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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2002.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______.
COMMISSION FILE NO. 0-27996
WIRELESS XCESSORIES GROUP, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 13-3835420
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State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification Number)
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1840 County Line Road, Huntingdon Valley, PA 19006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: (215) 494-0111
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
Title of Class
Over the Counter
Bulletin Board
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Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The number of outstanding shares of the Registrant's Common Stock, par value
$.001 per share, on March 3, 2003 was 5,222,080.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (computed by reference to the closing price of such stock on Over the
Counter Market on June 28, 2002 of $0.13) was approximately $503,776.
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PART I
ITEM 1. BUSINESS
Wireless Xcessories Group, Inc. ("Wireless Xcessories" or the "Company") was
founded in May 1995. We are engaged in the nationwide sale and distribution of a
wide range of accessories for cellular phones, including batteries, chargers and
antennas (collectively, "Wireless Accessories"). Our products are generally sold
through third party retailers' stores. As discussed more fully below, we have
completed the disposition of our remaining business in the Battery Segment and
have accounted for this segment as discontinued operations. The Battery Segment
involved the assembly and distribution of primarily specialty batteries as well
as a small percentage of cellular phone batteries. Prior to March 20, 2000, our
name was Batteries Batteries, Inc.
On March 13, 2001, Advanced Fox Antenna, Inc.( "Advanced Fox"), Cliffco of Tampa
Bay, Inc.("Cliffco") and AccessorySolutions.Com.("Accessory Solutions") formerly
100% wholly subsidiaries entered into an agreement to combine and merge with
Wireless Xcessories, the surviving entity. This merger has facilitated the
Company's ability to integrate and combine functions to eliminate redundancy,
improve communication and facilitate the development and implementation of
common marketing and operating strategies.
CURRENT OPERATIONS
Our headquarters for all operations are located at 1840 County Line Road,
Huntingdon Valley, Pennsylvania 19006.
The Wireless Accessories industry remains fragmented. Our strategy is to
effectively market one of the broadest and most complete lines of wireless
accessories products. We currently offer in excess of 3,000 different products.
We strive to leverage our distribution channels and relationships and provide
high quality technical expertise and service to our customers.
Our business strategy involves the following components:
o Maintain Diversity of Products and Customers. We distribute a
complete line of wireless accessories. We sell our products to
dealers, other distributors, communications carriers, mass
merchandisers and retail customers.
o Obtain Advantageous Purchasing. All our purchasing for our
distribution is under the direct control of a corporate purchasing
manager who is responsible for assuring that the vendors chosen and
the pricing they offer are the most advantageous for us.
o We offer a full retail solution to our customers providing
specialized private label retail packaging in both proprietary and
custom packaging through our semi- automated warehouse and
production facility. We also provide and offer display and point of
sale merchandising aids to an increasing proportion of our
customers.
2
o We offer an e-commerce solution to our dealer agents for cellular
phone accessories. The solution includes a full custom retail web
site help desk and order fulfillment. In addition the dealer agents
get a 30% commission check quarterly for all e-commerce sales.
o We also offer a wholesale web site where our dealer agents and
retail stores can order online to commit inventory. This has
streamlined our internal order process and facilitates the customer
reorder process.
o Strategic acquisitions, if feasible, in regional markets other than
the East Coast markets of the U.S. in which the Company is already
operating.
Products. We currently market over 3,000 wireless accessories. The product
category offerings include rechargeable batteries, personal and portable hands
free kits, hands free installation kits, portable and vehicle antennas, in-car
and travel chargers, fashionable accessory faceplates and colored housings for
cellular phones, plain and colored phone carrying cases.
Purchasing. We purchase approximately 75% of our wireless accessory products
from manufacturers located overseas, principally in the Far East. In 2002, the
Company purchased approximately 52% of its products from three Far East
suppliers with two each at 19% and one at 14% of total purchases. No other
vendor accounted for 10% or more of our purchases.
Sales. We market and sell the majority of our products to dealers, other
distributors, communications carriers, mass merchandisers and retail customers.
Additionally, we produce one product line catalog that is circulated nationally
and internationally.
Concentration. During the twelve months ended December 31, 2002, we effected
sales to more than 3,000 commercial, and retail customers. In that same period,
our two largest customers accounted for 3.6% and 3.3% of our net sales,
respectively. No customer of ours accounted for 10% or more of our net sales.
Export sales accounted for less than 3% of net sales for the period.
EMPLOYEES
As of March 3, 2003, we employed approximately 70 persons. These employees work
in the following areas of our business: one in technical operations; 20 in
telemarketing and commercial sales; 33 in packaging; warehousing, inventory
control, shipping and receiving; two in purchasing, and 14 in management and
administration. None of the employees are represented by a labor union. We
consider our relations with our employees to be satisfactory.
ENVIRONMENTAL MATTERS
Although batteries have become a very small percentage of our business as a
result of the discontinued battery operations, we continue to purchase and
distribute batteries, which contain chemicals such as lithium ion. We do not
manufacture the batteries but rather purchase the items in their finished state.
Our operations do not involve the alteration or penetration of the batteries.
Returns of our batteries are made to a recycler for disposition. We believe that
we have operated our present and former respective facilities in compliance with
applicable environmental laws and regulations. Accordingly, we do not believe
that it has any material risk of environmental liability.
3
We currently are not aware of any environmental conditions relating to present
or past waste generation at or from any of our present or former facilities or
operations, that would likely have a material adverse effect on our financial
condition or our results of operations 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
our financial condition or our results of operations.
INTELLECTUAL PROPERTY
We believe that we have all rights to trademarks and trade names necessary for
the conduct of our business. See discussion relating to the Company facing
possible patent infringement legal action in selected products in following
paragraph titled " WE FACE PATENT INFRINGEMENT LEGAL ACTIONS IN SELECTED
PRODUCTS".
DISCONTINUED OPERATIONS
Management, upon approval of the Board of Directors, disposed all of the
subsidiaries within our Battery Segment. As a result of this decision, the
Battery Segment has been accounted for as discontinued operations for all
periods presented.
On January 27, 2000, we consummated the sale of substantially all of the assets
of Tauber to Nexergy Tauber, Inc. ("NT"), a wholly owned subsidiary of Nexergy
Inc. ("Nexergy"). As consideration for the sale, we received a cash payment of
$1,005,894 on February 1, 2000 and a note in the amount of $519,708 due in 2005
with interest payments beginning upon the closing of the transaction and
principal payments commencing during the first quarter of 2002. The principal
amount of this note was subsequently reduced to $483,573 effective on March 15,
2000 to reflect a final valuation of transferred assets. The note was subject to
upward adjustment during the first quarter of 2001 based on the valuation of
certain inventory reserves. In March 2001 it was determined based on a full
valuation provided by the purchaser to us, that no adjustment was required. In
addition, NT assumed $705,669 of Tauber's liabilities. In a related transaction,
NT entered into a sub-lease with the Company to occupy approximately 19,000
square feet of our leased facility in Escondido, California, which terminated in
August 2000.
On November 6, 2000, effective October 31, 2000, the Battery Network sold
selective inventory and substantially all of its machinery and equipment, trade
names and customer lists to Ohlin Sales Corp. for a total of $200,000 in cash
and a note totaling $125,000. The note provides for twenty-four consecutive
equal monthly payments of $5,655, including interest at 8% and principal
starting on December 1, 2000 and ending on November 1, 2002. The note has a
total of $22,060 that is past due which is being held by the debtor subject to
the resolution of certain obligations which the debtor claims are due him from
the Company. On December 16, 2000 the Company sold selected remaining inventory,
and trade names related to Absolute Battery (a division and trade name of
Battery Network principally involved in the laptop battery and accessories
business) to Battery Universe for cash of $40,000 and a $10,000 note. The note,
which was paid in full effective July 2001, provided for interest at 8% along
with equal monthly principal payments commencing on January 1, 2001 and ending
on June 1, 2001.
We came to the conclusion to dispose of these operations as a result of a
shrinking sales base and continued losses in this segment. After assessing the
magnitude of the efforts that would be required to improve the profitability of
this segment, we determined that our limited managerial and financial resources
should be focused on continuing to enhance the business and profitability of the
Wireless Products Segment.
4
MANAGEMENT
In November 1999, Kenneth Rickel's term as a member of our Board of Directors
expired and Christopher C. Cole was subsequently elected by the Board to fill
the resulting vacancy in February 2000.
In November 2000, Robert Tauber's term as a member of our Board of Directors
expired and presently remains vacant.
Effective February 26, 2002 Barbara M. Henagan resigned from our Board of
Directors due to increased outside business commitments.
On and effective June, 2002 our Board elected Stephen Rade to be the Chairman of
the Board of Directors of the Company. Christopher F.McConnell, who previously
held this position, will continue to serve the Company in a director capacity.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") provide companies with a "safe harbor" when making forward-looking
statements. This "safe harbor" encourages companies to provide prospective
information.
We wish to take advantage of the "safe harbor" provisions of the Act and are
including this section in our Annual Report on Form 10-K in order to do so.
Forward-looking statements also appear in other sections of this report.
