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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to __________
Commission File No. 0-27996
WIRELESS XCESSORIES GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3835420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1840 COUNTY LINE ROAD, HUNTINGDON VALLEY, PA 19006
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 494-0111
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports 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 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. __
The number of outstanding shares of the Registrant's Common Stock, par
value $.001 per share, on March 24, 2000 was 5,132,732.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (computed by reference to the closing price of such stock on The
Nasdaq Stock Market on March 24, 2000 of $3.00) was approximately $9,055,098. In
making such calculation, Registrant is not making a determination of the
affiliate or non-affiliate status of any holders of shares of Common Stock.
PART I
ITEM 1. BUSINESS
Wireless Xcessories Group, Inc. ("Wireless Xcessories" or the "Company")
was founded in May 1995. The Company is engaged in the nationwide sale and
distribution of a wide range of products, accessories and components for
cellular phones, including batteries, chargers and antennae (collectively,
"Wireless Accessories"). The Company's products are generally sold through third
party retailers' stores or Web sites and directly to customers on the Company's
Web site. As discussed more fully below, the Company is in the process of
completing its disposition of its remaining business in the Battery Segment and
has accounted for this segment as discontinued operations. The Battery Segment
involved the assembly and distribution of primarily specialty batteries as well
as a small percentage of cellular phone batteries. Prior to March 20, 2000, the
Company's name was Batteries Batteries, Inc.
The business of Wireless Xcessories was created through the acquisition of
five existing businesses - two of which were subsequently disposed of - and the
formation of a new subsidiary:
o In June 1995, the Company acquired Specific Energy Corporation
("Specific Energy"), a retail distributor of specialty batteries based
in Phoenix, Arizona. The Company sold the assets of Specific Energy in
September 1998.
o In April 1996, the Company acquired both Advanced Fox Antenna, Inc.
("Advanced Fox") based in Huntingdon Valley, Pennsylvania, and Tauber
Electronics, Inc. ("Tauber") based in San Diego, California. Those
acquisitions were part of a "roll-up" transaction also involving an
initial public offering of the Company's shares. The Company sold
substantially all of the assets of Tauber Electronics, Inc. on January
27, 2000.
o In January 1997, the Company acquired Battery Network, Inc. and
affiliate companies ("Battery Network"), which has operations in
Escondido, California.
o In May 1997, the Company acquired Cliffco of Tampa Bay, Inc.
("Cliffco"), which is based in Tampa, Florida.
o On August 26, 1999, the Company formed a new, wholly owned subsidiary
named AccessorySolutions.Com, Inc. ("AccessorySolutions") which is
now operating within Advanced Fox's facility in Huntingdon Valley,
Pennsylvania.
The Company's operations were historically organized into the following two
business segments:
o battery assembly and distribution, which is conducted by Battery
Network and was conducted by the Company through Specific Energy and
Tauber prior to the disposition of substantially all of their assets
(the "Battery Segment"); and
o the distribution and sale of products, accessories and components for
cellular phones, which is being conducted by Advanced Fox, Cliffco and
AccessorySolutions (the "Wireless Products Segment");
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o Advanced Fox distributes over 3,500 Wireless Accessories to
customers throughout North and South America;
o Cliffco distributes Wireless Accessories to a variety of
customers including midsize communication carriers; and
o AccessorySolutions designs, develops and hosts Web sites for
client companies which desire to sell Wireless Accessories
on-line and provides ordering, warehouse and distribution
services to client companies.
On March 22, 2000, the Board of Directors authorized the Company's
management to dispose of Battery Network, its only remaining subsidiary within
the Battery Segment. As a result of this decision, the Battery Segment has been
accounted for as discontinued operations at December 31, 1999 and for all
periods presented. The basis for this decision is discussed below under the
caption "Discontinued Operations."
The Company's headquarters for its Wireless Products Segment is located in
Huntingdon Valley, Pennsylvania.
DISCONTINUED OPERATIONS
With the sale of the assets of both Specific Energy and Tauber in September
1998 and January 2000, respectively, the remaining company in the Battery
Segment is Battery Network which is a national distributor of specialty
batteries to the commercial, industrial, and government/institutional markets.
In light of the shrinking sales base and continued losses in this segment and
the significant efforts that would be required to improve the profitability of
the Battery Segment, the Company determined that its limited managerial and
financial resources should be focused on continuing to enhance the business and
profitability of the Wireless Products Segment, which includes further
developing the Company's Internet retail business being conducted by
AccessorySolutions.
OPERATING STRATEGY
The Wireless Accessories industry remains fragmented. The Company's
strategy is to effectively market one of the broadest and most complete lines of
Wireless Accessories. The Company currently offers in excess of 3,500 different
products. The Company strives to leverage its distribution channels and
relationships and provide high quality technical expertise and service to its
customers.
The Company's business strategy involves the following components:
o Maintain Diversity of Products and Customers. The Company distributes
a complete line of Wireless Accessories. Through its subsidiaries,
Advanced Fox and Cliffco, the Company sells its products to dealers,
other distributors, commercial and industrial businesses,
communications carriers, mass merchandisers and retail customers. Any
of these customer groups can also purchase the Company's products
directly from its Web site.
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o Obtain Advantageous Purchasing. The Wireless Products Segment, which
includes the Company's Internet retail business, is under the direct
control of a corporate purchasing manager who is responsible for
assuring that the vendors chosen and the pricing they offer are the
most advantageous for the Company.
o Continue the Expansion of the Wireless Products Segment. The two
distribution units within the Wireless Products Segment, Advanced Fox
and Cliffco, conduct their operations in separate facilities, while
the Company's Internet retail business is currently operating out of
Advanced Fox's facilities. The successful expansion of the Wireless
Products Segment is dependent in part on the degree to which these
subsidiaries work effectively with each other. While the day-to-day
management of the units is for the most part separate, the management
teams of each subsidiary and Wireless Xcessories confer daily.
Further, purchasing for the Wireless Products Segment has been
consolidated, and these subsidiaries operate under similar marketing
and operating plans. In addition, the Company plans to enhance the
Wireless Products Segment through:
o strategic acquisitions in regional markets other than the East
Coast markets of the U.S. in which the Company is already
operating, and
o rapid expansion of the Company's Internet retail business
through the accelerated solicitation of partnerships, as
discussed in the following paragraphs.
The Company's Internet retail business, which is conducted through its
AccessorySolutions subsidiary, is primarily directed at forming Web site and/or
fulfillment partnerships with third parties for the sale of Wireless
Accessories. In a Web site partnership, the Company creates a Web site for a
third party on which the Company's Wireless Accessories are offered and sold.
This Web site is presented solely as the third party's Web site, and not as the
Company's site. Although from the viewpoint of the customer the third party is
operating the Web site, the customer will in fact be purchasing the Wireless
Accessories directly from the Company by means of a unseen Internet link - known
as a transparent link - to the Company's Internet order processing Web site.
Thus, when a customer clicks on the third party Web site to order a Wireless
Accessory, the order is immediately directed via the transparent link to the
Company's Internet order processing Web site. Upon receiving the order, the
Company processes the customer's credit card payment, fills the order and ships
the product. The Company also provides a help desk for use of the product and
handles all customer returns and disputes.
A fulfillment partnership is identical to a Web site partnership, except
that instead of creating a new Web site for the third party, the Company
establishes a transparent link from its Internet order processing Web site to a
pre-existing Web site operated by the third party.
The Company's current partners include traditional retailers (i.e.
operators of retail stores), established and start-up Internet retailers,
dealers, distributors, wholesalers and communications carriers. As of March 15,
2000, the Company had entered into 63 partnership arrangements. In either a Web
site or fulfillment partnership, the partner is generally responsible for
marketing its Web site for which it receives from the Company a monthly fee
based on the level of sales generated on the site.
The Company also offers its Wireless Accessories on its own Web site. The
Company does not, however, expect that sales from this site will be significant
in the near term.
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With respect to its Internet and non-Internet activities, the Company
believes that its size and broad product offerings provide certain competitive
advantages such as those arising from centralized volume purchasing and the
ability to simultaneously service several geographic and demographic markets.
The Company also plans to capitalize on the trend toward increasing colorization
and patterning of Wireless Accessories which will lead to a proliferation of
product offerings crossing various customer demographic lines.
OPERATIONS
Products. As discussed in the prior section, the Company currently markets
in excess of 3,500 Wireless Accessories. The product category offerings include
rechargeable batteries, personal and portable hands free kits, hands free
installation kits, portable and vehicle antennas, in-car and travel chargers,
fashionable accessory faceplates and colored housings for cellular phones, plain
and colored phone carrying cases and two-way and pager accessories. The Company
expects a major increase in cellular phone product offerings due to the trend
toward customized fashion accessories and color coordination of various related
products. The Company's Battery Network subsidiary also offers a multitude of
products for commercial and industrial use. However, as mentioned under the
caption "Discontinued Operations" above, the Company is in the process of
disposing of Battery Network and, therefore, has accounted for this subsidiary,
and the entire Battery Segment, as discontinued operations. The Company offers
branded and private label items but, for the most part, no longer offers
custom-designed products with the sale of the Tauber division in January, 2000.
Purchasing. The Wireless Products Segment purchases over 90% of its
products from manufacturers located overseas, principally in the Far East. Three
Far East suppliers accounted for almost 49% of the Wireless Products Segment's
purchases, with one supplier accounting for 20% of all purchases and the other
two suppliers each accounting for approximately 14.5% of this segment's
purchases. In early 1999, the Company opened a buying office in Taiwan which has
helped to reduce costs and improve the quality of items currently imported.
Sales. The Company markets and sells the majority of its products to
dealers, other distributors, commercial and industrial businesses,
communications carriers, mass merchandisers and retail customers. Through August
1998, the Company operated a retail division in Phoenix, Arizona under the
tradename Batteries Batteries for Everything. The assets of the division were
sold and the Company no longer operates any retail outlets.
Additionally, the Company produces two product line catalogs that are
circulated nationally and internationally. The Company intends to integrate the
catalogs on a Company-wide basis, and to enhance, as appropriate, private label
and proprietary item sales that generally provide higher margins.
Concentration. During the twelve months ended December 31, 1999, the
Company effected sales to more than 17,000 commercial and industrial customers.
In that same period, the Wireless Products Segment's two largest customers
accounted for 8.6% and 5.3% of the Company's net sales. No customer of the
Company accounted for 10% or more of the Company's net sales. Export sales
accounted for less than 3% of net sales for the period.
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EMPLOYEES
As of March 15, 2000, the Company employed approximately 225 personnel in
its operations. These employees work in the following areas of the Company's
business: 3 in technical operations, 55 in telemarketing and commercial sales,
112 in packaging, warehousing, inventory control, shipping and receiving, 10 in
purchasing and 45 in management and administration. None of the employees is
represented by a labor union. The Company considers its relations with its
employees to be satisfactory.
ENVIRONMENTAL MATTERS
The Company purchases and distributes batteries which contain chemicals
such as alkaline, nickel-cadmium and lithium. The Company does not manufacture
the batteries but rather purchases the items in their finished state. Company
operations do not involve the alteration or penetration of the batteries.
Returns of its nickel-cadmium batteries are made to the manufacturer and returns
of its lead acid and mercury batteries are handled through a bonded agency. The
Company believes that it has operated its respective facilities in compliance
with applicable environmental laws and regulations. Accordingly, the Company
does not believe that it has any material risk of environmental liability.
The Company currently is not aware of any environmental conditions relating
to present or past waste generation at or from any of its facilities or
operations, that would likely have a material adverse effect on the financial
condition or results of operations of the Company and does not anticipate any
material expenditures to comply with environmental laws, regulations or
ordinances. However, there can be no assurance that environmental liabilities in
the future will not be incurred and that they will not have a material adverse
effect on the financial condition or results of operations of the Company.
INTELLECTUAL PROPERTY
The Company believes that it has all rights to trademarks and trade names
necessary for the conduct of its business.
SALE OF SUBSIDIARIES
In September 1998, the Company sold all of the assets of Specific Energy
for $715,000 in cash to a retail franchise in Phoenix, Arizona. Specific Energy
was the Company's retail subsidiary, operating four retail stores in Phoenix,
Arizona under the trade name Batteries Batteries for Everything. Since the sale
of that subsidiary, the Company ceased all retail operations.
On January 27, 2000, the Company consummated the sale of substantially all
of the assets of Tauber to Nexergy Tauber, Inc. ("NT"), a wholly owned
subsidiary of Nexergy Inc. ("Nexergy"). As consideration for the sale, Tauber
received a cash payment of $1,005,894 on February 1, 2000 and a note in the
amount of $519,708 due in 2005 with interest payments beginning upon the closing
of the transaction and principal payments commencing during the first quarter of
2002. The principal amount of this note was subsequently reduced to $483,573
effective on March 15, 2000 to reflect a final valuation of transferred assets.
The note is subject to upward adjustment during the first quarter of 2001 based
on the valuation of certain inventory reserves. In addition, NT assumed $705,669
of Tauber's liabilities. In a related transaction, NT entered into a sub-lease
with the Company to occupy approximately 19,000 square feet of Battery Network's
leased facility in Escondido, California.
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MANAGEMENT
On April 30, 1998, a group of shareholders headed by Stephen Rade, a
director and 10% shareholder, filed a consent solicitation seeking to remove
Warren Haber as the Chairman of the Board, Allan Baldwin as a director and Chief
Executive Officer, John Teeger as a director and the Company's Secretary, and
directors John Simon, Fred Corrado and Bruce Barnett. The shareholder group
sought to replace the six directors with two independent directors: Robert C.
Meehan and Allan Kalish. Following negotiations between the parties, all six
directors resigned from the Board and Messrs. Haber, Baldwin and Teeger resigned
as officers of the Company. On June 5, 1998, Mr. Meehan was elected Chairman of
the Board and Mr. Rade was elected President and Chief Executive Officer.
