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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACTS OF 1934
For the quarterly period ended June 30, 2002
Commission File Number 0-27996
WIRELESS XCESSORIES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3835420
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1840 COUNTY LINE ROAD
HUNTINGDON VALLEY, PA 19006
(Address of principal executive offices)
(215) 322-4600
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former
fiscal year, If changed since last
report)
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 [ ]
As of July 31, 2002, there were 5,222,080 shares of the registrant's Common
Stock, par value $.001 per share, outstanding.
1
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WIRELESS XCESSORIES GROUP, INC.
FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2002
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheet June 30, 2002
(unaudited) and December 31, 2001............................. 3
Consolidated Condensed Statements of Operations for the
three And six months ended June 30, 2002 and 2001.
(unaudited)................................................... 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001
(unaudited)................................................... 5
Notes to Consolidated Condensed Financial Statements.......... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk..........................................................11
PART II. OTHER INFORMATION
ITEM 1. Legal proceedings.............................................12
ITEM 2. Changes in Securities and Use of Proceeds.....................12
ITEM 3. Defaults upon Senior Securities...............................12
ITEM 4. Submission of Matters to a vote of Security Holders...........12
ITEM 5. Other Information.............................................12
ITEM 6. Exhibits and reports on Form 8-K..............................13
Signatures....................................................14
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
WIRELESS XCESSORIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS December 31, June 30,
2001 2002
----------- --------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 648 $ 393
Accounts receivable (net of allowance of 2,132 1,154
$432 and $519, respectively)
Inventories 1,807 1,739
Refundable income taxes 583 583
Prepaid expenses and other current assets 161 139
Current portion- notes receivable 207 189
-------- --------
Total Current Assets 5,538 4,197
PROPERTY AND EQUIPMENT - Net 1,220 982
OTHER ASSETS 460 384
-------- --------
TOTAL ASSETS $ 7,218 $ 5,563
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 57 $ 52
Bank overdraft 186 149
Accounts payable 419 565
Net liabilities on disposal of discontinued operations 103 58
Accrued payroll and related benefits 139 89
Amounts due to officer 274 240
Rent and related obligation 164 87
Other accrued expense 584 315
-------- --------
Total Current Liabilities 1,926 1,555
LONG-TERM DEBT 1,155 296
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, 5,222,080 issued 5 5
Additional paid - in capital 11,331 11,331
Accumulated deficit (7,167) (7,577)
Treasury Stock at cost 115,700 and 175,200 shares (32) (47)
-------- --------
Total Stockholders' Equity 4,137 3,712
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,218 $ 5,563
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The accompanying notes are an integral part of these
consolidated financial statements.
3
WIRELESS XCESSORIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
NET SALES $ 4,897 $ 3,644 $ 10,752 $ 7,158
COST OF SALES 2,789 1,932 5,948 3,970
----------- ----------- ----------- -----------
Gross profit 2,108 1,712 4,804 3,188
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,528 1,755 5,360 3,588
INTEREST EXPENSE, net 30 5 79 10
----------- ----------- ----------- -----------
(Loss) before income taxes (450) (48) (635) (410)
INCOME TAX (BENEFIT) (159) (--) (238) --
----------- ----------- ----------- -----------
Net(Loss) $ (291) $ (48) $ (397) $ (410)
=========== =========== =========== ===========
(Loss) per common share- Basic and Diluted $ (.06) $ (.01) $ (.08) $ (.08)
=========== =========== =========== ===========
Basic and Diluted weighted average common shares outstanding 5,197,009 5,079,799 5,207,320 5,103,432
=========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
4
WIRELESS XCESSORIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended June 30
2001 2002
------- -------
OPERATING ACTIVITIES:
Net (Loss) $ (397) $ (410)
Adjustments to reconcile net (loss) to cash
provided by operating activities-
Depreciation and amortization 316 262
Provision for doubtful account 66 87
Changes in assets and liabilities, net of effects from dispositions:
Accounts receivable 1,847 890
Inventories 1,524 68
Prepaid expenses and other assets 137 3
Accounts payable and accrued expenses (1,713) (367)
------- -------
Net cash provided by operating
activities 1,780 533
------- -------
INVESTING ACTIVITIES:
Purchase of property and equipment (98) (9)
Principal payments on notes receivables 38 99
------- -------
Net cash (used in) provided by investing activities (60) 90
------- -------
FINANCING ACTIVITIES:
Net payment on borrowings (1,927) (863)
Repurchase of company stock (18) (15)
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Net cash (used in) financing activities (1,945) (878)
------- -------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (225) (255)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 501 648
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD 276 393
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period for-
Interest $ 67 $ 12
======= =======
Income taxes net of refunds $ 69 $ 0
======= =======
The accompanying notes are an integral part of these
consolidated financial statements
5
WIRELESS XCESSORIES GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated condensed financial statements included herein have been
prepared by the management of Wireless Xcessories Group, Inc. ("Wireless
Xcessories" or the "Company") without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These statements include all
adjustments that, in the opinion of management, are necessary to provide a fair
statement of the results for the periods covered. All such adjustments are of a
normal recurring nature. These financial statements should be read in
conjunction with the audited financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2001. The results of operations for the six months ended June 30, 2002 are not
necessarily indicative of the results for the full year. Prior year amounts have
been reclassified to conform with current period presentations.