Statements that are not historical facts, including statements about
management's expectations for fiscal year 2003 and beyond, are forward-looking
statements and involve various risks and uncertainties. Factors that could cause
the actual results to differ materially from management's projections,
forecasts, estimates and expectations include, but are not limited to, the
following:
WE MAY NOT SUCCESSFULLY OFFER ATTRACTIVE MERCHANDISE TO OUR CUSTOMERS.
In order to meet our strategic goals, we must successfully locate and offer our
customers new, innovative and high quality products. Our product offerings must
be affordable, useful to the customer, well made, distinctive in design, and not
widely available from other sources. We cannot predict with certainty that we
will successfully offer products that meet these requirements in the future.
5
If our products become less popular with our customers or our competitors offer
the same or similar products as we offer at lower prices, our sales may decline
or we may decide to offer our products at lower prices. If customers buy less of
our products or if we have to reduce our prices, our revenues and profits will
decline which will have a material adverse effect on our results of operations.
In addition, we must offer our merchandise in sufficient quantities to meet the
demands of our customers and deliver this merchandise to customers in a timely
manner. We must be able to maintain sufficient inventory levels, particularly
during peak selling seasons. Our future results may be affected if we are not
successful in achieving these goals.
WE MAY NOT SUCCESSFULLY DESIGN AND DEVELOP PROPRIETARY PRODUCTS.
We are dependent to some extent on the success of our proprietary products that
the Company has designed and developed for our customers. We must in certain
cases design products that meet the demands of our customers and have these
products manufactured cost-effectively. In addition, we must rely on contracted
manufacturing resources to produce these products in sufficient quantities to
meet customer demand and deliver these products in a timely manner to our
customers. The Company relies solely on its contracted manufacturers to produce
and timely deliver these proprietary products. If we are unable to successfully
design, develop, and timely deliver our proprietary products, our operating
results may be materially adversely affected.
WE FACE CERTAIN RISKS ASSOCIATED WITH EXPANSION.
We plan to continue to increase the number of retail outlets and web sites
operated by third parties in which our products are sold. Our ability to expand
will depend in part on the following factors:
o our ability to persuade retail stores to carry our products in their
stores and web sites;
o general economic conditions; and
o the availability of sufficient funds for expansion.
We need to expand our management information systems and distribution systems to
facilitate possible future expansion plans. If we are unable to grow our
existing system, it may hinder future expansion efforts.
6
WE DEPEND ON OUR VENDORS.
Our performance depends on our ability to purchase our products in sufficient
quantities at competitive prices and on our vendors' ability to make and deliver
high quality products in a cost effective, timely manner. Some of our smaller
vendors have limited resources, production capacities and limited operating
histories. We have no long-term purchase contracts or other contracts that
provide continued supply, pricing or access to new products and any vendor or
distributor could discontinue selling to us at any time. There can be no
assurance that we will be able to acquire the products that we desire in
sufficient quantities or on terms that are acceptable to us in the future. In
addition, there can be no assurance that our vendors will make and deliver high
quality products in a cost effective, timely manner. We may also be unable to
develop relationships with new vendors. Also, all products we purchase from
vendors in the Far East must be shipped to our warehouses by freight carriers
and there can be no assurance that we will be able to obtain sufficient capacity
at favorable rates. Our inability to acquire suitable products in a cost
effective, timely manner or the loss of one or more key vendors or freight
carriers could have a negative impact on our business.
WE FACE CERTAIN RISKS RELATING TO CUSTOMER SERVICE.
Any material disruption or slowdown in our order processing systems resulting
from labor disputes, telephone down times, electrical outages, mechanical
problems, human error or accidents, fire, natural disasters, or comparable
events could cause delays in our ability to receive and distribute orders and
may cause orders to be lost or to be shipped or delivered late. As a result,
customers may cancel orders or refuse to receive goods on account of late
shipments, which would result in a reduction of net sales and could mean
increased administrative and shipping costs.
7
WE FACE RISKS ASSOCIATED WITH DISTRIBUTION.
We conduct all of our distribution and packaging operations and Internet order
processing fulfillment functions from one facility in Huntingdon Valley,
Pennsylvania. Any disruption in the operations at the distribution center could
have a negative impact on our business. In addition, we rely upon third party
carriers for our product shipments. As a result, we are subject to certain
risks, including employee strikes and inclement weather, associated with such
carriers' ability to provide delivery services to meet our shipping needs.
WE FACE PATENT INFRINGEMENT LEGAL ACTIONS IN SELECTED PRODUCTS.
We were notified in the fall of 2000 that certain of our 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 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 hired 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 resolution of any and all outstanding issues.
The amount of any possible 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.
WE EXPERIENCE INTENSE COMPETITION IN OUR MARKETS.
We operate in a highly competitive environment. We principally compete with a
variety of small distributors of cellular phone accessories that focus on a
particular segment of the market, as well as a few single large distributors
that offer a broad range of such products.
Competition in the industry is based on maintenance of product quality,
competitive pricing, delivery efficiency, customer service and satisfaction
levels, maintenance of satisfactory dealer relationships and training programs,
and the ability to anticipate technological changes and changes in customer
preferences. No assurance can be given that any of our major suppliers
(primarily located in the Far East) whose products we distribute or major
cellular phone manufacturers will not acquire, startup, and or expand their own
distribution systems to sell directly to commercial and retail customers.
8
WE MAY FAIL TO ANTICIPATE AND ADAPT TO CHANGING CONSUMER TRENDS.
Our success depends on our ability to anticipate and respond to changing product
trends and consumer demands in a timely manner. Our products must appeal to a
broad range of consumers whose preferences cannot always be predicted with
certainty and may change between sales seasons. If we misjudge either the market
for our products or our customers' purchasing habits, our sales may decline or
we may be required to sell our products at lower prices. This would result in a
negative impact on our business.
POOR ECONOMIC CONDITIONS MAY HURT OUR BUSINESS.
Certain economic conditions affect the level of consumer spending on our
products, including, among others, the following:
o general business conditions;
o interest rates;
o tax law changes;
o consumer confidence in future economic conditions.
Our business could be negatively impacted by a protracted recession or poor
economic conditions and any related decline in consumer demand for discretionary
items such as our products. Because we purchase merchandise from foreign
entities, we are subject to risks resulting from fluctuations in the economic
conditions in foreign countries. The majority of our foreign vendors and
manufacturers are located in the Far East, and as a result, our business may be
particularly impacted by changes in the political, social, legal, and economic
conditions in the Far East. Additionally, foreign weather and product
transportation problems could affect our ability to maintain adequate inventory
levels and adversely affect our future results.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL.
Our success depends to a significant extent upon the abilities of our senior
management. The loss of the services of any of the members of our senior
management or of certain other key employees could have a significant adverse
effect on our business. In addition, our performance will depend upon our
ability to attract and retain qualified management, merchandising and sales
personnel. There can be no assurance that the members of our existing management
team will be able to manage the Company or our growth or that we will be able to
attract and hire additional qualified personnel as needed in the future.
WE MUST SUCCESSFULLY RESPOND TO CHANGES IN THE RETAIL INDUSTRY.
The United States retail industry, and the specialty retail industry in
particular, are dynamic by nature and have undergone significant changes over
the past several years. Our ability to anticipate and successfully respond to
continuing challenges is critical to achieving our expectations.
9
WE COULD BE LIABLE FOR BREACHES OF SECURITY ON OUR WEB SITE AND THE WEB SITES OF
OUR PARTNERS AND FRAUDULENT ACTIVITIES OF USERS OF OUR INTERNET PAYMENT SYSTEM.
A fundamental requirement for electronic commerce is the secure transmission of
confidential information over public networks. Although we have developed
systems and processes to prevent fraudulent credit card transactions and other
security breaches, failure to mitigate such fraud or breaches may negatively
impact our financial results. The law relating to the liability of providers of
online payment services is currently unsettled.
OUR COMMON STOCK PRICE IS VOLATILE.
Our common stock was de-listed from Nasdaq National Market in 2000 and currently
trades on the Over the Counter Bulletin Board. The price of our common stock has
experienced, and is likely to experience in the future, significant price and
volume fluctuations, which could reduce the market price of the common stock
without regard to our operating performance. We believe that among other
factors, any of the risk factors outlined in the preceding paragraphs if
realized, could cause the price of the common stock to fluctuate substantially.
ITEM 2. PROPERTIES
All of our real properties are held under leases. The following table provides
certain information concerning our leased properties:
APPROXIMATE LEASE
AREA EXPIRATION
OPERATION NATURE LOCATION (SQ.FT.) DATE
-------- -------- -------- -----
Main Facility Warehouse and Huntingdon Valley, PA 52,000 5/31/05
Office 13,100 3/31/05
ITEM 3. LEGAL PROCEEDINGS
Pursuant to a Management Agreement with The Founders Management Services, Inc.
("Founders"), we paid Founders, for its origination and negotiating services in
connection with the acquisitions of Battery Network and a loan facility, the sum
of $240,000. We also issued to certain designees of Founders warrants to
purchase 100,000 shares of our Common Stock at a price of $4.125 per share.