In November 1998 and December 1998, the Board elected Kenneth Rickel and
Christopher F. McConnell, respectively, to the Board of Directors to fill two of
the vacancies. On December 17, 1998, Mr. Meehan resigned as Chairman of the
Board of Directors and Mr. McConnell was elected as the new Chairman.
On March 24, 1999, Messrs. Meehan and Sapp resigned from the Company's
Board of Directors and Barbara M. Henagan and Bradley T. MacDonald were elected
by the Board to fill the vacancies created by the resignations.
In November 1999, Kenneth Rickel's term as a member of the Board of
Directors expired and Christopher C. Cole was subsequently elected by the Board
to fill the resulting vacancy in February 2000.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act"), which became law in late December 1995, provide companies with a "safe
harbor" when making forward-looking statements. This "safe harbor" encourages
companies to provide prospective information about their companies without fear
of litigation. The Company wishes to take advantage of the "safe harbor"
provisions of the Act and is including this section in its Annual Report on Form
10-K in order to do so. Forward-looking statements also appear in other sections
of this report. Statements that are not historical facts, including statements
about management's expectations for fiscal year 2000 and beyond, are
forward-looking statements and involve various risks and uncertainties. Factors
that could cause the Company's actual results to differ materially from
management's projections, forecasts, estimates and expectations include, but are
not limited to, the following:
THE COMPANY MAY NOT SUCCESSFULLY OFFER ATTRACTIVE MERCHANDISE TO ITS CUSTOMERS.
In order to meet the Company's strategic goals, it must successfully locate
and offer to its customers new, innovative and high quality products. Its
product offerings must be affordable, useful to the customer, well made,
distinctive in design, and not widely available from other sources. The Company
can not predict with certainty that it will successfully offer products that
meet these requirements in the future.
If the Company's products become less popular with its customers or its
competitors offer the same or similar products as the Company offers at lower
prices, its sales may decline or the
6
Company may decide to offer its products at lower prices. If customers buy less
of the Company's products or if the Company has to reduce its prices, its
revenues and profits will decline.
In addition, the Company must offer its merchandise in sufficient
quantities to meet the demands of its customers and deliver this merchandise to
customers in a timely manner. The Company must be able to maintain sufficient
inventory levels, particularly during peak selling seasons. The Company's future
results may be affected if the Company is not successful in achieving these
goals.
THE COMPANY MAY NOT SUCCESSFULLY DESIGN AND DEVELOP PROPRIETARY PRODUCTS.
The Company is dependent to a large extent on the success of the
proprietary products that the Company has designed and developed for its
customers. The Company must design products that meet the demands of its
customers and have these products manufactured cost-effectively. In addition,
the Company must rely on contracted manufacturing resources to produce these
products in sufficient quantities to meet customer demand and deliver these
products in a timely manner to its customers. The Company relies solely on its
contracted manufacturers to produce and timely deliver these proprietary
products. If the Company is unable to successfully design, develop, and timely
deliver its proprietary products, its operating results may be materially
adversely affected.
THE COMPANY FACES CERTAIN RISKS ASSOCIATED WITH EXPANSION.
The Company plans to continue to increase the number of retail outlets and
Web sites operated by third parties in which its products are sold and to
increase the sales volume on the Company's own Web site in order to grow its
revenues. The Company's ability to expand will depend in part on the following
factors:
o its ability to persuade retail stores to carry its products in their
stores and Web sites;
o general economic conditions; and
o the availability of sufficient funds for expansion.
In order to continue the Company's expansion, it will need to hire
additional management and staff for its corporate offices and warehouse and
distribution facilities. The Company must also expand its management information
systems and distribution systems to facilitate this expansion. If the Company is
unable to hire necessary personnel or grow its existing systems, its expansion
efforts may not succeed and its operations may suffer.
Some of the Company's expenses will increase if additional retail stores
carry its products or if sales through its Web site or third party Web sites
increase. If sales are inadequate to support these new costs, the Company's
profitability will decrease. For example, inventory costs will increase as the
Company increases inventory levels to fulfill the orders of additional stores.
The Company may not be able to manage this increased inventory without
decreasing its profitability.
THE COMPANY'S WIRELESS ACCESSORIES BUSINESS LINE AND INTERNET RETAIL BUSINESS
STRATEGY MAY NOT SUCCEED.
In the past, the Company has tested new lines of business that have not
always proven profitable, such as its Battery Segment. The Company continually
examines and evaluates all revenue channels for profitability. The Company may
decide to develop new business lines or to
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acquire additional businesses in the future, and the Company cannot predict
whether such efforts will be successful. The failure of new business lines or
acquisitions could hurt future results.
The Company believes that it needs to reach its current customers and
generate new customers through methods other than sales through retail stores.
The Company is pursuing opportunities to sell its products over the Internet
through its own web site www.advfoxcell.com, Web sites operated by third parties
and other interactive shopping media. This is a new business and marketing
strategy for the Company and involves certain risks and uncertainties. The
Company may not succeed in achieving profitable operations in marketing its
products over the Internet. Further, consumer use of the Internet as a medium
for commerce is a recent phenomenon and is subject to a high level of
uncertainty. While the number of Internet users has been rising, the Internet
infrastructure may not expand fast enough to meet the increased levels of
demand. The increased use of the Internet as a medium for commerce raises
concerns regarding Internet security, reliability, pricing, accessibility and
quality of service. If use of the Internet does not continue to grow, or grows
at a slower rate than the Company anticipates, or if the necessary Internet
infrastructure or complementary services are not developed to support
effectively growth that may occur, the Company's Internet retail business would
be impaired.
Additionally, technology in the Internet retail business market changes
rapidly. The Company may not be able to adapt quickly enough to changing
customer requirements and preferences and industry standards. These changes and
the emergence of new industry standards and practices could render the Company's
existing Web site obsolete. To succeed, the Company must enhance its Web site
responsiveness, functionality and features, enhance its existing services,
develop new services and technology and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
THE COMPANY DEPENDS ON ITS VENDORS.
The Company's performance depends on its ability to purchase its products
in sufficient quantities at competitive prices and on its vendors' ability to
make and deliver high quality products in a cost effective, timely manner. Some
of the Company's smaller vendors have limited resources, production capacities
and limited operating histories. The Company has no long-term purchase contracts
or other contracts that provide continued supply, pricing or access to new
products and any vendor or distributor could discontinue selling to the Company
at any time. The Company cannot assure you that the Company will be able to
acquire the products the Company desires in sufficient quantities or on terms
that are acceptable to it in the future. In addition, the Company cannot assure
you that its vendors will make and deliver high quality products in a cost
effective, timely manner. The Company may also be unable to develop
relationships with new vendors. Also all products the Company purchases from
vendors in the Far East must be shipped to its warehouses by freight carriers
and the Company cannot assure you that the Company will be able to obtain
sufficient capacity at favorable rates. The Company's inability to acquire
suitable products in a cost effective, timely manner or the loss of one or more
key vendors or freight carriers could have a negative impact on its business.
THE COMPANY FACES CERTAIN RISKS RELATING TO CUSTOMER SERVICE.
Any material disruption or slowdown in the Company's order processing
systems resulting from labor disputes, telephone down times, electrical outages,
mechanical problems, human error or accidents, fire, natural disasters, or
comparable events could cause delays in the Company's
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ability to receive and distribute orders and may cause orders to be lost or to
be shipped or delivered late. As a result, customers may cancel orders or refuse
to receive goods on account of late shipments, which would result in a reduction
of net sales and could mean increased administrative and shipping costs.
THE COMPANY FACES RISKS ASSOCIATED WITH DISTRIBUTION.
The Company conducts most of its distribution operations and all of its
Internet order processing fulfillment functions from two facilities in
Huntingdon Valley, Pennsylvania and Tampa, Florida. Any disruption in the
operations at the distribution centers could have a negative impact on the
Company's business. In addition, the Company relies upon third party carriers
for its product shipments. As a result, the Company is subject to certain risks,
including employee strikes and inclement weather, associated with such carriers'
ability to provide delivery services to meet the Company's shipping needs.
THE COMPANY EXPERIENCES INTENSE COMPETITION IN ITS MARKETS.
The Company operates in a highly competitive environment. The Company
principally competes with a variety of small distributors of cellular phone
accessories that focus on a particular segment of the market, as well as a
single large distributor that offers a broad range of such products.
Competition in the industry is based on maintenance of product quality,
competitive pricing, delivery efficiency, customer service and satisfaction
levels, maintenance of satisfactory dealer relationships and training programs,
and the ability to anticipate technological changes and changes in customer
preferences. No assurance can be given that any of the Company's major suppliers
(mostly located in the Far East) whose products the Company distributes or major
cellular phone manufacturers will not acquire, startup, and or expand their own
distribution systems to sell directly to commercial and retail customers.
Further, the Internet retail business market is new, rapidly evolving and
intensely competitive. The Company believes that the principal competitive
factors in this market include brand recognition, selection, personalized
services, convenience, price, accessibility, customer service, quality of search
tools, quality of Web site content, reliability and speed of fulfillment. The
Company expects to experience increased competition from online commerce sites
that provide goods and services at or near cost, relying on advertising revenues
to achieve profitability. As the online commerce market continues to grow, other
companies may enter into business combinations or alliances that strengthen
their competitive positions. Competition in the Internet retail business market
probably will intensify.
As various Internet market segments obtain large, loyal customer bases,
participants in those segments may use their market power to expand into the
markets in which the Company operates. In addition, new and expanded Web
technologies may increase the competitive pressures on online retailers. The
nature of the Internet as an electronic marketplace may facilitate competitive
entry and comparison shopping and render it inherently more competitive than
conventional retailing formats. For example, "shopping agent" technologies
permit customers to quickly compare the Company's prices with those of its
competitors. This increased competition may reduce the Company's operating
margins, diminish its market share or impair the value of its brand.
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THE COMPANY MAY FAIL TO ANTICIPATE AND ADAPT TO CHANGING CONSUMER TRENDS.
The Company's success depends on its ability to anticipate and respond to
changing product trends and consumer demands in a timely manner. The Company's
products must appeal to a broad range of consumers whose preferences cannot
always be predicted with certainty and may change between sales seasons. If the
Company misjudges either the market for its products or its customers'
purchasing habits, the Company's sales may decline or the Company may be
required to sell its products at lower prices. This would result in a negative
impact on the Company's business.
POOR ECONOMIC CONDITIONS MAY HURT THE COMPANY'S BUSINESS.
Certain economic conditions affect the level of consumer spending on the
Company's products, including, among others, the following:
o general business conditions;
o interest rates;
o taxation; and
o consumer confidence in future economic conditions.
The Company's business could be negatively impacted by a recession or poor
economic conditions and any related decline in consumer demand for discretionary
items such as the Company's products. Because the Company purchases merchandise
from foreign entities, the Company is subject to risks resulting from
fluctuations in the economic conditions in foreign countries. The majority of
the Company's foreign vendors and manufacturers are located in the Far East, and
as a result, its business may be particularly impacted by changes in the
political, social, legal, and economic conditions in the Far East. Additionally,
foreign weather and product transportation problems could affect the Company's
ability to maintain adequate inventory levels and adversely affect its future
results.
THE COMPANY IS DEPENDENT ON CERTAIN KEY PERSONNEL.
The Company's success depends to a significant extent upon the abilities of
its senior management. The loss of the services of any of the members of its
senior management or of certain other key employees could have a significant
adverse effect on its business. In addition, the Company's performance will
depend upon its ability to attract and retain qualified management,
merchandising and sales personnel. There can be no assurance that the members of
the Company's existing management team will be able to manage the Company or its
growth or that the Company will be able to attract and hire additional qualified
personnel as needed in the future.
THE COMPANY'S COMMON STOCK PRICE IS VOLATILE.
The Company's common stock is quoted on the Nasdaq National Market, which
has experienced and is likely to experience in the future significant price and
volume fluctuations, which could reduce the market price of the common stock
without regard to the Company's operating performance. In addition, the Company
believes that among other factors, any of the following factors could cause the
price of the common stock to fluctuate substantially:
o quarterly fluctuations in the Company's sales;
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o announcements by other cellular phone accessory distributors or
retailers;
o the trading volume of the Company's common stock in the public market;
o general economic conditions;
o financial market conditions;
o the Company's ability to retain existing customers, attract new
customers and satisfy its customers' demands;
o the Company's ability to acquire merchandise, manage its inventory and
fulfill orders,
o changes in gross margins of the Company's current and future products,
services and markets;
o introductions of popular cellular phone accessories and new types of
cellular phones and the Company's ability to properly anticipate
demand;
o changes in usage of the Internet and online services and consumer
acceptance of the Internet and online commerce;
o timing of upgrades and developments in the Company's systems and
infrastructure,
o the level of traffic on the Company's Web site and on any third party
Web sites through which the Company sells its products;
o the effects of acquisitions and other business combinations, and
related integration;
o technical difficulties, system downtime or Internet brownouts; and
o the Company's level of merchandise and vendor returns.
THE COMPANY MUST SUCCESSFULLY RESPOND TO CHANGES IN THE RETAIL INDUSTRY.
The United States retail industry, and the specialty retail industry in
particular, are dynamic by nature and have undergone significant changes over
the past several years. The Company's ability to anticipate and successfully
respond to continuing challenges is critical to achieving its expectations.
THE COMPANY MAY BE SUBJECT TO STATE SALES AND USE TAX OR INTERNET REGULATION.
The Company's developing Internet retail business may be affected by the
adoption of new regulations or rules governing the sale of its products,
particularly with regard to state sales and use taxes. Any unfavorable change in
the state sales and use taxes could adversely affect the Company's business and
results of operations. In addition, the Internet at present is largely
unregulated and the Company is unable to predict whether significant regulations
or taxes will be imposed on Internet commerce in the near future. Because the
Company's Internet business is still in its initial stages, the Company is
unable to predict how such regulations could affect the further development of
its Internet business.
THE COMPANY COULD BE LIABLE FOR BREACHES OF SECURITY ON ITS WEB SITE AND THE WEB
SITES OF ITS PARTNERS AND FRAUDULENT ACTIVITIES OF USERS OF ITS INTERNET PAYMENT
SYSTEM.