2. COMPANY OPERATIONS
On March 13, 2001, effective March 1, 2001, Advanced Fox Antenna, Inc. (Advanced
Fox), Cliffco of Tampa Bay, Inc. (Cliffco), and AccessorySolutions.Com, Inc.
(Accessory Solutions) together (the "Wireless Product Segment") entered into an
agreement to combine and merge with and into Wireless Xcessories Group, Inc.
with Wireless Xcessories Group, Inc. being the surviving Company. In October,
2001 the Company decided to shut down its Tampa Bay facility (former
headquarters of Cliffco of Tampa Bay, Inc) and subsequently completed the merger
of its remaining operations into the corporate headquarters in Huntingdon
Valley, Pennsylvania. With the decision to close the Cliffco operation and merge
its operation into Wireless Xcessories Group the Company evaluated the net
realizable value of net assets of the Cliffco business and in particular its
trade name. In connection, with this evaluation the Company determined that the
unamortized excess of cost over net assets acquired at September 30, 2001 was
not realizable and therefore, recognized a related impairment charge of $876,508
in the quarter ended September 30, 2001 financial results. Earlier in the year
the Company became involved in litigation brought by the landlord of the Tampa
Bay facility for amounts purportedly owed as a result of the Company's decision
to shut down its leased facility in December, 2001. On July 31, 2002 the parties
came to an out of court monetary settlement with the landlord relating to the
lease and its termination and related financial claims against the Company. The
settlement, which totals approximately $102,000, was fully accrued for in the
prior year and provides for two installments payable by August 31, 2002.
3. LOAN FACILITY
The Company entered into a Revolving Credit, Term Loan and Security Agreement,
dated January 6, 1997, (the "Loan Facility"), with IBJ Whitehall-Financial Group
(formerly known as IBJ Schroder Bank and Trust Company), as agent ("IBJ"). The
Loan Facility, which expires on January 7, 2004, consisted of a Term Loan
facility (which was paid off in full effective in June, 2001) and a Revolving
credit facility (the "Revolver Loan"). Currently, the Company under the Revolver
Loan facility may borrow up to $5,000,000 (less an undrawn availability of
$800,000 to be maintained at all times) to be advanced at the rate of 80% of
eligible accounts receivable and 40% of inventories. The Loan Facility is
secured by a pledge of the assets of the borrowers and a pledge of the
outstanding capital stock of the subsidiaries of the Company. The interest rate
on borrowings under the Loan Facility is equal to the sum of the alternate base
rate (as defined) plus .75% with respect to domestic rate loans or the sum of
the Eurodollar rate plus 2-1/2% with respect to Eurodollar rate loans. The Loan
Facility contains covenants that include maintenance of certain financial
ratios, amounts of earnings before interest, taxes and depreciation (EBITDA) as
defined, and net worth as well as other affirmative and negative covenants. As
of June 30, 2002, the Company was in compliance with its covenants. There was a
total of $279,507 outstanding under the credit facility as of June 30, 2002.
