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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, 1997 0-27994
BATTERIES BATTERIES, INC.
(Exact name of Registrant as specified in its charter)
13-383-5420
(I.R.S. Employer
Identification No.)
50 Tannery Road, Unit 2 08876
North Branch, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including Area Code: (908) 534-2111
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 [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant (holders other than officers or directors and other affiliates) as
of April 10, 1998 was $6,415,463
As of April 10, 1998, 4,743,000 shares of the Registrant's Common Stock, $0.01
par value per share, were outstanding.
PART 1
ITEM 1. BUSINESS
Batteries Batteries, Inc. (the "Company" or "Batteries Batteries") was
founded in May 1995 to create a nationwide battery 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, (iii) in January 1997 Battery Network, Inc.
and affiliate companies ("Battery Network") based in Chicago, Illinois, North
Branch, New Jersey and Escondido, California, and (iv) in May 1997 Cliffco of
Tampa Bay, Inc. ("CTB") based in Tampa, Florida.
In November 1997, the Company initiated a plan to consolidate the
operations of Tauber and Battery Network and moved both operations to new and
larger facilities located in Escondido, California. The Company's plan was
partially completed during 1997, and is expected to be completed June 30, 1998.
Key areas of focus in the plan include upgrading general management, full
integration and rationalization of the two staffs, upgrading manufacturing
management, adding new sales and marketing management, upgrading financial
management and financial controls, and reorganizing domestic outside sales and
warehouse locations.
Additionally, the Company is undertaking an effort to develop stronger
domestic and international vendors to insure continuing supply of current and
new battery and battery accessory products at competitive prices. The result of
the merger and reorganization of Battery Network and Tauber is intended to
provide a more efficient nationwide distributor of high-end two-way radio,
professional video, electronic, biomedical and OEM battery and battery
accessory products.
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 commercial,
industrial accounts and retail accounts.
OPERATING STRATEGY
The battery distribution business is presently highly fragmented. The
Company believes a leader or leaders will emerge to more effectively market a
very broad line of original 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 industrial 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, distribution operations and direct sale operations.
2
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
control product inventories so as to be able to address a broad spectrum of
customer needs.
Because of the multiplicity of battery products, mass merchandisers and
retail chains generally serve only specific segments of the market, offer a
limited number of battery products, and are staffed with personnel lacking
specific training with respect to the battery products offered. Additionally,
such vendors in most instances offer batteries for products that are usually
not more than a few years old. The alternative, and, in fact, often the
supplier of mass-merchandisers and retail chains, is a series of regional
distributors who have over time developed long standing relationships with
manufacturers of reliable battery and accessory products. The distributors
customarily carry and sell a wide variety of battery products, produce and
assemble a number of value-added battery systems and provide other services and
training to a broad range of retail customers, mass merchandisers, dealers and
other distributors. The long-term relationship with battery manufacturers
together with comprehensive inventories and product knowledge serve to make it
difficult for new ventures to enter the market.
The Company believes that as a result of these factors an opportunity
exists to combine a number of 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 has the capability to supply all market segments, including original
equipment manufacturers (OEMs) and maintenance repair organizations
(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.
3
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 domestic manufacturers and foreign sources.
National and Regional Marketing. The use of regionally centralized
inventory, telemarketing, fully integrated and linked Batteries Batteries
internet home page (to be added in 1998), direct mail techniques, and
operation of retail stores, to achieve synergies enables the Company's
products to be marketed and sold regionally and nationally.
Superior Customer Service and Competitive Pricing. The achievement
of superior customer service and competitive prices is effected through
(i) cost-effective purchasing of products from selected domestic and
off-shore vendors, (ii) maintaining optimum inventory levels of products
to enable rapid delivery response, (iii) utilizing a network of regional
sales offices with qualified outside sales personnel covering major
market areas, (iv) employing highly trained customer service and inside
sales personnel and (v) offering a very broad product selection to
fulfill customers' needs.
OPERATIONS
Products. The Company markets in excess of 23,000 different battery
products and value-added battery packs and over 4,500 cellular phone
accessories and components. Detailed engineering drawings for Company-assembled
battery packs are maintained in a Company database. The products address a
multitude of applications for commercial, industrial and consumer use with
individual sales ranging from several dollars for a retail consumer to
thousands of dollars for commercial and industrial customers. 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 that
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 22.4% of the Company's cost of purchases for the 12 months ended
December 31, 1997. Purchases are made in U.S. dollars. No one supplier
accounted for purchases representing more than 10% of the total purchases for
the year. The Company coordinates decentralized purchasing in an effort to
obtain volume discounts. The Company is reviewing a number of prospective
alliances in the Far East and Mexico to continue to reduce costs and improve
the quality of items currently imported or purchased from US sources.
Sales. The Company markets and sells the majority of its products to
dealers, other distributors, telephone carriers, mass merchandisers and to a
lesser degree directly to consumers through Company owned retail outlets.
Additionally, the Company sells value added battery packs and battery
4
supplies directly to OEM customers, and through fulfillment programs to
individual consumers.
Specialty battery packs are assembled for sale at the Company's modern
value added facilities in Escondido, California. By the end of December 1997,
the battery pack assembly at the Company's North Branch, New Jersey facility
had been relocated to the Escondido facility. Additionally, battery pack
assembly is performed by the Company's technical centers located adjacent to
its retail stores and its warehouse servicing the retail outlets.
The Company employs direct sales professionals located at each of the
Company's 4 business operations as well as at 7 field offices located
throughout the United States. Telemarketing is utilized extensively by all of
the business operations. Additionally, the Company produces and distributes
eight product line catalogues that are circulated nationally and
internationally; the largest of which, containing cellular accessories and
components, has distribution volume of over 37,000 copies. Sales are also
effected through independent sales representatives compensated on a commission
basis. The Company intends to integrate the catalogs on a Company-wide basis,
and to enhance, as appropriate, private label and proprietary item sales that
generally provide higher margins.
The Company operates four retail stores in Arizona (one each in Phoenix,
Scottsdale, Mesa 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 that are then transferred to
an authorized recycling center. The Company is presently reviewing the
compatibility of the Arizona retail operations with the Company's strategic
plan to concentrate on growing distribution and OEM sales nationally and
internationally. Additionally, the Company discontinued its relationship with
Office Max in December 1997, and formally closed the last two Office Max
outlets in the Phoenix area in early 1998.
During the twelve months ended December 31, 1997, the Company effected
sales to more than 60,000 commercial and industrial customers. No one customer
accounted for more than 5% of the revenues of the Company for the twelve months
ended December 31, 1997. Export sales were less than 3% of total revenues for
the period.
Inventory Management. The Company has completed upgrading the inventory
and warehouse management system at Advanced Fox in conjunction with its move
into expanded and more modern warehouse facilities, and is actively working to
implement an upgraded warehouse management network at Battery Network. In
coordination with these projects the Company is addressing Year 2000 computer
software issues that exist at Advanced Fox and Battery Network. New software
programs for business management, finance and accounting, sales and order
entry, inventory and warehouse management, and manufacturing shop floor loading
have been identified and will be implemented and be operational at Advanced Fox
and Battery Network prior to the end of the third quarter 1998. Thereafter, the
networks will be extended to all Battery Network field sales offices and to CTB
in Florida on a scheduled basis with the view to insure all facilities are Year
2000 compliant by early 1999.
5
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, 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 large national chains and discount operators such
as Sears, K-Mart, NAPA Distribution Center, Northern Automotive Corporation,
Pep 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.
The Company believes that its size and diversity provides certain
competitive advantages such as those arising from centralized volume purchasing
and the ability to simultaneously service several markets. Competition in the
industry is also based on maintenance of product quality, delivery efficiency,
customer service and satisfaction levels, maintenance of satisfactory dealer
relationships and training programs, and the ability to anticipate
technological changes and changes in customer preferences. Although management
considers it unlikely, no assurance can be given that any of several major
battery manufacturers whose products the Company distributes will not acquire,
startup or expand their own distribution systems to sell directly to
industrial, commercial and retail customers.
The Company 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 the acquisition
of companies in the industry. The Company, however, believes that its
operational strategy will make the Company an attractive acquirer to other
battery distribution businesses and to OEMs. No assurance can be given,
however, as to the success of the Company's acquisition program.
EMPLOYEES
As of April 1, 1998, the Company employed 266 personnel in its
operations. Included were 7 in technical operations, 18 in sales at retail
stores, 60 in telemarketing and commercial sales, 35 in assembly and
value-added operations, 76 in warehousing, inventory control, shipping and
receiving, 8 in purchasing and 62 in management and administration. None of the
employees is represented by a labor union. The Company considers its relations
with its employees to be satisfactory.