A fundamental requirement for electronic commerce is the secure
transmission of confidential information over public networks. Although the
Company has developed systems and processes to prevent fraudulent credit card
transactions and other security breaches, failure to mitigate such fraud or
breaches may impact the Company's financial results. The law relating to the
liability of providers of online payment services is currently unsettled.
11
THE COMPANY MAY BE ADVERSELY AFFECTED BY UNIDENTIFIED YEAR 2000 ISSUES.
There can be no assurances that the Company will not experience serious
unanticipated negative consequences and/or material costs caused by as yet
undetected errors or defects in technology used in its products or internal
systems, which are comprised predominantly of third party software and hardware,
or by the inability of third parties to adequately disclose and correct their
Year 2000 issues. While the Company presently believes that its efforts to be
Year 2000 ready have been successful, there can be no assurances that the costs
of as yet undiscovered errors or problems will not have a material effect on the
results of operations.
ITEM 2. PROPERTIES
All of the Company's real properties are held under leases. The following
table provides certain information concerning the Company's leased properties:
APPROXIMATE LEASE
AREA EXPIRATION
OPERATION NATURE LOCATION (sq.ft.) DATE
- --------- -------- ---------- -------- ----
Advanced Fox Executive and Sales Huntingdon Valley, PA 7,000 4/30/00
Office(1) (estimated)
Advanced Fox Warehouse and assembly Huntingdon Valley, PA 52,000 8/31/03
Advanced Fox Office and warehouse (2) Miami, FL 5,555 4/15/02
Battery Network Office, warehouse and Escondido, CA 34,820 1/30/04
assembly(3)
Cliffco Office and warehouse Tampa, FL 18,800 8/01/04
(1) Leased from an affiliate of the Chief Executive Officer of the
Company. The original lease expired on December 31, 1999. Since that
time, the Company has been leasing the space on a month-to-month basis
under the same terms and conditions as the expired lease. The Company
anticipates that it will terminate this lease at approximately the
time the Company moves its executive, sales and administrative
operations to a new facility on or about April 30, 2000. When
completed, this move will serve to consolidate the corporate and
executive offices of the Company, as well as the Pennsylvania
operations of Advanced Fox and AccessorySolutions, in one building.
The Company has also entered into a five year lease for an additional
13,500 square feet of space effective April 1, 2000.
(2) The Company ceased operations in this facility, which housed its
Miami, Florida office and warehouse operation, in January, 2000 and is
currently negotiating an early lease termination with the landlord of
this facility. It is expected that any settlement with the landlord
will cost no more than $20,000 in additional rent.
(3) On February 1, 2000, Battery Network entered into an agreement to
sub-lease approximately 19,000 square feet to Nexergy, the acquiror of
Tauber. The sub-lease extends over the term of the existing lease
subject to an option on part of the sub-tenant to terminate its lease
interest without penalty on 90 days prior written notice to Battery
Network. Additionally, the sub-tenant is obligated to pay its monthly
pro rata share of the existing lease cost based on the percentage of
square footage it occupies along with a portion of the facility's
common area space.
12
ITEM 3. LEGAL PROCEEDINGS
In December 1999, the Company settled for a small fraction of the damages
sought in an action brought by David Peterson, a former employee of Battery
Network. Mr. Peterson had filed suit against the Company seeking damages in an
aggregate amount equal to approximately $300,000 claiming a breach of his
employment contract by the Company. As part of the settlement, the Company and
Mr. Peterson signed mutual releases ending each parties obligations to each
other.
Pursuant to the Management Agreement with Founders Management Services,
Inc. ("Founders"), the Company paid Founders, for its origination and
negotiating services in connection with the acquisitions of Battery Network and
a loan facility, the sum of $240,000. The Company also issued to certain
designees of Founders warrants to purchase 100,000 shares of the Company's
Common Stock at a price of $4.125 per share. Since June 1998 when Messrs. Haber
and Teeger resigned as officers and directors of the Company, Founders has
provided no services to the Company and the Company has not paid any fees to
Founders. Although neither the Company nor Founders has formally terminated the
Management Agreement, both parties have conducted themselves as if the
Management Agreement has been terminated.
In December 1999, Founders filed a lawsuit in the United States District
Court for the Southern District of New York against the Company alleging the
Company owed Founders the amount of approximately $493,000 for a purportedly
improper early termination of the Management Agreement. The Company believes its
early termination of the agreement was proper and therefore believes that the
alleged amount claimed is not due to Founders. In addition, the Company has
asserted counterclaims related to Founders' services under the Management
Agreement.
The Company is, from time to time, a party to other litigation arising in
the normal course of its business, most of which involves claims for personal
injury and property damage incurred in connection with its operations.
Management believes that none of these actions, including the Founders law suit,
will have a material adverse effect on the financial condition or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on November 17, 1999.
The following are results of the voting on the proposals submitted to the
stockholders at the annual meeting:
13
Proposal No. 1: Election of Directors.
The following individuals were elected as directors:
NAME FOR AGAINST
---- --- -------
Christopher F. McConnell 2,418,570 206,678
Stephen Rade 2,401,304 223,944
Bradley T. MacDonald 2,401,304 223,944
Barbara M. Henagan 2,418,570 206,678
Allan Kalish 2,418,570 206,678
Robert Tauber 2,418,570 206,678
There were no broker non-votes or abstentions or votes withheld with respect to
this proposal.
Proposal No. 2: Ratification of Arthur Andersen LLP as the Company's auditors
for fiscal year 1999.
FOR: 2,421,078
AGAINST: 190,970
WITHHELD: 13,200
There were no broker non-votes or abstentions with respect to this proposal.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Redeemable Common Stock Purchase Warrants
have traded on the Nasdaq National Market (the "NMS") since April 8, 1996.
Through March 19, 2000, the Common Stock traded under the symbol "BATS" and the
Warrants trade under "BATSW." Thereafter, as a result of the change of the
Company's name from Batteries Batteries, Inc. to Wireless Xcessories Group, Inc.
on March 20, 2000, the Company's Common Stock has traded under the symbol "WIRX"
and the Warrants have traded under the symbol "WIRXW." The following tables set
forth the range of high and low closing prices for the quarters indicated for
the Common Stock and Warrants on the NMS as reported by NMS for the calendar
year 1998 and 1999.
14
COMMON STOCK WARRANTS
------------ ----------
HIGH LOW HIGH LOW
---- --- ---- ---
1998
- ----
FIRST QUARTER 2 11/16 1 3/4 5/8 5/16
SECOND QUARTER 2 1/4 1 1/2 1/2 1/4
THIRD QUARTER 2 1 5/16 1/8
FOURTH QUARTER 2 1 1/16 1/4 1/16
1999
- ----
FIRST QUARTER 1 15/16 1 1/4 1/4 1/8
SECOND QUARTER 1 11/16 1 3/16 3/16 1/16
THIRD QUARTER 2 1 5/16 3/16 1/16
FOURTH QUARTER 3 1/2 1 1/4 7/16 1/16
These prices reflect inter-dealer quotations, without retail mark-ups,
mark-downs or other fees or commissions, and may not necessarily represent
actual transactions.
The number of record holders of the Company's Common Stock and of the
Warrants as of March 20, 2000 were 51 and 53, respectively. A substantially
larger number of beneficial owners hold such shares of Common Stock in
depository or nominee form.
No dividends have been paid on the outstanding shares of Common Stock. The
Company's Revolving Credit, Term Loan and Security Agreement prohibits the
payment of dividends on the Common Stock without the consent of the lender that
is a party to that agreement. A discussion of this agreement can be found in
Item 7 below.
On April 23, 1999, the Company offered and sold a total of 389,732 shares
of its Common Stock to Christopher McConnell and Barbara Henagan, two directors
of the Company, as well as to two other related parties. The aggregate offering
price for these shares was $498,800. This offering was made pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 6. SELECTED FINANCIAL DATA
INTRODUCTION
The following table sets forth the selected financial data for Wireless
Xcessories and its subsidiaries. The Income Statement Data includes the results
of operations for the Company and each of its subsidiaries since their dates of
acquisition (see Item 1 - Business), except for Advanced Fox and Tauber, which
are included for all periods presented. The subsidiaries within the Battery
Segment (Tauber, Battery Network and Specific Energy) have been accounted for as
discontinued operations. This information should be read in conjunction with the
Consolidated Financial Statements
15
and Notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" that appear elsewhere in this document.
For the year ended December 31, 1996, the Income Statement Data includes
the results of operations for Wireless Xcessories for the eleven months ended
and Advance Fox for the full year.
Prior to 1997, Advanced Fox was organized as a Subchapter S corporation
under the Internal Revenue Code of 1986, as amended. As a result, Advanced Fox
was not subject to U.S. federal income taxes as the taxable income of the
Company was included in the personal return of the stockholder. Beginning in
1997, the Company filed as a consolidated group for Federal income tax purposes.
For purposes of the Unaudited Pro Forma Statements of Operations Data included
in this report, pro forma Federal and state income taxes have been provided as
if the Company had filed C corporation tax returns. The unaudited pro forma
results reflect an income tax provision at an effective tax rate of
approximately 41% calculated in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes".
The Selected Financial Data has been derived from the consolidated
financial results for the years ended December 31, 1995, 1996, 1997 and 1998
audited by Deloitte & Touche LLP and the year ended December 31, 1999 audited by
Arthur Andersen LLP that appears elsewhere in this report.
16
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED DECEMBER 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
($ Thousands, Except Share and Per Share Data)
INCOME STATEMENT DATA:
Net sales $9,502 $13,679 $20,171 $24,852 $31,653
Cost of sales 5,876 8,531 12,352 13,776 16,034
----- ----- ------ ------ -------
Gross profit 3,626 5,148 7,819 11,076 15,619
----- ----- ------ ------ -------
Selling, general &
administrative expenses 2,294 4,374 6,674 8,906 11,558
Net interest (expense) (49) (67) (234) (311) (395)
---- --- ----- ----- -----
Income before income taxes 1,283 774 910 1,859 3,666
Income tax expense 1 306 397 880 1,323
---- --- ----- ----- -----
Net income from continuing
operations 1,283 468 513 979 2,343
Discontinued Operations:
(Loss) Income from operations
net of tax benefit (provision)
of ($99),($31), $(167), $1,259
and $847 6 48 55 (2,483) (1,504)
Estimated loss on sale of
subsidiaries (net of
applicable tax benefits of
$0, $0, $0, $0 and $225,140) 0 0 0 (558) (4,277)
----- ----- ------ ------ -------
Net income (loss) from
discounted operations 6 48 55 (3,041) (5,781)
----- ----- ------ ------ -------
Net income (loss) 1,289 516 568 (2,062) (3,438)
Preferred stock dividend
requirements 53 60 15 0 0
-- -- -- - -
Net income (loss)
attributable to common
shareholders 1,236 456 553 (2,062) (3,438)
----- ----- ------ ------ -------
Net income (loss) per
share of common stock
(basic) $0.12 $ 0.12 $(0.43) $(0.68)
===== ======= ======= =======
17
FISCAL YEAR ENDED
DECEMBER 31,
1995 1996
---- ----
($ THOUSANDS)
UNAUDITED PRO FORMA DATA:
Income before taxes $ 1,283 $ 774
Provision for income taxes 526 317
Pro forma net income 757 457
Pro forma net income per common stock
(basic & diluted) $ .17 $ .14
Pro forma net income attributable to common
shareholders 397
Pro forma net income per share .10
Pro forma number of shares outstanding 4,100,000
FISCAL YEAR ENDED DECEMBER 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital 5,728 7,218 $ 16,178 $ 11,532 $ 9,366
Total assets 8,010 10,622 24,531 21,320 16,685
Long term debt, less
current portion 160 -- 10,742 8,865 5,505
Mandatory redeemable
preferred stock -- 750 -- -- --
Stockholders' equity 6,533 8,460 11,730 9,668 6,718
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended December 31, 1999 ("1999") Compared to Year Ended December 31, 1998
- ------------------------------------------------------------------------------
("1998")
- --------
Net sales increased by 27.4% or $6.8 million from $24.9 million in 1998 to
$31.7 million in 1999. The increase in sales dollars and percentage are
attributable to Advanced Fox and Cliffco who had increases of $4.9 million
(27.3%) and $1.8 million (26.8%), respectively. In addition, AccessorySolutions,
which was formed in August 1999, contributed $41,000 in net sales. The net sales
growth in both Advanced Fox and Cliffco are reflective of the Company's broad
product offerings and strong telemarketing efforts which continue to generate
new accounts, and a good price/value relationship attributable to advantageous
buying.
Gross profit increased by $4.5 million or 41.0% from $11.1 million in 1998
to $15.6 million in 1999 and as a percentage of sales from 44.6% to 49.3%. The
increase in gross profit dollars is attributable both to Advanced Fox and
Cliffco who had increases of $3.1 million (27.3%) and $1.0 million (26.8%),
respectively. The increase in gross profit percentage of 4.7% was due to
continued advantageous Far East purchasing bolstered by a consolidation of the
two cellular companies' purchasing efforts, which began in June 1998.
Selling, general and administrative ("SG&A") expenses increased 29.8%, from
$8.9 million in 1998 to $11.6 million in 1999, and as a percentage of sales
increased from 35.8% in 1998 to 36.5% in 1999. The increase in SG&A expenses as
a percentage of sales was attributable to: (a) increases in occupancy and
distribution costs at Advanced Fox to support the current and anticipated sales
unit growth, including a major expansion of its main distribution facilities to
handle the substantial increases in unit sales volume, which tends to lower the
average sales per unit, (b) increased purchasing and warehousing services
provided to Cliffco, (c) more customized packaging services to accommodate
changes in the Company's customer mix and needs, and (d) expenses attributable
to AccessorySolutions (mainly start up costs) from the date of its inception
in August 1999 to the end of the year of $134,000. In addition, added computer
costs were incurred at Advanced Fox to enhance the existing accounting and
warehousing systems to better accommodate the unit volume growth and for Y2K
compliance, as well as the new system implementation at Cliffco.
