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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Fee Required)
For the Fiscal Year Ended Commission File Number
December 31, 1996 0-27994
BATTERIES BATTERIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-383-5420
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
711 Fifth Avenue 10022
New York, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including Area Code: (212) 953-0100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Common Stock Purchase Warranties
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 25, 1997 was $10,857,390.
As of March 25, 1997, 4,550,000 shares of the Registrant's Common Stock, $.001
par value per share, were outstanding.
PART I
ITEM 1. BUSINESS
Batteries Batteries, Inc. (the "Company" or "Batteries Batteries")
was founded in May 1995 to create a nationwide battery and cellular products
distribution business serving the commercial, industrial and retail markets.
Through a series of acquisitions for cash, notes and securities, Batteries
Batteries acquired (i) in June 1995, Specific Energy, Inc. ("Specific Energy")
based in Phoenix, Arizona, (ii) in April 1996, Advanced Fox Antenna, Inc.
("Advanced Fox") based in Philadelphia, Pennsylvania and Tauber Electronics,
Inc. ("Tauber") based in San Diego, California, and (iii) in January 1997
Battery Network, Inc. and affiliated companies ("Battery Network") based in
Chicago, Illinois, North Branch, New Jersey and Escondido, California. As a
result the Company is engaged in the sale and distribution of a wide range of
batteries and battery related products and cellular products, accessories and
components. Sales are effected on a nationwide basis to numerous retail,
commercial and industrial accounts by means of the Company's administered
business-to-business telemarketing and catalog circulation program and direct
selling, and regionally to retail public and local commercial/industrial
accounts through retail stores, technical centers, direct marketing and
specialty store operations.
OPERATING STRATEGY
The battery distribution business is highly fragmented. The Company
believes a leader or leaders will emerge to more effectively market a very
broad line of new and replacement specialty batteries and that an opportunity
exists for industry consolidation through acquisitions and subsequent
rationalization of the acquired businesses. The specialty battery market
includes users of computers, scientific and medical equipment, photographic
and industry equipment, calculators, cellular phones, camcorders, hearing aids
and military equipment. The Company's strategy is to become a significant
factor in the battery distribution business through the combination, by
strategic acquisitions and otherwise, of value added assembly operations.
The proliferation of battery types and chemistries, and expanded
usage driven by the demand for portable devices has created a growing
replacement market for battery products. Batteries are utilized in
applications, the majority of which were nonexistent a decade ago, such as
keyless entry systems, hand-held scanning devices, cellular phones, paging
units, laptop computers, medical equipment, security devices, emergency
lighting, children's toys and a vast array of power tools. Since thousands of
battery types exist for a continually expanding universe of products,
expertise is required to adequately address customer's needs.
With the multiplicity of battery products, mass merchandisers and
retail chains presently serve only segments of the market, offering a limited
number of battery products which are often not specifically designed for
intended applications, and staffed with personnel lacking specific training
with respect to products offered. Additionally, such vendors in most instances
offer batteries for products that are not more than a few years old.
Furthermore, distributors of batteries have specific sources of reliable
products and relationships with manufacturers making it difficult for a new
venture to enter the market as a start-up.
The Company believes that as a result of these factors an opportunity
exists to combine regional distribution businesses, thereby leveraging
already established distribution channels and relationships and providing high
quality technical expertise while simultaneously achieving national
recognition. The Company's business strategy features the following:
Diversity of Products. Through consolidated purchasing,
combined with engineering and technical capability (enabling the
Company to provide battery packs for specific applications), the
Company offers a broad range of products, including chargers, power
supplies and cellular communications items, well beyond that of any
single existing competitor and is capable of supplying all market
segments, including OEMs and MROs.
Expansion through Strategic Acquisitions. A strong
management team combining substantial experience in identifying and
acquiring businesses and in successfully managing battery and
cellular distribution operations provides the Company with a
competitive advantage for expanding through acquisitions of similar
businesses in targeted markets. The Company plans to enhance its
engineering capability through additions of battery companies with
technical capabilities to allow assembly of unique battery packs to
address specific products or industry segments and to meet additional
applications.
Rationalization of Business Combinations. Operating
efficiencies are being effected through: (i) combination of certain
administrative functions, (ii) installation and integration of
improved operating systems and (iii) achievement of cost savings by
volume purchases of batteries from manufacturers and foreign sourcing
and direct import of products.
National and Regional Marketing. The use of regionally
centralized inventory, telemarketing and direct mail techniques, and
operation of retail stores, to achieve synergies enables the
Company's products to be marketed and sold nationally and supplied
locally.
Superior Customer Service and Competitive Pricing. The
achievement of superior customer service and competitive prices is to
be effected through (i) utilizing regional value added operations,
technical centers and high volume assembly operations as hubs to
support store operations, (ii) employing highly trained personnel to
service customers and (iii) offering a very broad product selection
to fulfill customers' needs.
Decentralized Management. Management of operations on a
decentralized basis through three operating groups: (i) OEMs, (ii)
stores and direct marketing to the consumer and MRO segments, and
(iii) specialty products, creates an atmosphere attractive to
entrepreneurs by providing the opportunity for local managers to
focus on marketing and expansion of their businesses.
3
OPERATIONS
Products. The Company markets in excess of 6,000 different battery
products (including those added in January 1997 with the Battery Network
acquisition) and value-added battery packs and over 1,000 cellular phone
accessories and components. Detailed engineering drawings for each
Company-assembled battery pack are maintained in a Company database. The
products address a multitude of applications for commercial and consumer use
with individual sales ranging from less than a dollar to the retail consumer
to thousands of dollars for commercial and industrial orders. The Company
offers branded items, private label items and custom designed products for
special situations produced or assembled at the Company's technical centers or
its value added facilities. The Company is an authorized dealer for numerous
major battery manufactures including Panasonic, Gates Energy Products,
Duracell, Sanyo, Varta and Saft pursuant to agreements or arrangements which
are terminable by the Company or the manufacturer on short notice.
Purchases are made from many vendors, including several manufacturers
located overseas, principally in the Far East, from whom the Company acquires
most of its cellular accessories and components. Direct imports accounted for
approximately 44% of the Company's cost of purchases for the 12 months ended
December 31, 1996 (22% on a pro forma basis to include Battery Network's
operations for the period). Purchases are made in U.S. dollars. No one
supplier accounted for purchases representing more than 10% of the total pro
forma purchase costs for the period, except for purchases from a manufacturer
which accounted for approximately 10.5%. Although the Company has available
several alternative sources for substantially all of the products acquired
from that vendor, the unavailability of products from this source could have
a short-term adverse effect on the Company's operations. The Company
coordinates decentralized purchasing enabling volume discounts. The Company
is considering the establishment of an office in the Far East area to reduce
the costs of purchases of items currently imported and to permit the Company
to benefit from lower costs for some items it currently acquires in the
United States.
Sales. The Company currently operates three retail stores in Arizona
(one each in Phoenix, Scottsdale and Tempe), with selling areas ranging from
960 to 2,000 square feet. Each retail outlet has a small technical center and
operates as a recycling center for the receipt of used batteries which are
either sold or provided to an authorized recycling center. Retail sales are
also effected through two leased departments as of March 25, 1997 in Office
Max outlets in the Phoenix area.
Battery packs are assembled at the Company's modern value added
facilities in San Diego and Escondido, California and North Branch, New
Jersey, and at its technical centers located adjacent to its retail stores and
its warehouse servicing the retail outlets.
The Company also engages in telemarketing from its own facilities and
the production and distribution of eight product line catalogues which are
circulated nationally and overseas, and one of which contains cellular
accessories and component catalog with a national and international
distribution of approximately 37,000 copies. Sales are effected through
independent sales representatives compensated on a commission basis and the
Company's own salaried sales representatives. The Company intends to expand
and integrate the catalogs on a Company-wide basis, particularly as to private
label and proprietary items, which generally provides higher margins and are
produced at the technical centers or at the three value-added facilities.
4
During the twelve months ended December 31, 1996, the Company
effected sales to more than 7,000 commercial and industrial customers. Sales
during 1996 by Battery Network, acquired in January 1997, were to more than
9,500 accounts. No one customer accounted for more than 5% of the pro forma
revenues of the Company for the twelve months ended December 31, 1996. Export
sales did not exceed 3% of total pro forma revenues for the period.
Inventory Management. The Company has commenced a program to
integrate and expand the computerized inventory and management system
maintained by each acquired company to provide more efficient and integrated
inventory management with centralized controls, to enable quick and accurate
reporting of inventory and product movement throughout the Company, and to
expand and integrate in its telemarketing operations.
COMPETITION
The battery distribution business is fragmented, multi-tiered and
loosely structured with manufacturers often competing with their own regional
distributors in sales to both large OEM and commercial accounts. There are
many distributors, most operating regionally or locally, directly selling to
smaller commercial and industrial accounts, regional retail accounts and, to a
small extent, directly to retail customers. In many instances, small
distributors focus on a particular market segment. There are numerous
retailers offering batteries, including several larger or national chain or
discount operators such as Sears, K-Mark, Montgomery Ward, NAPA Distribution
Center, Northern Automotive Corporation, Post Effective Period Boys - Manny,
Moe and Jack, Radio Shack and Home Depot. These retailers, however, carry a
limited number of batteries, a majority of which are automotive, and offer
many products under their private label. Cellular accessories are sold by many
large retailers, numerous small importers and by one large distributor of many
cellular products.
While the Company believes that its size and diversity provides
certain competitive advantages such as those arising from centralized and
volume purchasing and the ability to be located at the same time in several
markets, competition is also based on delivery fulfillment efficiency,
customer service satisfaction levels, maintenance of satisfactory dealer
arrangements with major manufacturers and the ability to anticipate
technological changes in products and customer preferences. Furthermore, no
assurance can be given that some of the major battery manufacturers whose
products the Company distributes will not acquire, commence or expand their
own distribution systems to sell to commercial and retail customers directly.
The Company also anticipates competition in the acquisition of other
battery distributors and OEMs as the industry recognizes the benefits of
consolidation. Such competition could result in higher prices being paid for
other companies in the industry. The Company, however, believes that its
operational strategy which includes an emphasis on decentralized management,
will make the Company an attractive acquiror to other battery distribution
businesses and to OEMs. No assurance can be given, however, as to the success
of the Company's acquisition program.
5
EMPLOYEES
As of March 15, 1997, the Company had 247 persons engaged in its
operations (mostly full-time), of whom 48 were employed in management and
administration, one in technical operations, 25 in sales at the retail stores,
57 in telemarketing and commercial sales, 68 in assembly and value added
operations and 48 in shipping and receiving. 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 is subject to Federal, state and local laws, regulations
and ordinances that govern activities or operations that may have adverse
environmental effects, such as discharges to air and water as well as handling
and disposal practices for solid and hazardous wastes; or impose liability for
the costs of cleaning up sites and certain damages resulting from past spills,
disposal or other releases of hazardous substances which batteries contain.
Although batteries contain chemicals such as alkaline, nickel-cadmium and
lithium, the Company purchases the items in their finished state and its
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. The Company
accordingly does not believe that it has any material risk of environmental
problems.