Since June 1998 when Messrs. Haber and Teeger resigned as officers and directors
of the Company, Founders has provided no services to us and we have not paid any
fees to Founders. Although neither we nor Founders had formally terminated the
Management Agreement, we believed that both parties have conducted themselves as
if the Management Agreement had been terminated.
In December 1999, Founders filed a lawsuit in the United States District Court
for the Southern District of New York against us alleging that we owed Founders
approximately $493,000 for a purportedly improper early termination of the
Management Agreement. We settled in full all matters relating to this case with
Founders in October 2001 for a total of $228,000 of which $150,000 was paid
shortly after settlement and the balance on January 15, 2002, with mutual
releases issued and obtained by all concerned parties.
We, from time to time, are a party to other litigation arising in the normal
course of our business, most of which involves claims for amounts due from
merchandise or services purchased or merchandise sold to third parties We
believe that none of these actions will have a material adverse effect on our
financial condition or our results of operations.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was held on June 11, 2002. The following are
results of the voting on the proposals submitted to the stockholders at the
annual meeting:
Proposal No. 1: Election of Directors.
The following individuals were elected as directors:
NAME FOR AGAINST
----- --- -------
Christopher F. McConnell 4,239,735 263,148
Stephen Rade 4,239,735 263,148
Bradley T. MacDonald 4,199,535 303,348
Allan Kalish 4,239,735 263,148
Christopher C. Cole 4,239,735 263,148
There were no broker non-votes or abstentions or votes withheld with respect to
this proposal.
Proposal No. 2: Proposal to ratify the appointment by our Board of Directors of
BDO Seidman, LLP as the Company's independent auditors for the fiscal year
ending December 31, 2002.
FOR: 4,222,393
AGAINST: 62,700
ABSTAIN: 217,790
The proposal passed by a majority of the votes casts as dictated by our by-laws.
There were no broker non-votes or votes withheld with respect to this proposal.
This passed proposal was overturned when BDO Seidman, LLP was replaced with
Bagell, Josephs & Company, L.L.C. as the Company's independent auditors in
conjunction with the Current Form 8-K which was filed on December 26, 2002 (See
Item 9 and Item 15).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock and Redeemable Common Stock Purchase Warrants started trading
on the Nasdaq National Market (the "NMS") on April 8, 1996 under the symbol
"BATS" and "BATSW", respectively. On March 20, 2000, as a result of a change of
our name from Batteries Batteries, Inc. to Wireless Xcessories Group, Inc., our
Common Stock began trading under the symbol "WIRX" and the Warrants under the
symbol "WIRXW." The Warrants expired on April 8, 2000 in accordance with the
Warrant agreement and are no longer actively traded. Effective, December 19,
2000, our Common Stock began trading on the Over The Counter Bulletin Board
("OTC") resulting from a de-listing action taken by Nasdaq removing our
securities from the NMS for failure to meet certain listing requirements. The
following tables set forth the range of high and low closing prices for the
quarters indicated for the Common Stock on the NMS as reported by NMS for
calendar year 2001 and 2002 on the OTC.
11
COMMON STOCK
2001 HIGH LOW
- ----- ---- ---
FIRST QUARTER 0.59 0.125
SECOND QUARTER 0.52 0.34
THIRD QUARTER 0.52 0.02
FOURTH QUARTER 0.40 0.12
2002
- ----
FIRST QUARTER 0.37 0.10
SECOND QUARTER 0.29 0.10
THIRD QUARTER 0.29 0.12
FOURTH QUARTER 0.27 0.15
The OTC prices reflect inter-dealer quotations, without retail mark-ups,
markdowns or other fees or commissions, and may not necessarily represent actual
transactions.
There were 56 record holders of the Company's Common Stock as of March 1, 2003.
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. Our
Revolving Credit, Term Loan and Security Agreement prohibits the payment of
dividends on our Common Stock without the consent of the lender that is a party
to that agreement. A discussion of this agreement can be found in Item 7 below.
On April 23, 1999, we offered and sold a total of 389,732 shares of its Common
Stock to Christopher McConnell, and Barbara Henagan, two directors of the
Company respectively, as well as to two other related parties. Ms Henagan
subsequently resigned her position as a Director as of February 26, 2002. The
aggregate offering price for these shares was $498,800. This offering was made
pursuant to an exemption from registration under Section 4(2) of the Securities
act of 1933, as amended.
0n January 11, 2001, our Board approved a stock buyback plan whereby we will
repurchase a maximum of 500,000 shares of our Common Stock at a total cost not
to exceed $250,000 through July 20, 2003. As of December 31, 2002, we have
repurchased 344,810 shares at an average cost of $0.26 per share.
ITEM 6. SELECTED FINANCIAL DATA
INTRODUCTION
The following table sets forth the selected financial data for Wireless
Xcessories and its subsidiaries. The Income Statement Data includes the results
of operations for us and each of our subsidiaries since their dates of
acquisition (see Item 1 -- Business). The subsidiaries within the Battery
Segment (Tauber, Battery Network and Specific Energy) have been accounted for as
discontinued operations. This information should be read in conjunction with the
Consolidated Financial Statements and Notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that appear elsewhere
in this document.
12
The Selected Financial Data as of and for the years ended December 31, 1998 and
1999 have been derived from the consolidated financial results for the year
ended December 31, 1998 and 1999 audited by Deloitte & Touche LLP, and Arthur
Andersen LLP, respectively, and appear only in this section. The Selected
Financial Data as of and for the years ended December 31, 2000, 2001 and 2002
have been derived from the financial statements audited by Arthur Andersen LLP,
BDO Seidman LLP and Bagell, Josephs & Company, L.L.C., respectively, that appear
elsewhere in this report.
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME STATEMENT DATA:
NET SALES $ 24,852 $ 31,653 $ 30,128 $ 20,890 $ 14,068
COST OF SALES 13,776 16,034 15,440 12,446 7,834
-------- -------- -------- -------- --------
GROSS PROFIT 11,076 15,619 14,688 8,444 6,234
-------- -------- -------- -------- --------
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES (1) 8,906 11,558 13,010 11,179 6,757
INTEREST EXPENSE, NET 311 395 274 117 17
-------- -------- -------- -------- --------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES 1,859 3,666 1,404 (2,852) (541)
INCOME TAX EXPENSE 880 1,323 579 71 0
-------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 979 2,343 825 (2,923) (541)
DISCONTINUED OPERATIONS:
(LOSS) FROM OPERATIONS
(NET OF TAX (PROVISION)
OF $1,259, $847, $188 and $0 and $0) (2,483) (1,504) (293) 0 0
ESTIMATED LOSS ON SALE OF
SUBSIDIARIES (NET OF TAX
BENEFITS OF $0, $225, $187, $0, $0) (558) (4,277) (286) 0 0
-------- -------- -------- -------- --------
(LOSS) FROM DISCOUNTED
OPERATIONS (3,041) (5,781) (579) 0
-------- -------- -------- -------- --------
0
NET (LOSS) INCOME (2,062) (3,438) 246 (2,923) (541)
PREFERRED STOCK DIVIDEND
REQUIREMENTS 0 0 0 0 0
-------- -------- -------- -------- --------
NET (LOSS) INCOME ATTRIBUTABLE
TO COMMON SHAREHOLDERS $ (2,062) $ (3,438) $ 246 $ (2,923) $ (541)
======== ======== ======== ======== ========
13
SELECTED FINANCIAL DATA (CONTINUED)
FISCAL YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NET (LOSS) INCOME PER SHARE OF
COMMON STOCK (BASIC) $ 0.21 $ 0.47 $ 0.16 $ (0.56) $ (0.11)
======== ======== ======== ======== ========
NET (LOSS) PER SHARE OF
COMMON STOCK (BASIC)
FROM DISCONTINUING OPERATIONS $ (0.64) $ (1.15) $ (0.11) $ 0.00 $ 0.00
======== ======== ======== ======== ========
NET (LOSS) INCOME PER SHARE
ATTRIBUTABLE TO COMMON
STOCKHOLDERS (BASIC) $ (0.43) $ (0.69) $ .05 $ (0.56) $ (0.11)
======== ======== ======== ======== ========
NET (LOSS) INCOME PER SHARE OF
COMMON STOCK (DILUTED)
FROM CONTINUING OPERATIONS $ 0.21 $ 0.46 $ .16 $ (0.56) $ (0.11)
======== ======== ======== ======== ========
NET (LOSS) PER SHARE OF
COMMON STOCK (DILUTED)
FROM DISCONTINUING OPERATIONS $ (0.64) $ (1.15) $ (0.11) $ 0.00 $ 0.00
======== ======== ======== ======== ========
NET INCOME (LOSS) PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS
(DILUTED) $ (0.43) $ (0.69) $ 0.05 $ (0.56) $ (0.11)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
AS OF ENDED DECEMBER 31,
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
WORKING CAPITAL $ 11,532 $ 9,366 $ 6,535 $ 3,613 $ 2,512
TOTAL ASSETS 21,320 16,685 13,939 7,218 4,770
LONG TERM DEBT 8,865 5,505 2,859 1,155 9
STOCKHOLDERS' EQUITY 9,668 6,718 7,092 4,138 3,540
(1) During the first quarter of 2000, the Company sold most of its assets
and transferred certain liabilities of Tauber Electronics, Inc. During
the fourth quarter of 2000, the Company sold the remaining assets of
Battery Network, Inc. As these two companies represented all of the
company's remaining business within its Battery Segment, the Company
has accounted for this segment as a discontinued operation which is
reflected in all periods reported above.