Interest expense, net of the amounts allocated to discontinued operations,
increased $83,481 from $311,412 in 1998 to $394,893 in 1999 due primarily to the
growth in the continuing operations, offset by reduced borrowings under the
Company's Loan Facility resulting from the sale of Specific Energy's retail
assets on September 14, 1998, the proceeds from the sale of 389,732 shares of
its common stock in April 1999 and cash provided by operations. Additionally,
the Company benefited from a drop in the weighted average interest rates in
effect on debt from 8.25% in 1998 to 7.30% in 1999.
The Company's effective income tax rate decreased from 47.4% in 1998 to
36.1% in 1999. The decrease is primarily attributable to the permanent refunds
related to amended state tax returns filed in 1999.
19
In accordance with the decision to exit the Battery Segment, the Company
has evaluated the net realizable value of net assets of the Battery Network
business. In connection with the evaluation, the Company has determined that the
unamortized excess of the costs over net assets acquired at December 31, 1999
will not be realizable and, therefore, has recognized a related impairment of
$3.9 million (with no tax benefit). In addition, the Company has recorded a
reserve for the estimated operating losses and costs to dispose of the business
of $152,242 (net of a tax benefit of $101,496). Such amounts, along with the
loss on the sale of Tauber of $185,466 (net of a tax benefit of $123,644) are
included in the 1999 estimated net loss from the disposal of the Battery Segment
within discontinued operations in the accompanying consolidated statements of
the operations.
Year Ended December 31, 1998 ("1998") Compared to Year Ended December 31, 1997
- -------------------------------------------------------------------------------
("1997")
- ---------
Net sales increased by 23.2% or $4.7 million, from $20.2 million in 1997 to
$24.9 million in 1998. Sales increased by $1.6 million and $3.1 million at
Advanced Fox and Cliffco, respectively. Approximately $850,000 of the increase
at Cliffco is attributable to the period from May 12, 1998 (date acquired in
1997) to the end of the year.
Gross profit increased by $3.3 million from $7.8 million in 1997 to $11.1
million in 1998 and as a percentage of sales gross profit improved from 38.8% in
1997 to 44.6% in 1998. The increase in gross margin dollars was primarily the
result of a decline at Advanced Fox of $2.0 million, and the acquisition of
Cliffco on May 5, 1997 that contributed approximately $600,000 in gross profit
for the January 1 to May 12, 1998 period with an additional comparative increase
of approximately $882,000 for the balance of the year. Both Advanced Fox and
Cliffco substantially improved their gross margin percentage due to advantageous
Far East purchasing bolstered by a consolidation of the two cellular companies'
purchasing efforts, which began in June 1998.
SG&A expenses increased $2.2 million or 33.4%, from $6.7 million in 1997 to
$8.9 million in 1998, and as a percentage of sales increased from 33.1% in 1997
to 35.8% in 1998. The increase in SG&A was attributable to: (a) the acquisition
of Cliffco in May 1997 (approximately $750,000 attributable to comparative
period in 1998), and (b) an approximate increase of $1.2 million principally in
marketing, selling, and distribution costs at Advanced Fox to support the
current and anticipated sales growth, including continued expansion of its main
and Miami distribution facilities (note the Miami facility was subsequently
closed), increased sales and telemarketing costs, and purchasing, packaging and
warehousing services provided to Cliffco.
Interest expense, net of the amounts allocated to discontinued operations,
increased $76,966 to $311,412 in 1998 from $234,446 in 1997 due primarily to
increased borrowings under the Company's Loan Facility in connection with the
acquisition of Cliffco in May 1997, the redemption in April 1997 of 750,000
shares of Series A Preferred Stock and general operating needs, offset partially
by the sale of Specific Energy's retail assets for $715,000 on September 14,
1998.
The Company's effective income tax rate increased from 43.7% in 1997 to
47.4% in 1998.
During 1998, the Company reviewed the unamortized portion of the excess of
cost over net asset acquired related to the original purchase of Specific Energy
and determined that the asset was impaired. Accordingly, the Company recorded a
charge of $558,112 (with no tax benefit). Subsequent to recording the
impairment, the Company sold the retail assets of Specific Energy for
approximately net book value. The related impairment has been recorded in the
1998 estimated net
20
loss from the disposal of the Battery Segment within discontinued operations in
the accompanying consolidated statements of the operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's requirement for capital is to fund (i) sales growth, and (ii)
financing for acquisitions. The Company's primary sources of financing during
1999 and 1998 were cash flow from operations, equity issuances, the sale of
substantially all of the retail assets of Specific Energy in September 1998 and
bank borrowings.
The Company's working capital as of December 31, 1999 was $9,365,173. Net
cash provided by operating activities for the year ended December 31, 1999 and
1998 was $3,663,731 and $1,580,295, respectively. Net cash used in operating
activities during 1997 was $1,763,927. In 1999, the Company was able to provide
cash from operations of $3,663,731 from its net loss of $3,438,355 as adjusted
for non-cash items of depreciation and amortization of $888,271, impairment of
excess cost over net assets acquired of $3,939,470 and estimated losses on
disposals of discontinued operations of $562,848. Cash provided from changes in
assets and liabilities totaled $1,474,127 consisting of reductions in accounts
receivable and inventory of $98,586 and $1,556,752, respectively, and a net
increase in accounts payable and accrued expenses of $194,204 offset in part by
a reduction in prepaid expenses of $375,415.
The Company's reduction in accounts receivable was mostly attributable to
improved collection procedures and significant improvements in its agings. The
reductions in inventory are primarily the result of major reductions in Battery
Network inventories as a result of reduced purchases in response to the
deteriorated sales base, aggressive markdowns to move older inventory and
tighter inventory controls.
Net cash used by investing activities in 1999 of $755,883 was for capital
expenditures consisting primarily of computer equipment and upgrades. Net cash
provided by investing activities in 1998 consisted of proceeds from the sale of
Specific Energy's retail assets for approximately $715,000, less $619,820 for
the purchase of property and equipment. Net cash used in investing activities
for the year ended December 31, 1997 was approximately $9.5 million, consisting
of approximately $8.5 million (net of cash acquired) utilized in the acquisition
of Battery Network during January 1997, and approximately $399,000 (net of cash
acquired) utilized in the acquisition of Cliffco during May 1997.
Cash used in financing activities for the twelve months ended December 31,
1999 was $2.9 million and represents the net payments under the Revolver Loan
and Term Loan of $2.8 million and $.6 million, respectively, offset in part by
the receipt of $488,366 representing the net proceeds from the issuance of
Common Stock under a private placement to two directors of the Company and
related parties. Net cash used in financing activities in 1998 of $1.9 million
was to pay down the Revolver Loan and Term Loan in the amounts of $.9 million
and $1.0 million, respectively. Net cash provided by financing activities in
1997 of $9.2 million was comprised of approximately $3.0 million and $8.9
million in borrowings under the Revolver Loan and Term Loan, respectively,
offset by $550,000 payments under the Term Loan, $750,000 payment for redemption
of preferred stock, approximately $1.2 million repayment on subsidiary
borrowings, approximately $180,000 of financing and acquisition costs related to
the Battery Network acquisition, and $50,000 payment of preferred stock
dividends.
21
The Company is party to a Revolving Credit, Term Loan and Security
Agreement, dated January 6, 1997, as subsequently amended (the "Loan Facility"),
between IBJ Whitehall - Financial Group (formerly known as IBJ Schroder Bank &
Trust Company), as Agent ("IBJ"), the Company and certain of the Company's
affiliates. The Loan Facility consists of a $3,000,000 Term Loan (the "Term
Loan") payable in 35 monthly installments of $50,000 each, with the balance to
be paid at maturity, and a Revolving Credit Facility (the "Revolver Loan") of up
to $10,000,000 to be advanced at the rate of 80% of eligible accounts receivable
and 50% of inventories. The Revolver Loan bears interest at the rate of 1/4 of
1% plus the higher of (i) the base commercial lending rate of IBJ or (ii) the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers plus 1/4
of 1%, or, at the option of the Company at the Eurodollar rate plus 2%. The
Eurodollar rate is defined as LIBOR for a designated period divided by one less
the aggregate reserve requirements. The interest on the Term Loan is 1/2% higher
than the interest rate on the Revolver Loan. The Loan Facility is secured by a
pledge of the assets of the borrowers and a pledge of the outstanding capital
stock of the subsidiaries of the Company. As of December 31, 1999, the principal
amount outstanding under the Term Loan was $0.89 million and the principal
amount outstanding under the Revolver Loan was $5.21 million.
The Loan Facility contains certain covenants that include maintenance of
certain financial ratios, maintenance of certain amounts of working capital and
net worth as well as other affirmative and negative covenants. At December 31,
1999, the Company was not in compliance with certain of these covenants. On
March 30, 2000, the Company entered into an amended credit agreement whereby the
non-compliance at December 31, 1999 was waived and new financial covenants were
negotiated through December 31, 2001, which reflect the Company's current
projections. The Loan Facility is due to expire on January 7, 2002.
Pursuant to the Management Agreement with Founders Management Services,
Inc. ("Founders"), the Company paid Founders, for its origination and
negotiating services in connection with the acquisitions of Battery Network and
the Loan Facility, $240,000. The Company also issued to the designees of
Founders warrants to purchase 100,000 shares of Common Stock at a price of
$4.125 per share. Since June 1998 when Messrs. Haber and Teeger resigned as
officers and directors of the Company, Founders has provided no services to the
Company and the Company has not paid any fees to Founders. Although neither the
Company nor Founders has formally terminated the Management Agreement, both
parties have acted as if the Management Agreement has been terminated.
In December 1999, Founders filed a lawsuit in the United States District
Court for the Southern District of New York against the Company alleging the
Company owed Founders the amount of approximately $493,000 for a purportedly
improper early termination of the Management Agreement. The Company believes its
early termination of the agreement was proper and, therefore, believes the
alleged amount claimed is not due to Founders. In addition, the Company has
asserted counterclaims related to Founders' services under the Management
Agreement.
Based upon its present plans, management believes that operating cash flow,
available cash and available credit resources will be adequate to make the
repayments of indebtedness described herein, to meet the working capital cash
needs of the Company and to meet anticipated capital expenditure needs during
the 12 months ending December 31, 2000. Although the Company would like to issue
shares of Common Stock as its primary method of financing acquisitions, it
anticipates that additional funds will be required to successfully implement its
acquisition program, and will use various methods to finance acquisitions,
including raising new equity capital, for this purpose. There is no guarantee
that such financing will be available to the Company in the future.
22
SEASONALITY AND INFLATION
The Company's net sales typically show little or no significant seasonal
variations.
The impact of inflation on the Company's operations has not been
significant to date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on the Company's
operating results.
YEAR 2000
The Company identified its various applications and hardware that required
modification or replacement to be Year 2000 ("Y2K") compliant. In addition, the
Company contacted its vendors and significant customers regarding their Y2K
compliance plans. Y2K introduced the potential for errors and miscalculations
related to IT and non-IT systems, which were not designed to accommodate a date
of year 2000 and beyond. As of March 27, 2000 the Company had encountered no
significant Y2K-related problems.
The Company incurred costs related to Y2K for outside consultants and
capital expenditures in 1999, 1998 and 1997, which aggregated approximately
$466,000 of which $256,000 related to the Wireless Products Segment. The Company
did not separately track the internal costs for the Y2K project. This cost is
principally the payroll costs for the information systems department.
The most significant remaining risk to the Company regarding Y2K would be
interruption of business due to vendor and customer non-compliance. As the
Company has not experienced any major problems to date related to Y2K, it does
not have a contingency plan. However, in the event that the Company develops
future problems, the failure to have a contingency plan could have a material
adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk - The Company's only financial instruments with market
risk exposure are revolving credit borrowings and variable rate term loans,
which totaled $6,104,522 at December 31, 1999. Based on this balance, a change
of one percent in the interest rate would cause a change in interest expense of
approximately $61,045 or $0.01 per share (or $0.005) per share net of an income
tax benefit calculated using the Company's historical statutory rates, on an
annual basis.
These instruments were not entered into for trading purposes and carry
interest at a pre-agreed upon percentage point spread from one of several
designated base rates. The Company's objective in maintaining these variable
rate borrowings is the flexibility obtained regarding early repayment without
penalties and lower overall cost as compared with fixed-rate borrowings.
Foreign Currency Risk - The Company does not use foreign currency forward
exchange contracts or purchased currency options to hedge local currency cash
flows or for trading purposes. All sales arrangements with international
customers and suppliers are denominated in U.S. dollars. The Wireless Products
Segment purchases over 90% of its products from manufacturers located overseas,
principally in the Far East. The depreciation of the U.S. dollar against the
major Asian
23
currencies could, therefore, cause an increase in the cost of the Company's
products and adversely affect its results of operations or financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Company appear beginning on page
F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 25, 1999, the Company terminated the engagement of Deloitte &
Touche LLP as the Company's independent auditors and appointed Arthur Andersen
LLP to audit the Company's consolidated financial statements for the year ended
December 31, 1999, as more fully discussed in the Company's Current Report on
Form 8-K for October 25, 1999, as subsequently amended on November 12, 1999
and December 22, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth as of March 24, 2000, the name of each
Director and executive officer of the Company, his or her principal occupation
and the nature of all positions and offices with the Company held by him or her.
The Directors of the Company will hold office until the next Annual Meeting of
Stockholders.
FIRST
BECAME
NAME AGE OFFICE DIRECTOR
- ---- --- ------ ----------
Christopher F. McConnell 46 Chairman of the Board 1998
Stephen Rade 62 President, Chief Executive 1996
Officer and Director
Ronald E. Badke 54 Chief Financial Officer and Secretary
Robert W. Tauber 75 Director 1996
Allan Kalish 74 Director 1998
Christopher C. Cole 44 Director 1998
Barbara M. Henagan 41 Director 1999
Bradley T. MacDonald 52 Director 1999
Each executive officer serves at the discretion of the Board of Directors.