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 has applied for Federal service mark registration of
"Batteries Batteries -- for everything" and the associated Company logo. No
assurance can be given that any such registration will be effective to prevent
others from: (i) using the service mark concurrently or (ii) preventing the
Company from using the service mark in certain locations.
The Company believes that it has all rights to trademarks and trade
names necessary for the conduct of its business.
6
ITEM 2. PROPERTIES
All of the Company's real properties are held under leases
Its three retail stores, in the Phoenix, Arizona area, are occupied
under leases with expiration dates ranging from June, 1997 through October,
2001. The stores are supplied from a leased warehouse located in a building in
Phoenix containing a technical center.
The following table provides certain information concerning the
Company's other leased properties:
APPROXIMATE LEASE EXPIRATION
OPERATION NATURE LOCATION AREA DATE
- --------- ------ -------- ---- -----
Tauber Office, warehouse and San Diego, California 19,700 7/31/99
assembly
Advanced Fox Office* Huntingdon Valley, PA 6,400 12/31/99
Advanced Fox Office, warehouse and Huntingdon Valley, PA 6,200 Month-to-Month
assembly
Advanced Fox Office and warehouse Miami, FL 2,800 5/31/99
Battery Network Office and warehouse* McHenry, IL 16,000 1/1/99
Battery Network Office, warehouse and North Branch, NJ 10,800 1/1/99
assembly*
Battery Network Office, warehouse and Escondido, CA 14,000 8/31/97
assembly
Battery Network Office and warehouse Rebound, WA 3,000 6/1/97
Battery Network Office and warehouse McDonough, GA 400 Month-to-Month
- ---------------
* Leased from an affiliate of an officer or officers of the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to 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 will have a material adverse
effect on the financial condition or results of operations of the Company.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of security holders during
the three months ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The "Company's" Common Stock ("BATS") and Redeemable Common Stock
Purchase Warrants ("BATSW") have traded on the National Market System
since April 8, 1996. The following table sets forth the range of high
and low sale prices for the quarters indicated for the Common Stock and
Warrants as reported by Nasdaq for the period from April 8, 1996 through
December 31, 1996.
Common Stock Warrants
High Low High Low
---- --- ---- ---
1996
Second quarter (April 8-June 30)................ $7.125 $5.50 $2.625 $1.00
Third quarter................................... $5.875 $4.50 $1.875 $1.25
Fourth quarter.................................. $4.875 $3.50 $1.625 $ .625
The number of record holders of the Company's Common Stock as of
March 25, 1997 was 50. The Company believes that 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 bank lenders.
8
ITEM 6. SELECTED FINANCIAL DATA
In April 1996, Batteries Batteries, Inc. acquired, by merger or stock
acquisition (the "Mergers"), simultaneously with the closing of its initial
public offering of common stock and redeemable warrants (the "Offering"),
Advanced Fox Antenna, Inc. ("Advanced Fox") and Tauber Electronics, Inc.
("Tauber"), (collectively, the "Merger Companies") for common stock and cash.
These three businesses are referred to herein as the "Founding Companies." As a
result of the substantial continuing interests in the Company of the former
stockholders of the Founding Companies, the historical financial information of
each of the Founding Companies has been combined on a historical cost basis in
accordance with generally accepted accounting principles as if the Founding
Companies had always been members of the same operating group. In June 1995,
the Company acquired 95% of the outstanding common stock of Specific Energy
Corporation ("Specific Energy") in a business combination accounted for as
purchase. (In June 1996, the Company acquired the remaining minority 5%
interest for cash.) The accompanying consolidated financial statements and
related notes to the consolidated financial statements are representative of
what the financial position, results of operations and cash flows would have
been if the Founding Companies, except for Specific Energy, which is included
from June 1, 1995, the effective date of its acquisition, had been combined at
the beginning of fiscal 1992. The assets and liabilities of the Founding
Companies are reflected at their historical amounts. As of the date of the
Mergers, the capital stock of Batteries Batteries, Inc. is presented as capital
stock of the Company and the capital stock of Advanced Fox and Tauber is
included in additional paid-in capital and their retained earnings have been
reclassified to additional paid-in capital.
The results of operations of the Founding Companies reflect the
combined historical operating results of closely held Subchapter S and C
corporations through the effective date of the Mergers and do not include pro
forma adjustments for income taxes, officers' salaries or other items necessary
for combining Subchapter S and C corporations through such date.
Batteries Batteries, Inc. has previously reported on a fiscal year
ending January 31; Advanced Fox and Tauber have previously reported on a fiscal
year ending December 31. During the second quarter of fiscal 1996, Batteries
Batteries, Inc. changed its fiscal year-end to December 31, 1996 to conform
with that of Advanced Fox and Tauber. The results of operations are now
presented on a calendar year basis. For the year ended December 31, 1996, the
results of operations include the results of Batteries Batteries, Inc. for the
eleven months ended December 31, 1996 and those of Advanced Fox and Tauber For
the year ended December 31, 1996. For the year ended December 31, 1995, the
results of operations include the results of Batteries Batteries, Inc. for the
year ended January 31, 1996 and those of Advanced Fox and Tauber for the year
ended December 31, 1995. For the year ended December 31, 1994, the results of
operations include those of Tauber for the year ended December 31, 1994 and
Advanced Fox for the ten months ended December 31, 1994. Batteries Batteries,
Inc. did not commence operations until June 1995 and Advanced Fox had
previously reported on a February 28 fiscal year basis. The results of
operations of Batteries Batteries, Inc. (excluding Advanced Fox and Tauber)
for one month are not significant, therefore the 1996 consolidated results
are provided on a basis comparable to the prior year.
The Selected Financial Data for the fiscal years ended December 31,
1994, 1995 and 1996 have been derived from the Company's consolidated financial
statements that have been audited by Deloitte & Touche LLP and that appear
elsewhere in this Report. The Selected Financial Data for the fiscal year ended
December 31, 1993 has been derived from the Company's consolidated financial
statements that have been audited by Deloitte & Touche LLP and for the fiscal
year ended December 31, 1992 has been derived from unaudited consolidated
financial statements not included elsewhere in this Report. These unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
contain all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation of the financial position and results of
operations for the periods presented.
9
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME STATEMENT DATA:
Net sales............................ $ 11,166 $ 14,219 $ 18,213 $21,029 $ 25,650
Cost of sales........................ 8,972 11,223 14,304 15,238 17,805
-------- --------- ------- ------- ----------
Gross profit...................... 2,194 2,996 3,909 5,791 7,845
Selling, general and administrative
expenses.......................... 1,722 2,184 2,346 4,577 7,004
-------- --------- ------- ------- ----------
Operating income.................. 472 812 1,563 1,214 841
Interest expense..................... 51 83 98 81 15
Other (income)....................... (35) (31) (8) (58) (27)
-------- --------- ------- ------- ----------
Income before provision for income taxes 456 760 1,473 1,191 853
Provision (benefit) for income taxes. 11 60 (8) (98) 337
-------- --------- ------- ------- ----------
Net income........................... $ 445 $ 700 $ 1,481 1,289 516
======== ========= =======
Preferred stock dividend requirements 53 60
------- ----------
Net income attributable to common share-
holders........................... $ 1,236 $ 456
======= ==========
UNAUDITED PRO FORMA DATA(1):
Income before income taxes........... $ 456 $ 760 $ 1,473 $ 1,191 $ 853
Provision for income taxes........... 187 312 604 488 350
-------- --------- ------- ------- ----------
Pro forma net income................. $ 269 $ 448 $ 869 $ 703 $ 503
======== ========= ======= ======= ==========
Pro forma net income attributable to
common shareholders............... $ 443
==========
Pro forma net income per share....... $ .11
==========
Pro forma number of shares outstanding 4,100,000
==========
AS OF DECEMBER 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital...................... $ 2,709 $ 2,570 $ 3,597 $ 5,295 $ 6,782
Total assets......................... 4,874 5,232 6,889 9,105 11,735
Long-term debt, less current portion. 144 3 1 183 --
Mandatory redeemable preferred stock. 750
Stockholders' equity................. $ 2,612 $ 2,668 $ 3,809 $ 6,533 8,460
(1) Certain of the Founding Companies were Subchapter S corporations during
the periods presented and, accordingly, were not subject to corporate
income taxes. The unaudited proforma information is presented for the
purpose of reflecting a provision for income taxes as if all of the
Founding Companies had been subject to income tax for all periods
presented, calculated in accordance with SFAS No. 109, based on tax laws
that were in effect during the respective periods.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
of its liquidity and capital resources should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto appearing
elsewhere in this Report.
INTRODUCTION
Simultaneously with the closing of the Offering in April 1996, each
of the three Founding Companies were combined by merger or stock acquisition
(collectively the "Mergers"). Prior to the Mergers, each of the Founding
Companies had been operating as a separate independent entity. As a result,
historical combined results may not be comparable to or indicative of future
performance. For all periods presented, the Consolidated Financial Statements
include the accounts of the Founding Companies as if the Founding Companies
had always been members of the same operating group without giving effect to
the Mergers or the Offering. The assets and liabilities of the Founding
Companies are reflected at their historical amounts.
Certain of the Founding Companies had operated as Subchapter S
corporations under the Internal Revenue Code of 1986, as amended. Upon
consummation of the Mergers, the Company now files as a consolidated group for
Federal income tax purposes. For purposes of the Unaudited Pro Forma
Statements of Operations date included in this Report, pro forma Federal and
state income taxes have been provided as if the Combined Companies had filed C
corporation tax returns. The unaudited pro forma results reflect an income tax
provision at an effective rate of 41% calculated in accordance with SFAS No.
109. While this effective rate represents the Founding Companies' pro forma
tax rate based on the historic earnings trends in the respective tax
jurisdictions, this rate may change in the future in accordance with such
trends.
11
RESULTS OF OPERATIONS
The following table represents the Company's statement of income
data expressed as a percentage of net sales for the three most recent fiscal
years:
Fiscal Year Ended December 31,
1996 1995 1994
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 69.4 72.5 78.5
---- ---- ----
Gross Margin 30.6 27.5 21.5
Selling, general and administrative expenses 27.3 21.7 12.9
---- ----- -----
Operating income 3.3 5.8 8.6
Interest expense, net -- .4 .5
Other income (.1) (.3) --
---- ---- ----
Income before provision for 3.4% 5.7% 8.1%
income taxes
Year Ended December 31, 1996 ("1996") Compared to Year Ended January 31, 1995
("1995")
Net sales increased 20.8% from $21.0 million in 1995 to $25.4
million in 1996. The increase was primarily due to the continued growth of
Advanced Fox's cellular accessory business (up 45.7% as compared to 1995), as
well as an increase in Specific Energy's retail sales, partially offset by a
5.1% decline in Tauber's value added and distribution sales.
Gross profit increased from $5.8 million in 1995 to $7.8 million in
1996 and as a percentage of sales increased from 27.5% in 1995 to 30.6% in
1996. The increase was primarily due to the inclusion for the longer period
in 1996 of the revenues and cost of sales of Specific Energy which operates at
higher gross profit margins, particularly its retail sales, and the
substantial sales increase in the Advanced Fox cellular accessory business
which are effected at significantly higher margins than the margins of Tauber
sales.