(2) During the quarter ended September 30, 2001, the Company recognized an
impairment of the remaining balance of its excess of cost over net
assets acquired of $876,008. The impairment related to the significant
deterioration of Cliffco of Tampa Bay, Inc.'s business. What remained
of Cliffco's operations was merged into Wireless Xcessories Group, Inc.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Year Ended December 31, 2002 ("2002") Compared to Year Ended December 31, 2001
("2001")
Net sales decreased by 32.7% or $6.8 million from $20.9 million in 2001 to $14.1
million in 2002. Overall sales continued to be negatively effected by the
sluggish market demand for new cellular phones and its resultant effect on after
market accessory sales. The industry is still experiencing lower average pricing
per accessory unit sold due in a large part to the highly competitive market
conditions and changes in product mix. This has had a negative financial effect
on a major portion of our dealer and distributor customer base who have
continued to cut back ordering from prior year levels in reaction to lower
sales, and are actively reducing inventories. Additionally, the Company lost two
major customers, and experienced reduced sales to two other key customers due,
respectively to, bankruptcy and financial difficulties which accounted for over
two million dollars of combined sales . The above factors combined with the
Company's conscious decision to drop selected lower volume marginally profitable
accounts combined to more than offset our additional sales generated from our
new overseas vendor direct ship to customer program, and enhanced new product
offerings.
Gross profit decreased by $2.2 million or 26.2% from $8.4 million in 2001 to
$6.2 million in 2002, but as a percentage of sales increased from 40.4% to
44.3%. The increase in gross profit percentage was a result of the following:
o Reductions in charges to earnings to provide for obsolete and slower
moving inventory due primarily to enhanced controls over quantities
of new product purchased.
o The Company was able to either improve pricing and reduce packaging
services and incentives or eliminate selected lower margin or
unprofitable customers which positively effected margins.
o Higher margins on selected newer products,
o Significant reduction in freight costs to customers by tightening
free freight policies to our customers.
o Partially offset by the continued pricing pressure due to the
extremely competitive environment.
Selling, general and administrative ("SG&A") expenses decreased by 39.6% or $4.4
million, from $11.2 million in 2001 to $6.8 million in 2002, and as a percentage
of sales decreased from 53.5% in 2001 to 48.0% in 2002. A major part of the
reduction in SG&A as a percentage of sales is attributable to our recording of
an impairment charge related to the excess of cost over assets acquired related
to the Cliffco operation during the third quarter of 2001 of approximately
$876,000 or 4.2% of 2001 net sales. In factoring out the impairment loss,
operating expenses actually dropped by $3.5 million or 31.7% in comparing year
2001 to year 2002.
15
A major contributing factor in our substantial reduction in expenses was a
result of our consolidation of our warehouse, selling, accounting and most
administrative functions (Cliffco consolidation and shut-down which was fully
completed in last half of 2001). This resulted in major reductions in
duplicative personnel, administrative and occupancy expenses and selling
expenses as the Company was able to combine functions and activities while
achieving savings of direct facility costs such as rent, common area and
utilities. On July 31, 2002, the Company was able to terminate its lease on the
Cliffco facility which had a lease expiration date of August 1, 2004 through an
out of court money settlement with the landlord. The settlement which totaled
approximately $102,000 had been fully reserved in prior reporting periods and
was paid in two installments in August, 2002.
Additionally, through its on-going expense control program the Company was able
to achieve substantial percentage reductions in such areas as corporate related
expenses, professional fees, bank fees, telephone, office and warehouse
supplies, rented equipment, advertising, printing and photograph, and insurance
expense. In addition, the Company was able to reduce its warehouse, packaging
and shipping labor and related expense at a rate substantially in excess of the
sales decline percentage for the year 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 costs, and a larger percentage of
our product drop shipped direct from our vendors to our customers.
Interest expense, net of interest income, decreased $99,000 from approximately
$116,000 in 2001 to approximately $17,000 in 2002 due to substantially reduced
bank borrowings under our Loan Facility resulting principally from excess cash
provided by operations principally from the reduction of accounts receivable and
inventory during 2002, and the collection of principal and interest payments
related to notes receivable realized in the sale of the Company's Tauber and
Battery Network subsidiaries, and lower effective interest rates. The weighted
average interest rates in effect on average debt outstanding decreased from
approximately 6.7% in 2001 to 5.9% in 2002.
Our effective income tax rate decreased from 2.5% of taxable income in 2001 to
0% of the taxable loss in 2002. The decrease relates primarily to the effect of
state income taxes in the states in which we operate.
Year Ended December 31, 2001 ("2001") Compared to Year Ended December 31, 2000
("2000")
Net sales decreased by 30.7% or $9.2 million from $30.1 million in 2000 to $20.9
million in 2001. Sales were negatively affected by sluggish 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 who filed for bankruptcy in year 2000 and reduced sales to other key
customers, combined to more than offset our efforts to replace the lost volume
and expand our customer base through selling and marketing strategies.
16
Gross profit decreased by $6.3 million or 42.5% from $14.7 million in 2000 to
$8.4 million in 2001 and as a percentage of sales from 48.8% to 40.4%. The
decrease in gross profit percentage was due to additional incentives given to
customers in the form of expanded volume allowances and discounts, changes in
customer mix, lost business, price reductions to improve turns on slower moving
inventory, partially offset by improved initial selling margins on selected new
product and outbound freight reductions. In the fourth quarter of 2001 we took
an additional $570,000 (2.7% of net 2001 sales) non-cash charge for a write down
of discontinued excess inventory. This resulted from our effort to focus on
targeted core products and the difficulties of moving older product in a
sluggish and continued lower price market.
Selling, general and administrative ("SG&A") expenses decreased $1.8 million,
from $13.0 million in 2000 to $11.2 million in 2001, and as a percentage of
sales increased from 43.2% in 2000 to 53.5% in 2001. A major part of the rise in
SG&A as a percentage of sales is attributable to our recording of an impairment
charge related to the excess of cost over assets acquired related to the Cliffco
operation during the third quarter of 2001 approximately $876,000 or 4.2% of
2001 net sales. In factoring out the impairment loss, operating expenses
actually dropped by $2.7 million or 21% in comparing year 2000 to year 2001. The
reduction in expenses was primarily a result of our continuous cost cutting
program, aided by the consolidation of our warehouse, selling, accounting and
most administrative functions (Cliffco consolidation and shut-down). This
resulted in substantial reductions in such areas as professional fees, corporate
expenses, office and warehouse supplies, telephone expense, warehouse,
accounting and administrative personnel, and insurance expense. The increase in
the percentage of net sales is a result of the one-time impairment loss and our
not being able to reduce certain of our more fixed expenses, such as occupancy,
to the approximate 31% drop in sales experienced by us in 2001. Additionally,
though warehouse labor was saved through consolidation, continued lower average
prices per unit shipped and increased customized packaging and labeling to
accommodate changes in our customer needs and product mix resulted in less
overall average dollars shipped per warehouse employee.
Interest expense, net of interest income, decreased $157,000 from $273,000 in
2000 to $116,000 in 2001 due to reduced bank borrowings under our Loan Facility
resulting principally from, downsizing of Battery Network's operation during
2000, and subsequent sale of most of its assets in the November-December period
of 2000, interest income related to notes receivable realized in the Tauber
sale, cash provided by operations, and lower effective interest rates. The
weighted average interest rates in effect on average debt outstanding decreased
from 8.69% in 2000 to 6.73% in 2001.
Our effective income tax rate decreased from 41.2% of taxable income in 2000 to
2.5% of the taxable loss in 2001. The decrease is primarily attributable to a
Company decision to set up a tax valuation allowance of $1,183,966 (41.5%) of
the pre-tax loss which covers the amount of the net deferred tax asset. The tax
expense relates primarily to effects of state franchise taxes.
17
NEW ACCOUNTING STANDARDS
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This new pronouncement also amends Accounting Research Bulletin
(ARB) No. 51 "Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired and also
broadens the presentation of discontinued operations to include more disposal
transactions. SFAS 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. Adoption of SFAS 144 on
January 1, 2002, did not have any impact on the Company's financial position,
cash flows or results of operations for the year ended December 31, 2002.
This statement requires that one accounting model be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired.