Mr. McConnell has been Chairman of the Board of the Company since December
1998. He is also currently Chairman of the Board of CFM Technologies, Inc. For
the past five years, he has been either Chairman or President and Chief
Executive Officer of CFM Technologies, Inc. Mr.
24
McConnell also serves as a director of V-Span, Inc., a privately held company
located in Pennsylvania.
Mr. Rade has been President and Chief Executive Officer of the Company
since June 1998. From 1996 until June 1998, he was Executive Vice President of
the Company. He has been a Director since April 1996. He has been the President,
Chief Executive Officer and a Director of Advanced Fox Antenna, Inc. since he
founded that company in 1990.
Mr. Badke has been Chief Financial Officer of the Company since November
1995 and Secretary of the Company since March 1999. He was a Senior Vice
President and the Chief Financial Officer of Shoe Town Inc. from 1984 through
September 1994, positions he later held (September to November 1995) with
Natures Elements. Mr. Badke, a certified public accountant, had been a
consultant from October 1994 through August 1995.
Mr. Tauber has been a director of the Company since 1996. In addition, he
has served as the President of Tauber since it was founded by him in 1975 and as
a director of Tauber from 1975 until April 1996.
Mr. Kalish is the owner of Kalish & Associates, a consulting firm
specializing in marketing, advertising and public relations, which he founded in
1986. Kalish & Associates serves advertisers, marketers and advertising agencies
throughout the country, including three New York Stock Exchange companies. Prior
to founding Kalish & Associates, Mr. Kalish managed Kalish & Rice, Inc., one of
the largest advertising agencies in Philadelphia. Mr. Kalish served as a member
of the Board of Directors of Checkpoint Systems, Inc., a New York Stock Exchange
company, from 1993 to 1997.
Ms. Henagan was elected to the Company's Board of Directors in March 1999.
For the past five years, she has been a Senior Managing Director of Bradford
Ventures, Ltd. Since July 1999, she has served as Manager of Linx Partners. Ms.
Henagan also serves on the Board of Directors of General Bearing Corporation and
Hampton Industries.
Mr. MacDonald was elected a Director of the Company in March 1999. He is
the Chairman of the Board and Chief Executive Officer of HealthRite, a position
he has held since January 1998. Prior thereto, he was appointed as Program
Director of the U.S. Olympic Coin Program of the Atlanta Centennial Olympic
Games. Mr. MacDonald previously was employed by HealthRite as its Chief
Executive Officer from September 1996 to August 1997. From 1991 through 1994,
Mr. MacDonald was Deputy Director and Chief Financial Officer of the Retail,
Food and Hospitality and Recreation Business for the United States Marine Corps.
Mr. Cole was elected as a Director of the Company in February, 2000. He is
currently President of the FKI Logistex Systems Division of FKI, Plc., a
publicly traded company in the United Kingdom ("FKI"). Until the acquisition of
Pinnacle Automation by FKI in early 2000, Mr. Cole was employed by Pinnacle as
its Chief Operating Officer and served as a director of Pinnacle since June 1997
and as Executive Vice President from March 1994 to June 1997. Mr. Cole has
served on the Board of Directors of the Cincinnati chapter of the American Red
Cross since 1989 and is currently chairman of its board.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
25
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers and persons who own more than ten
percent of its Common Stock to file with the Securities and Exchange Commission
and The Nasdaq Stock Market initial reports of ownership and reports of changes
in ownership of Common Stock and other equity securities of the Company.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to it and written representations with respect to the year
ended December 31, 1999, the Company's officers, directors and greater than ten
percent shareholders were in compliance with all applicable Section 16(a) filing
requirements, except Stephen Rade, the Company's Chief Executive Officer,
President and a Director, who inadvertently failed to file a report on Form 5
for the year ended December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the years ended December 31, 1999, 1998,
and 1997, the compensation for services rendered in all capacities to the
Company and subsidiaries by the Chief Executive Officer and the Company's other
executive officer for the year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
NAME PERIOD SALARY ($)
- ---- ------ ----------
Stephen Rade, Year ended 12/31/99 398,000 (1)
Chief Executive Officer, Year ended 12/31/98 350,000 (2)
President and Director Year ended 12/31/97 350,000 (3)
Ronald E. Badke Year ended 12/31/99 135,000
Chief Financial Officer Year ended 12/31/98 135,000
and Secretary Year ended 12/31/97 129,515 (4)
(1) Includes a bonus of $200,000 earned in 1999 and payable in 2000.
(2) Includes a bonus of $200,000 earned in 1998 and deferred pursuant to an
agreement relating to the acquisition of Advanced Fox. See Item 12.
(3) Includes a bonus of $200,000 earned in 1997 and deferred pursuant to an
agreement relating to the acquisition of Advanced Fox. See Item 12.
(4) Does not include a bonus of $15,000 earned in 1996 and paid in 1997.
EMPLOYMENT AGREEMENTS
The employment agreements between the Company and each of Messrs. Rade,
Tauber and Badke terminated on April 1998, April 1999 and March 1999,
respectively.
26
DIRECTORS
The Company does not pay a fee to its directors. It reimburses those
directors who are not employees of the Company for their expenses incurred in
attending meetings.
27
STOCK OPTIONS
Under the Company's 1995 stock option plan (the "plan"), the Company's
board of directors or a stock option committee appointed by the board may grant
stock options to officers, key employees, directors, and independent consultants
of the Company. Currently, 600,000 shares of the Company's common stock are
subject to the plan.
Neither of the Company's executive officers was granted options in 1999.
The following table sets forth the number of shares which underlie
unexercised options held at December 31, 1999 by the executive officers named in
the Summary Compensation Table. Neither of those officers exercised options
during 1999.
28
FISCAL YEAR END OPTION VALUES
NUMBER OF SHARES UNDERLYING
UNEXERCISED OPTIONS AT FISCAL
YEAR END (1)
----------------------------------
NAME EXERCISABLE UNEXERCISABLE
- ---- -------------- ----------------
Stephen Rade 25,000 0
Ronald E. Badke 60,000 0
(1) The exercise price of all outstanding options at December 31, 1999 was
greater than the market value of the shares covered by those options.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 24, 2000, as
supplied to the Company, regarding the beneficial ownership of the Common Stock
by all persons known to the Company who own more than 5% of the outstanding
shares of the Company's Common Stock, each director of the Company, each
executive officer of the Company named in the Summary Compensation Table
included elsewhere in this report and all executive officers and directors as a
group. Unless otherwise indicated, based on information provided to the Company
by the directors, executive officers and principal shareholders, the persons
named in the table below have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them.
NUMBER OF
SHARES
BENEFICIALLY
NAME* OWNED (1) PERCENTAGE (2)
- ----- ------------- ----------------
Christopher F. McConnell (3) 167,567 3.3%
Robert W. Tauber (4) 252,333 4.9%
Stephen Rade (5) 699,000 13.6%
Ronald E. Badke (6) 60,000 1.2%
Christopher C. Cole (7) 5,500 **
Allan Kalish (8) 33,000 **
Barbara M. Henagan (9) 240,164 4.7%
Bradley T. MacDonald (10) 5,500 **
29
NUMBER OF
SHARES
BENEFICIALLY
NAME* OWNED (1) PERCENTAGE (2)
- ----- ------------- ----------------
A. G. EDWARDS 575,140 10.8%
Fiser Correspondent Services, Inc. 273,495 5.1%
Directors and Officers as a group 1,463,064 27.5%
(8 persons) (11)
* The business address of each shareholder named in this table, with the
exception of A.G. Edwards and Fiser Correspondent Services, Inc.,
is Wireless Xcessories Group,Inc., 1840 County Line Road, Huntingdon
Valley, PA 19006. The address of A.G. Edwards is 125 Broad Street, 40th
Floor, New York, New York 10004, and the address of Fiser Correspondent
Services, Inc. is 1125 17th Street, Denver, Colorado 80202.
** Less than 1%.
(1) For purposes of this table, a person or group is deemed to have "beneficial
ownership" of any shares which such person has the right to acquire within
60 days.
(2) Percentage ownership is based on 5,132,732 shares of Common Stock
outstanding on March 24, 2000. For purposes of computing the percentage of
outstanding shares held by each such person or group of persons named
above, any security which such person or group of persons has the right to
acquire within 60 days is deemed to be outstanding, but is not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person.
(3) Includes exercisable options to purchase 11,500 shares.
(4) Includes exercisable options to purchase 57,333 shares.
(5) Includes exercisable options to purchase 25,000 shares.
(6) Includes exercisable options to purchase 60,000 shares.
(7) Includes options to purchase 5,500 shares.
(8) Includes exercisable options to purchase 25,500 shares.
(9) Includes exercisable options to purchase 7,000 shares.
(10) Includes exercisable options to purchase 5,500 shares.
(11) Includes exercisable options to purchase 197,333 shares.
30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In consideration for the acquisition of Tauber and Advanced Fox, the
Company in April 1996 issued to Robert W. Tauber, a director of the Company,
300,000 shares of Common Stock and a five year option to purchase an additional
50,000 shares at $5.00 per share. This option remains unexercised.
The principal offices of Advanced Fox, which comprise approximately 7,000
square feet in Huntingdon Valley, Pennsylvania, are occupied under a
month-to-month lease with Rade Limited Partnership, of which Mr. Rade and his
wife are the partners. The lease, as amended with respect to additions to the
facility, provides for an annual rent of $70,000 with the tenant obligated to
pay the applicable real estate taxes and maintenance and insurance costs. The
Company expects that it will terminate this lease on or about April 30, 2000.
The Company at that time will relocate its principal offices to space leased
from a third party.
Rental payments for the twelve months ended December 31, 1999, 1998 and
1997 were $76,462, $76,000 and $76,000, respectively.
PRIOR MANAGEMENT
Messrs. Warren H. Haber, the former Chairman of the Board, and John L.
Teeger, the former Vice President, Secretary and Director of the Company, were
the sole stockholders, officers and directors of Founders. Pursuant to the
Management Agreement between Founders and the Company dated as of June 6, 1995,
as subsequently amended, Founders was to provide advice and consultative
services regarding management, overall strategic planning, acquisition policy,
relations with commercial and investment banking institutions, and stockholders
matters to or on behalf of the Company. In addition to an annual base fee of
$150,000 and a fee based on the Company's profits, Founders was entitled to
receive originating fees with respect to acquisitions or financings for which it
performed originating services. This fee was to be calculated by reference to
the fee customarily charged by non-affiliated investment bankers or professional
originators for transactions of similar size and nature. To determine the fees
customarily charged, the Company was to review then current proxy statements and
investment publications and consult with nonaffiliated investment bankers for
the computation of originating fees in similar transactions as those in which
the Founders' originating services have been employed. The amount of the fee was
subject to the approval of a majority of the Directors not affiliated with
Founders. Founders received for its origination and consultation services in
connection with the combination with Advanced Fox and Tauber a fee of $150,000;
and in connection with the Battery Network acquisition and related financing of
$13,000,000, a fee of $240,000 and five year warrants to purchase 100,000 shares
of Common Stock at a price of $4.125 per share. These warrants were split
equally by Messrs. Haber and Teeger as designees of Founders.
In February 1998, the Management Agreement was revised by mutual consent
to, among other things, eliminate the origination and incentive fee provisions
of the original agreement. The revised agreement thereby limited fees that were
payable to Founders to an annual fee of $150,000, payable monthly.
Since June 1998, when Messrs. Haber and Teeger resigned as officers and
directors of the Company, Founders has provided no services to the Company and
the Company has not paid any fees to Founders. Although neither the Company nor
Founders has formally terminated the Management
31
Agreement, both parties have acted as if the Management Agreement has been
terminated. Founders has initiated a lawsuit against the Company with respect to
this Management Agreement, as discussed under Item 4 above.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this Report.
1. Financial Statements - The financial statements and schedules required
by this item begin on page F-1 of this report. The Reports of Independent Public
Accountants appear on pages F-2 and F-3 of this report.
All other schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial statements
or notes thereto.
2. Exhibits - The following is a list of exhibits. Where so indicated by
footnote, exhibits which were previously filed are incorporated by reference.
Exhibit
Number
- ---------
3.1 Certificate of Incorporation of Company and amendments thereto*
3.2 By-Laws*
4.1 Form of Common Stock Certificate*
4.2 Form of Warrant*
10.1 Warrant Agreement related to Redeemable Stock Purchase Warrants*
10.2 Form of Purchase Option issued to underwriter of initial public
offering*
10.3 Form of Preferred Stock, Series A Certificate*
10.4 1995 Stock Option Plan of Company*
10.5 Forms of Option Agreement under the Plan
10.6 Option issued to Mr. Robert W. Tauber*
10.7 Management Services Agreement between the Company and Founders
Management Services, Inc., as amended*
10.8 Lease between Advanced Fox Antenna, Inc. and Rade Limited Partners*
10.9 Registration Rights Agreement between the Company and Messrs. Tauber
and Rade*
10.10 Form of Warrant issued to each of Warren H. Haber and John L.
Teeger **
10.11 Revolving Credit, Term Loan and Security Agreement, dated
January 6, 1997 among IBJ Schroder Bank & Trust Company as Agent and
the Company, Advanced Fox Antenna, Inc., Tauber Electronics Inc.,
Battery Acquisition Corp., Specific Energy Corporation, Battery
Network, Inc. and W.S. Battery & Sales Company, Inc.**
10.12 Amendment No. 1 and Joinder Agreement among the Company, certain of
its
32
Exhibit
Number
- ---------
affiliates and IBJ Schroder Bank & Trust Company***
10.13 Waiver and Amendment to Revolving Credit, Term Loan and Security
Agreement by and among the Company, certain of its affiliates and IBJ
Schroder Bank & Trust Company****
10.14 Waiver and Amendment to Revolving Credit, Term Loan and Security
Agreement by and among the Company, certain of its affiliates and IBJ
Schroder Bank & Trust Company*****
10.15 Asset Purchase Agreement with respect to the sale of substantially all
of the assets of Tauber Electronics, Inc.******
21 List of Subsidiaries
27 Financial Data Schedule
* Filed as an exhibit to the Company's Registration Statement on Form
S-1 (File No. 33-80939) and incorporated by reference thereto.
