowell's employment ends, Mr.
Crowell is automatically retained as a consultant for three years (at $125,000
per year) and is precluded from "competing" (as defined therein) against the
Company for a period of three years. The 1997 Crowell Agreement provides that
Mr. Crowell is entitled to participate in all Company compensation plans and
fringe benefit plans, on terms at least as