Selling, general and administrative ("SG&A") expenses increased
from $4.6 million in 1995 to $7.0 million in 1996 and as a percentage of sales
increased from 21.7% in 1995 to 27.3% in 1996. The increases were
substantially due to (i) an increase in marketing, selling and distribution
costs incurred by Advanced Fox, which resulted in and is attributable to
increased revenues, (ii) contract termination costs relating to the
resignation of the Chief Executive Officer, (iii) addition of management
employees, (iv) general and administrative expenses associated with the
responsibilities of a publicly held corporation, and (v) start-up expenses
relating to the opening of four Battery Max departments leased in Office Max
outlets.
12
Interest expense net decreased from approximately $81,000 in 1995
to approximately $15,000 in 1996, principally due to the reduction in
borrowings, and interest income earned on invested cash from the proceeds of
the initial public offering.
Year Ended December 31, 1995 ("1995") Compared to Year Ended December 31, 1994
("1994")
Net sales increased 15.5% from $18.2 million in 1994 to $21.0
million in 1995. The increase was primarily due to the inclusion of the
results of operations of Specific Energy since June 1, 1995 and the continued
growth of Advanced Fox's cellular accessory business, partially offset by a
decline in Tauber's sales, the latter primarily the result of a reduction of
its value added battery assembly business caused by a discontinuation of
production by a supplier of a battery product, late deliveries from another
supplier and the failure of anticipated orders from a customer to materialize.
Gross profit increased from $3.9 million in 1994 to $5.8 million in
1995. Gross profit as a percentage of sales increased from 21.5% in 1994 to
27.5% in 1995. The increase is primarily due to the inclusion of the results
of Specific Energy which reflect higher gross profit margins and reductions in
product costs and higher margins of new cellular accessory products offered by
Advanced Fox, partially offset by the high fixed costs of Tauber in relation
to its sales and a change in its product mix.
SG&A expenses increased from $2.3 million in 1994 to $4.6 million
in 1995. SG&A as a percentage of sales increased from 12.9% in 1994 to 21.7%
in 1995. The increase was substantially due to: (i) the inclusion of the
result of operations of Specific Energy which due to its retail operations has
a higher percentage of SG&A to sales ($.8 million); (ii) the increase in
marketing costs incurred by Advanced Fox resulting primarily from higher
management and consulting fees, personnel costs and catalog costs ($.6
million); (iii) an increase in compensation expense of Tauber's Chief
Executive Officer of approximately $325,000; and (iv) an increase in
approximately $235,000 of merger advisory and legal expenses relating to the
anticipated Mergers.
Interest expense decreased from $98,000 to $81,000, primarily as a
result of reduced borrowings.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund (i) the
working capital requirements necessitated by its sales growth, (ii)
acquisitions and (iii) prior to the initial public offering, distributions to
its existing stockholders primarily to satisfy their tax liabilities resulting
from the S Corporation status of certain of the Predecessor Companies. The
Company's primary sources of financing have been cash from operations and, to
a lesser extent, bank borrowings and loans from affiliates.
Net cash provided by operating activities was $227,000, $607,000
and $193,000 in 1994, 1995 and 1996, respectively. The increase from 1994 to
1995 was due to increased working capital as a result of increased sales and
improved management of inventory and accounts receivable. The decrease from
1995 to 1996 was due to the decrease in net income (partially due to the
Company's C Corporation tax status) and increases in inventories and accounts
receivable as a result of the increased sales.
Net cash used in investing activities was $143,000, $973,000 and
$458,000 in 1994, 1995 and 1996, respectively. Cash used for additions to
property and equipment to fund new stores, the growth of Company's business
and computer equipment was $143,000, $254,000 and $407,000 during 1994, 1995
and 1996, respectively. In addition, the Company used $719,000 and $51,000
respectively, during 1995 and 1996 to fund the acquisition of Specific Energy.
Net cash provided by (used in) financing activities was $(384,000),
$794,000, and $1,929,000 during 1994, 1995 and 1996, respectively. The use of
funds in 1994 was primarily due to dividends to fund stockholders' S
Corporation income taxes. The cash provided by financing activities in 1995
was due primarily to the private placement of common and preferred stock for
gross proceeds of $1,500,000, which were used to finance the acquisition of
Specific Energy, offset by amounts used to repay loans to affiliates and short
term borrowings. The cash provided by financing activities in 1996 was
primarily due to the net proceeds of the Offering of $9.1 million, of which
$6.7 million was paid to the former stockholders of the Merger Companies.
To effect the Mergers, the Company, in addition to the $6.7 million
cash payment, issued 960,000 shares of Common Stock and an option to purchase
an additional 50,000 shares at a price of $5.00 per share.
The Company redeemed in May 1996 from the net proceeds of the
Offering 250,000 of the 1,000,000 outstanding shares of Series A Preferred
Stock at the redemption price of $1.00 per
14
share plus accrued dividends at 8% per annum. Pursuant to their terms, the
remaining 750,000 shares are to be redeemed on April 11, 1997 at the
redemption price. In June 1996, the Company prepaid its 8% subordinated note
for $180,000 and acquired the remaining 5% of Specific Energy Corporation for
$51,000.
At December 31, 1996, the Company had cash and cash equivalents of
approximately $2.6 million and working capital of approximately $6.8 million.
On January 7, 1997 the Company acquired the business and related
assets of Battery Network, Inc. ("Battery Network") and affiliated companies,
an assembler and wholesale distributor of batteries servicing specialty
battery customers nationally.
The total purchase price of approximately $11.2 million consisted
of (1) the payment of approximately $8.3 million in cash, (ii) the issuance of
550,000 shares of Common Stock 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 cash portion of the purchase
price is subject to adjustment to the extent that the net worth of Battery
Network as of December 31, 1996 exceeds or is less than $7.3 million.
The Battery Network agreement also provides the sellers the
contingent right to receive additional consideration of up to $1 million in
cash, 350,000 shares of Common Stock and five year options to acquire 250,000
shares of Common Stock, of which half are exercisable at $4.50 per share and
half are exercisable at $6.00 per share. Payment of the additional
consideration is to be based on the excess amount by which the combined
"pre-tax income" as defined of the acquired company and Tauber, exceeds (i)
$2,100,000 for the year ending December 31, 1997 (the "One-Year Period"), (ii)
$4,200,000 for the two years ending December 31, 1998 (the "Two-Year Period")
or (iii) $6,300,000 for the three years ending December 31, 1999 (the
"Three-Year Period"), with the maximum amount of additional consideration to
be paid if the excess is $400,000 for the One-Year Period, $800,000 for the
Two-Year Period or $1,200,000 for the Three-Year Period.
The cash portion of the purchase price was funded with a portion of
the proceeds of a borrowing pursuant to a Revolving Credit, Term Loan and
Security Agreement, dated January 6, 1997 (the "Loan Facility"), with IBJ
Schroder Bank & Trust Company, as Agent. The Loan Facility consists of a
$3,000,000 three year Term Loan payable in 35 monthly installments of $50,000
each with the balance to be paid at maturity and a revolving credit of up to
$10,000,000 to be advanced at the rate of 80% of eligible accounts receivable
and 50% of inventories. The revolving credit loans bear 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 a rate 2% over the
Eurodollar rate, which is defined as the applicable Libor rate divided by
the difference between 1 and the aggregate reserve requirement. The interest on
the Term Loan is 1/2% higher than the revolving credit interest rate. The
loans are secured by a pledge of the assets of the borrowers and a pledge of
the outstanding capital stock of the subsidiaries of the Company.
15
The Company repaid $590,000 of short term indebtedness in January
1997 with a portion of the borrowings under the loan facility.
Pursuant to the Management Agreement with Founders, the Company
will pay Founders for its origination and negotiating services in connection
with the acquisition and loan, $240,000 and issue to each of Founders'
affiliates, Messrs. Haber and Teeger, who are officers and directors of the
Company, five year warrants to purchase 50,000 shares of Common Stock at a price
of $4.125 per share.
The acquisition will be accounted for as a purchase in 1997. The
purchase price will be allocated to the assets acquired and liabilities
assumed based on their estimated fair values. The excess of the purchase price
over the net assets acquired is estimated to be approximately $4.2 million,
and will be amortized over a period of 25 years. Results of operations for
Battery Network will be included with those of the Company for periods
subsequent to the date of acquisition.
The Company estimates that it will incur additional capital
expenditures of approximately $1 million during the twelve months ended
December 31, 1997 in connection with the expansion and relocation of office
and warehouse facilities, acquisition of machinery and equipment used in the
assembly of batteries pack and procurement of computer systems.
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 and redemptions described herein, to meet
the working capital cash needs of the Company and to meet anticipated capital
expenditures needs during the 12 months. Although the Company intends to issue
shares of Common Stock as its primary method of financing acquisitions, it
anticipates that additional funds will be required to implement successfully
its acquisition program, and will use various methods to finance acquisitions,
including the payment of cash, for this purpose.
SEASONALITY AND INFLATION
The Company's net sales typically show no significant seasonal
variations, although net sales may be affected in the future by timing of
acquisitions.
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.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
Recent pronouncements of the Financial Accounting Standards Board
("FASB") included Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123") and SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"), which are effective for the fiscal year ended
December 31, 1996. The adoption of SFAS 123 and SFAS 121 did not have a
material impact on the Company's consolidated financial position or results of
operations.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements as of December 31,
1996 and December 31, 1995 and for each of the three years in the period ended
December 31, 1996 are included in this report as listed in the Index to
Financial Statements in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth 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
Shareholders, which management presently contemplates will be held in July
1997.
First
Became
NAME Age Office--Principal Occupation Director
---- --- ---------------------------- --------
Warren H. Haber 56 Chairman of the Board 1983
Ronald E. Badke 51 Vice President, Chief Operating Officer
and Chief Financial Officer
Stephen Rade 58 Executive Vice President and Director 1996
John L. Teeger 53 Vice President, Secretary and Director 1983
Robert W. Tauber 72 Vice President and Director 1996
William Steven Sapp 41 Vice President
James Sapp 36 Vice President
Susan Grandt 43 Vice President
Bruce Barnet 51 Director 1995
John Simon 54 Director 1995
Fred Corrado 56 Director 1996
William Schlesinger Sapp 65 Director 1997
17
Each executive officer serves at the discretion of the Board of
Directors.
Mr. Haber has been Chairman of the Board of the Company since its
incorporation in November 1983, and its acting Chief Executive Officer since
September 1996. For more than 20 years, he has been Chairman of the Board and
Chief Executive Officer of Founders Equity, Inc., Founders Management
Services, Inc. and affiliates (collectively, the "Founders Group"), all
private investment concerns engaged in identifying businesses for acquisition
by companies in which the principal stockholders of the Founders group have a
substantial equity interest and managing such businesses for such principal
stockholders' accounts. Since June 1993, Mr. Haber has been Chairman of the
Board and Chief Executive Officer of HealthRite, Inc., a distributor and
producer of vitamins, natural nutritional and dietary supplements, herbal
based products, and weight-loss products. He had been, from December 1986
until December 1992 Chairman of the Board and Chief Executive officer of
International Power Machines, an American Stock Exchange- listed manufacturer
of uninterruptible power equipment, with which he remained director until
February 1995 when it was merged into another company. He is a director of
Lunn Industries, Inc., a composite product manufacturer and Realty Information
Group, L.P., a privately held commercial real estate information provider. Mr.