This statement also broadens the presentation of discontinued operations to
include more disposal transactions. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
Adoption of SFAS 144 on January 1, 2002 did not have any impact on the Company's
financial position, cash flows or results of operations for the year ended
December 31, 2002
In April 2002, the FASB issued No. 145, "Recission of FASB Statements No. 4, 44
and 64, Amendment of FASB statement No.13, and Technical Corrections"("SFAS
145"). The recission of FASB No. 4 "Reporting Gains and Losses for
Extinguishment of Debt" applies to the Company. 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. Management does not anticipate that the
adoption of SFAS 145 will have a material impact on the Company's financial
position or results of operations.
In June 2002, the FASB issued Statement No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities"("SFAS 146"). The standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit on
Activity (Including Certain Costs Incurred in a Restructuring)" is replaced by
this statement. SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. Management does not anticipate
that the adoption of this statement will have a significant effect on the
Company's financial position or results of operations.
18
In December 2002, the FASB issued Statement No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure, an amendment of FASB Statement No. 123,
Accounting for Stock-Based Compensation" ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation.
Finally, this statement amends Accounting Principles Board ("APB") Opinion No.
28, "Interim Financial Reporting", to require disclosure about those effects in
interim financial information. SFAS 148 is effective for financial statements
for fiscal years ending after December 15, 2002. The Company will continue to
account for stock-based employee compensation using the intrinsic value method
of APB Opinion No. 25, "Accounting for Stock Issued to Employees," but has
adopted the enhanced disclosure requirements of SFAS 148.
CRITICAL ACCOUNTING POLICIES AN ESTIMATES
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 the Consolidated Financial Statements. The significant
accounting policies that we believe are most critical to aid in fully
understanding our reported financial results are the following:
Significant Estimates-- We have made a number of estimates and assumptions
related to the reporting of assets and liabilities in preparation of the
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. The most significant
estimates relate to the allowance for doubtful accounts, the reserve for
inventory obsolescence and the deferred tax valuation allowance.
In determining the adequacy of the allowance for doubtful accounts, we consider
a number of factors including the aging of the receivable portfolio, customer
payment trends, financial condition of the customer, industry conditions and
overall credibility of the customer. Actual amounts could differ significantly
from our estimates.
In determining the adequacy of the reserve for inventory obsolescence, we
consider a number of factors including the aging of the inventory, recent sales
trends, availability of the product in the market, industry market conditions
and overall economic conditions. Actual amounts could differ significantly from
our estimates.
In assessing the realizability of deferred income tax assets, we consider
whether it is more likely than not that the deferred income assets will be
realized through the future generation of taxable income.
Inventories -- Inventories, which consist solely of finished goods, are carried
at the lower of cost, determined on a first-in, first-out basis (FIFO), or
market 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.
19
LIQUIDITY AND CAPITAL RESOURCES
Our requirement for capital is to fund (i) sales growth and (ii) financing for
possible acquisitions. Our primary sources of financing during 2002 and 2001
were cash flow from operations, reduction in net assets (particularly inventory
and accounts receivable), collection of notes receivable principal and interest
relating to the sale of substantially all of the assets of Tauber and Battery
Network in January 2000 and November-December 2000, respectively, and bank
borrowings.
Our working capital as of December 31, 2002 was $2,511,635 Net cash provided by
operating activities for the years ended December 31, 2002, 2001 and 2000 was
$1,486,790, $2,226,006 and $2,724,948, respectively. In 2002, we showed a loss
of cash from operations of $257,310 from our net loss of $541,152 as adjusted
for non-cash items of depreciation and amortization of $569,079 and bad debt
provision of $229,383. Cash provided from changes in assets and liabilities
totaled $1,229,480 consisting of reductions in accounts receivable, inventory
and prepaid expenses of $873,667, $426,558 and $25,233 respectively, collection
of the federal income tax refund receivable of $582,751 less a net decrease in
accounts payable and accrued expenses of $678,729.
Our reduction in accounts receivable was mostly attributable to tighter credit
policies including the increased use of Cash on Delivery and immediate customer
credit payments on selected newer and less credit worthy accounts, coupled with
more stringent collection procedures.
The reductions in inventory are primarily the result of reduced purchases in
response to the deteriorated sales base, aggressive markdowns to move older
inventory, write off of obsolete inventory and improved inventory turns due in a
large part to tighter controls over quantities of new items purchased.
Net cash provided by investing activities in 2002 of $79,708 resulted from the
collection of $185,287 of principal payments related to the sale of discontinued
operations offset in part by capital expenditures of $105,579. Net cash used in
investing activities in 2001 of $70,804 was for capital expenditure of $141,212
net of principal payments related to the sale of Battery Network of $70,408. Net
cash provided by investing activities in 2000 of $62,745 was primarily for
capital expenditures of $1,187,075 net of cash proceeds from the sale of
substantially all of the assets of Tauber in January 2000 and Battery Network in
November and December 2000 totaling $1,005,000 and $240,000, respectively.
Capital expenditures in 2000 were primarily for automated labor saving packaging
machines, automated shipping system, warehouse and office furniture, equipment,
and improvements. We expanded warehouse capacity and relocated Advanced Fox
headquarters in 2000.
20
Cash used in financing activities for the twelve months ended December 31, 2002
totaling $1,228,555 was due to net debt repayments of $1,114,864, net payments
of capital lease obligations of $56,787 and the cost of reacquiring company
stock of $56,904. Cash used in financing activities for the twelve months ended
December 31, 2001 totaling $2,008,776 and was due to net debt repayments of
$1,962,951, net payments of capital lease debt of $14,202 and the cost of
reacquiring company stock of $31,623. Cash used in financing activities for the
twelve months ended December 31, 2000 totaling $2,652,451 was principally due to
$2,755,126 net payments in borrowings and net additions to capital lease debt of
$24,714, offset in part by proceeds from the exercise of common stock options of
$127,389.
We are party to a Revolving Credit, Term Loan and Security Agreement, dated
January 6, 1997, as subsequently amended (the "Loan Facility"), between IBJ
Whitehall-Financial Group (formerly known as IBJ Schroder Bank & Trust Company),
as Agent ("IBJ"), us and certain of our affiliates. The Loan Facility consists
of a $3,000,000 Term Loan (the "Term Loan") payable in 35 monthly installments
of $50,000 each, with the balance to be paid at maturity, and a Revolving Credit
Facility (the "Revolver Loan") of up to $10,000,000 to be advanced at the rate
of 80% of eligible accounts receivable and 50% of inventories. The Loan Facility
is secured by a pledge of the assets of the Company and a pledge of the
outstanding capital stock of our subsidiaries. On August 14, 2001, we entered
into an amended credit agreement and at management's request, to reduce the
revolving credit facility to $5,000,000 (less an undrawn availability of
$800,000 to be maintained at all times) At the same time, the interest rate we
pay to IBJ on our borrowings was increased 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 Term Loan
was paid in full effective with a final payment of $39,218 in June 2001. There
was no debt outstanding under the credit facility as of December 31, 2002.
The Loan Facility, as amended, contains certain covenants that include
maintenance of certain financial ratios, maintenance of certain amounts of
EBITDA (earnings before interest, taxes, depreciation and amortization), minimum
amounts of funds available for borrowing under its Loan Facility and limits on
capital expenditures as well as other affirmative and negative covenants. At
December 31, 2001, we were not in compliance with one of these covenants. On
March 21, 2002, we entered into an amended credit agreement whereby the
non-compliance at December 31, 2001 was waived and new financial covenants were
negotiated through December 31, 2003, which reflect our current projections. As
part of the agreement, the advance rate for borrowing on eligible inventory was
lowered from 50% to 40%. Additionally, the Loan Facility was extended for an
additional one-year period, expiring on January 7, 2004. At December 31, 2002,
we were not in compliance with two of the covenants.
21
We are in the process of negotiating with the lender a restructuring of the
existing credit facility to better reflect our current reduced borrowing
requirements. The planned restructuring of the existing credit facility may
include the receipt of a waiver of the non-compliance with the aforementioned
covenants.
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 finance the stock repurchase
program, to meet the working capital cash needs of the Company and to meet
anticipated capital expenditure needs during the 12 months ending December 31,
2003. Although we would like to issue shares of Common Stock as our primary
method of financing acquisitions, we anticipate that additional funds may be
required to successfully implement any acquisition program, and will use various
methods to finance acquisitions, including raising new equity capital. There is
no guarantee that such equity or debt financing will be available to us in the
future.
COMMITMENT:
We lease various types of warehouse and other space and equipment, furniture and
fixtures under non-cancellable operating lease agreements, which expire at
various dates. Certain leases for warehouse and other space contain rental
escalation clauses based on the Consumer Price Index. Future minimum lease
payments under non-cancellable operating leases for the years ending December
31, 2002 are as follows:
2003 $ 429,013
2004 254,286
2005 32,370
thereafter 0
-------------
Total $ 715,669
=============
During 2000, we entered into certain capital leases for equipment and office
furniture. Total future lease payments under these lease obligations are $33,603
and $7,014 in 2003, and 2004, respectively.
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 traditionally lower demand for Wireless
Accessories during the December holiday season. Though in the fiscal years ended
December 31, 2002 and 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 the timing of the loss of key customers. In
addition, our net sales could be affected in the future by business
acquisitions.