ENVIRONMENTAL MATTERS
The Company 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
6
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.
SUBSEQUENT EVENTS
On February 2, 1998, Mr. William Steven Sapp was relieved of his duties
as Vice President of Batteries Batteries and President of Battery Network.
Mr. Sapp had been employed under the terms of a three (3) year employment
agreement that expires on January 2, 2000.
The Company signed confidentiality agreements during March 1998 with
firms located in Mexico and China to explore the feasibility of strategic
alliances with one or both of the firms to produce selected battery products
and accessories for sale through the Company's distribution network.
7
ITEM 2. PROPERTIES
All of the Company's real properties are held under leases. The following
table provides certain information concerning the Company's leased properties:
- --------------------------------------------------------------------------------
OPERATION NATURE LOCATION APPROXIMATE LEASE
AREA EXPIRATION DATE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Tauber Office, San Diego, CA 19,800 07/31/99
warehouse and
assembly*
- --------------------------------------------------------------------------------
Advanced Fox Office** Huntingdon, PA 7,000 12/31/99
- --------------------------------------------------------------------------------
Advanced fox Warehouse and Huntingdon, PA 15,500 05/30/02
assembly
- --------------------------------------------------------------------------------
Advanced Fox Office and Miami, FL 4,800 4/15/02
warehouse
- --------------------------------------------------------------------------------
Battery Network Office and McHenry, IL 16,000 12/31/01
warehouse**
- --------------------------------------------------------------------------------
Battery Network Office, North Branch, 11,750 12/31/01
warehouse and NJ
assembly**
- --------------------------------------------------------------------------------
Battery Network Office, Escondido, CA 34,820 01/30/04
warehouse and
assembly
- --------------------------------------------------------------------------------
Battery Network Office and Redmond, WA 3,000 05/31/98
warehouse
- --------------------------------------------------------------------------------
Battery Network Office and McDonough, GA 1,500 07/31/98
warehouse
- --------------------------------------------------------------------------------
CTB Office and Tampa, FL 18,800 08/01/04
warehouse
- --------------------------------------------------------------------------------
Specific Energy Office, Phoenix, AZ 6,400 10/01/01
warehouse and (Glendale)
assembly
- --------------------------------------------------------------------------------
Specific Energy Warehouse and Mesa, AZ 350 01/31/99
assembly
- --------------------------------------------------------------------------------
Specific Energy Office, Phoenix, 500 05/31/01
warehouse and AZ
assembly (Tatum Point)
- --------------------------------------------------------------------------------
Specific Energy Office and Phoenix, 6,100 03/31/01
warehouse AZ
(LaSalle St.)
- --------------------------------------------------------------------------------
Specific Energy Warehouse and Tempe, AZ 125 06/30/98
assembly
- --------------------------------------------------------------------------------
* Leased but not occupied as a result of the consolidation of Tauber and
Battery Network. The Company will attempt to sublease the facility.
** Leased from an affiliate of a Director 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.
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, 1997.
8
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 Nasdaq National Market (the
"NMS") since April 8, 1996. The following tables set forth the range of high
and low sale prices for the quarters indicated for the Common Stock and
Warrants on the NMS as reported by for the period from April 8, 1996 through
December 31, 1997.
HIGH AND LOW PRICES OF BATTERIES BATTERIES, INC.
COMMON STOCK AND PUBLIC WARRANTS ON NASDAQ
COMMON STOCK WARRANTS
HIGH LOW HIGH LOW
-------------------------------------------
1996
SECOND QUARTER (APRIL 8-JUNE 30) 7 1/8 5 1/2 2 5/8 1
THIRD QUARTER 5 7/8 4 1/2 1 7/8 1 1/4
FOURTH QUARTER 4 7/8 3 1/2 1 5/8 5/8
1997
FIRST QUARTER 4 1/4 3 1/2 1 1/16 9/16
SECOND QUARTER 3 5/8 2 1/8 7/8 7/16
THIRD QUARTER 3 3/4 2 1/2 9/16 7/16
FOURTH QUARTER 3 1 3/4 9/16 7/32
The number of record holders of the Company's Common Stock and of the Warrants
as of April 13, 1998 were 45 and 22, respectively. A substantially larger
number of beneficial owners hold such shares of Common Stock in depository or
nominee form.
No dividends have been paid on the outstanding shares of Common Stock.
The Company's Revolver Credit, Term Loan and Security Agreement prohibits the
payment of dividends on the Common Stock without the consent of the lenders
9
ITEM 6. SELECTED FINANCIAL DATA
INTRODUCTION
Simultaneously with the closing of the Public 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 data 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. See Note 1 of Notes to
Consolidated Financial Statements.
In June 1995, the Company Acquired 95% of the outstanding common stock of
Specific Energy in a business combination accounted for as a purchase. In June
1996, the Company acquired the remaining minority 5% interest for cash.
In April 1996, Batteries Batteries 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.
On January 7, 1997, effective January 1, 1997 the Company acquired (the
"BN Acquisition") the business and related assets of Battery Network, Inc. and
affiliated companies (collectively "Battery Network"), an assembler and
wholesale distributor of batteries servicing specialty battery consumers
nationally, in a business combination accounted as a purchase. The results of
operations of Battery Network are included in the consolidated results of the
Company from January 1, 1997, the effective date of its acquisition.
Pursuant to the Management Agreement with Founders Management Services,
Inc. ("Founders"), the Company paid Founders $240,000 and issued to the
designees of Founders five- year warrants to purchase 100,000 shares of Common
Stock at a price of $4.125 per share for its origination and negotiating
services in connection with (i) the acquisition of Battery Network and (ii) the
loan facility.
10
On May 12, 1997, effective May 9, 1997, the Company acquired the business
and related assets of Cliffco of Tampa Bay, Inc. ("CTB"), a distributor of
cellular products operating out of Tampa, Florida, in a business combination
accounted for as a purchase. The results of operations of CTB are included in
the consolidated results of the Company from May 9, 1997, the effective date of
its acquisition.
Pursuant to the Management Agreement with Founders, the Company paid
Founders $40,000 for its origination and negotiating services in connection
with the acquisition of CTB.
In November 1997, the Company consolidated and relocated the operations
of Tauber and Battery Network into newly leased facilities located in
Escondido, California. The Company anticipates completion of the consolidation
and integration of the two operations will extend into the second quarter of
1998.
For the year ended December 31, 1997, the results of operations include
the results of Batteries Batteries, Battery Network, Advanced Fox and Tauber
for the year ended December 31, 1997 and those of CTB from the date of
acquisition, May 9, 1997, through December 31, 1997. For the fiscal year ended
December 31, 1996, the results of operations include the results of Batteries
Batteries for the eleven months ended December 31, 1996 and those of Advanced
Fox and Tauber for the year ended December 31, 1996. For the year ended
December 31, 1995, the results of operations include the results of Batteries
Batteries for the year ended January 31, 1996 and those of Advanced Fox and
Tauber for the year ended December 31, 1995.
The Selected Financial Data for the years ended December 31, 1995, 1996
and 1997 have been derived from the Company's consolidated financial statements
that have been audited by Deloitte & Touche LLP and that appear elsewhere in
the Report.
11
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED DECEMBER 31,
1993 1994 1995 1996 1997
------------------------------------
($ THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME STATEMENT DATA
NET SALES 14,219 18,213 21,029 25,650 53,974
COST OF SALES 11,223 14,304 15,238 17,805 37,677
------ ------ ------ ------ ------
GROSS PROFIT 2,996 3,909 5,791 7,845 16,297
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 2,184 2,346 4,577 7,004 14,438
----- ------ ----- ------ ------
EXPENSES
OPERATING INCOME 812 1,563 1,214 841 1,859
INTEREST EXPENSES 83 98 81 15 726
OTHER (INCOME) EXPENSE (31) (8) (58) (27) --
----- ----- ----- ----- -----
INCOME BEFORE PROVISION FOR 760 1,473 1,191 853 1,133
INCOME TAXES
PROVISION (BENEFIT) FOR
INCOME TAXES 60 (8) (98) 337 565
----- ----- ----- ----- -----
NET INCOME 700 1,481 1,289 516 568
PREFERRED STOCK DIVIDEND ===== =====
REQUIREMENTS 53 60 15
------ ----- -----
NET INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS 1,236 456 553
===== ===== =====
NET INCOME PER SHARE OF
COMMON STOCK (BASIC AND DILUTED) $ .12
=====
12
SELECTED FINANCIAL DATA -CONTINUED
FISCAL YEAR ENDED DECEMBER 31,
1993 1994 1995 1996
----------------------------
($ THOUSANDS)
UNAUDITED PRO FORMA DATA
INCOME BEFORE TAXES 760 1,473 1,191 853
PROVISION FOR INCOME TAXES 312 604 488 350
--- ----- ------ ---
PRO FORMA NET INCOME 448 869 703 503
=== ===== === ===
PRO FORMA NET INCOME PER
COMMON STOCK (BASIC & DIULTED) $.16 $.11
==== ====
FISCAL YEAR ENDED DECEMBER 31,
1993 1994 1995 1996 1997
------------------------------------
BALANCE SHEET DATA
WORKING CAPITAL 2,570 3,597 5,295 6,782 14,844
TOTAL ASSETS 5,232 6,889 9,105 11,735 28,538
LONG TERM DEBT, LESS 3 1 183 -- 10,742
CURRENT PORTION
MANDATORY REDEEMABLE -- -- -- 750 --
PREFERRED STOCK
STOCKHOLDERS' EQUITY 2,668 3,809 6,533 8,460 11,730
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
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.