Haber has been for more than 20 years an officer and director of Founders
Property, Inc., a private real estate investment concern.
Mr. Badke, Vice President and Chief Financial Officer since
November 1995 and Chief Operating Officer since November 1996, had been Senior
Vice President and 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. Rade, Vice President and a Director since April 1996 and Executive
Vice President since September 1996, has been the President, Chief Executive
Officer and director of Advanced Fox Antenna, Inc. since he founded the company
in 1990.
Mr. Teeger, Vice President, Secretary and Director and, until November
1995, the Company's Chief Financial Officer, since its incorporation in
November 1983, has been employed since 1981 by, and has served since 1984 as
President of, the Founders Group. He has also been Vice Chairman and director of
HealthRite Inc. since December 1993. From 1976 to 1981, he was Vice President -
Corporate Finance of Bear Stearns & Company, Inc., investment bankers.
Mr. Tauber, Vice President and a Director since April 1996, has been
the President until February 1997 and a Director of Tauber Electronics, Inc.
since he founded the company in 1975.
Messrs. William Steven Sapp and James Sapp and Ms. Susan Grandt, each
of whom was appointed a Vice President of the Company in January 1997, have been
officers and directors, and until its acquisition in January 1997 the principal
stockholders, of Battery Network for more than five years.
18
Their father, Mr. William Schlesinger Sapp, who was appointed a
Director in February 1997, is the founder of Battery Network, of which he had
been an officer, director and principal stockholder for more than five years.
Mr. Barnet, has been President of Cahners Publishing Company since
1995. Prior thereto he had been, from March 1993 until 1995,
Chief Executive Officer of Cowles Enthusiast Media, from November 1991 to
March 1993 an independent investor and consultant, and from October 1990 to
November 1991 President of the Family Media Publications of Riordan Publishing
Company. From 1969 to 1990 he was associated with Time Inc., the last two years
as President of Time Inc. Magazines - Asia. Mr. Barnet is also a director of
Culbro, Inc.
Mr. Simon, is a Managing Director of the investment banking firm of
Allen & Company Incorporated, with which firm he has been affiliated for more
than 20 years. He is also a director of Immune Response Corp., Lunn Industries
Inc., Neurogen Corp., and T. Cell.
Mr. Corrado, has been Vice Chairman and Chief Financial Officer of The
Great Atlantic & Pacific Tea Company for more than five years.
19
ITEM 11. EXECUTIVE COMPENSATION
Batteries Batteries, Inc. did not conduct any operations prior to June
6, 1995, the date of its acquisition of Specific Energy Corporation. No
executive officer or director received any compensation from Batteries
Batteries prior to such date.
The following table sets forth for the years ended December 31, 1996
and December 31, 1995, the compensation for services rendered in all capacities
to the Company and subsidiaries by the Chief Executive Officer and the three
highest paid executive officers who received compensation in excess of
$100,000:
SUMMARY COMPENSATION TABLE
PERIOD SALARY ($)
Warren H. Haber, (1) year ended 12/31/96 (1)
Chairman of the Board and acting year ended 12/31/95 (1)
Chief Executive Officer
Donald L. Luke, year ended 12/31/96 $197,615(2)
former President and Chief Executive Officer year ended 12/31/95 53,333
Robert W. Tauber, (3) year ended 12/31/96 177,865
Vice President and Director year ended 12/31/95 578,500
Stephen Rade, year ended 12/31/96 347,825(3)
Vice President and Director year ended 12/31/95 98,608(4)
Ronald E. Badke, year ended 12/31/96 129,615(5)
Vice President, Chief Operating Officer
and Chief Financial Officer
- --------------
(1) Appointed acting Chief Executive Officer in September 1996. See Item 13
for compensation paid to his affiliate.
(2) Includes $110,346 payment made to him pursuant to an agreement with
respect to termination of his employment agreement and his resignation as
an officer and Director in September 1996.
(3) Includes a bonus of $200,000 accrued pursuant to an agreement relating to
acquisition of Advanced Fox. See Item 12.
(4) Represents a management fee paid to an affiliate of Mr. Rade, who did not
otherwise receive compensation for his services.
(5) Includes an earned bonus of $15,000 payable in 1997. Mr. Badke joined the
Company in November 1995.
20
The Company entered into employment agreements in April 1996 with
each of Messrs. Rade and Tauber. The agreements provide for Mr. Rade to
receive a salary of $150,000 per annum during the three year term and for Mr.
Tauber to receive a salary of $150,000 during the first year, $120,000 during
the second year, and, if extended by mutual agreement, $100,000 during the
third year. Mr. Tauber's agreement further provides that after October 11,
1996 he will only be required to serve 20 hours per week; to the extent that
the time served averages less than 20 hours per week, his salary will be
proportionately reduced. Each agreement obligates the Company to continue the
compensation for the term of the agreement in the event of a termination of
the officer's employment by the Company without cause. Messrs. Tauber and Rade
have agreed not to compete with the Company or solicit any employees of the
Company for a period of five years, subject to a shorter period should the
Company breach the agreement. Applicable law may reduce the time period of the
covenant not to compete.
Mr. Ronald E. Badke is employed pursuant to an employment agreement
expiring April 1998 at an annual salary of $120,000, with provision for an
annual bonus of up to 25% of the base salary subject to the achievement of
certain goals.
In January 1997, pursuant to agreements related to the Battery
Network acquisition, each of Mr. William Steven Sapp ("WSS"), Mr. James Sapp
("JS") and Ms. Susan Grandt ("SG") entered into employment agreements with
Battery Network, providing for their employment as officers of Battery Network
at a base salary of $100,000 per annum, with WSS and JS to be employed for
three years and SG for six months. with each to serve as a consultant
thereafter. The agreements with WSS and JS provide that they are to be paid
annual bonuses not to exceed $400,000 in the aggregate for any year, computed
as the sum of (i) 30% of the first $300,000 by which the combined pre-tax
income of Battery Network and Tauber (the Company's California subsidiary)
exceeds $2,500,000 for the year ended December 31, 1997, $2,750,000 for the
year ended December 31, 1998, and $3,025,000 for the year ended December 31,
1999, and (ii) 40% of the amount by which the combined pre-tax income for the
foregoing years exceeds, respectively, $2,800,000, $3,050,000 and $3,325,000.
WSS, JS and SG also received five-year stock options under the Company's Stock
Option Plan to purchase an aggregate of 50,000 shares of Common Stock at a
price of $4.50 per share.
The terms of the respective employment agreements were negotiated
on an arm's-length basis with each of the officers.
Directors. The Company does not pay a fee to its directors. It
reimburses those who are not employees of the Company for their expenses
incurred in attending meetings.
Stock Options. The Company's Stock Option plan (the "Plan") relates
to 250,000 shares of its Common Stock and authorizes the Board of Directors or
a Stock Option Committee appointed by the Board to grant incentive stock
options and non-incentive stock options to officers and key employees,
directors, and independent consultants, with directors who are not employees
and consultants eligible only to receive non-incentive stock options.
21
The following tables sets forth the details as to the options
granted during and held at the end of the year ended December 31, 1996 by the
executive officers set forth in the Summary Compensation Table (neither Mr.
Haber nor Mr. Tauber have been granted options under the Plan, but see Item 13
with respect to an option granted in April 1996 to Mr. Tauber as part of the
consideration for the Tauber acquisition):
22
Option Grants in Last Fiscal Year
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
Percent of OF STOCK PRICE
Number of Securities Total Options Exercise APPRECIATION FOR OPTION
underlying Options Granted in Price per Expiration TERM (1)
Name Granted Fiscal Year Share Date 5% 10%
---------- -------------------- ----------- --------- ------ --------- --------
Donald L. Luke 80,000 20.2 5.00 8/31/97 $20,000 $ 40,000
Ronald E. Badke 40,000 10.1 5.00 3/11/01 66,827 142,961
- ---------------
(1) Based on the exercise price per share.
Fiscal Year End Option Values
NUMBER OF SHARES UNDERLYING
UNEXERCISED OPTIONS AT FISCAL
YEAR END(1)
Name Exercisable Unexercisable
---- ----------- -------------
Donald L Luke 80,000 0
Ronald E. Badke 13,333 26,667
- ---------------
(1) None of the outstanding options held by the named individuals were
in-the-money on December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information with respect to
the beneficial ownership as of March 20, 1997 of shares of Common Stock of
each executive officer and director, and of each stockholder of the Company
known to own beneficially more than 5% of the outstanding shares of Common
Stock and all officers and Directors as a group.
23
NAME OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE
---------------- ------------------ ----------
Warren H. Haber* 235,006 shares (1) 5.1%
John Teeger 104,762 shares (2) 2.3
Robert W. Tauber 350,000 shares (3) 7.6
10656 Roselle Street
San Diego, CA 92121
Stephen Rade 660,000 shares 14.5
3915 Somers Drive
Huntington Valley, PA 19606
Ronald E. Badke 16,667 shares (4) **
Bruce A. Barnet 27,626 shares (5) **
John Simon 10,360 shares (6) **
Fred Corrado 10,000 shares (4) **
William Steven Sapp* 262,027 shares (7) 5.7
James Sapp* 250,093 shares (8) 5.4
Susan Grandt* 261,880 shares (9) 5.7
William Schlesinger Sapp None -----
Directors and officers as a group (12 1,963,421 shares (10) 40.0
persons)
- ---------------
* The address for Mr. Haber is c/o Batteries Batteries, Inc., 711 Fifth
Avenue, New York, NY 10022, and for each of Messrs. William Steven Sapp
and James Sapp and Ms. Susan Grandt is c/o Battery Network, Inc., 4071
Albany Street, McHenry, IL 60050.
** Less than 1%.
(1) Includes 50,000 shares issuable upon exercise of a warrant, but does not
include an aggregate of 25,900 shares owned by his children and brother as
to which shares he disclaims beneficial ownership.
(2) Includes 50,000 shares issuable upon exercise of a warrant, but does not
include an aggregate of 24,173 shares owned by his wife and children to
which shares he disclaims beneficial ownership.
(3) Includes 50,000 shares issuable upon exercise of an option.
(4) Represents shares issuable upon exercise of an option or options within 60
days.
(5) Includes 10,360 shares issuable upon exercise of an option.
(6) Represents shares issuable upon exercise of options within 60 days; does
not include shares owned by Allen & Company Incorporated, of which he is a
Managing Director.
(7) Includes 76,072 shares issuable upon exercise of options.
(8) Includes 72,608 shares issuable upon exercise of options.
24
(9) Includes 76,320 shares issuable upon exercise of options.