** Filed as an exhibit to the Company's Current Report on Form 8-K for
January 7, 1997 and incorporated by reference thereto.
*** Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the three months ended June 30, 1997 and incorporated by reference
thereto.
**** Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated by reference hereto.
***** Filed as an exhibit to the Company's Quarterly Report for the three
months ended June 30, 1998 and incorporated by reference thereto.
******Filed as an exhibit to the Company's Current Report on Form 8-K for
January 27, 2000 and incorporated by reference thereto.
(b) During the quarter ended December 31, 1999, the Company filed a Current
Report on Form 8-K, dated October 29, 1999 reporting information under "Item 4.
Changes in Registrant's Certifying Accountant" regarding the Company's
termination of the Company's independent auditors, Deloitte & Touche LLP, on
October 25, 1999 and the appointment of Arthur Andersen, LLP to audit the
Company's consolidated financial statements for the year ended December 31,
1999. This Current Report was amended on November 12, 1999 to include a letter
from Deloitte & Touche LLP confirming the comments contained in Item 4 of the
original Current Report. A second amendment to this Current Report was made on
December 22, 1999 to include a letter from Deloitte & Touche LLP confirming the
comments contained in the November 12, 1999 amendment.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WIRELESS XCESSORIES GROUP, INC.
By: /s/ Stephen Rade
-------------------------------------
Stephen Rade
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Name Title Date
- ---- ----- -----
/s/ Christopher F. McConnell Chairman of the Board March 29, 2000
- ----------------------------
Christopher F. McConnell
/s/ Ronald E. Badke Chief Financial Officer and March 29, 2000
- ----------------------------
Ronald E. Badke Secretary (principal financial officer)
/s/ Stephen Rade Chief Executive Officer, March 29, 2000
- ----------------------------
Stephen Rade President and Director
(principal executive
officer)
/s/ Robert W. Tauber Director March 29, 2000
- ----------------------------
Robert W. Tauber
/s/ Allan Kalish Director March 29, 2000
- ----------------------------
Allan Kalish
/s/ Christopher C. Cole Director March 29, 2000
- ----------------------------
Christopher C. Cole
/s/ Barbara M. Henagan Director March 29, 2000
- ----------------------------
Barbara M. Henagan
/s/ Bradley T. MacDonald Director March 29, 2000
- ----------------------------
Bradley T. MacDonald
34
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
-------------------------------------------------------
PAGE
----
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS F-4
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
CONSOLIDATED SUPPORTING SCHEDULE FILED:
II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES S-1
All other schedules are omitted because they are not applicable, not required,
or the information required to be set forth therein is included in the
Consolidated Financial Statements or in the Notes thereto.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Wireless Xcessories Group, Inc.
We have audited the accompanying consolidated balance sheet of Wireless
Xcessories Group, Inc. (formerly, Batteries Batteries, Inc.) (a Delaware
corporation) and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wireless Xcessories
Group, Inc. and subsidiaries at December 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to the financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statement taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
March 30, 2000
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Wireless Xcessories Group, Inc.
We have audited the accompanying consolidated balance sheet of Wireless
Xcessories Group, Inc. (formerly, Batteries Batteries, Inc.) and subsidiaries as
of December 31, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the two years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1998,
and the results of their operations and their cash flows for the two years in
the period ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP /s/
San Diego, California
March 30, 1999
F-3
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31
-----------------------
1999 1998
------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 365,827 $ 330,647
Accounts receivable (net of allowance for
doubtful accounts of $120,467
and $170,317, respectively) 5,119,283 3,958,358
Inventories 5,204,220 3,907,802
Prepaid expenses and other current assets 187,651 282,849
Income tax refund receivable 586,746 367,394
Current deferred income taxes 379,227 297,223
Net current assets held for sale 1,984,817 5,174,915
------------ ------------
Total current assets 13,827,771 14,319,188
PROPERTY AND EQUIPMENT - net 999,223 832,033
EXCESS OF COST OVER NET ASSETS ACQUIRED
(net of accumulated amortization of
$111,814 and $69,361, respectively) 949,508 991,961
NET NONCURRENT ASSETS HELD FOR SALE 737,090 4,854,022
OTHER ASSETS 171,736 322,915
------------ -------------
Total assets $16,685,328 $ 21,320,119
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 600,000 $ 600,000
Bank overdraft 344,654 526,691
Accounts payable 999,839 411,465
Accrued payroll and related benefits 1,013,962 719,629
Other accrued expenses 1,504,143 528,981
------------ -------------
Total current liabilities 4,462,598 2,786,766
------------ -------------
LONG-TERM DEBT 5,504,522 8,865,156
------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001, 1,000,000
shares authorized, no shares issued
or outstanding - -
Common stock, par value $.001, 10,000,000
shares authorized, 5,132,732 and 4,743,000
shares, respectively, issued and outstanding 5,133 4,743
Additional paid-in capital 11,203,806 10,715,830
Accumulated deficit (4,490,731) (1,052,376)
------------ -------------
Total stockholders' equity 6,718,208 9,668,197
------------ -------------
Total liabilities and stockholders' equity $16,685,328 $21,320,119
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Years Ended December 31
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
NET SALES $31,652,681 $ 24,852,022 $ 20,171,234
COST OF SALES 16,034,150 13,775,932 12,351,661
----------- ------------- -------------
Gross profit 15,618,531 11,076,090 7,819,573
----------- ------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 11,557,821 8,905,593 6,674,254
----------- ------------- -------------
INTEREST EXPENSE, net 394,893 311,412 234,446
----------- ------------- -------------
Income before income taxes 3,665,817 1,859,085 910,873
INCOME TAX EXPENSE 1,322,917 880,333 397,892
----------- ------------- -------------
Net income from continuing
operations 2,342,900 978,752 512,981
----------- ------------- -------------
DISCONTINUED OPERATIONS:
(Loss) income from operations
(net of tax benefit (provision)
of $847,186, $1,259,405 and
($167,483), respectively) (1,504,077) (2,482,345) 55,022
Estimated loss on sale of
subsidiaries (net of tax
benefit of $225,140, $0 and
$0, respectively) (4,277,178) (558,112) -
----------- ------------- -------------
Net (loss) income from
discontinued operations (5,781,255) (3,040,457) 55,022
----------- ------------- -------------
Net income (loss) (3,438,355) (2,061,705) 568,003
PREFERRED STOCK DIVIDEND REQUIREMENTS - - 15,000
----------- ------------- -------------
Net income (loss) attributable to
common stockholders $(3,438,355) (2,061,705) 553,003
=========== ============= =============
Earnings (loss) per common share - Basic:
Income from continuing operations $ 0.47 $ 0.21 $ 0.11
Income (loss) from discontinued
operations (1.15) (0.64) 0.01
----------- ------------- -------------
Net income (loss) per common
share $ (0.68) $ (0.43) $ 0.12
=========== ============= =============
Earnings (loss) per common share - Diluted:
Income from continuing operations $ 0.46 $ 0.21 $ 0.11
Income (loss) from discontinued
operations (1.15) (0.64) 0.01
----------- ------------- -------------
Net income (loss) per common share $ (0.69) $ (0.43) $ 0.12
=========== ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Preferred Stock Common Stock Additional Retained
--------------------------- ------------------------- Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit) Total
---------- ----------- ---------- ---------- ------------ ---------- ------------
BALANCE, DECEMBER 31, 1996 - $ - 4,000,000 $ 4,000 $ 7,999,838 $ 456,326 $ 8,460,164
Issuance of common stock
to former stockholders
of Battery Network - - 550,000 550 2,269,200 - 2,269,750
Issuance of common stock to
former stockholders of
Cliffco of Tampa Bay - - 193,000 193 446,792 - 446,985
Preferred stock dividends paid - - - - - (15,000) (15,000)
Net income - - - - - 568,003 568,003
---------- ----------- ---------- ---------- ------------ ---------- ------------
BALANCE, DECEMBER 31, 1997 - - 4,743,000 4,743 10,715,830 1,009,329 11,729,902
Net loss - - - - - (2,061,705) (2,061,705)
---------- ----------- ---------- ---------- ------------ ---------- ------------
BALANCE, DECEMBER 31, 1998 - - 4,743,000 4,743 10,715,830 (1,052,376) 9,668,197
Issuance of common stock - - 389,732 390 487,976 - 488,366
Net loss - - - - - (3,438,355) (3,438,355)
---------- ----------- ---------- ---------- ------------ ---------- ------------
BALANCE, DECEMBER 31, 1999 - $ - 5,132,732 $ 5,133 $ 11,203,806 $(4,490,731) $ 6,718,208
========== =========== ========== =========== ============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Years Ended December 31
------------------------------------------------
1999 1998 1997
----------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ (3,438,355) $ (2,061,705) $ 568,003
Adjustments to reconcile
net income (loss) to net
cash provided by (used in)
operating activities--
Depreciation and amortization 888,271 749,402 647,190
Allowance for doubtful accounts
provision 402,153 326,915 400,275
Deferred income tax (benefit)
provision (165,183) 8,405 173,933
Estimated loss on sale of
subsidiaries 562,848 - -
Impairment of excess cost
over net assets acquired 3,939,470 558,112 -
Changes in assets and liabilities,
net of effects from acquisitions--
Accounts receivable 98,586 160,137 (2,138,462)
Inventories 1,556,752 2,040,204 (2,460,565)
Prepaid expenses and other assets (375,415) (95,227) (128,760)
Accounts payable and accrued expenses 194,204 (105,948) 1,174,459
----------- ------------- -------------
Net cash provided by
(used in) operating
activities 3,663,331 1,580,295 (1,763,927)
----------- ------------- -------------
INVESTING ACTIVITIES:
Purchase of property and equipment,
net (755,883) (619,820) (633,265)
Disposal of Specific Energy Corporation - 715,000 -
Acquisition of businesses, net of
cash acquired - - (8,844,006)
----------- ------------- -------------
Net cash (used in) provided by
investing activities (755,883) 95,180 (9,477,271)
----------- ------------- -------------
FINANCING ACTIVITIES:
Borrowing under Term Loan Facility - - 3,000,000
Borrowing under Revolving Credit Facility - - 8,892,028
Issuance of common stock 488,366 - -
Redemption of preferred stock - - (750,000)
Net payments on borrowings (3,360,634) (1,885,257) (1,742,012)
Dividends paid - - (50,000)
Prepaid financing and acquisition
costs relating to the Battery
Network acquisition - - (178,000)
----------- ------------- -------------
Net cash (used in) provided
by financing activities (2,872,268) (1,885,257) 9,172,016
----------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 35,180 (209,782) (2,069,182)
----------- ------------- -------------
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 330,647 540,429 2,609,611
----------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 365,827 $ 330,647 $ 540,429
=========== ============== =============
F-7
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during year for--
Interest $ 606,500 $ 863,337 $ 617,520
=========== ============== =============
Income taxes $ 378,843 $ 412,341 $ 508,071
=========== ============== =============
NON-CASH ITEMS:
Proceeds from issuance of common
stock to stockholders--
To Stockholders of Battery
Network $ - $ - $2,269,000
To Stockholders of Cliffco of
Tampa Bay - - 446,985
----------- ------------- -------------
Total proceeds from
issuance of common
stock to stockholders $ - $ - $2,715,985
=========== ============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Name Change
- -----------
In March 2000, Batteries Batteries, Inc. changed its name to Wireless Xcessories
Group, Inc.
Business Description
- --------------------
Wireless Xcessories Group, Inc. and its subsidiaries (collectively, the
"Company") are engaged in the distribution of batteries, battery accessories and
cellular accessories, and components in the United States. During the fourth
quarter of 1999, the Company began selling products via the newly created
e-commerce subsidiary, AccessorySolutions.com, Inc.
Principles of Consolidation
- ----------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany transactions have been
eliminated.
Cash Equivalents
- -----------------
The Company considers all highly liquid investments with a maturity date of
three months or less from the date of purchase to be cash equivalents.
Concentration of Risk
- ----------------------
The Company utilizes its excess cash to reduce its bank borrowings. The Company
has not experienced any losses on its cash accounts or short-term investments.
The Company sells its products to commercial businesses and retail consumers
primarily in the United States. Through its continuing relationships with these
customers, the Company performs credit evaluations and generally does not
require collateral. The Company maintains a reserve for potential credit losses,
and such losses have been minimal. No single customer accounted for greater than
10% of consolidated net sales during any of the years presented.
In 1999, the Company purchased approximtaely 49% of its products from three Far
East suppliers. One supplier accounted for approximately 20% of all purchases
and the other two suppliers each accounted for approximately 14% of all
purchases.
Inventories
- ------------
Inventories consist of cellular accessories and are carried at the lower of
cost, determined on a first-in, first-out basis (FIFO), or market value.
Property and Equipment
- -----------------------
Property and equipment are stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation and
amortization of property and equipment is calculated under the straight-line
method over the estimated useful lives of the respective assets. Estimated
useful lives are five to seven years for furniture and fixtures and three to ten
years for machinery and equipment. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the terms of
F-9
their leases. Depreciation expense was $368,505, $267,815 and $158,954 in 1999,
1998 and 1997, respectively, and is included in selling, general and
administrative expense in the consolidated statements of operations.
Other Assets
- -------------
Other assets in 1999 consist primarily of purchased internal use software and
refundable deposits. Other assets in 1998 consists primarily of deferred bank
financing fees, which were amortized over the life of the Loan Facility (see
Note 4). Amortization expense was $95,000, $90,000 and $90,000 in 1999, 1998 and
1997, respectively.