13
RESULTS OF OPERATIONS
Year Ended December 31, 1997 ("1997") Compared to Year Ended December 31, 1996
("1996")
Net sales increased 110% from $25.7 million in 1996 to $54 million in
1997. The increase was due primarily to the acquisition in January 1997 of
Battery Network, which added $22.1 million in sales, and in May 1997 the
acquisition of CTB, which added $3.8 million in sales. Additionally, Advanced
Fox's cellular accessory business continued to grow (up 22% compared to 1996)
and Tauber, reversing a decline in 1995, increased sales in 1997 to $9.6
million (up 6% compared to 1996).
Gross profit increased 109% from $7.8 million in 1996 to $16.3 million in
1997, again due primarily to the acquisitions of Battery Network and CTB. In
addition, Advanced Fox's gross profit increased $1.3 million (or 25%) to $6.5
million compared to $5.2 million in 1996. Overall gross profit as a percentage
of sales decreased to 30.2% from 30.6 principally due to lower gross margins in
the Battery Network product line.
Selling, general and administrative ("SG&A") expenses increased 110% from
$7.0 million in 1996 to $14.5 million in 1997, and as a percentage of sales
decreased from 28% in 1996 to 27% in 1997. The increases were substantially due
to the added SG&A expenses (approximately $7 million) resulting from the
Battery Network and CTB acquisitions. Additionally, Advanced Fox's SG&A
increased 18% from $3.7 million in 1996 to $4.4 million during 1997, due
primarily to increased warehouse space in Huntingdon, PA, increased utilization
of office space in Huntingdon, PA, addition of new sales office and associated
warehouse space in Miami, Florida at mid year 1997, and increased selling and
telemarketing support.
Interest expense in 1997 increased to $727,000 from $15,000 in 1996
due entirely to increased borrowings related to a Revolving Credit, Term Loan
and Security Agreement, dated January 6, 1997, as amended May 13, 1997, (the
"Loan Facility"), between IBJ Schroder Bank & Trust Company and the Company.
Borrowing against the Loan Facility in 1997 consisted primarily of $8.3 million
as the cash portion of the purchase price of the Battery Network acquisition,
$0.075 million as the cash portion of the purchase price of the CTB
acquisition, $0.560 million of indebtedness paid by the Company at the closing
of the CTB acquisition, and the balance as working capital. As of December 31,
1997, the principal amounts outstanding of Term Loans and the Revolver Loans
were $8.892 million and $1.85 million, respectively.
Subsequent to the end of 1997, the Company hired Alan W. Baldwin as Chief
Executive Officer and Director. In February 1998, Dave Peterson, President of
the Company's Specific Energy operation was promoted to replace William Sapp as
President of Battery Network and Tauber.
14
Year Ended December 31, 1996 ("1996") Compared to Year Ended January 31, 1995
("1995")
Net sales increased 22.4% from $21.0 million in 1995 to $25.7 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 increases are 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.
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 Company's 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's requirement for capital is to fund (i) sales growth, (ii)
capital equipment expenditures related to Year 2000 system compliance and
manufacturing tooling, and (iii) financing for acquisitions. The Company's
primary sources of financing during 1997 and 1996 were cash flow from
operations, equity issuances and bank borrowings.
Net cash used in operating activities for the year ended December 31,
1997 was approximately $1.8 million. Net cash provided from operating
activities during 1996 and 1995 was $ 0.193 million and $ 0.607 million,
respectively. The increase in cash used in operating activities during 1997 was
comprised of net income of $ 0.568 million, plus depreciation of $ 0.647
million, offset by net changes in assets and liabilities of approximately $3
million. The major changes in assets and liabilities included increased
accounts receivable, inventory and accounts payable of $1.7 million, $2.5
million, and $1.4 million, respectively, arising primarily from increased
sales at Advance Fox as well as the added sales volume resulting from the
acquisition of Battery Network and CTB.
15
Net cash used in investing activities in 1997 was approximately $12.2
million, consisting of approximately $10.7 million (net of cash acquired)
utilized in the acquisition of Battery Network during January 1997, and
approximately $0.85 million (net of cash acquired) utilized in the
acquisition of CTB during May 1997. Net cash used in investing activities
during 1996 and 1995 was approximately $0.458 million and $0.973 million,
respectively. Of the 1996 and 1995 totals approximately $0.051 million and
$0.72 million, respectively, were utilized by the Company to fund the
acquisition of Specific Energy.
Net cash provided by financing activities was approximately $11.9 million
during 1997, comprised of approximately $3.0 million borrowings under the term
loan facility, approximately $8.9 million borrowings under the revolving credit
facility, and approximately $2.7 million from the issuance of the Company's
Common Stock. Net cash utilized by financing activities during 1997 consisted
primarily of $0.55 million payments under the term loan facility, $0.75 million
payment for redemption of preferred stock, approximately $1.2 million repayment
on subsidiary borrowings, approximately $0.18 million prepaid financing and
acquisition costs related to the Battery Network acquisition, and $0.05 million
payment of preferred stock dividends. Cash provided by financing activities
during 1996 consisted primarily of $9.1 million net proceeds of the Initial
Public Offering, of which $6.7 million was paid to the former stockholders of
Advanced Fox and Tauber. Cash provided by financing activities during 1995 was
primarily $1.5 million proceeds from a private placement, of which
approximately $0.423 million was utilized as payment on borrowings and $0.27
million was prepaid offering costs.
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 $0.10 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
acquired by merger or stock acquisition Advanced Fox and Tauber
(collectively, the "Merger Companies") by issuing 960,000 shares of Common
Stock and options to purchase 50,000 shares of common Stock at a price of
$5.00 per share, and paid approximately $5.9 million in cash to the former
stockholders of the Merger Companies. The Company simultaneously paid an
additional $0.8 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 stockholder's
equity in the consolidated financial statements. The remaining cash proceeds
from the Offering were used for general corporate purposes.
In May 1996, the Company redeemed 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 share plus accrued dividends at 8% per annum.
Pursuant to their terms, in April 1997, the Company redeemed 750,000 of the
outstanding shares of Series A Preferred Stock at a redemption price of $1.00
per share plus accrued dividends at 8% per annum, a total of $0.80 million.
16
On January 7, 1997 effective January 1, 1997 the Company acquired the
business and related assets of Battery Network, which operates principally
in California, New Jersey and Illinois.
The purchase price of approximately $11.2 million consisted of (i)
approximately $8.3 million in cash, subject to adjustment to the extent that
the net worth, as defined of Battery Network, exceeded or was less than $7.3
million; (ii) 550,000 shares of Common Stock valued at a price of $4.125 per
share and five year options to purchase an additional 225,000 shares at an
exercise price of $4.50 per share, and (iii) approximately $0.63 million in
transaction costs.
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 Battery Network 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 December31, 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 sellers also entered into employment agreements and were
granted options under the Company's Stock Option Plan purchase an aggregate of
50,000 shares of Common Stock.
During 1997, there was no additional consideration earned or has paid by
the Company to the sellers of Battery Network, Inc., and the Company does not
expect to pay any additional consideration related to this acquisition.
On May 12, 1997, the Company acquired the business and related assets of
CTB. The purchase price of approximately $615,000 consisted of (i) cash of
approximately $75,000 (ii) 193,000 shares of common stock valued at $2.35 per
share or $446,985 and (iii) approximately $93,000 in transaction costs. In
addition, the Company assumed liabilities of $1,321,000. As part of its
assumption of liabilities, the Company paid at the closing indebtedness of CTB
of approximately $560,000. The CTB agreement provides the President and sole
stockholder of the seller with a three-year employment agreement.