6
4. STOCK REPURCHASE PROGRAM
On January 11, 2001, the Board of Directors approved a stock buy back plan
whereby the Company will repurchase a total of up to 500,000 shares of common
stock at a total cost not to exceed $250,000 through July 20, 2001. The Company
has extended the buyback period to July 21, 2003. Through June 30, 2002, the
Company had repurchased 175,200 shares at an average approximate price of $.27
per share, recorded at cost as Treasury Stock in the accompanying balance sheet
as at June 30, 2002.
5. EARNINGS PER SHARE
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." The calculation of basic and diluted
earnings per share ("EPS") is reflected on the accompanying Consolidated
Statement of Operations.
Options to purchase 318,605 and 340,652 shares with the exercise prices ranging
$1.063 to $4.50 and $.28 to $4.44 were outstanding at June 30, 2001 and June 30,
2002, respectively. There were no Warrants to purchase shares outstanding as of
June 30, 2002. Because of losses incurred during the three and six months ended
June 30, 2001 and June 30, 2002, the impact of outstanding warrants and options
were not considered because the effect is anti-dilutive.
On March 12, 2002, the Board of Directors granted stock options to certain
directors to acquire 51,000 shares of common stock of the Company at an option
price equal to the fair market price on the date of the grant.
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our significant accounting policies are described in Note
1 of the Notes to Consolidated Financial Statements. The significant policies
that we believe are most critical to aid in fully understanding our reported
financial results are the following:
Inventories - Inventories, which consist solely of finished goods, are carried
at the lower of cost, determined on a first-out basis (FIFO), or market value.
We periodically review our inventory for discontinued excess inventory as part
of our effort to focus on targeted core products and the difficulties of moving
older product in a sluggish and continued lower price market. We appropriately
take non-cash charges for write-down of discontinued or excess inventory to
reflect its proper value.
Revenue Recognition-Revenue is recognized at the time of shipment. Revenue
related to the web site vendor agreements at AccessorySolutions.com, Inc. are
recognized ratably over the related contract period.
6. CONTINGENCY
The Company was notified in the fall of 2000 that certain of its products might
have infringed the patents of an original equipment manufacturer (OEM). We have
discontinued the sale of such products in question, and in early 2001 developed
alternative products to meet our customer's needs that we believe do not
infringe. Several other distributors have either settled or are in the process
of litigating similar claims with the OEM. We have outside counsel to assist us
in resolving all financial issues relating to our sales prior to the
discontinuance of alleged patent infringement. At this point, we are involved in
the information discovery phase with the OEM, which hopefully will lead to a
reasonable settlement of any and all outstanding issues. The amount of any claim
is unknown at this time and management cannot reasonably assess our liability
exposure. We believe that the possibility of an unfavorable outcome will not
have a material adverse effect on our financial position.
7. NEW ACCOUNTING PRONOUNCEMENTS
In April, 2002, the FASB issued SFAS No. 145, "Recission of FASB statements No.
4,44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). The rescission of FASB No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" applies to us. FASB No. 4 required that gains and losses
from extinguishments of debt were included in the determination of net income be
aggregated and, if material, classified as an extraordinary item, net of related
income tax effect. SFAS 145 is effective for our fiscal year beginning January
1, 2003. Effective January 1, 2003, pursuant to SFAS 145, the treatment of the
early extinguishments of debt will be included in "other expenses" in the
financial statements. Currently, the Company is assessing, but has not yet
determined, how the adoption of SFAS 145 will impact its financial position and
results of operations.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
The following table represents the Company's statement of operations data
expressed as a percentage of net sales for the respective periods:
Three Months Ended June 30 Six Months Ended June 30
2001 2002 2001 2002
----- ----- ----- -----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 57.0 53.0 55.3 55.5
----- ----- ----- -----
Gross Profit 43.0 47.0 44.7 44.5
Selling, General and administrative Expenses 51.6 48.2 49.9 50.1
Interest Expense, net 0.6 0.1 0.7 0.1
----- ----- ----- -----
Net (Loss) before Income Tax (Benefit) (9.2) (1.3) (5.9) (5.7)
Income Tax (Benefit) (3.2) 0.0 (2.2) 0.0
----- ----- ----- -----
Net (Loss) (6.0)% (1.3)% (3.7)% (5.7)%
===== ===== ===== =====
Three Months Ended June 30, 2002 ("2002") Compared to Three Months ended June
- -----------------------------------------------------------------------------
30, 2001 ("2001").