Excess of Cost Over Net Assets Acquired
- ---------------------------------------
The excess of cost over net assets acquired is being amortized on a
straight-line basis over twenty-five years. The carrying value of the excess
cost over net assets acquired is periodically reviewed to determine whether
impairment exists. The review is based on comparing the carrying amounts to the
undiscounted estimated cash flows before interest charges from operations over
the remaining amortization period. In connection with this review, the Company
recognized an impairment of $3,939,470 in 1999 related to Battery Network, Inc.
as a result of the decision to exit the Battery Segment (see Note 2) and
$558,112 in 1998 related to Specific Energy Corporation.
Revenue Recognition
- --------------------
Revenue is recognized at the time of shipment. Revenue related to the web site
vendor agreements at AccessorySolutions.com, Inc. is recognized ratably over
the related contract period.
Income Taxes
- -------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under the
liability method specified by SFAS No. 109, a deferred tax asset or liability is
determined based on the difference between the financial reporting basis and tax
basis of assets and liabilities, measured using enacted tax rates. The impact of
changes in tax rates is reflected in income in the period in which the change is
enacted.
Discontinued Operations
- ------------------------
During the first quarter of 2000, the Company sold most of the assets and
transferred certain liabilities of Tauber Electronics, Inc. (see Note 2). In
addition, the Company has developed a plan, which has been approved by the Board
of Directors of the Company, to dispose of Battery Network, Inc. The Company
expects that the disposition will be completed during 2000. As these two
companies represent all of the Company's remaining businesses within its Battery
Segment, the Company has accounted for this segment as discontinued operations.
The results of operations for the Battery Segment have been classified as
discontinued operations for all periods presented in the consolidated statements
of operations and balance sheets. The assets and liabilities of the discontinued
operations have been classified in the accompanying consolidated balance sheets
as "Net assets held for sale" and "Net noncurrent assets held for sale."
Discontinued operations have not been segregated in the
F-10
accompanying consolidated statements of cash flows, and, therefore, amounts of
certain captions will not agree with the respective consolidated statements of
operations. Net sales for the Battery Segment were $16,137,635, $26,601,820 and
$33,802,978 for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company allocated interest not specifically associated with any segment
based upon a ratio of net tangible assets. Interest expense allocated to
discontinued operations was $256,000, $479,000 and $491,000 in 1999, 1998 and
1997, respectively.
Earnings Per Share
- ------------------
Basic earning per share (EPS) is computed using the weighted average number of
common shares outstanding for the period while diluted EPS is computed assuming
conversion of all dilutive securities such as options. Included below is a
reconciliation of shares for the basic and diluted EPS computations.
1999 1998 1997
---------- ---------- -----------
Basic EPS Shares 5,013,537 4,743,000 4,688,803
Dilutive effect of stock
options and warrants 38,213 16,677 2,283
--------- --------- ---------
Diluted EPS Shares 5,051,750 4,759,677 4,691,086
========= ========= =========
There is no difference between net income (loss) per common share on a basic and
diluted EPS basis. In 1999, the stock options and warrants had an antidilutive
effect on earnings per share from discontinued operations; therefore, they have
not been included in the related calculation.
Options to purchase 130,532, 108,865 and 140,000 shares with exercise prices
ranging from $1.875 to $5.00 and warrants to purchase 2,400,000, 2,400,000 and
2,400,000 shares with exercise prices ranging from $4.13 to $5.00 were
outstanding at December 31, 1999, 1998 and 1997, respectively, but were not
included in the computation of diluted EPS because the option's exercise price
was greater than the average market price of the common shares.
Disclosures About Fair Value of Financial Instruments
- -----------------------------------------------------
The carrying value at December 31, 1999 of the Company's financial instruments
approximated their fair value primarily due to the short maturities of these
instruments.
New Accounting Pronouncements
- ------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Costs," and is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. Although the
Company is not currently required to report under SFAS No. 133, the Company is
analyzing the potential impact of implementing SFAS No. 133 and does not
believe that implementation, when required, will have a material impact on the
Company's financial statements.
Employee Stock Options
- -----------------------
The Company applies Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees," which recognizes compensation costs
based on the intrinsic value of an equity instrument recorded. The Company has
applied APB No. 25 to its stockholder compensation awards to employees and has
disclosed the required pro forma effect on net income (loss) per share. (See
Note 5).
F-11
Use of Estimates in the Preparation of Financial Statements
- ------------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain amounts in prior years have been reclassified to conform to the current
year presentation.
2. ACQUISITIONS AND DIVESTITURES:
------------------------------
Effective January 1, 1997, the Company acquired the business and related assets
of Battery Network, Inc. and affiliated companies ("Battery Network"), which
currently operates principally in California and had combined revenues of
approximately $23.0 million for the year ended December 31, 1996. The purchase
price of approximately $11.2 million consisted of (i) approximately $8.3 million
in cash; (ii) 550,000 shares of Common Stock valued at a price of $4.125 per
share and five year options to purchase an additional 225,000 shares at an
exercise price of $4.50 per share, and (iii) approximately $590,000 in
transaction costs.
The Battery Network agreement also provided the sellers the contingent right to
receive additional consideration of up to $1.0 million in cash, 350,000 shares
of Common Stock and five year options to acquire 250,000 shares of Common Stock.
Payment of the additional consideration is based on the excess amount by which
the combined "pre-tax income" as defined, of Battery Network and Tauber exceeded
certain levels for the following three years. The sellers also entered into
employment agreements and were granted options under the Company's Stock Option
Plan to purchase an aggregate of 50,000 shares of Common Stock. During this
period, there was no additional consideration earned or paid by the Company to
the sellers of Battery Network.
In accordance with the decision to exit the Battery Segment (see Note 1 -
Discontinued Operations), the Company has evaluated the net realizable value of
net assets of the Battery Network business. In connection with this evaluation,
the Company has determined that the unamortized excess of cost over net assets
acquired at December 31, 1999 is not realizable and, therefore, has recognized a
related impairment of $3,939,470. In addition, the Company has recorded a
reserve for the estimated operating losses and costs to dispose of the business
of $152,242 (net of $101,496 tax benefit). Such amounts are included in the 1999
net loss from discontinued operations in the accompanying consolidated
statements of operations.
In May 1997, the Company acquired the business and related assets of Cliffco of
Tampa Bay, Inc. ("CTB"). The purchase price of approximately $615,000 consisted
of (i) cash of approximately $75,000, (ii) 193,000 shares of common stock valued
at $2.35 per share or $446,985 and (iii) approximately $93,000 in transaction
costs. In addition, the Company assumed liabilities of $1,162,000. As part of
its assumption of liabilities, the Company paid at the closing indebtedness of
CTB of approximately $560,000. The CTB agreement provided the president and sole
stockholder of the seller with a three-year employment agreement. This
employment agreement has been terminated.
F-12
The cash portion of the purchase price of each transaction, as well as the
repayment of CTB debt of $560,000 to its collateralized lender was funded with a
portion of the proceeds of a borrowing pursuant to a Revolving Credit, Term Loan
and Security Agreement (see Note 4).
The Battery Network acquisition and CTB acquisition were accounted for as
purchases in accordance with Accounting Principles Board Opinion No. 16. The
total purchase price, net of cash acquired, was allocated to the assets acquired
and liabilities assumed based on their estimated fair values, as follows:
(In Thousands)
Battery Network CTB
----------------- ---------------
Accounts receivable $ 2,522 $ 648
Inventories 4,679 347
Property and equipment 185 79
Other assets 177 32
Accounts payable, accrued expenses and debt (1,307) (1,321)
Excess of cost over net assets acquired 4,458 1,061
------------- -----------
Total $ 10,714 $ 846
============= ===========
The excess of the cost over the net assets acquired is being amortized over a
period of 25 years. The results of operations of CTB are included with those of
the Company for the periods subsequent to the date of acquisition. The results
of Battery Network are included in loss from discontinued operations for each of
the years presented.
The pro forma consolidated results of operations for the year ended December 31,
1997 would not have been materially different if the CTB acquisition would have
been completed at the beginning of 1997.
During the second quarter of 1998, the Company made the decision to exit the
retail battery business and explore the sale of Specific Energy Corporation
("Specific Energy") in Phoenix, Arizona (which is the Company's sole retail
facility). Consistent with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Assets to be Disposed Of," management determined that a
portion of the carrying value of the Company's excess of cost over net assets
acquired was impaired. Accordingly, the Company recorded a charge of $558,112,
which principally represented the remaining unamortized excess of cost over net
assets acquired that resulted from the Company's acquisition of Specific Energy
in 1995. On September 14, 1998, the Company sold the retail assets of Specific
Energy for cash proceeds of approximately $715,000, which represented the
approximate carrying value of the net assets sold and applicable transaction
costs.
On January 27, 2000, the Company sold substantially all of the assets and
certain liabilities of Tauber Electronics, Inc. for $1,489,427, consisting of
cash of $1,005,854 and a note receivable of $519,708 bearing interest at 1%
above prime, as defined and payable over 5 years. Any outstanding principal or
accrued interest is due in full on January 26, 2005. The principal amount of
this note was subsequently reduced to $483,573, effective on March 15, 2000, to
reflect the final valuation of transferred assets. The note is subject to
further adjustment (only upward) during the first quarter of 2001 based on the
valuation of certain
F-13
inventory reserves. The related loss on the sale of $185,466 (net of $123,644
tax benefit) has been reflected in the estimated loss on sale of subsidiaries
within the net loss from discontinued operations in the 1999 consolidated
statement of operations.
3. PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment consists of the following:
December 31,
-------------------------------------
1999 1998
---------------- ----------------
Machinery and equipment $ 1,496,197 $ 1,062,352
Furniture and fixtures 242,617 191,550
Vehicles 49,265 49,265
Leasehold improvements 195,085 143,192
---------------- ----------------
1,983,164 1,446,359
Less accumulated depreciation (983,941) (614,326)
---------------- ----------------
Property and equipment, net $ 999,223 $ 832,033
================ ================
4. LONG-TERM DEBT:
Long-term debt consists of the following:
December 31,
-------------------------------------
1999 1998
---------------- ----------------
Revolving Loan Facility $ 6,104,522 $ 9,465,156
Less current portion (600,000) (600,000)
---------------- ----------------
Long-term debt, net of current portion $ 5,504,522 $ 8,865,156
================ ================
The weighted average interest rates in effect on debt for the years ended
December 31, 1999 and 1998 was 7.30% and 8.25%, respectively.
The Company entered into a Revolving Credit, Term Loan and Security Agreement,
dated January 6, 1997, as subsequently amended (the "Loan Facility"), with IBJ
Whitehall-Financial Group (formerly known as IBJ Schroder Bank and Trust
Company), as Agent ("IBJ"). The Loan Facility consists of a $3,000,000 Term Loan
(the "Term Loan") payable in 35 monthly installments of $50,000 each with the
balance to be paid at maturity and a Revolving Credit Facility (the "Revolver
Loan") of up to $10,000,000 to be advanced at the rate of 80% of eligible
accounts receivable and 40% of inventories. The Revolver Loan bears interest at
the rate of 1/4 of 1% plus the higher of i) the base commercial lending rate of
IBJ or ii) the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers plus 1/4 of 1%, or, at the option of the Company at the Eurodollar
rate plus 2%. The Eurodollar rate is defined as LIBOR for a designated period
divided by one less the aggregate reserve requirements. The interest on the Term
Loan is 1/2% higher than the
F-14
interest rate on the Revolver Loan. The Loan Facility is secured by a pledge of
the assets of the borrowers and pledge of the outstanding capital stock of the
subsidiaries of the Company. As of December 31, 1999, the principle amount
outstanding of the Term Loan is $889,218 and the Revolver Loan is $5,215,304.
The Loan Facility contains certain covenants which include maintenance of
certain financial ratios, maintenance of certain amounts of working capital and
net worth as well as other affirmative and negative covenants. It also prohibits
the payment of dividends of common stock without consent. At December 31, 1999,
the Company was not in compliance with certain of these covenants. On March
30, 2000, the Company entered into an amendment to the Loan Facility, whereby
the non-compliance at December 31, 1999 was waived, and the financial covenants
through December 31, 2000 were amended to reflect the Company's current
projections. The Loan Facility is due to expire on January 7, 2002.
5. STOCKHOLDERS' EQUITY:
----------------------
Preferred Stock
- ----------------
The Board of Directors of the Company, without action by the stockholders, is
authorized to issue shares of Preferred Stock in one or more series and, within
certain limitations, to determine the voting rights (including the right to vote
as a series on particular matters), preferences as to dividends and in
liquidation, conversion, redemption and other rights of each such series. The
Board of Directors could issue a series with rights more favorable with respect
to dividends, liquidation and voting than those held by the holders of any class
of Common Stock. In 1995, the Company issued 1,000,000 shares of Preferred
Stock, Series A in connection with a private placement. The Preferred Stock,
Series A shares were nonvoting and were redeemed in accordance with their terms
one year following consummation of the initial public offering at the redemption
price of $1.00 per share plus accrued dividends from the date of issuance at the
rate of 8% per annum of the redemption price. In May 1996, the Company redeemed
250,000 shares of Preferred Stock. In April 1997, the Company redeemed the
remaining 750,000 shares of the Preferred Stock.
Common Stock
- -------------
The shares of Common Stock have one vote per share. None of the shares have
preemptive or cumulative voting rights, redemption rights, are or will be liable
for assessment or further calls. The holders of the Common Stock are entitled to
dividends when declared from funds legally available therefore.
On April 23, 1999, the Company raised $488,366 (net of costs of $10,434) through
a private placement of 389,732 shares of its common stock to two of its Board
members (Christopher F. McConnell, Board Chairman, and Barbara M. Henagan) and
to two other related parties.