The impact of inflation on our 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 our operating results.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk - The Company did not have any interest rate risk at December
31, 2002, as there was no outstanding balance owed by the Company under its
revolving credit facility at this date.
These instruments were not entered into for trading purposes and carry interest
at a pre-agreed upon percentage point spread from one of several designated base
rates. Our objective in maintaining these variable rate borrowings is the
flexibility obtained regarding early repayment without penalties and lower
overall cost as compared with fixed-rate borrowings.
Foreign Currency Risk - We do not use foreign currency forward exchange
contracts or purchased currency options to hedge local currency cash flows or
for trading purposes. All sales arrangements with international customers and
suppliers are denominated in U.S. dollars. We purchase approximately 75% of our
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 our products and adversely affect
our results of operations or financial condition.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
[THIS PAGE INTENTIONALLY LEFT BLANK]
24
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS F-5
CONSOLIDATED STATEMENTS OF OPERATIONS F-7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-11
CONSOLIDATED SUPPORTING SCHEDULE FILED:
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS S-1
All other schedules are omitted because they are not applicable, not required,
or the information required to be set forth therein is included in the
Consolidated Financial Statements or in the Notes thereto.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Wireless Xcessories Group, Inc.
We have audited the accompanying consolidated balance sheet of Wireless
Xcessories Group, Inc. and subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. We have also audited the schedule listed in the index on
page F-1 of this Form 10-K. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements and schedule are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements and schedule. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the
consolidated financial statements and schedule. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wireless Xcessories
Group, Inc. and subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the schedule presents fairly, in all material respects, the
information set forth therein.
BAGELL, JOSEPHS & COMPANY, L.L.C.
Gibbsboro, New Jersey
March 25, 2003
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Wireless Xcessories Group, Inc.
We have audited the accompanying consolidated balance sheet of Wireless
Xcessories Group, Inc. and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit includes assessing the
accounting principles used and significant estimates made by the management, as
well as evaluating the overall presentation of the financial statements and
schedule. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wireless Xcessories
Group, Inc. and subsidiaries as of December 31, 2001 and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
March 21, 2002
F-3
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN, LLP IN
CONNECTION WITH WIRELESS XCESSORIES GROUP, INC'S FILING ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2000. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN, LLP IN CONNECTION WITH THIS FILING ON FORM 10-K, AS ARTHUR ANDERSEN,
LLP CEASED PROVIDING AUDIT SERVICES AS OF AUGUST 31, 2002. THE CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 2000 REFERRED TO IN THIS REPORT HAS NOT BEEN
INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Wireless Xcessories Group, Inc.
We have audited the accompanying consolidated balance sheet of Wireless
Xcessories Group, Inc. (a Delaware Corporation) and subsidiaries as of December
31, 2000 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
2000. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by our 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wireless Xcessories
Group, Inc. and subsidiaries as of December 31, 2000 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to the financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and in our opinion, fairly states in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statement taken as a whole.
ARTHUR ANDERSEN, LLP
Philadelphia, Pennsylvania
March 31, 2001
F-4
WIRELESS XCESSORIES GROUP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 985,438 $ 647,495
Accounts receivable (net of allowance for doubtful
accounts of $536,345 and $431,577, respectively) 1,029,158 2,132,208
Inventories 1,380,901 1,807,459
Prepaid expenses and other assets 154,254 160,972
Income tax refund receivable -- 582,751
Current maturities of Notes Receivable 183,434 207,529
---------- ----------
Total current assets 3,733,185 5,538,414
PROPERTY AND EQUIPMENT - Net 771,916 1,219,990
NOTES RECEIVABLE-NET OF CURRENT PORTION 174,623 335,815
OTHER ASSETS 90,144 124,083
---------- ----------
Total assets $4,769,868 $7,218,302
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2002 AND 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001
---------- ----------
CURRENT LIABILITIES
Current portion of long-term debt $ 31,579 $ 56,796
Bank overdraft 206,772 185,965
Accounts payable 405,421 418,917
Net liabilities of discontinued operations 58,000 103,000
Accrued payroll and related benefits 92,275 139,213
Amounts due to officer 209,313 273,897
Rent and related obligations -- 163,885
Other accrued expenses 218,190 583,821
---------- ----------
Total current liabilities 1,221,550 1,925,494
---------- ----------
LONG-TERM DEBT 8,510 1,154,944
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001, 1,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock, par value $.001, 10,000,000 shares
authorized, 5,222,080 issued 5,222 5,222
Additional paid-in capital 11,331,106 11,331,106
Accumulated deficit (7,707,993) (7,166,841)
Treasury stock, at cost, 344,810 and 78,000
shares, respectively (88,527) (31,623)
---------- ----------
Total stockholders' equity 3,539,808 4,137,864
---------- ----------
Total liabilities and stockholders' equity $4,769,868 $7,218,302
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
Net sales $ 14,067,672 $ 20,890,284 $ 30,128,028
Cost of sales 7,834,019 12,446,317 15,440,512
------------ ------------ ------------
Gross profit 6,233,653 8,443,967 14,687,516
Selling, general and administrative expenses 6,757,434 11,179,715 13,009,812
Interest expense, net 17,371 116,172 273,452
------------ ------------ ------------
(Loss) income from continuing operations
before income taxes (541,152) (2,851,920) 1,404,252
Income tax expense -- 70,766 579,036
------------ ------------ ------------
(Loss) income from continuing operations (541,152) (2,922,686) 825,216
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from operations (net of tax benefit of $0,
$0, and $187,548, respectively) -- -- (293,344)
Estimated loss on sale of subsidiaries (net of tax
benefit of $0, $0, and $186,900, respectively) -- -- (285,296)
------------ ------------ ------------
(Loss) from discontinued operations -- -- (578,640)
------------ ------------ ------------
Net (loss) income $ (541,152) $ (2,922,686) $ 246,576
============ ============ ============
(Loss) earnings per common share- Basic and Diluted:
(Loss) income from continuing operations $ (0.11) $ (0.56) $ 0.16
(Loss) from discontinued operations -- -- (0.11)
------------ ------------ ------------
Net (loss) income $ (0.11) $ (0.56) $ 0.05
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-7
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Common Stock Additional Treasury Stock
------------------------- Paid-In Accumulated -------------------------
Shares Amount Capital Deficit Shares Amount Total
------------------------- ----------- ----------- ------------------------- -----------
BALANCE, JANUARY 1, 2000 5,132,732 $ 5,133 $11,203,806 $(4,490,731) -- $ -- $ 6,718,208
Option exercises 89,348 89 127,300 -- -- -- 127,389
Net income -- -- -- 246,576 -- -- 246,576
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 5,222,080 5,222 11,331,106 (4,244,155) -- -- 7,092,173
Stock repurchased -- -- -- -- 78,000 (31,623) (31,623)
Net (loss) -- -- -- (2,922,686) -- -- (2,922,686)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2001 5,222,080 5,222 11,331,106 (7,166,841) 78,000 (31,623) 4,137,864
Stock repurchased -- -- -- -- 266,810 (56,904) (56,904)
Net (loss) -- -- -- (541,152) -- -- (541,152)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2002 5,222,080 $ 5,222 $11,331,106 $(7,707,993) 344,810 $ (88,527) $ 3,539,808
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-8
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
OPERATING ACTIVITIES:
Net (loss) income $ (541,152) $ (2,922,686) $ 246,576
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 569,079 589,874 765,545
Provision for doubtful accounts 229,383 401,196 669,565
Deferred income taxes (benefit) -- 701,974 (26,782)
Estimated loss on sale of subsidiaries -- -- 472,196
Impairment of excess cost over net assets acquired -- 876,008 --
Loss on disposition of equipment -- 93,126 --
Changes in assets and liabilities,
net of effects from dispositions:
Accounts receivable 873,667 1,525,470 1,311,486
Inventories 426,558 3,088,666 1,116,857
Income tax refund receivable 582,751 (582,751) 566,633
Prepaid expenses and other assets 25,233 280,938 (126,885)
Accounts payable and accrued expenses (678,729) (1,825,809) (2,270,243)
------------ ------------ ------------
Net cash provided by operating activities 1,486,790 2,226,006 2,724,948
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (105,579) (141,212) (1,187,075)
Proceeds from sale of subsidiaries -- -- 1,245,000
Principal payment received on note receivables 185,287 70,408 4,820
------------ ------------ ------------
Net cash provided by (used in)
investing activities 79,708 (70,804) 62,745
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements.
F-9
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
FINANCING ACTIVITIES:
Payments on capital lease obligation $ (56,787) $ (14,202) $ (24,714)
Repurchase of common stock (56,904) (31,623) --
Issuance of common stock -- -- 127,389
Net payments of borrowings (1,114,864) (1,962,951) (2,755,126)
------------ ------------ ------------
Net cash used in financing activities (1,228,555) (2,008,776) (2,652,451)
------------ ------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 337,943 146,426 135,242
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 647,495 501,069 365,827
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 985,438 $ 647,495 $ 501,069
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during year for:
Interest $ 44,000 $ 179,680 $ 353,924
Income taxes 25,000 142,854 590,758
The accompanying notes are an integral part of these consolidated financial statements.