(10) Includes 408,563 shares subject to options and warrants described in the
foregoing notes.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1995, the Company sold in a private placement at a price of
$3.00 per Unit 500,000 Units, each consisting of two shares of 8% Preferred
Stock, Series A and one share of Class A Common Stock, an aggregate of
1,000,000 shares of Preferred Stock, Series A and 500,000 shares of Class A
Common Stock, which were subsequently, as a result of a 1.47 for one stock
split in December 1994 and a .70475 for one reverse stock split in March 1996
increased to 517,990 shares. Included among the purchasers were Mr. Warren H.
Haber, Chairman of the Board, who along with his children and brother acquired
74,988 Units; Mr. John L. Teeger, Vice President, Secretary and Director, who
along with his wife and children acquired 33,333 1/3 Units; the wife of Mr.
Donald L. Luke, at the time President and Chief Executive Officer and a
Director, who acquired 66,666 2/3 Units; Allen & Company Incorporated, of
which Mr. John Simon is a Managing Director, which acquired 83,333 1/3 Units;
and Mr. Bruce Barnet, a Director, who acquired 16,666 2/3 Units.
In consideration for the acquisition of Tauber and Advanced Fox,
the Company in April 1996 issued to Mr. Robert W. Tauber 300,000 shares of
Common Stock and a five year option to purchase an additional 50,000 shares at
$5.00 per share and issued to Mr. Stephen Rade 660,000 shares of Common Stock;
and paid cash of $3,289,000 to an affiliate of Mr. Tauber, and $2,175,000 to
Mr. Rade. Mr. Rade also has a contingent right to receive additional cash
consideration of up to $600,000, but not more than $200,000 per year,
depending on the achievement of designated levels of pre-tax earnings by the
Advanced Fox subsidiary over the three year period ending December 31, 1998.
The Company has accrued $200,000 based on the earnings of Advanced Fox for the
year ended December 31, 1996.
Advanced Video Corp. ("AVC"), an affiliate of Mr. Stephen Rade,
provided management consulting services to Advanced Fox during the twelve
months ended December 31, 1995 for which it received a management fee of
$98,608. Such fee was in lieu of any salary for Mr. Rade's services. Mr. Rade,
AVC and Advanced Cellular of Philadelphia, which is affiliated with Mr. Rade,
have from time to time extended to and received from Advanced Fox loans, some
of which were noninterest bearing and others of which bore interest at the
rate of 12% per annum. As of December 31, 1995, December 31, 1994 and February
28, 1994, there were net amounts of $165,498, $603,258 and $645,164,
respectively, owed to Mr. Rade and the affiliates. The interest, net, paid or
payable to Mr. Rade and the affiliates aggregated $108,811 for the twelve
months ended December 31, 1995, ten months ended December 31, 1994 and the
year ended February 28, 1994. The outstanding balance of the loans was repaid
from the proceeds of the Company's public offering in April 1996.
The principal offices of Advanced Fox, which comprise approximately
6,400 square feet in Huntingdon Valley, Pennsylvania, are occupied under a
five year lease terminating December
25
31, 1999 with Rare 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. Rental
payments for the twelve months ended February 28, 1994, ten months ended
December 31, 1994 and the twelve months ended December 31, 1995 and December
31, 1996 were $34,330, $37,500, $55,800, and $70,000 respectively.
On January 7, 1997 the Company acquired, the business and related
assets of Battery Network, Inc. and affiliated companies ("Battery Network"), a
major assembler and wholesale distributor of specialty batteries servicing
customers in the United States, Canada and Europe. The purchase was effected
through the acquisition of (i) the outstanding capital stock of Battery
Network, which in anticipation of the acquisition by the Company had merged
with Alexander Battery Co. East, Inc., Alexander Battery Co. West, Inc., and
Alexander Battery Co. South, Inc. (collectively, "Alexander Battery"), (ii) the
outstanding capital stock of W.S. Battery Sales & Company, Inc. ("WSB"), and
(iii) substantially all of the assets of WSJ Enterprises, Inc. ("Enterprises").
Battery Network, Alexander Battery and WSB were owned by WSS, JS and their
sister SG, or their parents, William Schlesinger Sapp, the founder of the
companies, and Dolores Sapp. Enterprises is owned by their affiliate, W.S.
Battery Sales & Co. Inc. Employee Stock Ownership Plan & Trust.
The purchase price consisted of (i) a cash payment of $8,314,551, and
(ii) the issuance of an aggregate of 550,000 shares of Common Stock and
five-year options to purchase an additional 225,000 shares at an exercise price
of $4.50 per share. The cash portion of the purchase price is subject to
adjustment to the extent that the combined net worth of Battery Network, WSB
and Enterprises as defined in the acquisition agreement exceeds or is less than
$7.3 million as of December 31, 1996.
The Battery Network agreement also provides WSS, JS and SG with the
contingent right to receive additional consideration of up to $1 million in
cash, 350,000 shares of Common Stock, and five-year options to acquire 250,000
shares of Common Stock, with one-half of the options exercisable at $4.50 and
one-half exercisable at $6.00 per share. Payment of the contingent
consideration is to be based on the amount by which the amount of the combined
"pre-tax" income of the acquired companies and Tauber exceeds (i) $2,100,000
for the year ending December 31, 1997, (ii) $4,200,000 for the year ending
December 31, 1998, or (iii) $6,300,000 for the year ending December 31, 1999,
with the maximum amount of consideration payable if the excess is $400,000,
$800,000 or $1,200,000 for 1997, 1998 and 1999,
respectively.
Upon consummation of the acquisition, Battery Network entered into
leases with J.W.S. Partnership, an affiliate of WSS, JS and SG, with respect
to its facilities in McHenry, Illinois and North Branch, New Jersey. Each
lease is for a five-year term and contains a five-year renewal option.
Aggregate rent for the two leases is $143,000 per annum, subject to increases
commencing in third year based on incremental increases in the Consumer Price
Index. The lessee is to bear the cost of insurance, real estate taxes and
maintenance related to the properties.
26
In September 1996, the Company entered into an agreement with Mr.
Donald L. Luke, in connection with his resignation as President, Chief
Executive Officer and Director of the Company, providing for the termination
of his employment agreement which was to extend to April 11, 1998 and provided
for an annual salary of $165,000 plus an annual bonus of up to $82,500 upon
the attainment of certain goals; the payment by the Company to Mr. Luke of
$110,000; his employment as a consultant at $500 per month through August 31,
1997; the amendment of his stock option to permit exercise as to all 80,000
shares at any time during the consulting period; and the agreement of the
Company to acquire or to find purchasers for 20,000 shares of Common Stock
held by his wife at a price of not less than $5 per share on or prior to
January 1997. In January 1997, the 20,000 shares were sold and the Company
paid him $21,000 to cover the difference between the aggregate sales proceeds
and the $5.00 per share minimum.
Messrs. Warren H. Haber, Chairman of the Board and John L. Teeger,
Vice President, Secretary and Director of the Company are the sole
stockholders, officers and directors of Founders Management Services Inc.
("Founders"). Pursuant to an agreement dated as of June 6, 1995, as
subsequently amended, Founders provides 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. The agreement is for a
term expiring in April 1999, subject to five one-year renewal options and
provides for Founders to receive a base fee of $120,000 per annum which
increased to $150,000 per annum upon consummation of the acquisition of
Battery Network. Founders is also to receive an additional fee of 5% of the
Company's annual pre-tax income in excess of $750,000. Under the agreement,
Founders is also entitled to receive originating fees with respect to
acquisitions or financings for which it performed originating services - the
fee to be that customarily charged by non-affiliated investment bankers or
professional originators for transactions of similar size and nature.
The amount of the fee is 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. The warrants were issued to the extent of 50,000 shares
each to Messrs. Haber and Teeger as designees of Founders. The Company
believes that the terms of the management services agreement are no less
favorable than the terms the Company could have received from an unaffiliated
party.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The following is an index of consolidated financial statements of
Batteries Batteries, Inc., and subsidiaries, financial statement schedules and
exhibits included in Part IV, Item 14:
FINANCIAL STATEMENTS PAGE
Independent Auditor's Report .......................................................... F-1
Consolidated Balance Sheets - December 31, 1996 and December 31, 1995 ................. F-2
Consolidated Statements of Income - Years ended December 31, 1996,
December 31, 1995 and December 31, 1994................................................ F-3
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1996
December 31, 1995 and December 31, 1994................................................ F-4
Consolidated Statements of Cash Flows - Years ended December 31, 1996,
December 31, 1995 and December 31, 1994................................................ F-5
Notes to Consolidated Financial Statements ............................................ F-6
FINANCIAL SCHEDULES
None
EXHIBITS
2(a) Copy of Agreement and Plan of Merger with respect to Advanced Fox Antenna, Inc.*
2(a)-1 Copy of Amendment to Merger Agreement*
2(b) Copy of Stock Purchase Agreement with respect to Tauber Industries Inc.*
2(b)-1 Copy of Amendment to Stock Purchase Agreement*
2(c) Copy of Stock Purchase Agreement with respect to Specific Energy Corp.*
2(d) Copy of Stock Purchase Agreement relating to Battery Network, Inc. **
2(e) Copy of Stock Purchase Agreement relating to W.S. Battery Sales & Company, Inc.**
2(f) Copy of Asset Purchase Agreement relating to WSJ Enterprises, Inc.**
3(a) Certificate of Incorporation of Company and amendments thereto*
3(b) By-Laws of Company*
4(a) Copy of Common Stock Certificate*
4(b) Copy of Warrant*
10(a) Copy of Warrant Agreement related to Redeemable Stock Purchase Warrants*
10(b) Form of Purchase Option issued to underwriter of initial public offering*
10(c) Copy of Preferred Stock, Series A Certificate*
10(d) Stock Option Plan of Company*
28
10(d)-1 Forms of Option Agreement under the Plan*
10(e) Copy of option issued to Mr. Robert W. Tauber*
10(f) Copy of Management Services Agreement between Company and Founders Management
Services, Inc., as amended*
10(g) Copy of Employment Agreement with Robert W. Tauber*
10(h) Copy of employment agreement with Stephen Rade, as amended*
10(i) Copy of Employment agreement with William Steven Sapp**
10(j) Copy of Employment agreement with James Sapp**
10(k) Copy of Employment agreement with Susan Grandt**
10(l) Copy of employment Agreement with Mr. Ronald E. Badke*
10(m) Copy of agreement relating to termination of the Employment Agreement of Donald L.
Luke***
10(n) Copy of lease between Advanced Fox Antenna, Inc. and Rade Limited Partners*
10(o) Copy of lease with J.W.S. Partnership related to the McHenry, Illinois property**
10(p) Copy of the lease with J.W.S. Partnership related to the North Branch, New Jersey
property**
10(q) Copy of Registration Rights Agreement between Company and Messrs. Tauber and
Rade*
10(r) Form of Warrant issued to each of Warren H. Haber and John L. Teeger **
- -------------
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(File #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 Current Report on Form 8-K for
September 6, 1996 and incorporated by reference thereto.
29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Batteries Batteries, Inc.