The cash portion of the purchase price of the Battery Network and CTB
transactions, as well as the repayment of CTB debt of $560,000 to its
collateralized lender was funded with a portion of the proceeds of a borrowing
pursuant to a Revolving Credit, Term Loan and Security Agreement, dated January
6, 1997, as amended May 13, 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 (the "Term
Loan") payable in 35 monthly installments of $50,000 each with the balance to
be paid at maturity and a Revolving Credit Facility (the "Revolver Loan") of up
to $10,000,000 to be advanced at the rate of 80% of eligible accounts
receivable and 50% of inventories. The Revolver Loan bears interest at the rate
of 1/4 of 1% plus the higher of (i) the base commercial lending rate of IBJ or
(ii) the weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds brokers
plus 1/4 of 1%, or, at the option of the Company at the
17
Eurodollar rate plus 2%. The Eurodollar rate is defined as Libor for a
designated period divided by one less the aggregate reserve requirements. The
interest on the Term Loan is 1/2% higher than the interest rate on the Revolver
Loans. The Loans Facility is secured by a pledge of the assets of the
borrowers and a pledge of the outstanding capital stock of the subsidiaries
of the Company. As of December 31, 1997, the principal amounts outstanding of
Term Loan was $2.45 million and the Revolver Loan was $8.89 million.
The Loan Facility contains certain covenants that include maintenance of
certain financial ratios, maintenance of certain amounts of working capital and
net worth as well as other affirmative and negative covenants. At December 31,
1997, the Company was not in compliance with certain of these covenants. On
April 14, 1998, the Company entered into an amended credit agreement whereby
the non-compliance at December 31, 1997 was waived, and the financial covenants
through December 31, 1998 were amended to reflect the Company's current
projections.
Pursuant to the Management Agreement with Founders Management Services,
Inc. ("Founders"), the Company paid Founders, for its origination and
negotiating services in connection with the acquisitions of Battery Network and
the loan facility, $240,000 and issued to the designees Founders warrants to
purchase100,000 shares of Common Stock at a price of $4.125 per share.
Based upon its present plans, management believes that operating cash
flow, available cash and available credit resources will be adequate to make
the repayments of indebtedness described herein, to meet the working capital
cash needs of the Company and to meet antpated capital expenditure needs during
the 12 months ending December 31, 1998. Although the Company would intend to
issue shares of Common Stock as its primary method of financing acquisitions,
it anticipates that additional funds may be required to successfully implement
its acquisition program, and will use various methods to finance acquisitions,
including raising new equity capital, for this purpose.
SEASONALITY AND INFLATION
The Company's net sales typically show little or no significant
seasonal variations, although net sales may be affected in the future by timing
of retail store openings or 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.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The forward-looking
statements are those that do not state historical facts and are inherently
subject to risk and uncertainties. The forward-looking statements contained
herein are based on current expectations and entail various risks and
18
uncertainties that could cause actual results to differ materially from those
projected in such forward-looking statements. Such risks and uncertainties
include:
1. Possible competition from the primary battery cell manufacturers,
Panasonic, Sanyo and others, which could materially affect the
Company's after-market sale of batteries, battery packs and
accessories.
2. Possible expanded competition from OEM manufacturers of cellular
telephones and two-way radios to include increased emphasis on
after-market sales of batteries, battery packs and accessories.
3. Increased competition on the part of telephone carriers to
replace traditional dealers and distributors with their own
direct sales locations. Such a move on the part of the carriers
could materially affect the Company's sales to the traditional
dealers and distributors.
4. The uncertainty and lack of financial stability in Asia could
potentially effect one or more of the Company's suppliers of
cellular products in the Far East. This could have the effect of
delaying or interrupting shipments of products and could
materially affect the Company's projected sales during 1998.
YEAR 2000 ISSUES
As is the case with most other companies using computers, the Company
is in the process of addressing the Year 2000 problem. The Company is currently
engaged in a comprehensive project to upgrade its information, technology, and
manufacturing computer software to programs that will consistently and properly
recognize the Year 2000. Many of the Company's systems include new hardware and
new packaged software recently purchased or to be purchased from large vendors
who have represented that these systems are Year 2000 compliant. The Company is
also in the process of obtaining assurances from vendors that timely updates
will be made available to make all remaining purchased software Year 2000
compliant.
The Company will utilize both internal and external resources to
replace and test all of its software for Year 2000 compliance, and the Company
expects to complete the project late in 1998 or early in 1999. The estimated
cost for this project could range as high as $750,000, including approximately
$550,000 for new systems that will be capitalized. This cost is being funded by
a combination of operating cash flows and capital leases for the new systems.
Failure by the Company and/or vendors and customers to complete Year 2000
compliance work in a timely manner could have a material adverse effect on
certain of the Company's operations.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements as of December 31, 1997
and for each of the three years in the period ended December 31, 1997 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 as of April 10, 1998, the name of each
Director and executive officer of the Company, his or her principal occupation
and the nature of all positions and offices with the Company held by him or
her. The Directors of the Company will hold office until the next Annual
Meeting of Stockholders.
First
Became
Name Age Office-Principal Occupation Director
- -------------------------------------------------------------------------------
Warren H. Haber 57 Chairman of the Board 1983
Alan W. Baldwin 61 President, Chief Executive 1998
Officer and Director
Ronald E. Badke 52 Vice President, Chief
Operating Officer, and Chief
Financial Officer
David R. Peterson 49 President of Battery Network
John L. Teeger 54 Vice President, Secretary and 1983
Director
Robert W. Tauber 73 Vice President and Director 1996
Steve Rade 59 Executive Vice President and
Director
Bruce Barnet 52 Director 1995
John Simon 54 Director 1995
Fred Corrado 57 Director 1996
William Schlesinger Sapp 66 Director 1997
Each executive officer serves at the discretion of the Board of Directors.
20
Mr. Haber has been Chairman of the Board of the Company since its
incorporation in November 1983, and was its acting Chief Executive Officer from
September 1996 to January 1998. 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 in principal transactions and managing businesses for its own
account. From June 1993, until January 1998, Mr. Haber was Chairman of the
Board and Chief Executive Officer of HealthRite, Inc., a distributor and
producer of nutritional supplements. He is a director of Beverly Glen Medical
Systems, American Life Care Corporation, and Grand Charter, Ltd. Mr. Haber has
been for more than 20 years an officer and director of Founders Property, Inc.,
a private real estate investment concern.
Mr. Baldwin, has been President, Chief Executive Officer and Director
of the Company since he joined the Company in January 1998. Previously from
March 1994 through October 1997 he had been Chairman of the Board and
Chief Executive Officer of Lunn Industries, Inc. From 1990 through
February 1994 and from October 1997 through December 1997 Mr. Baldwin
was an independent business consultant. From 1987 through 1989, Mr. Baldwin
was Chairman of the Board and Chief Executive Officer of Hytek Microsystems,
and from 1982 through 1986 he was Chief Executive Officer of American
Fiber Optics. From 1968 through 1982 he held various senior management
positions with TRW, Inc. and Q.T. Wiles & Associates. He is also a director
of Advanced Technical Products, Inc.
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., Peterson, President of Battery Network since February 1998, had
been President of Specific Energy since April 1996. He joined the Company in
September 1995. Previously he had been President of Renaissance Executive
Forums from September 1994 through August 1995 and he had held various sales,
marketing and management positions at Avery Dennison Corporation from
December 1971 through August 1994.
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 had been an officer and director of
HealthRite Inc. from December 1993 to January 1998. He is a director of Beverly
Glen Medical Systems and American Life Care Corporation. 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 and a Director of Tauber Electronics, Inc. since it was founded
by him in 1975.
21
Mr. Rade, has been Vice President (Executive Vice President since
August 1996) and a Director since April 1996. He has been the President, Chief
Executive Officer and a Director of Advanced Fox Antenna, Inc. since he
founded the company in 1990.
Mr. Barnet, has been President of Cahners Publishing Company since
1996. Prior thereto, he had been, from March 1993 until 1996, 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
General Cigar, Reed Elsevier, Inc USA and Mainspring Communications.
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., Advanced
Technical Products, Inc., and Neurogen Corporation.
Mr. Corrado, has been Vice Chairman and Chief Financial Officer of
The Great Atlantic & Pacific Tea Company for more than five years.
Mr. 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.
22
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, Inc prior to such date.