- ------------------
Net sales decreased by $1.3 million or 26% from $4.9 million in 2001 to $3.6
million in 2002. Sales continued to be negatively effected by the reduced market
demand for new cellular phones and its resultant effect on after market
accessory sales, coupled with a continuing industry trend toward significantly
lower pricing per accessory unit sold. These market factors, along with the loss
of two major customers and reduced sales to two other key customers, combined to
more than offset additional sales obtained from new customers and selected new
product offerings.
Gross profit decreased by $.4 million from $2.1 million in 2001 to $1.7 million
in 2002, but as a percentage of sales increased from 43.0% to 47.0%. The
percentage improvement was due to increased pricing and reductions in packaging
services and incentives to selected lower margin customers, favorable margins on
newer product mix, negotiated price reductions from some key vendors and
significant reductions in freight costs to customers. These factors more than
offset the overall continuing industry trend toward significantly lower pricing
per accessory unit sold and related squeeze on margins.
Selling, general and administrative (SG&A) expenses decreased approximately
$775,000 from $2.530 million in 2001 to $1.755 million in 2002, or 30.6%, and as
a percentage of sales, decreased from 51.6% in 2001 to 48.2% in 2002. This
reduction in SG&A expenses was primarily a result of the Company's continuous
cost cutting program, aided by the consolidation of the Company's warehouse and
sales, accounting and most of its administrative functions during the last nine
months of 2001 (Cliffco consolidation and shut-down). This resulted in major
reductions in areas such as advertising, printing and photography, professional
fees, bank fees corporate related expenses, postage and telephone cost, leased
and rented equipment expenses, financial and administrative expense, insurance
and office and warehouse supplies. In addition, the Company was able to reduce
its warehouse, packaging and shipping labor and related expense at a percentage
that is in excess of the sales decline percentage for the quarter due to reduced
packaging services offered to customers, the effect of having an increased
percentage of our product offerings pre-packaged by our vendors at lower cost,
and a larger percentage of our product dropped shipped direct from our vendors
to our customers. On the other hand certain costs such as occupancy are more
fixed in nature and were reduced at a much lower percentage than our sales
decline.
Net interest expense decreased from $30,000 in 2001 to $5,000 in 2002 due
primarily to substantially decreased borrowings under the Company's Loan
Facility, coupled with significantly lower effective interest rates.
The Company's effective income tax rate in calculating a possible benefit based
on the loss for the quarter in 2002 would have been 38% or a total benefit of
$18,000 but as result of a Company decision to provide an offsetting tax
valuation allowance to cover the amount of the net deferred tax asset, the net
benefit was reduced to $0. The Company has provided the tax allowance as a
result of the uncertainty that the Company will generate sufficient income in
the future to fully or partially realize the net deferred tax asset of
approximately $1,322,000 at March 31, 2002 along with the additional $18,000
added in this quarter. The 38% income tax rate effective in 2002 (before
applying the tax allowance) is compared to an effective rate of 35.0% in 2001.
The difference in rates is attributable to the effect of state net operating
losses in the various states in which the entity operates.
8
Six Months Ended June 30, 2002 ("2002") Compared to Six Months ended June 30,
- -----------------------------------------------------------------------------
2001 ("2001").
- --------------
Net sales decreased by $3.6 million or 33%, from $10.8 million in 2001 to $7.2
million in 2002. Sales continued to be negatively effected by the reduced market
demand for new cellular phones and its resultant effect on after market
accessory sales, coupled with a continuing industry trend toward significantly
lower pricing per accessory unit sold. These market factors, along with the loss
of three major customers (one of which has resumed ordering product from us in
April, 2002), and reduced sales to two other key customers, combined to more
than offset Company efforts to replace the lost volume including additional
sales obtained from new customers and selected new product offerings.