We have audited the accompanying combined balance sheets of Batteries
Batteries, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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 consolidated financial position of
Batteries Batteries, Inc. and subsidiaries at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31,1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
March 21, 1997
- F-1 -
BATTERIES BATTERIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1996 1995
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................................. $ 2,609,611 $ 945,613
Accounts receivable (Net of allowance for doubtful accounts
of $78,409 and $50,521, respectively)............................................... 2,730,158 2,516,915
Inventories............................................................................ 4,445,138 3,979,484
Prepaid expenses and other current assets.............................................. 219,107 129,219
Current deferred income taxes.......................................................... 27,932 103,358
----------- -----------
Total current assets.............................................................. 10,031,946 7,674,589
PROPERTY AND EQUIPMENT- Net.............................................................. 750,964 508,335
EXCESS OF COST OVER NET ASSETS ACQUIRED (Net of
accumulated amortization of $40,539 and $16,850, respectively) 614,736 587,543
OTHER ASSETS............................................................................. 337,121 334,513
----------- -----------
TOTAL.................................................................................... $11,734,767 $ 9,104,980
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt, including notes payable to related parties ........................... $ 589,658 $ 755,156
Accounts payable....................................................................... 1,336,270 1,257,652
Accrued expenses....................................................................... 498,857 221,459
Redeemable Preferred Stock............................................................. 750,000 -
Preferred dividends payable............................................................ 35,000 53,333
Current portion of long-term debt...................................................... - 51,399
Current portion of obligations under capital leases ................................... 40,443 40,636
--------- --------
Total current liabilities......................................................... 3,250,228 2,379,635
----------- -----------
LONG-TERM DEBT........................................................................... - 160,204
OBLIGATIONS UNDER CAPITAL LEASES......................................................... 7,101 22,911
DEFERRED INCOME TAXES.................................................................... 17,274 9,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.001, 2,000,000 shares authorized; 750,000 shares
(included in current liabilities) and 1,000,000 shares issued and outstanding,
respectively......................................................................... - 1,000
Class A Common Stock, par value $.001, at December 31, 1995 2,000,000 shares
authorized, 517,990 shares issued and outstanding .................................. - 518
Common Stock, par value $.001, 10,000,000 shares authorized, 4,000,000 shares
and 222,010 shares issued and outstanding, respectively ............................ 4,000 222
Additional paid-in capital............................................................. 7,999,838 1,506,760
Retained earnings...................................................................... 456,326 5,024,730
----------- -----------
Total stockholders' equity........................................................ 8,460,164 6,533,230
----------- -----------
TOTAL.................................................................................... $11,734,767 $9,104,980
=========== ==========
See notes to consolidated financial statements.
- F-2 -
BATTERIES BATTERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994
---- ---- ----
Net sales .................................................................... $ 25,650,075 $ 21,028,765 $ 18,213,442
Cost of sales ................................................................ 17,804,883 15,238,046 14,304,003
------------ ------------ ------------
Gross profit ...................................................... 7,845,192 5,790,719 3,909,439
Selling, general and administrative expenses ................................. 7,004,489 4,577,131 2,346,204
------------ ------------ ------------
Income from operations ....................................................... 840,703 1,213,588 1,563,235
Interest expense, net ........................................................ 14,555 80,903 98,190
Other income ................................................................. (27,098) (58,181) (7,911)
------------ ------------ ------------
Income before provision (benefit)
for income taxes ........................................................... 853,246 1,190,866 1,472,956
Provision (benefit) for income taxes ......................................... 336,920 (98,280) (7,875)
------------ ------------ ------------
Net income ................................................................... 516,326 1,289,146 1,480,831
Preferred stock dividend requirements ........................................ 60,000 53,333 --
------------ ------------ ------------
Net income attributable to common
shareholders ............................................................... $ 456,326 $ 1,235,813 $ 1,480,831
============ ============= ============
Pro Forma Income Data (Unaudited)
Income before provision for income taxes as
reported ................................................................. $ 853,246 $ 1,190,866 $ 1,472,956
Pro forma income tax provision ............................................. 349,831 488,255 603,912
------------ ------------ ------------
Pro forma net income ....................................................... $ 503,415 $ 702,611 $ 869,044
============ ============= ============
Operating results of nontaxable closely held predecessor companies
have been combined without adjustment for income taxes, salaries or other
items that are included in the operating results of the taxable predecessor
companies. Pro forma net income results have been presented, reflecting an
estimated effective income tax rate of 41%.
See notes to consolidated financial statements.
- F-3 -
BATTERIES BATTERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS A
PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------- ------------------ ------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------ ------ ------ ------ ------- -------- -----
Balance, January 1, 1994 - $ - - $ - 200 $ - $ 8,500 $ 2,659,710 $ 2,668,210
Dividends paid
to stockholders - - - - - - - (339,830) (339,830)
Net income - - - - - - - 1,480,831 1,480,831
------ --------- -------- -------- ------ ------ - ------- ------------- ------------
Balance, December 31, 1994 - - - - 200 - 8,500 3,800,711 3,809,211
Dividends paid to
stockholders - - - - - - - (11,794) (11,794)
Unpaid preferred stock
dividend requirements - - - - - - - (53,333) (53,333)
Private placement and
recapitalization 1,000,000 1,000 500,000 500 214,100 214 1,498,286 - 1,500,000
Net income - - - - - - - 1,289,146 1,289,146
1.47 for 1 stock split
in December 1995 - - 235,000 235 100,721 101 (336) - -
.70475 for 1 stock
split in March 1996 - - (217,010) (217) (93,011) (93) 310 - -
---------- --------- -------- -------- ------- ------ ---------- ------------- -----------
Balance, December
31, 1995 1,000,000 1,000 517,990 518 222,010 222 1,506,760 5,024,730 6,533,230
Conversion of
Class A Common
Stock to
Common Stock (517,990) (518) 517,990 518
Elimination of retained
earnings of Founding
Companies to reflect
the Mergers 5,024,730 (5,024,730)
Proceeds of Offering,
net of underwriting
discounts and offering
costs 2,300,000 2,300 9,132,700 9,135,000
Issuance of 960,000
shares of Common
Stock to stockholders
of Founding Companies 960,000 960 960
Use of portion of
proceeds of Offering
to pay the cash
portion of the Merger
consideration (6,665,352) (6,665,352)
Reclassification of
Preferred Stock to
Redeemable Preferred
Stock upon consummation
of the Offering (1,000,000) (1,000) (999,000) (1,000,000)
Preferred stock dividend
requirements (60,000) (60,000)
Net income 516,326 516,326
---------- ------- ------- -------- ---------- ------ ---------- ----------- ------------
Balance,
December 31, 1996 - $ - - $ - 4,000,000 4,000 $7,999,838 $456,326 $8,460,164
========== ======= ======= ======== ========== ====== =========== =========== ============
See notes to consolidated financial statements.
F-4
BATTERIES, BATTERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------------------
1996 1995 1994
OPERATING ACTIVITIES:
Net income $ 516,326 $ 1,289,146 $ 1,480,831
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 188,075 91,823 31,018
Deferred income taxes 83,700 (100,497) (7,875)
Changes in assets and liabilities, net of effects
from acquisition of Specific Energy Corporation:
Accounts receivable (213,243) (188,808) (877,072)
Inventories (465,654) 235,060 (961,812)
Prepaid expenses and other assets (293,987) (130,427) (6,164)
Accounts payable and accrued expenses 377,863 (589,119) 568,002
--------- ------- --------
Net cash provided by operating activities 193,080 607,178 226,928
--------- ------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (407,015) (253,535) (142,996)
Acquisition of Specific Energy Corporation, net
of cash acquired (50,882) (719,559) -
--------- ------- --------
Net cash used in investing activities (457,897) (973,094) (142,996)
--------- ------- --------
FINANCING ACTIVITIES:
Proceeds from Offering, net of expenses 9,135,000 - -
Payments to stockholders of Merger companies
in connection with Mergers (6,665,352) - -
Redemption of preferred stock (250,000) - -
Proceeds from private placement - 1,500,000 -
Net payments on borrowings (213,104) (423,444) (44,296)
Dividends paid (78,333) (11,794) (339,830)
Prepaid financing and acquisition costs relating to the
Battery Network acquisition (90,000) - -
Repayment of note to minority shareholder (180,000) - -
Prepaid Offering costs 270,604 (270,604) -
--------- ------- --------
Net cash provided by (used in) financing activities 1,928,815 794,158 (384,126)
--------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,663,998 428,242 (300,194)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 945,613 517,371 817,565
--------- ------- -------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 2,609,611 $ 945,613 $ 517,371
============ ============= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during period for:
Interest $ 81,386 $ 87,242 $ 111,917
============= ============= =========
Income taxes $ 115,000 $ 27,090 $ -
============= ============= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH
ACTIVITY:
Capital lease obligations incurred $ 8,641 $ 78,958
============= =============
Portion of purchase price of Specific Energy
Corporation which was financed by seller $ 180,000
=============
See notes to consolidated financial statements.
F-5
BATTERIES, BATTERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION, BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ORGANIZATION AND BASIS OF PRESENTATION - In April 1996,
Batteries Batteries, Inc. (the "Company") acquired, by merger or stock
acquisition (the "Mergers"), simultaneously with the closing of its
initial public offering (Note 2) of common stock and redeemable warrants
(the "Offering"), Advanced Fox Antenna, Inc. ("Advanced Fox") and Tauber
Electronics, Inc. ("Tauber"), (collectively, the "Merger Companies") for
common stock and cash. These three businesses are referred to herein as
the "Founding Companies." As a result of the substantial continuing
interests in the Company of the former stockholders of the Founding
Companies, the historical financial information of each of the Founding
Companies has been combined on a historical cost basis in accordance
with generally accepted accounting principles as if the Founding
Companies had always been members of the same operating group. In June
1995, Batteries Batteries Inc. acquired 95% of the outstanding common
stock of Specific Energy Corporation ("Specific Energy") in a business
combination accounted for as a purchase. (In June 1996, the Company
acquired the remaining minority 5% interest). The accompanying
consolidated financial statements and related notes to the consolidated
financial statements are representative of what the financial position,
results of operations and cash flows would have been if the Founding
Companies, except for Specific Energy, which is included from June 1,
1995, the effective date of its acquisition, had been combined at the
beginning of fiscal 1994. The assets and liabilities of the Founding
Companies are reflected at their historical amounts. As of the date of
the Mergers, the capital stock of Batteries Batteries, Inc. is presented
as capital stock of the Company and the capital stock of Advanced Fox
and Tauber is included in additional paid-in capital and their retained
earnings have been reclassified to additional paid-in capital.
The results of operations of the Founding Companies reflect the combined
historical operating results of closely held Subchapter S and C
corporations through the effective date of the Mergers and do not
include pro forma adjustments for income taxes, officers' salaries or
other items necessary for combining Subchapter S and C corporations
through such date. (See unaudited pro forma information presented on the
face of the consolidated statements of income.)