The following table sets forth for the years ended December 31, 1997,
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 four highest paid executive officers who received
compensation in excess of $100,000 for the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
NAME PERIOD SALARY ($)
Warren H. Haber, Year ended 12/31/97 (1)
Chairman of the Board and acting Year ended 12/31/96 (1)
Chief Executive Officer Year ended 12/31/95 (1)
Robert W. Tauber, Year ended 12/31/97 128,269
Vice President and Director Year ended 12/31/96 177,865
Year ended 12/31/95 578,500
Stephen Rade, Year ended 12/31/97 350,000 (2)
Executive Vice President and Year ended 12/31/96 347,825 (3)
Director Year ended 12/31/95 98,608 (4)
Ronald E. Badke Year ended 12/31/97 135,000 (5)
Vice President, Chief Operating Year ended 12/31/96 129,515 (6)
Officer And Chief Financial Officer
William Sapp Year ended 12/31/97 103,953
Vice President
- ---------------------
(1) Appointed acting Chief Executive Officer in September 1996. See Item 13 for
compensation paid to his affiliate.
(2) Includes a bonus of $200,000 earned in 1997 and payable in 1998 pursuant to
an agreement relating to the acquisition of Advanced Fox. See Item 12.
(3) Includes a bonus of $157,768 earned in 1996 and paid in 1997 pursuant to an
agreement relating to the 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) Does not include an earned bonus of $15,000 earned in 1996 and paid in
1997.
(6) Includes an earned bonus of $15,000 payable in 1997. Mr. Badke joined the
Company in November 1995.
23
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 and $120,000 during the
second year. Mr. Tauber's agreement terminated on April 11, 1998. Mr. Rade's
agreement obligates the Company to continue his 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 as
amended in January 1998 expiring March 31, 1999 at an annual salary of $120,000
through December 31, 1997 and $135,000 thereafter 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"), then affiliates of Battery Network, 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 ended July 1997.
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 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. See below for information as
to the termination of the employment of James Sapp and of William Steven Sapp.
Mr. Alan W. Baldwin is employed pursuant to a three year employment
agreement, dated January 8, 1998 which provides for an annual salary of
$165,000 and an annual incentive bonus based on meeting specific annual
performance goals but not to exceed 50% of his base salary. The agreement
provides for the grant of a five year stock option under the Company's Stock
Option Plan to Mr. Baldwin to purchase 200,000 shares of Common Stock at a
price of $2.6875 per share, the closing sales price on NASDAQ on January 8,
1998. The option may not be exercised as to more than 66,666 shares prior to
January 8, 1999 and 133,334 shares prior to January 8, 2000.
24
On February 2, 1998 the Company entered into an employment agreement with
Mr. David Peterson who is President of the Specific Energy subsidiary providing
for his employment as President of Battery Network at an annual salary of
$100,000 during the three year term and an annual incentive bonus based on
meeting specific annual performance but not to exceed 50% of his base
salary. Mr. Peterson was also granted an option under the Company's Stock
Option Plan to purchase 50,000 shares at a price of $2.375 per share, the
closing sales price on February 2, 1998 on NASDAQ. Exercise of the option is
limited to not more than 16,666 shares prior to February 2, 1999 and 33,334
shares prior to February 2, 2000. Both Mr. Baldwin's and Mr. Peterson's options
may not be exercised prior to approval of an amendment to the Company's Stock
Option Plan authorizing sufficient additional shares of Common Stock to permit
their exercise under the Plan.
The terms of the respective employment agreements were negotiated on an
arm's-length basis with each of the officers.
On January 9, 1998 the Company and Mr. James Sapp agreed to the
termination of his employment agreement, which was to expire on January 9,
2000. The termination agreement provides for the continuation of his salary and
benefits through March 10, 1998 and the termination of his employee stock
option to purchase 16,135 shares.
Mr. Peterson replaced as President of Battery Network Mr. William
Steven Sapp who was also relieved on that date of his duties as Vice President
of the Company.
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. The Board
has authorized, subject to stockholders approval, an increase to 450,000 in the
number of shares subject to the plan.
The following table sets forth the details as to the options granted
during and held at the end of the year ended December 31, 1997 by the executive
officers set forth in the Summary Compensation Table (none of Messrs. Haber,
Tauber and Rade have been granted options under the Plan, but see Item 13 with
respect to warrants granted to Mr. Haber with respect to the Battery Network
acquisition).
25
Option Grants in Last fiscal Year
Potential realizable value
at assumed annual rates
Percent of Total of stock price appreciation
Number of Shares Options Exercise For option Term (1)
Underlying Options Granted in Price per Expiration
Name Granted Fiscal Year Share Date 5% 10%
- -----------------------------------------------------------------------------------------------------------------------
Ronald E. Badke 25,000 (1) 100% 2 7/8 04/15/02 $91,733 $115,755
- -----------------------
(1) Granted pursuant to Stock Option plan
Fiscal Year End Option Values
Number of Shares Underlying
Unexercised Options at Fiscal
Year End (1)
Name Exercisable Unexercisable
- ------------------------------------------------------------------------------
Ronald E. Badke 34,999 30,001
- ------------------------
(1) None of the outstanding options held by the named individual were
in-the-money on December 31, 1997
26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership as of April 10, 1998 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.
SHARES
BENEFICIALLY OWNED PERCENTAGE
------------------- ----------
Warren H. Haber 235,006 shares (1) 4.9%
John Teeger 105,862 shares (2) 2.2%
Robert W. Tauber 245,000 shares (3) 5.2%
2192 Harbour Heights Road
San Diego, CA 92109
Stephen Rade 660,000 shares 12.6%
3915 Sommers Drive
Huntingdon, PA 19606
Ronald E. Badke 34,999 shares (4) **
Bruce A. Barnet 27,626 shares (5) **
John Simon 10,360 shares (6) **
Fred Corrado 10,000 shares (4) **
William Steven Sapp* 278,932 shares (7) 5.8%
James Sapp* 250,093 shares (8) 5.3%
Susan Grandt* 278,840 shares (9) 5.8%
William Schlesinger Sapp None
Alan W. Baldwin 66,667 shares (10) **
David R. Peterson 27,917 shares (11) **
Directors & officers as a group 1,423,437 shares (10) 28.2%
(13 persons)
27
- ----------------------
* The address 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 92,977 shares issuable upon exercise of options.
(8) Includes 72,608 shares issuable upon exercise of options.
(9) Includes 93,280 shares issuable upon exercise of options.
(10) Includes shares issuable upon exercise of options within 60 days.
(11) Includes 16,667 shares issuable upon exercise of options within 60 days.
(12) Includes 299,053 shares subject to options and warrants described in the
foregoing notes.
28
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
112,500 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. The shares of Series A
Preferred stock were redeemed in full in May 1996 and April 1997 at a price of
$1,000,000 plus accrued dividends.
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. Mr. Rade earned
$176, 353 and $157,758 based on the earnings of Advanced Fox for the years
ended December 31, 1997 and December 31, 1996, respectively.
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 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
December 31, 1997, December 31, 1996 and December 31,1995 were $76,000, $70,000
and $55,800, respectively.
On January 7, 1997 the Company acquired the business and related
assets of 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"). WSS, JS and their sister SG,
or their parents, William Schlesinger Sapp, the founder of the companies, and
Dolores Sapp owned
29
Battery Network, Alexander Battery and WSB. 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 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 as adjusted 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 the years ending in 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
the 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
relate to the properties.
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
30
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 $150,000 per annum. Founders is also to receive an additional fee of 5% of
the Company's annual pre-tax income in excess of $1,250,000. Under the
agreement, Founders was 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. To
determine the fees customarily charged, the Company is to review then current
proxy statements and investment publications and consult with nonaffiliated
investment bankers for the computation of originating fees in similar
transactions as those in which the Founders' originating services have been
employed. The amount of the fee is to be 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 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.
In February 1998 the Management Agreement was revised by mutual consent
to eliminate the origination and incentive fee provisions of the original
agreement, and to establish April 30, 1999 as the expiration date for the
Agreement. The revised agreement thereby limits fees paid to Founders to an
annual fee of $150,000, payable monthly.