Gross profit decreased by $1.6 million from $4.8 million in 2001 to $3.2 million
in 2002 and as a percentage of sales decreased slightly from 44.7% to 44.5%. The
slight drop in percentage for the six months was a result of increased pricing
and/ reductions in packaging services and incentives to selected lower margin
customers, the loss of certain lower margin customers, favorable margins on
selected newer products, negotiated price reductions from some key vendors and
significant reductions in freight costs to customers. These actions helped to
lessen the impact of the still highly competitive market and the continued
industry trend toward significantly lower pricing per accessory unit sold and
its resultant squeeze on gross margin.
Selling, general and administrative (SG&A) expenses decreased approximately
$1,800,000 from $5.4 million in 2001 to $3.6 million in 2002, or 33.3%, but as a
percentage of sales, increased slightly from 49.9% in 2001 to 50.1% in 2002. The
$1,800,000 reduction in SG&A expenses was primarily a result of the Company's
continuous cost cutting program, aided by the consolidation of the Company's
warehouse and sales, accounting and most of its administrative functions during
the last nine months of 2001 (Cliffco consolidation and shut-down). This
resulted in major reductions in areas such as expenses, professional fees, bank
fees and warehouse, office and accounting salary expense, insurance and office
and warehouse supplies.
Net interest expense decreased from $79,000 in 2001 to $10,000 in 2002 due
primarily to decreased borrowings under the Company's Loan Facility, coupled
with significantly lower effective interest rates.
The Company's effective income tax rate in calculating a possible benefit based
on the loss for the quarter in 2002 would have been 38% or a total benefit of
$156,000, but as result of a Company decision to provide an offsetting tax
valuation allowance to cover the amount of the net deferred tax asset, the net
benefit was reduced to $0. The Company has provided the tax allowance as a
result of the uncertainty that the Company will generate sufficient income in
the future to fully or partially realize the net deferred tax asset of
approximately $1,184,000 at December 31, 2001 along with the additional $156,000
added in the six months ended June 30, 2002. The 38% income tax rate effective
in 2002 (before applying the tax allowance) is the same effective rate used in
2001. The difference in rates is attributable to the effect of state net
operating losses in the various states in which the entity operates.
9
LIQUIDITY AND CAPITAL RESOURCES:
The Company's requirements for capital are to fund (I) sales growth, (ii)
financing for possible acquisitions, (iii) repurchase of stock, and (iv) capital
expenditures mainly related to business system upgrades. The Company's primary
sources of financing during the twelve months ended June 30, 2002 were cash flow
from reductions in Accounts Receivable and Inventory, principal payments of
Notes Receivable related to the disposition of the discontinued operations
(Battery Network and Tauber) and bank borrowings.
The Company's working capital as of June 30, 2002 and 2001 were $2,642,000 and
$4,751,000, respectively. Net cash provided by operating activities for the six
months ended June 30, 2002 and 2001 were $533,000 and $1,780,000, respectively.
In 2002, the Company lost cash from operations of $61,000 from its net loss of
$410,000 as adjusted for non-cash items of depreciation and amortization of
$262,000 and bad debt provision of $87,000. Cash provided from changes in assets
and liabilities of $594,000 resulted from net decreases in accounts receivable
of $890,000, inventory of $68,000 less a decrease in accounts payable and
accrued expenses of $367,000. In 2001, The Company lost cash from operations of
$15,000 from its net loss of $397,000 as adjusted for non-cash items of
depreciation and amortization of $316,000 and a bad debt provision of $66,000.
Cash provided from changes in assets and liabilities totaled $1,795,000
resulting from net decreases in accounts receivable of $1,847,000, inventory of
$1,524,000 and prepaid expenses and other assets of $137,000 less a decrease in
accounts payable and accrued expenses of $1,713,000.
Net cash provided by investing activities for the six months ended June 30, 2002
was $90,000 resulting from note principal payments received of approximately
$99,000 relating to the sale of the discontinued operations (Battery Network and
Tauber), offset in part by the purchase of property and equipment in the amount
of $9,000. Net cash used in investing activities for the six months ended June
30, 2001 was $60,000 from purchase of property and equipment of $98,000 offset
in part by note principal payments of $38,000 relating to the sale of Battery
Network.