F-10
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business description- Wireless Xcessories Group, Inc. and subsidiaries
(collectively, the "Company") are engaged in the distribution of
cellular accessories and components principally in the United States.
During the fourth quarter of 1999, the Company began selling products
via a newly created e-commerce subsidiary, AccessorySolutions.com,
Inc. On March 13, 2001, former subsidiaries of Wireless Xcessories
Group, Inc, Advanced Fox Antenna, Inc., Cliffco of Tampa Bay, Inc. and
AccessorySolutions.com, Inc. entered into an agreement to combine and
merge with Wireless Xcessories Group, Inc., the surviving Company.
Principles of Consolidation- The consolidated financial statements
include the accounts of the Wireless Xcessories Group, Inc.and its
wholly owned subsidiaries. All material intercompany transactions have
been eliminated.
Cash equivalents- The Company considers all highly liquid investments
with a maturity date of three months or less from the date of purchase
to be cash equivalents.
Concentration of Risk- The Company utilizes its excess cash to reduce
its bank borrowings. The Company has not experienced any losses on its
cash accounts or short-term investments. The Company sells its
products to commercial businesses and retail consumers. 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. Except for a
provision of approximately $190,000 resulting from a large customer
filing Chapter 7 bankruptcy in 2003, such credit losses have been
minimal. No single customers accounted for greater than 10% of
consolidated net sales during any of the years presented.
In 2002, the Company purchased approximately 52% of its products from
three Far East suppliers with two vendors accounting for 19% each and
one vendor at 14% of the total purchases.
In 2001, the Company purchased approximately 44% of its products from
our Far East supplier and one domestic supplier with each vendor
accounting for 22%.
Inventories- Inventories, which consist solely of finished goods, are
carried at the lower of cost, determined on a first-in, first-out
basis (FIFO), or market value.
F-11
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment- Property and equipment are stated at cost.
Additions and improvements are capitalized. Maintenance and repairs
are expensed as incurred. Depreciation and amortization of property
and equipment is calculated under the straight-line method over the
estimated useful lives of the respective assets. Estimated useful
lives are five to seven years for furniture and fixtures and three to
ten years for machinery and equipment. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the
terms of their leases. Depreciation and amortization expense was
$553,653, $549,059, and $561,953 in 2002, 2001 and 2000, respectively,
and is included in selling, general and administrative expense in the
consolidated statements of operations.
Other assets- Other assets consist of the Long-Term portion of Notes
Receivable received in connection with the disposition of the Battery
Segment Companies (See Note 2), as well as refundable deposits.
Excess of Costs Over Net Assets Acquired- The excess of cost over net
assets acquired prior to September 30, 2001, was 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 an impairment existed. This review was based on
comparing the carrying amounts to the undiscounted estimated cash
flows before interest charges from operations over the remaining
amortization period. During the quarter ended September 30, 2001, the
Company recognized an impairment loss of the remaining balance of its
excess of cost over net assets acquired of $876,008. This impairment
related to the significant deterioration of Cliffco of Tampa Bay,
Inc's business. What remained of Cliffco's operations were merged into
the Wireless Xcessories Group.
Revenue Recognition- Revenue is recognized at the time of shipment.
Revenue related to web site vendor agreements at
AccessorySolutions.com, Inc. is recognized ratably over the related
contract period.
F-12
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Shipping and Handling Fees- The Company records revenues derived from
shipping and handling in net sales and the costs associated with
shipping and handling in cost of sales.
Income Taxes- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under the liability method specified by
SFAS No. 109, a deferred tax asset or liability is determined based on
the difference between the financial reporting basis and tax basis of
assets and liabilities, measured using enacted tax rates. The impact
of changes in tax rates is reflected in income in the period in which
the change is enacted.
Discontinued Operations- During the first quarter of 2000, the Company
sold most of the assets and transferred certain liabilities of Tauber
Electronics, Inc. During the fourth quarter of 2000, the Company sold
the remaining assets of Battery Network, Inc. (see Note 2). As these
two companies represented all of the Company's remaining businesses
within its Battery Segment, the Company accounted for this segment as
discontinued operations.
The results of operations for the Battery Segment have been classified
as discontinued operations for all periods presented in the
consolidated statements of operations. Discontinued operations have
not been segregated in the accompanying consolidated statements of
cash flows, and, therefore, amounts of certain captions will not agree
with the respective consolidated statements of operations. Net sales
for the Battery segment were $0, $0 and $3,397,208 for the years ended
December 31 2002, 2001, 2000, respectively.
The Company allocated interest not specifically associated with any
segment based upon a ratio of net tangible assets. Interest expense
allocated to discontinued operations was $0, $0 and $50,000 in 2002,
2001, and 2000 respectively.
F-13
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per share- Basic earning per share (EPS) is computed using
the weighted average number of common shares outstanding for the
period while diluted EPS is computed assuming conversion of all
dilutive securities such as options. Included below is a
reconciliation of shares for the basic and diluted EPS computations.
2002 2001 2000
--------- --------- ---------
Basic EPS Shares 5,040,657 5,185,089 5,193,731
Dilutive effect of stock options
and warrants -- -- 60,598
--------- --------- ---------
Diluted EPS shares 5,040,657 5,185,089 5,254,329
========= ========= =========
Options to purchase 302,152, 315,612, and 112,960 shares with exercise
prices ranging from $.28 to $5.00 and warrants to purchase 0, 100,000,
and 100,000 shares with an exercise price of $4.13 were outstanding at
December 31, 2002, 2001, and 2000, respectively, but were not included
in the computation of diluted EPS because the option's exercise price
was greater than the average market price of the common shares.
Disclosures About Fair Value of Financial Instruments- The carrying
values of cash, cash equivalents, and long-term debt approximate their
respective fair values.
Employee Stock Options- The Company applies Accounting Principles
Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees," which recognizes compensation costs based on the intrinsic
value of an equity instrument.The Company has applied APB No. 25 to
its stock compensation awards to employees and has disclosed the
required pro forma effect on net (loss) income per share in accordance
with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and has adopted the enhanced disclosure provisions of
SFAS No. 148 "Accounting for Stock-Based Compensation- Transition and
Disclosure, an amendment of SFAS No. 123" (See Note 5).
Reclassifications- Certain prior year amounts have been reclassified
to conform to current year presentation.
F-14
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates in the Preparation of Financial Statements- The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS-
In October 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS
144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes SFAS
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions." This new pronouncement also amends Accounting
Research Bulletin (ARB) No. 51 "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. SFAS 144 requires that one
accounting model be used for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired and also
broadens the presentation of discontinued operations to include more
disposal transactions. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those
fiscal years. Adoption of SFAS 144 on January 1, 2002, did not have
any impact on the Company's financial position, cash flows or results
of operations for the year ended December 31, 2002.
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 recission of FASB No. 4,
"Reporting Gains and Losses for Extinguishment of Debt" applies to the
Company. 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 the
Company's 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. Management does not anticipate that the adoption
of SFAS 145 will not expected to have a material impact on the
Company's financial position and results of operations.
F-15
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 2002, the FASB issued Statement No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). The
standard requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of
commitment to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee
severance costs that are associated with restructuring, discontinued
operation, plant closing, or other exit or disposal activities.
Previous accounting guidance provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit on Activity (Including Certain Costs Incurred in a
Restructuring)" is replaced by this statement. SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. Management does not anticipate that the adoption of
this statement will have a significant effect on the Company's
financial position or results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of
FASB Statement No. 123"("SFAS 148"). SFAS 148 amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. Finally, this Statement
amends Accounting Principles Board ("APB") Opinion No. 28, "Interim
Financial Reporting", to require disclosure about those effects in
interim financial information. SFAS 148 is effective for financial
statements for fiscal years ending after December 15, 2002. The
Company will continue to account for stock-based employee compensation
using the intrinsic value method of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," but has adopted the enhanced
disclosure requirements of SFAS 148.
F-16
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - ACQUISITONS AND DIVESTITURES
Effective January 1, 1997, the Company acquired the business and
related assets of Battery Network, Inc. and affiliated companies
("Battery Network"), which operated principally in California. The
purchase price was approximately $11.2 million including transaction
cost. The Battery Network acquisition agreement also provided the
sellers with contingent consideration through a certain subsequent
period. Such additional consideration was not earned.
In accordance with the decision to exit the Battery Segment (see Note
1- Discontinued Operations), the Company evaluated the net realizable
value of net assets of the Battery Network business. In connection
with this evaluation, the Company determined that the unamortized
excess of cost over net assets acquired at December 31, 1999 was not
realizable and, therefore, recognized a related impairment loss of
$3,939,470 in 1999.
On January 27, 2000, the Company sold substantially all of the assets
and certain liabilities of Tauber Electronics, Inc. for $1,489,427,
consisting of cash of $1,005,854 and a note receivable of $519,708
bearing interest of 1% above prime, as defined and payable over five
years. Any outstanding principal or accrued interest is due in full on
January 26, 2005. The principal amount of this note was subsequently
reduced to $483,573, effective on March 15, 2000, to reflect the final
valuation of transferred assets.