Stock Options
- --------------
The Company, on June 6, 1995, adopted the Company's Stock Option Plan (the
"Plan"), which as amended in December 1995, authorizes the Board of Directors or
a Stock Option Committee appointed by the Board to grant up to 250,000 qualified
stock options and non-qualified stock options to officers and key employees,
directors and independent consultants, with directors who are not employees and
consultants eligible only to receive non-qualified stock options. The Board of
Directors in 1995 granted under the Plan options to purchase 20,720 shares of
Common Stock to two directors at a price of $2.89 per share. In 1996, the
Company granted under the Plan five-year options to purchase an aggregate of
195,000 shares of Common Stock to employees. The options are exercisable at the
initial Offering price per share of $5.00. In 1997, the Company granted, under
the Plan, five-year options to purchase an aggregate of 75,000 shares of Common
Stock to employees of the Company. The options are exercisable at prices ranging
from $2.80 to $4.50 per share. In
F-15
1998, the shareholders of the Company approved an amendment to the Plan
increasing the number of shares granted by 350,000 to an aggregate total of
600,000 for the plan. In addition in 1998, the Company granted, under the Plan,
five-year options to purchase an aggregate of 455,000 shares of Common Stock to
directors and employees of the Company. The options are exercisable at prices
ranging from $1.38 to $2.69 per share. In 1999, the Company granted, under the
Plan, one-year options to purchase 85,000 shares of Common Stock to a director
of the Company. The options are exercisable at prices ranging from $1.38 to
$1.88 per share. The Company also granted, under the Plan, ten-year options to
purchase 95,000 shares of Common Stock to directors and employees of the
Company. The options are exercisable at $1.38 per share. At December 31, 1999
and 1998, there are a total of 244,468 and 296,135, respectively, shares
available for grant.
The following information pertains to the stock options outstanding for the
three years ending December 31, 1999:
Weighted
Average
Number of Share
Shares Price
--------------- -------------
Options outstanding at January 1, 1997 215,720 $ 4.80
Granted 75,000 3.93
Forfeited (105,000) (5.00)
---------------
Options outstanding at December 31, 1997 185,720 4.33
Granted 455,000 2.17
Forfeited (336,855) (3.12)
---------------
Options outstanding at December 31, 1998 303,865 2.47
Granted 180,000 1.40
Forfeited (128,333) (1.59)
---------------
Options outstanding at December 31, 1999 355,532 2.23
===============
Options exercisable at December 31, 1999 301,365 2.37
===============
The following table summarizes information as of December 31, 1999 concerning
currently outstanding and exercisable options:
Option Outstanding Options Exercisable
------------------ ---------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Price Outstanding Life (Years) Exercise Price Exercisable Exercise Price
- -------------- ------------- -------------- -------------- ----------- --------------
$1.38 - $5.00 355,532 4 $2.21 301,365 $2.34
The outstanding stock options as of December 31, 1999 vest as follows: (a) half
of the option shares are vested on the date of grant with an additional one-half
vesting in the first anniversary therefrom (158,000 options outstanding at
December 31, 1999); or (b) one-third of
F-16
the option shares are vested on the date of the grant with an additional
one-third vesting on the first and second anniversaries therefrom, respectively
(86,667 options outstanding at December 31, 1999); or (c) one hundred percent of
the option shares are vested on the date of grant (118,865 options outstanding
at December 31, 1999).
As provided for in SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company utilizes the intrinsic value method of expense recognition under APB No.
25. Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation expense for the stock option plans been determined
consistent with the provisions of SFAS No. 123, the Company's net income and net
income per share would have been the pro forma amounts indicated below:
1999 1998 1997
---- ---- ----
Net income from continuing operations:
As reported $ 2,342,900 $ 978,752 $ 512,981
Pro forma 2,295,818 943,314 177,464
Basic net income from continuing
operations per common share:
As reported $ 0.47 $ 0.21 $ 0.11
Pro forma 0.46 0.20 0.04
Diluted net income from continuing
operations per common share:
As reported $ 0.46 $ 0.21 $ 0.11
Pro forma 0.45 0.20 0.04
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 6.2%, 5.5% and 6.0% for 1999, 1998 and
1997, respectively; expected dividend yield of 0%; expected life of 5 years; and
expected volatility of 95%, 117% and 83% for 1999, 1998 and 1997, respectively.
Additionally, in connection with the Battery Network acquisition in 1997, the
Company issued options to purchase 225,000 shares of common stock at an exercise
price of $4.50 per share and, in connection with the Tauber acquisition in 1996,
issued options to purchase 50,000 at an exercise price of $5.00 per share.
Warrants
- --------
In connection with the initial public offering, the Company sold 2,300,000
redeemable warrants to purchase the Company's Common Stock.
Each Warrant is exercisable at a price of $5.00 per share after April 8, 1997
and is redeemable by the Company thereafter at a price of $0.01 per Warrant upon
not less than 30 days' prior written notice if the last sale price of the Common
Stock has been at least $7.50 per share on the 20 consecutive trading days
ending on the third day prior to the date on which the notice of redemption is
given.
Also, in connection with the acquisition of Battery Network, on January 7, 1997
the Company issued five-year warrants to purchase 100,000 shares of common stock
at a price of $4.125 per share.
F-17
6. PROFIT SHARING PLAN:
--------------------
Tauber has a profit sharing plan covering substantially all of its employees.
Tauber makes contributions to the plan at its discretion. The plan allows
participating employees to make voluntary deposits into the plan, subject to
annual limits. Contributions to the plan were $0, $35,275 and $141,123 for the
years ended December 31, 1999, 1998, and 1997, respectively.
7. INCOME TAXES:
-------------
The provision (benefit) for income taxes consists of:
1999 1998 1997
---------- ------------ -------------
Current:
Federal $ 1,277,187 $ 662,916 $ 417,115
State 127,734 338,228 143,991
---------- ------------ -------------
1,404,921 1,001,144 561,106
---------- ------------ -------------
Deferred:
Federal (139,776) (91,740) (152,317)
State 57,772 (29,071) (10,897)
---------- ------------ -------------
(82,004) (120,811) (163,214)
---------- ------------ -------------
Total provision for income taxes $ 1,322,917 $ 880,333 $ 397,892
========== ============ =============
In conformity with SFAS No. 109, deferred tax assets and liabilities are
classified based on the financial reporting classification of the related assets
and liabilities which give rise to temporary book/tax differences. Deferred
taxes related to the following temporary differences are as follows:
December 31,
---------------------------------------
1999 1998
----------------- -----------------
Deferred income tax assets:
Accrued compensation $ 238,000 $ 163,167
Inventory reserve 97,609 41,605
Bad debts reserve 50,596 75,792
Other 61,460 82,005
----------------- -----------------
447,665 362,569
----------------- -----------------
Deferred income tax liabilities:
State taxes 26,260 45,903
Other 42,178 19,443
----------------- -----------------
68,438 65,346
----------------- -----------------
Net deferred tax asset $ 379,227 $ 297,223
================= =================
The Company has determined that no valuation allowance for the net deferred tax
asset is required as of December 31, 1999 and 1998, as the future realization of
such tax benefits is considered to be more likely than not through the
combination of carryback availability, certain tax planning strategies that
would allow for acceleration of deductible temporary differences to utilize the
remaining carryback availability and through expected future taxable income.
F-18
The effective income tax rate varied from the U.S. Federal statutory tax rate as
follows:
1999 1998 1997
-------------- -------------- ------------
Statutory income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 3.4 11.0 10.4
Goodwill 0.4 0.7 1.6
Meals and entertainment 0.2 0.5 -
Other (1.9) 1.2 (2.3)
-------------- -------------- ------------
Effective tax rate 36.1% 47.4% 43.7%
============== ============== ============
During 1999, the Company amended certain prior period state tax returns
resulting in certain refunds received in 1999 and others to be received in 2000.
At December 31, 1998, the Company generated a federal net operating loss of
approximately $1,549,088. During 1999, the Company carried back the entire
federal net operating loss resulting in a refund of $518,609. As this refund was
not received until January 2000, it is classified as a tax refund receivable in
the accompanying consolidated balance sheets.
8. COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Company is from time to time, party to litigation arising in the normal
course of its business. Based on consultation with legal counsel, management
does not believe that any such claims or litigation will have a material adverse
effect on the financial position or results of operations of the Company.
The Company leases various types of warehouse and other space and equipment,
furniture and fixtures under noncancellable operating lease agreements, which
expire at various dates. Certain leases for warehouse and other space contain
rental escalation clauses based on the Consumer Price Index. Future minimum
lease payments under noncancellable operating leases for the years ending
December 31, are as follows:
2000 $ 475,432
2001 448,979
2002 422,355
2003 403,870
2004 and thereafter 188,105
----------------
Total $ 1,938,741
================
Rent expense for all operating leases for the years ended December 31, 1999,
1998 and 1997 was $429,625, $291,123 and $190,822, respectively.
9. RELATED PARTY TRANSACTIONS:
---------------------------
Messrs. Warren H. Haber, former Chairman of the Board and Chief Executive
Officer and John L. Teeger, Vice President, Secretary and Director of the
Company are the sole
F-19
stockholders, officers and directors of Founders Management Services, Inc.
("Founders"). Founders had agreed, pursuant to an agreement (the "Management
Agreement") dated as of June 6, 1995, as subsequently amended, to provide advice
and consultative services regarding management, overall strategic planning,
acquisition policy, relations with commercial and investment banking
institutions, and stockholder matters to or on behalf of the Company. The
agreement, which was for a term expiring in April 1999, subject to five one-year
renewal options, provided for Founders to receive a base fee of $150,000 per
annum. Founders was also to receive an additional fee of 5% of the Company's
annual pre-tax income in excess of $750,000. Under the Management Agreement,
Founders was also entitled to originating fees with respect to acquisitions or
financing for which it performed originating services -- the fee to be that
customarily charged by nonaffiliated investment bankers or professional
originators for transactions or similar size and nature. Founders received a fee
of $150,000 for its origination and consulting services in connection with the
Mergers. Founders also received a fee of $240,000 for originating and
negotiating services in connection with the acquisition of Battery Network and
the Loan Facility, and was issued five-year warrants to purchase 100,000 shares
of the Company's common stock at a price of $4.125 per share. In connection with
the Management Agreement, the Company paid Founders $56,115 and $437,265 during
the years ended December 31, 1998 and 1997, respectively. In February 1998, the
Management Agreement was revised to eliminate the origination and incentive fee
provisions of the original Management Agreement, and to establish April 30, 1999
as the expiration date. The revised Management Agreement thereby limits fees
paid to Founders to an annual fee of $150,000. On May 5, 1998, both active
principals of Founders resigned as officers and directors of the Company. As a
result, the Company ceased making payments under the Management Agreement. In a
lawsuit filed in November 1999, Founders alleges that the Company improperly
repudiated this Management Agreement and is seeking damages. In March 2000, the
Company filed an answer to the lawsuit and asserted counterclaims against
Founders related to the Management Agreement. Based on consultation with legal
counsel, management does not believe that this lawsuit will have a material
adverse effect on the financial position or results of operations of the
Company.
The Company leases certain office space in Pennsylvania from an affiliate of the
current Chief Executive Officer of the Company. The lease expired on December
31, 1999 and is currently on a month-to-month basis with a mutually agreed
termination date of April 30, 2000. Rent expense related to this lease was
$76,462, $76,000 and $76,000 in 1999, 1998 and 1997, respectively.
The Company also leased certain office and warehouse space at branch locations
in Illinois and New Jersey from an affiliate of the sellers of Battery Network.
During June, 1998 and July, 1999, these leases were terminated by mutual consent
with no further obligation of the Company. Rent expense related to these leases
were $46,901, $138,734 and $176,551 in 1999, 1998 and 1997, respectively.
10. SEGMENT DISCLOSURE:
-------------------
As a result of the decision to exit the Battery Segment, the Company effectively
operates in one business segment, the Wireless Products Segment, which
distributes cellular telephone accessory products including batteries, chargers
and antennas throughout North and South America. The Wireless Products Segment
is headquartered in Huntingdon Valley, Pennsylvania and consists of Advanced Fox
Antenna, Cliffco of Tampa Bay, Inc. and AccessorySolutions.com, Inc.
F-20
All revenue and essentially all long-lived assets were related to operators in
the United States as of and for the years ended December 31, 1999, 1998, and
1997.
Export sales for the years ended December 31, 1999, 1998 and 1997 were as
follows:
1999 1998 1997
---------- ----------- -------------
Europe, Middle East & Africa $ 45,472 $ 31,139 $ 42,644
Asia & Pacific 8,345 8,479 9,539
Americas excluding United States 712,723 1,168,274 1,260,158
---------- ----------- -------------
Total $ 766,540 $1,207,892 $1,312,341
========== =========== =============
Receivables from export sales at December 31, 1999 and 1998 were approximately
$313,680 and $224,311 respectively, for the Wireless Products Segment.
F-21
INDEPENDENT AUDITORS' REPORT ON ADDITIONAL INFORMATION
To the Board of Directors and Stockholders of
Wireless Xcessories Group, Inc.
Our audits at December 31, 1998 and 1997 and for the two years then ended were
conducted for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The additional information included on
Schedule II on page S-1 is presented for the purpose of additional analysis and
is not a required part of the basic consolidated financial statements. This
additional information is the responsibility of the Company's management. Such
information has been subjected to the auditing procedures applied in our audits
of the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects when considered in relation to the basic
consolidated financial statements taken as a whole.
DELOITTE & TOUCHE LLP
San Diego, California
March 30, 1999
F-22
Schedule II
WIRELESS XCESSORIES GROUP, INC.
---------------------------------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
----------------------------------------------
Beginning Ending
Description Balance Additions Deductions Balance
- ----------- ----------- --------- ---------- ----------
Inventory reserves January 1, 1997 $ 162,192 $ 125,000 $ 135,219 $ 151,973
January 1, 1998 151,973 400,097 458,575 93,495
January 1, 1999 93,495 221,701 32,704 282,492
Allowance for doubtful
accounts January 1, 1997 $ 123,264 $ 144,726 $ 159,404 $ 108,586
January 1, 1998 108,586 191,760 130,029 170,317
January 1, 1999 170,317 182,993 232,843 120,467
S-1