Cash used in financing activities for the six months ended June 30, 2002 was
$878,000 and was principally used for $835,000 net payments under the Revolver
Loan, net reductions in capital leases of $28,000 and $15,000 for the repurchase
of the Company's common stock. Cash used in financing activities for the six
months ended June 30, 2001 of $1,945,000 and was principally used for $1,788,000
net payments under the Revolver Loan, and $139,000 to pay off the Term Loans and
$18,000 for the repurchase of the Company's common stock. The Company had cash
and cash equivalents of approximately $393,000 on June 30, 2002.
The Company entered into a Revolving Credit, Term Loan and Security Agreement,
dated January 6, 1997, (the "Loan Facility"), with IBJ Whitehall-Financial Group
(formerly known as IBJ Schroder Bank and Trust Company), as agent ("IBJ"). The
Loan Facility which expires on January 7, 2004, consisted of a Term Loan
facility (which was paid off in full effective in June, 2001) and a Revolving
credit facility (the "Revolver Loan"). Currently, the Company under the Revolver
Loan facility may borrow up to $5,000,000 (less an undrawn availability of
$800,000 to be maintained at all times) to be advanced at the rate of 80% of
eligible accounts receivable and 40% of inventories. The Loan Facility is
secured by a pledge of the assets of the borrowers and a pledge of the
outstanding capital stock of the subsidiaries of the Company. The interest rate
on borrowings under the Loan Facility is equal to the sum of the alternate base
rate (as defined) plus .75% with respect to domestic rate loans or the sum of
the Eurodollar rate plus 2-1/2% with respect to Eurodollar rate loans. The Loan
Facility contains covenants that include maintenance of certain financial
ratios, amounts of earnings before interest, taxes and depreciation (EBITDA) as
defined, and net worth as well as other affirmative and negative covenants. As
of June 30, 2002, the Company was in compliance with its covenants. There was a
total of $279,507 outstanding under the credit facility as of June 30, 2002
The Company estimates that it will incur capital expenditures of approximately
$200,000 during the twelve months ended June 30, 2003, principally for business
system upgrades and to purchase machinery and equipment needed to enhance its
warehousing, distribution and assembly operations.
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 and to meet the working capital cash
and capital expenditure needs of the Company during the twelve months ending
June 30, 2003.
SEASONALITY AND INFLATION
Our quarterly operating results have fluctuated only to a limited extent in the
past. However, with the discontinuation of the Battery Segment, it is likely
that they will fluctuate significantly in the future with lower product revenues
in the first and second quarters as compared with the third and fourth quarters.
This fluctuation is due primarily to the lower demand for wireless accessories
during the winter and spring months and higher demand during the December
holiday season. Though in the fiscal year ended December 31, 2001, combined
sales for the third and fourth quarters were less than the combined sales for
the first and second quarters due to the poor cellular accessory market and loss
of key customers. In addition, our net sales could be affected in the future by
business acquisitions. The impact of inflation on the Company's operations has
not been significant to date. However, a high rate of inflation in the future
poses a risk to the Company and its ability to sustain its operating results.
10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk - The Company's only financial instruments with interest rate
risk exposure are revolving credit borrowings, which total $279,507 at June 30,
2002. Based on this balance, a change of one percent in the interest rate would
cause a change in interest expense for the six months ended June 30, 2002 of
$1,387 or $0.0003 per share (or $0.00015 per share) net of income tax calculated
using the Company's historical statutory rates, on an annual basis.
These instruments are not entered into for trading purposes and carry interest
at a pre-agreed upon percentage point spread from one of several designated base
rates. The Company's objective in maintaining variable rate borrowings is the
flexibility obtained regarding early repayment without penalties and lower
overall cost as compared with fixed-rate borrowings.
Foreign Currency Risk - The Company does not use foreign currency forward
exchange contracts or purchase currency options to hedge local currency cash
flows or for trading purposes. All sales arrangements with international
customers and suppliers are denominated in U.S. dollars. The Company's Wireless
Products Segment purchases over 80% of its products from manufacturers located
overseas, principally in the Far East. The depreciation of the U.S. dollar
against the major Asian currencies could, therefore, cause an increase in the
cost of the Company's products and adversely affect its results of operations or
financial condition.