Batteries Batteries, Inc. has previously reported on a fiscal year
ending January 31; Advanced Fox and Tauber have previously reported on a
fiscal year ending December 31. During the second quarter of fiscal
1996, Batteries Batteries, Inc. changed its fiscal year-end to December
31, 1996 to conform with that of Advanced Fox and Tauber. The results of
operations are now presented on a calendar year basis. For the year
ended December 31, 1996, the results of operations include the results
of Batteries Batteries, Inc. for the eleven months ended December 31,
1996 and those of Advanced Fox and Tauber for the year ended December
31, 1996. For the year ended December 31, 1995, the results of
operations include the results of Batteries Batteries, Inc. for the year
ended January 31, 1996 and those of Advanced Fox and Tauber for the year
ended December 31, 1995. For the year ended December 31, 1994, the
results of operations include those of Tauber for the year ended
December 31, 1994 and Advanced Fox for the ten-months ended December 31,
1994. Batteries Batteries, Inc. did not commence operations until June
1995 and Advanced Fox had previously reported on a February 28 fiscal
year basis. The results of operations of Batteries Batteries, Inc.
(excluding Advanced Fox and Tauber) for one month are not significant;
therefore the 1996 consolidated results are presented on a basis
comparable to the prior year.
F-6
Batteries Batteries, Inc., Specific Energy and the Merger Companies
(collectively, the "Company") are engaged in the distribution of
batteries, battery accessories and cellular products, accessories and
components in the United States.
Significant accounting policies followed in the preparation of the
consolidated financial statements are as follows:
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 CREDIT RISK - The Company invests its excess cash in
money market accounts and short-term investments. The Company has not
experienced any losses on its cash accounts or short-term investments.
The Company sells its products to original equipment, maintenance and
repair organizations, commercial businesses, institutional users 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.
INVENTORIES - Inventories consist of batteries, battery packs and
related components and are carried at the lower of cost (first-in,
first-out) 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 straight-line and accelerated methods over
the estimated useful lives of the respective assets. Estimated useful
lives are 30 to 40 years for buildings, 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 their leases.
Property financed by capital leases (principally equipment) is amortized
on a straight-line basis over the shorter of the estimated useful lives
or remaining lease term. Amortization of property financed by capital
leases is included in depreciation expense and accumulated depreciation.
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. No impairment is
indicated as of December 31, 1996.
REVENUE RECOGNITION - Revenue from product sales is recognized at the
time of shipment.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," except for Tauber for the fiscal year
ended December 31, 1994 and Advanced Fox for the year ended December 31,
1995 and the ten months ended December 31, 1994. During such periods,
the respective entities were organized as Subchapter S corporations
under the Internal Revenue Code. Under the liability methods specified
by SFAS No. 109, a deferred tax asset or liability is determined based
on the difference between the financial statements and tax basis of
assets and liabilities, measured using enacted tax rates.
NET INCOME PER SHARE - Historical net income per share has not been
presented as it is not considered meaningful due to the Mergers, the
Offering and the Subchapter S corporation tax status of certain of the
Founding Companies.
F-7
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying
value at December 31, 1996 and 1995 of the Company's financial
instruments approximated their fair value primarily due to the short
maturities of these instruments.
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.
RECENT ACCOUNTING PRONOUNCEMENTS - In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which is effective for the Company beginning
January 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but
does not require) compensation cost to be measured based on the fair
value of the equity instrument awarded. Companies are permitted,
however, to continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. The Company continues to apply APB Opinion No. 25 to its stock
based compensation awards to employees and has disclosed the required
pro forma effect on net income and income per share in the notes to the
consolidated financial statements. The Company adopted the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed of" during the first quarter of fiscal
1996. There was no impact in the consolidated financial statements from
adoption of this statement.
RECLASSIFICATIONS - Certain amounts in prior years have been
reclassified to conform to the current year presentation.
2. INITIAL PUBLIC OFFERING
On April 8, 1996, the Company completed its initial public offering (the
"Offering") of 2,300,000 shares of Common Stock at an initial public
offering price of $5.00 per share and 2,300,000 redeemable common stock
purchase warrants (the "Warrants") at $.10 per Warrant. The net proceeds
to the Company, net of underwriting discounts and Offering costs, were
approximately $9.1 million. Simultaneously with the Closing of the
Offering, the Company issued 960,000 shares of Common Stock and options
to purchase 50,000 shares of Common Stock and paid approximately $5.9
million in cash to the former stockholders of the Merger Companies. In
addition, the Company subsequently paid an additional $.8 million in
cash to the former stockholders of the Merger Companies in connection
with price adjustments stipulated in the respective merger agreements.
The cash consideration paid to the former stockholders of the Merger
Companies has been reflected as a reduction of stockholders' equity in
the consolidated financial statements. The remaining cash proceeds from
the Offering were used for general corporate purposes.
3. ACQUISITION
On June 6, 1995, effective June 1, 1995, the Company acquired 95% of the
outstanding common stock of Specific Energy Corporation ("Specific
Energy") for approximately $1,013,000, including $770,000 in cash, a
note payable in the amount of $180,000, and acquisition related expenses
of approximately $63,000 (the "Acquisition"). In September 1996, the
Company acquired the remaining 5% interest for approximately $51,000 in
cash and repaid the net payable of $180,000. The Acquisition was
accounted for as a purchase in accordance with Accounting Principles
Board Opinion No. 16. The purchase price was allocated to the underlying
assets and liabilities based upon their respective fair values. The
allocation of the purchase price included the assignment of
approximately $604,000 to excess of cost over net assets acquired. The
results of
F-8
Specific Energy are included in the consolidated financial statements
from the effective date of the Acquisition.
4. PRO FORMA INFORMATION (UNAUDITED)
The following presents the unaudited results of operations of the
Company for the year ended December 31, 1996 and 1995 (1) as if the
acquisition of Specific Energy had been consummated at the beginning of
fiscal 1995 (Note 3); (2) for 1995, includes certain adjustments to
compensation expense resulting from the renegotiation of the executive
compensation agreements with the Presidents of each of the Founding
Companies, additional executives compensation and contractual management
fees payable to Founders Management Services, Inc., and (3) for 1996 and
1995 reflects a provision for income taxes to record the income tax effect
of items (1) and (2) and the pro forma income tax provisions for the
Merger Companies with S corporation status. Upon closing of the Mergers
and the Offering, each of the Merger Companies with S corporation status
terminated such status. The pro forma adjustment reflects increased
provisions for income taxes to an effective rate of 41%. While this
effective rate represents the Company's pro forma tax rate based on the
historic earnings trends in the respective tax jurisdictions, this rate
may change in the future in accordance with such trends.
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995
Net sales $ 25,650,000 $ 21,882,000
============= =============
Net income attributable
to common shareholders $ 443,000 $ 878,000
============= =============
Net income per share $ 0.11 $ 0.22
============= =============
Number of shares used in
computing per share data $ 4,100,000 $ 4,000,000
============= =============
The unaudited pro forma results of operations are prepared for
comparative purposes only and do not necessarily reflect the results
that would have occurred had such events occurred at the beginning of
the period, as assumed, or of the future results of the Company.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, December 31,
1996 1995
----------- -----------
Machinery and equipment $ 947,147 $ 555,731
Furniture and fixtures 67,779 164,575
Vehicles 60,237 60,237
Leasehold improvements 124,825 40,159
----------- -----------
1,199,988 820,702
Less accumulated depreciation (449,024) (312,367)
----------- -----------
Property and equipment, net $ 750,964 $ 508,335
=========== ===========
F-9
6. DEBT
DECEMBER 31, DECEMBER 31,
1996 1995
----------- -------------
Short-term debt:
Line of credit due on demand, with interest at the banks prime
rate plus 1.25% (8.25% and 9.75%, respectively), interest
payments are due monthly, collateralized by the assets of
Advanced Fox, maximum borrowings of $590,000. This
agreement is renewable annually $ 589,658 $ 589,658
Notes payable, stockholder, interest at 12% per annum,
payable on demand - 165,498
----------- -------------
Total short-term debt $ 589,658 $ 755,156
=========== =============
Long-term debt:
Note payable with interest at 8.25% per annum due in monthly
installments of $1,091, maturing October 1998; note repaid in 1996 $ - $ 31,603
8% subordinated promissory note payable to minority
shareholders, interest payable quarterly, principal payable
in two annual installments of $40,000 with a balloon payment
due June 1998, collateralized by the assets of Specific Energy;
note repaid in 1996 - 180,000
----------- -------------
- 211,603
Less current portion - (51,399)
----------- -------------
Long-term debt $ - $ 160,204
============ =============
The weighted average interest rates in effect on short-term debt for the
years ended December 31, 1996, 1995 and 1994 were 8.25%, 10.2% and 9.6%,
respectively.
7. STOCKHOLDERS' EQUITY
The following depicts the capitalization of Batteries Batteries, Inc.
(the "Company"), which is presented as the capital stock of the Company.
Capital stock of the Merger Companies is included in additional paid-in
capital.
CAPITALIZATION - In June 1995, the outstanding 200 shares of Common
Stock, par value $.001 per share, were converted, pursuant to an
amendment to the Certificate of Incorporation, into an aggregate of
214,300 shares (220,010 shares as adjusted for December 1995 and March
1996 stock splits) of Common Stock, par value $.001 per share.
In June 1995, the Company effected a private placement of its equity
securities. The Company sold, at a price of $3.00 per unit, 500,000
units, each consisting of two shares of the Preferred Stock, Series A
and one share of Class A Common Stock, or an aggregate of 1,000,000
shares of Preferred Stock, Series A and 500,000 shares (517,990 shares
as adjusted for December 1995 and March 1996 stock splits) of Class A
Common Stock. The proceeds of the unit sale were applied to consummate
the Acquisition and for working capital.
F-10
On December 26, 1995, the Company effected a 1.47 for 1 stock split of
the outstanding shares of Common Stock and Class A Common Stock. On
March 5, 1996, the Company effected a .70475 for 1 reverse stock split of
the outstanding shares of Common Stock and Class A Common Stock. All share
and per share information presented herein has been adjusted to reflect
the stock splits.
The terms of the classes of capital stock are as follows:
PREFERRED STOCK - The Board of Directors of the Company, without action
by the stockholders, is authorized to issue the 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. The Preferred Stock, Series A
shares are nonvoting and will be redeemed in accordance with their terms
one year following consummation of an 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. The
remaining shares are classified as Redeemable Preferred Stock in the
consolidated balance sheet.
CLASS A COMMON STOCK - The shares of Class A Common Stock were
automatically converted into like shares of the Common Stock upon the
consummation of the Offering in accordance with their terms. The
authority to issue Class A Common Stock terminated as a result of the
Offering and concurrent conversion.
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. Subject
to the rights of the holders of the Redeemable Preferred Stock, the
holders of the Common Stock are entitled to dividends when declared from
funds legally available therefore.
STOCK OPTIONS - The Company, on June 6, 1995, adopted the Company's
Stock Option Plan (the "Plan"), which as amended in December 1995
relates to 250,000 shares of its Common Stock, authorizing the Board of
Directors or a Stock Option Committee appointed by the Board to grant
incentive stock options and non-incentive stock options to officers and
key employees, directors and independent consultants, with directors who
are not employees and consultants eligible only to receive non-incentive
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 185,000 shares of Common
Stock to employees. The options are exercisable at the initial Offering
price per share of $5.00. At December 31, 1996, there were a total of
135,485 shares exercisable and 44,280 shares available for grant.