31
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
- -------------------- ----
Consolidated Balance Sheets - December 31, 1997 and December 31, 1996... F-2
Consolidated Statement of Operations - Years ended December 31, 1997,
December 31, 1996 and December 31, 1995................................. F-3
Consolidated Statement of Stockholders Equity - Years ended
December 31, 1997 December 31, 1996 and December 31, 1995............... F-4
Consolidated Statement of Cash Flow - Years ended December 31, 1997,
December 31, 1996 and December 31, 1995................................. F-5
FINANCIAL SCHEDULES
- -------------------
EXHIBITS
- --------
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*
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(j)-1 Copy of Agreement dated January 8, 1998 between the Company and James
Sapp related to the employment agreement
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 **
10(s) Copy of Revolving Credit, Term Loan and Security Agreement, dated
January 6, 1997 among IBJ Schroder Bank & Trust Company as Agent and
the Company, Advanced Fox Antenna, Inc., Tauber Electronics Inc.,
Battery Acquisition Corp., Specific Energy Corporation, Battery
Network, Inc. and W.S. Battery & Sales Company, Inc. (the "Loan
Agreement)**
10(s)-1 Copy of Amendment No. 1 to the Loan Agreement and Joinder Agreement with
IBJ Schroder Bank & Trust Company as Agent dated May 13, 1997****
10(s)-2 Copy of Amendment No. 2 and Waiver
- -------------
* 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.
**** Filed as an exhibit to the Company's Report on Form 10-Q for the three
months ended June 30, 1997 and incorporated by reference thereto.
32
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
and Principal Financial Officer
Officer
Dated: April 14,1998
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, April 14, 1998
- --------------------------
Warren H. Haber
/S/Alan W. Baldwin Chief Executive Officer April 14, 1998
- -------------------------- and Director
Alan W. Baldwin
/s/John L. Teeger Vice President, Secretary
- -------------------------- and Director April 14, 1998
John L. Teeger
/s/Ronald E. Badke Vice President, Chief Operating
- -------------------------- Officer and Chief Financial
Ronald E. Badke Officer April 14, 1998
(Principal Financial Officer)
/s/Stephen Rade Executive Vice President and April 14, 1998
- --------------------------- Director
Stephen Rade
/s/Bruce Barnet Director April 14, 1998
- ---------------------------
Bruce Barnet
33
/s/John Simon Director April 14, 1998
- ---------------------------
John Simon
- --------------------------- Director
William Schlesinger Sapp April __, 1998
/s/Robert W. Tauber Vice President and
- --------------------------- Director
Robert W. Tauber April 14, 1998
/s/Fred Corrado Director
- ---------------------------
Fred Corrado April 14, 1998
34
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, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31,1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
April 6, 1998, April 14, 1998 as it relates to
the last paragraph of Note 5.
PART IV
ITEM 14. EXHIBITS - FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report.
1. FINANCIAL STATEMENTS - The following consolidated
financial statements of the Company and Independent
Auditors Report are filed as part of the Report:
PAGE
----
INDEPENDENT AUDITORS' REPORT................................... F-1
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND
DECEMBER 31, 1996......................................... F-2
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31,1997, DECEMBER 31, 1996 AND DECEMBER 31, 1995...... F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1997, DECEMBER 31, 1996 AND
DECEMBER 31, 1995......................................... F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1997, DECEMBER 31, 1996 AND DECEMBER 31, 1995 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................... F-6 -F-16
2. FINANCIAL STATEMENT SCHEDULES- Financial statement
schedules have been omitted because they are not
applicable, not required or the required information
has been given in the Consolidated Financial
Statements of the Company and Notes thereto.
3. Reports in Form 8-K - There were no reports on Form
8-K filed during the three months ended December 31,
1997
(b) Exhibits
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*
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(j)-1 Copy of Agreement dated January 8, 1998 between the Company and James
Sapp related to the employment agreement
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 **
10(s) Copy of Revolving Credit, Term Loan and Security Agreement, dated
January 6, 1997 among IBJ Schroder Bank & Trust Company as Agent and
the Company, Advanced Fox Antenna, Inc., Tauber Electronics Inc.,
Battery Acquisition Corp., Specific Energy Corporation, Battery
Network, Inc. and W.S. Battery & Sales Company, Inc. (the "Loan
Agreement)**
10(s)-1 Copy of Amendment No. 1 to the Loan Agreement and Joinder Agreement with
IBJ Schroder Bank & Trust Company as Agent dated May 13, 1997****
10(s)-2 Copy of Amendment No. 2 and Waiver
- -------------
* 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.
**** Filed as an exhibit to the Company's Report on Form 10-Q for the three
months ended June 30, 1997 and incorporated by reference thereto.
BATTERIES BATTERIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................................. $ 540,429 $ 2,609,611
Accounts receivable (Net of allowance for doubtful accounts
of $589,882 and $78,409, respectively).............................................. 7,637,717 2,730,158
Inventories............................................................................ 11,931,938 4,445,138
Prepaid expenses and other current assets.............................................. 580,453 219,107
Current deferred income taxes.......................................................... 219,139 27,932
----------- -----------
Total current assets.............................................................. 20,909,676 10,031,946
PROPERTY AND EQUIPMENT- Net.............................................................. 1,327,737 750,964
EXCESS OF COST OVER NET ASSETS ACQUIRED (Net of
accumulated amortization of $269,580 and $25,411, respectively)..................... 5,905,379 614,736
OTHER ASSETS............................................................................. 394,814 337,121
----------- -----------
TOTAL ................................................................................. $28,537,606 $11,734,767
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt...................................................... $ 600,000 $ 589,658
Accounts payable....................................................................... 3,107,665 1,336,270
Accrued expenses....................................................................... 2,349,626 498,857
Redeemable Preferred Stock............................................................. - 750,000
Preferred dividends payable............................................................ - 35,000
Current portion of obligations under capital leases.................................... 8,385 40,443
----------- -----------
Total current liabilities......................................................... 6,065,676 3,250,228
----------- -----------
LONG-TERM DEBT, Net...................................................................... 10,742,028 -
OBLIGATIONS UNDER CAPITAL LEASES......................................................... - 7,101
DEFERRED INCOME TAXES.................................................................... - 17,274
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.001, 1,000,000 shares authorized, no shares
issued or outstanding.............................................................. - -
Common Stock, par value $.001, 10,000,000 shares authorized, 4,743,000 shares
and 4,000,000 shares issued and outstanding, respectively.......................... 4,743 4,000
Additional paid-in capital............................................................. 10,715,830 7,999,838
Retained earnings...................................................................... 1,009,329 456,326
----------- -----------
Total stockholders' equity........................................................ 11,729,902 8,460,164
----------- -----------
TOTAL .................................................................................. $28,537,606 $11,734,767
=========== ===========
See notes to consolidated financial statements.
F-2
BATTERIES BATTERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
Net sales ............................................ $ 53,974,212 $ 25,650,075 $ 21,028,765
Cost of sales ........................................ 37,676,966 17,804,883 15,238,046
------------ ------------ ------------
Gross profit 16,297,246 7,845,192 5,790,719
Selling, general and administrative expenses 14,437,595 7,004,489 4,577,131
------------ ------------ ------------
Income from operations ............................... 1,859,651 840,703 1,213,588
Interest expense, net ................................ 727,350 14,555 80,903
Other income ......................................... (1,077) (27,098) (58,181)
------------ ------------ ------------
Income before provision (benefit) for income taxes .. 1,133,378 853,246 1,190,866
Provision (benefit) for income taxes ................. 565,375 336,920 (98,280)
------------ ------------ ------------
Net income ........................................... 568,003 516,326 1,289,146
Preferred stock dividend requirements ................ 15,000 60,000 53,333
------------ ------------ ------------
Net income attributable to common shareholders ....... $ 553,003 $ 456,326 $ 1,235,813
============ ============ ============
Net income per common share - basic and diluted ...... $ 0.12
============
Pro Forma Income Data (Unaudited)
Income before provision for income taxes as reported $ 853,246 $ 1,190,866
Pro forma income tax provision ..................... 349,831 488,255
------------ ------------
Pro forma net income ............................... $ 503,415 $ 702,611
============ ============
Pro forma net income per share - basic and diluted . $ 0.11 $ 0.16
============ ============
For the fiscal years ended December 31, 1996 and 1995, operating
results of closely held nontaxable predecessor companies have been combined
with taxable predecessor companies. Pro forma net income results are presented
using an estimated effective income tax rate of 41%, Pro forma net income per
share was based on the weighted average number of shares of common stock
outstanding prior to and after the Company's initial public offering.
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, 1995 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
Merger
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
Issuance of 550,000 shares of Common
Stock to stockholders of
Battery Network 550,000 550 2,269,200 2,269,750
Issuance of 193,000 shares of Common
Stock to stockholders of Cliffco of
Tampa Bay 193,000 193 446,792 446,985
Dividends paid (15,000) (15,000)
Net income 568,003 568,003
---------- ------- --------- ------ ----------- ------- ------------ ---------- -----------
Balance, December 31, 1997 -- $ -- -- $ -- 4,743,000 $4,743 $10,715,830 $1,009,329 $11,729,902
========== ======= ========= ====== =========== ======= ============ ========== ===========
See notes to consolidated financial statements.