FORWARD LOOKING STATEMENTS
Some of the information presented in this quarterly report constitutes
forward-looking statements within the meaning of the private Securities
Litigation Reform Act of 1995. Statements that are not historical facts,
including statements about management's expectations for fiscal year 2002 and
beyond, are forward looking statements and involve various risks and
uncertainties. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge, there can be no
assurance that actual results will not differ materially from the Company's
expectations. Factors that could cause the actual results to differ materially
from expectations are discussed in the Company's Annual Report on Form 10-K and
in other filings with the Securities and Exchange Commission.
11
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------------
FROM TIME TO TIME, THE COMPANY IS INVOLVED IN LITIGATION RELATING TO CLAIMS
ARISING OUT OF ITS OPERATION IN THE NORMAL COURSE OF BUSINESS. THE COMPANY IS
NOT INVOLVED IN ANY LEGAL PROCEEDINGS, WHICH WOULD, IN MANAGEMENT'S OPINION,
HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS OR RESULTS OF
OPERATIONS.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- -------------------------------------------------------
THERE HAVE BEEN NO CHANGES IN SECURITES DURING THE QUARTER ENDED JUNE 30, 2002.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ---------------------------------------------
THERE HAVE BEEN NO DEFAULTS BY THE COMPANY ON ANY SENIOR SECURITIES DURING THE
QUARTER ENDED JUNE 30, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------------
AT THE ANNUAL MEETING OF SHAREHOLDERS HELD ON JUNE 11, 2002, PURSUANT TO THE
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS DATED MAY 8, 2002, THE FOLLOWING
ACTIONS WERE TAKEN:
1. THE PROPOSAL TO ELECT, STEPHEN RADE, BRADLEY T. MCDONALD, ALLAN KALISH
AND CHRISTOPHER C. COLE AND CHRISTOPHER F. MCCONNELL DIRECTORS TO HOLD
OFFICE UNTIL THE 2002 ANNUAL MEETING OF STOCKHOLDERS AND UNTIL THEIR
SUCCESSORS ARE ELECTED AND QUALIFIED WAS APPROVED AS FOLLOWS:
ALLAN KALISH, CHRISTOPHER C. COLE AND CHRISTOPHER F.
MCCONNELL- (4,239,735 SHARES IN FAVOR, 263,148 SHARES
AGAINST; AND NO SHARES ABSTAINED) BRADLEY T. MCDONALD-
(4,199,535 SHARES IN FAVOR, 303,348 SHARES AGAINST; AND NO
SHARES ABSTAINED) STEPHEN RADE- (4,239,535 SHARES IN FAVOR,
263,348 SHARES AGAINST; AND NO SHARES ABSTAINED)
2. THE PROPOSAL TO APPOINT BDO SEIDMAN LLP AS INDEPENDENT AUDITORS FOR THE
COMPANY FOR THE FISCAL YEAR ENDING DECEMBER 31, 2002 WAS APPROVED
(4,222,393 SHARES IN FAVOR: 62,700 SHARES AGAINST; AND 217,790 SHARES
ABSTAINING.
NO OTHER MATTERS WERE SUBMITTED TO A VOTE OF THE COMPANY'S STOCKHOLDERS DURING
THE SECOND QUARTER OF THE FISCAL YEAR COVERED BY THIS REPORT THROUGH THE
SOLICITATION OF PROXIES OR OTHERWISE.
ITEM 5. OTHER INFORMATION
- --------------------------------
NONE
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Statement under oath of principal executive officer.
99.2 Statement under oath of principal financial officer.
(b) Reports on Form 8-K
None
13
SIGNATURES
Pursuant to the requirements 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.
By: /s/ Stephen Rade
-----------------------
Date: May 14, 2002 Stephen Rade
Chief Executive Officer
By: /s/ Ronald E. Badke
-----------------------
Date: May 14, 2002 Ronald E. Badke
Chief Financial Officer
14