In addition, Tauber's selling stockholder received an option to purchase
50,000 additional shares of the Company's Common Stock exercisable at
$5.00 per share as part of his consideration for the sale of the capital
stock of Tauber.
The Company accounts for the Plans in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation costs have
been recognized for stock option awards. Had compensation costs of the
plans been determined under a fair value alternative method as stated in
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company
would have been required to prepare a fair value model for such options
and record such amount in the financial statements as compensation
expense. Pro forma net income available to common shareholders, as
adjusted, would have been $357,000 or $.09 per share for fiscal 1996.
The impact on fiscal 1995 net income would not have been material. The
Company arrived at the fair value
- F-11 -
of each stock grant at the date of grant by using the Black Scholes
pricing option model with the following weighted average assumptions
used for grants: risk-free interest rate of 6.1%; expected dividend
yield of 0%; expected life of 5 years; and expected volatility of 35%.
WARRANTS - Each Warrant is exercisable at a price of $5.00 per share
after April 8, 1997 and is redeemable thereafter at a price of $.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.
8. LEASE COMMITMENTS
The Company leases various types of warehouse and other space and
equipment, furniture and fixtures under capital and noncancelable
operating lease agreements which expire at various dates. Future minimum
lease payments under noncancelable operating and capital leases are as
follows:
OPERATING LEASES -
FISCAL YEAR ENDING
DECEMBER 31, AMOUNT
1997 $ 429,886
1998 385,907
1999 323,350
2000 160,047
2001 90,599
Thereafter -
-------------
Total $ 1,389,789
=============
CAPITAL LEASES -
FISCAL YEAR ENDING
DECEMBER 31, AMOUNT
1997 $ 40,443
1998 9,820
-------------
Total minimum lease payments 50,263
Less amount representing interest 2,719
-------------
Present value of net
minimum lease payments $ 47,544
=============
Rent expense for all operating leases for the fiscal years ended
December 31, 1996, 1995 and 1994 was $245,455, $291,331 and $151,853,
respectively.
9. PROFIT SHARING PLAN
Tauber has a profit share 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 $41,364,
$79,653 and $84,751 for the years ended December 31, 1996, 1995, and
1994, respectively.
- F-12 -
10. INCOME TAXES
The Company will file a consolidated Federal income tax return for
periods subsequent to the Mergers described in Note 1. Each of the
Merger Companies will file a "short period" Federal tax return through
the date of the Mergers.
The provision (benefit) for income taxes consists of:
Fiscal
-----------------------------------------------------------
1996 1995 1994
Current:
Federal $ 132,561 $ - $ -
State 120,659 2,217 -
---------- -------- ---------
253,220 2,217 -
---------- -------- ---------
Deferred:
Federal 66,170 (83,644) (5,064)
State 17,530 (16,853) (2,811)
---------- --------- ---------
83,700 (100,497) (7,875)
---------- --------- ---------
Total provision (benefit) for income taxes $ 336,920 $ (98,280) $ (7,875)
========== ========= =========
The approximate tax effects of temporary differences that gave rise to
deferred tax assets (liabilities) were as follows:
December 31, December 31,
1996 1995
---------------- ------------
Deferred income tax assets:
Net operating loss carryforwards - current $ - $ 58,451
Reserves not currently deductible - current 27,932 44,907
----------- -----------
Total deferred income tax assets $ 27,932 $ 103,358
=========== ===========
Deferred income tax liabilities:
Excess of tax depreciation over book - noncurrent $ (17,274) $ (9,000)
=========== ===========
The effective income tax rate varied from the U.S. Federal statutory tax
rate as follows:
Fiscal
-----------------------------------
1996 1995 1994
---- ---- ----
Statutory income tax rate 34.0 % 34.0 % 34.0 %
State income taxes, net of Federal tax benefit 9.9 - 0.2
Subchapter S corporation income not subject to
corporate level taxation (6.9) (34.0) (34.0)
Effect of converting status of corporations (8.3) (0.5)
Other 2.5 - (0.2)
--- ---- ----
Effective tax rate 39.5 % (8.3)% (0.5)%
==== ==== ====
F-13
Tauber was organized as a Subchapter S corporation for the fiscal year
ended December 31, 1994, and converted to a C corporation as of
January 1, 1995. Advanced Fox was organized as a Subchapter S corporation
for the ten months ended December 31, 1994 and the year ended
December 31, 1995. Prior to March 1, 1994, Advanced Fox was organized
as a C corporation. As discussed in Note 1, the historical consolidated
financial statements do not include adjustments to income taxes
necessary for combining the operating results of closely held
Subchapter S and C corporations. See unaudited pro forma information
presented on the face of the consolidated statements of income.
11. COMMITMENTS AND CONTINGENCIES
LITIGATION - The Company is, from time to time, party to litigation
arising in the normal course of its business. Management believes that
none of this litigation will have a material adverse effect on the
financial position or results of operations of the Company.
12. RELATED PARTY TRANSACTIONS
MANAGEMENT AGREEMENT - Messrs. Warren H. Haber, Chairman of the Board
and acting Chief Executive Officer and John L. Teeger, Vice President,
Secretary and Director of the Company are the sole stockholders,
officers and directors of Founders Management Services, Inc.
("Founders"). Founders has 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 is for a
term expiring on a date three years from the closing of the Offering,
subject to five one-year renewal options, provides for Founders to
receive a base fee of $120,000 per annum upon closing of the Mergers,
with a further increase to $150,000 per annum upon consummation of the
Company's first acquisition after the Mergers. Founders is also to
receive an additional fee of 5% of the Company's annual pre-tax income
in excess of $750,000. Under the agreement, Founders will also be
entitled to originating fees with respect to acquisitions or financings
for which it performed originating services-the fee to be that
customarily charged by nonaffiliated investment bankers or professional
originators for transactions of similar size and nature. Founders
received a fee of $150,000 for its origination and consulting services
in connection with the Mergers. In connection with the Management
Agreement, the Company paid Founders $245,024 during the year ended
December 31, 1996, including the origination fee.
The following is a summary of transactions and balances with the
stockholders or affiliated companies of each of the Founding Companies.
AS OF OR FOR THE
RESPECTIVE YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
Notes payable to stockholders of Founding Companies $ - $ 165,498 $ 386,117
Due to affiliates - - 217,141
Salary and bonus paid to stockholders 539,750 578,500 253,500
Interest expense paid to stockholders and affiliates
of stockholders 8,378 13,453 56,385
Rent expense paid to stockholders 70,000 55,800 37,500
F-14
13. SUBSEQUENT EVENT
On January 7, 1997, effective January 1, 1997 the Company acquired the
business and related assets of Battery Network, Inc. and affiliated
companies ("Battery Network"), an assembler and wholesale distributor of
batteries servicing specialty battery customers nationally. Battery
Network, which operates principally in California, New Jersey and
Illinois, had combined revenues of approximately $23 million for the
year ended December 31, 1996.
The total purchase price of approximately $11.2 million consisted of (i)
the payment of approximately $8.3 million in cash, (ii) the issuance of
550,000 shares of common stock 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 cash portion of the purchase price is subject to
adjustment to the extent that the net worth, as defined, of Battery
Network, exceeds or is less than $7.3 million.
The Battery Network agreement also provides the sellers the contingent
right to receive additional consideration of up to $1 million in cash,
350,000 shares of Common Stock and five year options to acquire 250,000
shares of Common Stock, of which half are exercisable at $4.50 per share
and half are exercisable at $6.00 per share. Payment of the additional
consideration is to be based on the excess amount by which the combined
"pre-tax income" as defined of the acquired company and Tauber, exceeds
(i) $2,100,000 for the year ending December 31, 1997 (the "One-Year
Period"), (ii) $4,200,000 for the two years ending December 31, 1998
(the "Two-Year Period") or (iii) $6,300,000 for the three years ending
December 31, 1999 (the "Three Year Period"), with the maximum amount of
additional consideration to be paid if the excess is $400,000 for the
One-Year Period, $800,000 for the Two-Year Period or $1,200,000 for
the Three-Year period.
The cash portion of the purchase price was funded with a portion of the
proceeds of a borrowing pursuant to a Revolving Credit, Term Loan and
Security Agreement, dated January 6, 1997 (the "Loan Facility"), between
IBJ Schroder Bank & Trust Company, as Agent ("IBJ") and the Company and
all its subsidiaries. The Loan Facility consists of a $3,000,000 Term
Loan payable in 35 monthly installments of $50,000 each with the balance
to be paid at maturity and a revolving credit of up to $10,000,000 to be
advanced at the rate of 80% of eligible accounts receivable and 50% of
inventories. The revolving credit loans bear 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
revolving credit loan interest rate. The loans are secured by a pledge
of the assets of the borrowers and a pledge of the outstanding capital
stock of the subsidiaries of the Company.
Pursuant to the Management Agreement with Founders, the Company is to pay
Founders, for its origination and negotiating services in connection with
the acquisition and loan, $240,000 and is to issue to the designees of
Founders five year warrants to purchase 100,000 shares of Common Stock
at a price of $4.125 per share.
The acquisition will be accounted for as a purchase in 1997. The
purchase price will be allocated to the assets acquired and liabilities
assumed based on their estimated fair values. The excess of the purchase
price over the net assets acquired is estimated to be approximately $4.2
million, and will be amortized over a period of 25 years. Results of
operations for Battery Network will be included with those of the
Company for periods subsequent to the date of acquisition.
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisition had been completed at the
beginning of 1996 and does not purport to be indicative of what would
F-15
have occurred had the acquisition actually been made as of such date or
of results which may occur in the future.
YEAR ENDED
DECEMBER 31,
1996
Net sales $ 48,868,000
============
Net income attributable to common stockholders $ 644,000
============
Income per share attributable to common
stockholders $0.14
=====
Adjustments made in arriving at the pro forma unaudited results of
operations include increased interest expense on acquisition debt,
amortization of goodwill, adjustments to stockholder compensation, and
related tax adjustments.
* * * * * * *
F-16
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.
Batteries Batteries, Inc.
--------------------------------
(Registrant)
s/ Ronald E. Badke
--------------------------------------------
Ronald E. Badke, Chief Operating Officer
Dated: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Warren H. Haber Chairman of the Board,
- ------------------- acting Chief Executive Officer March 31, 1997
Warren H. Haber
/s/ John L. Teeger Vice President, Secretary
- ------------------- and Director March 31, 1997
John L. Teeger
/s/ Ronald E. Badke Vice President, Chief Operating
- ------------------- Officer and Chief Financial
Ronald E. Badke Officer March 31, 1997
(Principal Financial Officer)
/s/ Stephen Rade Executive Vice President and
- ------------------- Director March 31, 1997
Stephen Rade
30
/s/ Bruce Barnett Director
- ---------------------------- March 31, 1997
Bruce Barnett
/s/ John Simon Director
- ---------------------------- March 31, 1997
John Simon
/s/ William Schlesinger Sapp Director
- ---------------------------- March 31, 1997
William Schlesinger Sapp
/s/ Vice President and
- ---------------------------- Director March__, 1997
Robert W. Tuber
/s/ Director
- ---------------------------- March __, 1997
Fred Corrdo
31