F-4
BATTERIES BATTERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
OPERATING ACTIVITIES:
Net income .................................................................... $ 568,003 $ 516,326 $ 1,289,146
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense ....................................... 647,190 188,075 91,823
Deferred income taxes ....................................................... 173,933 83,700 (100,497)
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable ....................................................... (1,738,187) (213,243) (188,808)
Inventories ............................................................... (2,460,565) (465,654) 235,060
Prepaid expenses and other assets ......................................... (128,760) (293,987) (130,427)
Accounts payable and accrued expenses ..................................... 1,174,459 377,863 (589,119)
------------ ------------ ------------
Net cash (used in) provided by operating activities .................. (1,763,927) 193,080 607,178
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment, net ....................................... (633,265) (407,015) (253,535)
Acquisition of Specific Energy Corporation, net of cash acquired .............. (50,882) (719,559)
Acquisition of Battery Network, net of cash acquired .......................... (10,713,788)
Acquisition of Cliffco of Tampa Bay, net of cash acquired ..................... (846,203)
------------ ------------ ------------
Net cash used in investing activities ................................ (12,193,256) (457,897) (973,094)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from the issuance of common stock to stockholders of
Battery Network and Cliffco of Tampa Bay .................................... 2,715,985
Borrowing under Term Loan Facility ............................................ 3,000,000
Payments under Term Loan Facility ............................................. (550,000)
Borrowing under Revolving Credit Facility ..................................... 8,892,028
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 ................................................. (750,000) (250,000)
Proceeds from private placement ............................................... 1,500,000
Net payments on borrowings .................................................... (1,192,012) (213,104) (423,445)
Dividends paid ................................................................ (50,000) (78,333) (11,794)
Prepaid financing and acquisition costs relating to the
Battery Network acquisition ................................................. (178,000) (90,000)
Repayment of note to minority shareholder ..................................... (180,000)
Prepaid Offering costs ........................................................ 270,604 (270,604)
------------ ------------ ------------
Net cash provided by financing activities ............................ 11,888,001 1,928,815 794,158
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................ (2,069,182) 1,663,998 428,242
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .................................... 2,609,611 945,613 517,371
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR .......................................... $ 540,429 $ 2,609,611 $ 945,613
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest .................................................................... $ 617,520 $ 81,386 $ 87,242
============ ============ ============
Income taxes ................................................................ $ 508,071 $ 115,000 $ 27,090
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITY:
Capital lease obligations incurred ............................................ $ -- 8,641 78,958
============ ============ ============
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 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 a purchase. (In June 1996, the Company acquired the remaining minority
5% interest for cash.) On January 7, 1997, the Company acquired the
business and related assets of Battery Network, Inc. ("Battery Network")
in a business combination accounted for as a purchase. On May 12, 1997,
the Company acquired the business and related assets of Cliffco of Tampa
Bay, Inc. ("CTB") in a business combination accounted for as a purchase.
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, had been combined at the beginning of fiscal
1995 and include the results of the companies acquired since the
effective dates of their acquisitions.
The results of operations of the Founding Companies for fiscal 1996 and
1995 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. (See unaudited
pro forma information presented on the consolidated statements of
income.)
Batteries Batteries, Inc. had 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. For the year ended
December 31, 1997, the results of operations include the results of
Batteries Batteries, Inc., Advanced Fox and Tauber for a full fiscal year
and those of Battery Network and CTB from the effective dates of their
respective acquisitions. 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.
Batteries Batteries, Inc. and its subsidiaries (collectively, the
"Company") are engaged in the distribution of batteries, battery
accessories and cellular products, accessories and components in the
United States.
F-6
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, 1997.
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." Under the liability method 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.
EARNINGS PER SHARE - In December 1997, the Company adopted SFAS No. 128,
"Earnings Per Share". Net income per common share-basic was calculated
based upon the weighted average number of common shares outstanding
during the period. Net income per common share-diluted was calculated
based upon the weighted average number of common shares outstanding and
include the equivalent shares for dilutive options outstanding. The
weighted average common shares outstanding for the computation of basic
earnings per common shares for 1997 was 4,668,083. Additionally 20,720 of
equivalent common shares were included for the diluted calculation.
F-7
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying
value at December 31, 1997 and 1996 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.
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. ACQUISITIONS
On June 6, 1995, effective June 1, 1995, the Company acquired 95% of the
outstanding common stock of 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 "Specific
Energy Acquisition"). In September 1996, the Company acquired the
remaining 5% interest for approximately $51,000 in cash and repaid the
note payable of $180,000. The Specific Energy 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 Specific Energy
are included in the consolidated financial statements from the effective
date of its Acquisition.
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"), which operates principally in California,
New Jersey and Illinois (the "BN Acquisition"). The purchase price of
approximately $11.2 million consisted of (i) approximately $8.3 million
in cash, (ii) 550,000 shares of Common Stock valued at a price of $4.125
per share and five year options to purchase an additional 225,000 shares
at an exercise price of $4.50 per share, and (iii) approximately $590,000
in transaction costs.
The Battery Network agreement also 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
F-8
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 "per-tax income" as defined of Battery Network 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 ended December 31,
1998 (the "Two-Year Period:) or (iii) $6,300,000 for the three year
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 sellers also entered into employment
agreements and were granted options under the Company's Stock Option Plan
purchase an aggregate of 50,000 shares of Common Stock. During 1997,
there was no additional consideration earned or paid by the Company to
the sellers of Battery Network.
On May 12, 1997, the Company acquired the business and related assets of
Cliffco of Tampa Bay, Inc. ("CTB") (the "CTB" Acquisition). The purchase
price of approximately $615,000 consisted of (i) cash of approximately
$75,000 (ii) 193,000 shares of common stock valued at $2.35 per share or
$446,985 and (iii) approximately $93,000 in transaction costs. In
addition, the Company assumed liabilities of $1,162,000. As part of its
assumption of liabilities, the Company paid at the closing indebtedness
of CTB of approximately $560,000. The CTB agreement provides the
president and sole stockholder of the seller with a three-year employment
agreement.
The cash portion of the purchase price of each transaction, as well as
the repayment of CTB debt of $560,000 to its collateralized lender was
funded with a portion of the proceeds of a borrowing pursuant to a
Revolving Credit, Term Loan and Security Agreement, dated January 6,
1997, as amended May 13, 1997 (the "Loan Facility"), between IBJ Schroder
Bank & Trust Company, as Agent ("IBJ") and the Company and all its
subsidiaries. See Note 5 - Debt.
The BN Acquisition and CTB Acquisition were accounted for as purchases in
accordance with Accounting Principles Board Opinion No. 16. The total
purchase price, net of cash acquired, was allocated to the assets
acquired and liabilities assumed based on their estimated fair values, as
follows:
(IN THOUSANDS)
BATTERY NETWORK CTB
Accounts receivable $ 2,522 $ 648
Inventories 4,679 347
Property and equipment 185 79
Other assets 177 32
Accounts payable, accrued expenses and debt (1,307) (1,321)
Excess of cost over net assets acquired 4,458 1,061
------- ------
Total $10,714 $ 846
======= ======
The excess of the cost over the net assets acquired will be amortized
over a period of 25 years. The results of operations of Battery Network
and CTB are included with those of the Company for the periods subsequent
to the dates of acquisition.
F-9
The following unaudited pro forma summary data presents the consolidated
results of operations of the Company for the year ended December 31, 1997
and December 31, 1996, as if the BN and CTB Acquisitions had been
completed at the beginning of 1996 and does not purport to be indicative
of what would have occurred had the acquisitions actually been made as of
such date or dates or results which may occur in the future.
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
Net sales $55,767,000 $53,386,000
Net income attributable to common shareholders $ 505,000 $ 469,000
Net income per common share (basic and diluted) $ 0.11 $ 0.10
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31, DECEMBER 31,
1997 1996
Machinery and equipment $ 1,991,180 $ 947,147
Furniture and fixtures 144,389 67,779
Vehicles 60,237 60,237
Leasehold improvements 287,006 124,825
----------- ----------
2,482,812 1,199,988
Less accumulated depreciation (1,155,075) (449,024)
----------- ----------
Property and equipment, net $ 1,327,737 $ 750,964
=========== ==========
5. DEBT
Debt at December 31, 1997 consists of the following:
DECEMBER 31, DECEMBER 31,
1997 1996
Revolving term loan agreement $11,342,028
Line of credit due on demand, repaid in 1997 $ 589,658
----------- ---------
Total debt 11,342,028 589,658
Less current portion (600,000) (589,658)
----------- ---------
Long-term debt, net $10,742,028 $ --
=========== =========
The weighted average interest rates in effect on debt for the years ended
December 31, 1997 and 1996 were 8% and 8.25%, respectively.
F-10
REVOLVING TERM LOAN AGREEMENT - The Company entered into to a Revolving
Credit, Term Loan and Security Agreement, dated January 6, 1997, as
amended May 13, 1997 (the "Loan Facility"), with IBJ Schroder Bank &
Trust Company, as Agent ("IBJ"). The Loan Facility consists of a
$3,000,000 Term Loan (the "Term Loan") payable in 35 monthly installments
of $50,000 each with the balance to be paid at maturity and a Revolving
Credit Facility (the "Revolver Loan") of up to $10,000,000 to be advanced
at the rate of 80% of eligible accounts receivable and 40% of
inventories. The Revolver Loans bears interest at the rate of 1/4 of 1%
plus the higher of (i) the base commercial lending rate of IBJ or (ii)
the weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds
brokers plus 1/4 of 1%, or, at the option of the Company at the
Eurodollar rate plus 2%. The Eurodollar rate is defined as Libor for a
designated period divided by one less the aggregate reserve requirements.
The interest on the Term Loan is 1/2% higher than the interest rate on
the Revolver Loans. The Loan Facility is secured by a pledge of the
assets of the borrowers and pledge of the outstanding capital stock of
the subsidiaries of the Company. As of December 31, 1997, the principal
amounts outstanding of Term Loans was $ 2,450,000 and the Revolver Loans
was $ 8,892,028.
The Loan Facility contains certain covenants which include maintenance of
certain financial ratios, maintenance of certain amounts of working
capital and net worth as well as other affirmative and negative
covenants. At December 31, 1997, the Company was not in compliance with
certain of these covenants. On April 14, 1998, The Company entered into
an amendment to the Revolving Term Loan Agreement, whereby the
non-compliance at December 31, 1997 was waived, and the financial
covenants through December 31, 1998 were amended to reflect the Company's
current projections. The Loan Facility is secured by a pledge of assets
of the borrowers and a pledge of the outstanding capital stock of the
Company.
6. 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 as described below) 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 as described below) of
Class A Common Stock. The proceeds of the unit sale were applied to
consummate the Specific Energy Acquisition and for working capital.
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 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:
F-11
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 were
nonvoting and 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. In April 1997, the Company
redeemed the remaining 750,000 shares of the Preferred Stock at the
redemption price of $1.00 per share plus accrued dividends of 8% per
annum.
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. 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 195,000 shares of Common Stock to
employees. The options are exercisable at the initial Offering price per
share of $5.00. In 1997, the Company granted, under the Plan, five year
options to purchase an aggregate of 75,000 shares of common stock to
employees of the Company. The options are exercisable at prices ranging
from $2.80 to 4.50 per share. At December 31, 1997, there were a total of
64,280 shares available for grant.
The following information pertains to the stock options outstanding under
the Plan at December 31, 1997:
NUMBER OF PER SHARE
SHARES (OUTSTANDING)
Shares outstanding at January 1, 1996 20,720 $ 2.89
Granted 195,000 5.00
-------- ------------
Shares outstanding at December 31, 1996 215,720 2.89 - 5.00
Granted 75,000 2.80 - 4.50
Forfeited (105,000) 5.00
-------- ------------
Shares outstanding at December 31, 1997 185,720 $2.80 -$5.00
======== ============
Shares exercisable at December 31, 1997 142,386
========
F-12
The Company accounts for the Plan 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, as adjusted, would have been $ 332,486 or
$ .07 per share (basic and diluted) and $426,926 or $.10 per share (basic
and diluted) for fiscal 1997 and 1996, respectively. The Company arrived
at the fair value 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 6.0%; expected
dividend yield of 0%; expected life of 5 years; and expected volatility
of 83% and 35% for 1997 and 1996, respectively.
Additionally, in connection with the Battery Network acquisition in 1997,
the Company issued options to purchase 225,000 shares of common stock at
an exercise price of $4.50 per share and, in connection with the Tauber
acquisition in 1996, issued options to purchase 50,000 shares at an
exercise price of $5.00 per share.
WARRANTS - In connection with the Offering, the Company sold 2,300,000
redeemable warrants to purchase the Company's common stock.
Each Warrant is exercisable at a price of $5.00 per share after April 8,
1997 and is redeemable 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.
Also, in connection with the BN Acquisition, on January 7, 1997 the
Company issued five year warrants to purchase 100,000 shares of common
stock at a price of $4.125 per share.
7. 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:
FISCAL YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
1998 $ 980,684 $8,385
1999 906,855
2000 758,646
2001 671,945
2002 359,077
Thereafter 385,299
---------- ------
Total $4,062,506 8,385
==========
Less amount representing interest (278)
------
Present value of net minimum lease payments $8,107
======
Rent expense for all operating leases for the fiscal years ended December
31, 1997, 1996 and 1995 was $821,093, $245,455 and $291,331,
respectively.
F-13
9. PROFIT SHARING PLANS
Tauber and Battery Network have profit sharing plans covering
substantially all of their respective employees. Tauber makes
contributions to the plan based upon a formula of earnings. Battery
Network makes contributions to its plan at its discretion. The Company's
contributions to the plans were $ 141,123, $41,364 and $79,653 for the
years ended December 31, 1997, 1996, and 1995, respectively.
10. INCOME TAXES
The provision (benefit) for income taxes consists of:
FISCAL
------------------------------------------
1997 1996 1995
Current:
Federal $426,459 $132,561 $ --
State 147,226 120,659 2,217
-------- -------- -----------
573,685 253,220 2,217
-------- -------- -----------
Deferred:
Federal (6,902) 66,170 (83,644)
State (1,408) 17,530 (16,853)
-------- -------- -----------
(8,310) 83,700 (100,497)
-------- -------- -----------
Total provision (benefit)
for income taxes $565,375 $336,920 $ (98,280)
======== ======== ===========
The approximate tax effects of temporary differences that gave rise to
deferred tax assets (liabilities) were as follows:
DECEMBER 31, DECEMBER 31,
1997 1996
Deferred income tax assets:
Reserves not currently deductible $ 291,657 $ 27,932
--------- ---------
Deferred income tax liabilities:
Deductible Acquisition costs $ (75,174)
Excess of tax depreciation over book 2,656 $ (17,274)
--------- ---------
Net deferred tax asset $ 219,139 $ 10,658
========= =========
F-14
The effective income tax rate varied from the U.S. Federal statutory tax
rate as follows:
FISCAL
---------------------
1997 1996 1995
Statutory income tax rate 34.0% 34.0% 34.0 %
State income taxes, net of Federal tax benefit 6.9% 9.9
Subchapter S corporation income not subject to
corporate level taxation (6.9) (34.0)
Effect of converting status of corporations (8.3)
Goodwill 8.6%
Other 2.5
---- ---- -----
Effective tax rate 49.5% 39.5% (8.3)%
==== ==== ======
Prior to the Offering, Advanced Fox was organized as an S Corporation.
Also, on January 1, 1995, Tauber converted from an S Corporation to a C
Corporation. Subsequent to the Offering, all subsidiaries are taxable
entities and for Federal purposes are included in a consolidated income
tax return.
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
until January 8, 1998, 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 if 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 $150,000 per annum. 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 financing for which is
performed originating services-the fee to be that customarily charged by
nonaffiliated investment bankers or professional originators for
transactions or similar size and nature. Founders received a fee of
$150,000 for its origination and consulting services in connection with
the Mergers. Founders also received a fee of $240,000 for originating and
negotiating services in connection with the BN Acquisition and Loan
Facility, and was issued five year warrants to purchase 100,000 shares of
the company's Common Stock at a price of $4.125 per share. In connection
with the Management Agreement, the Company paid Founders $245,024 during
the year ended December 31, 1996 and $ 437,265 during the year ended
December 31, 1997. In February, 1998, the Management Agreement was
revised to eliminate the origination and incentive fee provisions of the
original agreement, and to establish April 30, 1999 as the expiration
date. The revised agreement thereby limits fees paid to Founders to an
annual fee of $150,000.
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The following is a summary of transactions with other related parties.
AS OF OR FOR THE
RESPECTIVE YEAR ENDED DECEMBER
------------------------------------
1997 1996 1995
Salary and bonus paid to stockholders $804,188 $539,750 $578,500
Interest expense paid to stockholders and
affiliates of stockholders -- 8,378 13,453
Rent expense paid to stockholders 252,551 70,000 55,800
F-16