On November 6, 2000, the Company sold selective inventory and
substantially all of its machinery and equipment, trade names and
customer lists of Battery Network, Inc. to Ohlin Sales Corp. for
$200,000 in cash and a $125,000 note. The note provided for
twenty-four consecutive equal monthly payments of $5,655 including
interest at 8% and principal starting on December 1, 2000 and ending
on November 1, 2002. The note has a total of $22,620 that is past due,
which is being withheld by the debtor subject to the resolution of
certain obligations which the debtor claims are due him from the
Company. On December 16, 2000, the Company sold selected remaining
inventory, and trade names related to Absolute Battery (a division and
trade name of Battery Network principally involved in the laptop
battery and accessories business) to Battery Universe for cash of
$40,000 and a $10,000 note.
F-17
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2- ACQUISITONS AND DIVESTITURES (CONTINUED)
The note, which was paid in full effective July 2001, provided for
interest at 8% payable monthly along with equal monthly principal
payments commencing on January 1, 2001 and ending on June 1, 2001. The
Company retained accounts receivable, inventory and all outstanding
liabilities as of October 31, 2000. The Company physically shut down
the remaining Battery Network operation in January 2001, and achieved
an early termination of its existing lease obligation in June 2001.
The related loss on the sale and disposition of Battery Network of
($285,296, net of $186,900 tax benefit) has been reflected in the
estimated loss on sale of subsidiaries within the net loss from
discontinued operations in the 2000 consolidated statement of
operations.
NOTE 3 - PROPERTY AND EQUIPMENT - NET
Property and equipment consists of the following:
DECEMBER 31,
2002 2001
----------- -----------
Machinery and equipment $ 2,440,634 $ 2,335,055
Furniture and fixtures 416,153 416,153
Vehicles 38,463 38,463
Leasehold improvements 246,926 246,926
----------- -----------
3,142,176 3,036,597
Less accumulated depreciation
and amortization (2,370,260) (1,816,607)
----------- -----------
Property and equipment, net $ 771,916 $ 1,219,990
=========== ===========
F-18
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
2002 2001
----------- -----------
Revolving Credit Facility $ -- $ 1,114,864
Capital Leases 40,089 96,876
----------- -----------
40,089 1,211,740
Less current portion (31,579) (56,796)
----------- -----------
Long-term debt, net of current portion $ 8,510 $ 1,154,944
=========== ===========
The weighted average interest rates in effect on debt for the years
ended December 31, 2002, 2001, and 2000 were 6.9%, 6.7% and 8.7%,
respectively.
The Company entered into a Revolving Credit, Term Loan and Security
Agreement, dated January 6, 1997, as subsequently amended (the "Loan
Facility"), with IBJ Whitehall- Financial Group (formerly known as IBJ
Schroder Bank and Trust Company), as Agent ("IBJ"). The Loan Facility
consisted 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 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. On August 14, 2002
the Company entered into an amended credit agreement and at
management's request, to reduce the revolving credit facility to
$5,000,000 (less an undrawn availability of $800,000 to be maintained
at all times). At the same time, the interest rate the Company pays to
IBJ on its borrowings was increased 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 term loan was paid in full effective with a final payment
of $39,218 in June 2001. There was no debt outstanding under the
credit facility as of December 31, 2002.
F-19
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - LONG-TERM DEBT (CONTINUED)
The Loan Facility, as amended, contains certain covenants, which
include maintenance of certain financial ratios, maintenance of
certain amounts of EBITDA (earnings before interest, taxes,
depreciation, and amortization), minimum amounts of funds available
for borrowing under its Loan Facility and limits on capital
expenditures as well as other affirmative and negative covenants. It
also prohibits the payment of dividends on common stock without the
consent of the lender. At December 31, 2001, the Company was not in
compliance with one of these covenants. On March 21, 2002, the Company
entered into an amended credit agreement whereby the non-compliance at
December 31, 2001 was waived and new financial covenants were
negotiated through December 31, 2003, which reflect the Company's
current operating projections. As part of the agreement, the advance
rate for borrowing on eligible inventory was lowered from 50% to 40%.
Additionally, the Loan Facility was extended for an additional
one-year period, expiring on January 7, 2004. At December 31, 2002,
the Company was not in compliance with two of the covenants. The
Company is in the process of negotiating with the lender a
restructuring of the existing credit facility to better reflect its
current reduced borrowing requirements. The planned restructuring of
the existing credit facility may include the receipt of a waiver of
the non-compliance with the aforementioned covenants.
NOTE 5 - STOCKHOLDERS' EQUITY
PREFERRED STOCK- The Board of Directors of the Company, without action
by the stockholders, is authorized to issue shares of Preferred Stock
in one or more series and, within certain limitations, to determine
the voting rights (including the right to vote as a series on
particular matters), preferences as to dividends and in liquidation,
conversion, redemption, and other rights of each such series. The
Board of Directors could issue series with rights more favorable with
respect to dividends, liquidation and voting than those held by the
holders of any class of Common Stock.
COMMON STOCK- The shares of Common Stock have one vote per share. None
of the shares have preemptive or cumulative voting rights, redemption
rights, are or will be liable for assessment or further calls. The
holders of the Common Stock are entitled to dividends when declared
from funds legally available therefore.
F-20
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
On January 11, 2001, the Board of Directors approved a stock buyback
program 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 10, 2003. As of December 31, 2002 and 2001, the Company has
repurchased 266,810 and 78,000 shares at an average price of $0.21 and
$0.41 per share, respectively.
On June 11, 2002, the Board of Directors approved an issuance of
10,000 shares of the Company's Common Stock to each of the four
non-employee directors of the Company for a total of 40,000 shares.
Compensation expense of $6,000 has been accrued in the financial
statements as of December 31, 2002 since these Common Stock Shares
have not yet been issued.
STOCK OPTIONS- The Company, on June 6, 1995, adopted the Company's
Stock Option Plan (the "Plan"), which as amended in December 1995,
authorizes the Board of Directors or a Stock Option Committee
appointed by the Board to grant up to 250,000 qualified stock options
and non-qualified stock options to officers and key employees,
directors, and independent consultants. Directors who are not
employees and consultants are eligible only to receive non-qualified
stock options. The Board of Directors in 1995 granted under the Plan
options to purchase 20,720 shares of Common Stock to two directors at
a price of $2.89 per share. In 1996, the Company granted under the
Plan five-year options to purchase an aggregate of 195,000 shares of
Common Stock to employees. The options are exercisable at the initial
offering price per share of $5.00. In 1997, the Company granted, under
the Plan, five-year options to purchase an aggregate of 75,000 shares
of Common Stock to employees of the Company. The options are
exercisable at prices ranging from $2.80 to $4.50 per share. In 1998,
the shareholders of the Company approved an amendment to the Plan
increasing the number of shares granted by 350,000 to an aggregate
total of 600,000 for the Plan. In addition in 1998, the Company
granted, under the Plan, five-year options to purchase an aggregate of
455,000 shares of Common Stock to directors and employees of the
Company. The options are exercisable at prices ranging from $1.38 to
$2.69 per share. In 1999, the Company granted, under the Plan,
one-year options to purchase 85,000 shares of Common Stock to a
director of the Company. The options are exercisable at prices ranging
from $1.38 to $1.88 per share. The Company also granted, under the
Plan, ten-year options to purchase 95,000 shares of Common Stock to
directors and employees of the Company. The options are exercisable at
$1.38 per share.
F-21
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
In 2000, the stockholders of the Company approved an amendment to the
Plan increasing the number of shares reserved for issuance by 400,000
to an aggregate of 1,000,000 under the Plan. In addition in 2000, the
Company granted, under the Plan, ten-year options to purchase an
aggregate of 138,500 shares of Common Stock to directors and employees
of the Company. In 2001, the Company granted, under the Plan, ten-year
options to purchase a total of 65,000 shares of Common Stock at $.375
per share to the directors of the Company. In 2002, the Company
granted, under the plan, ten-year options to purchase a total of
51,000 shares of Common Stock at $0.28 per share to the directors of
the Company. At December 31, 2002 and 2001, there were a total of
608,500 and 595,040, respectively, shares available for grant.
The following information pertains to the stock options outstanding
for the three years ending December 31, 2002:
Outstanding Exercisable
--------------------- --------------------
Weighted Wtd. Avg.
Number of Average Options Exercise
Shares Share Price Shares Price
-------- -------- -------- --------
Options outstanding at January 1, 2000 355,532 $ 2.23 301,365 $ 2.37
Granted 138,500 1.54
Exercised (89,348) (1.43)
Forfeited (60,572) (2.23)
-------- -------- -------- --------
Options outstanding at December 31, 2000 344,112 2.16 244,112 2.44
Granted 65,000 0.37
Forfeited (93,500) (2.86)
-------- -------- -------- --------
Options outstanding at December 31, 2001 315,612 1.58 244,112 1.78
Granted 51,000 0.28
Forfeited (64,460) (2.62)
-------- -------- -------- --------
Options outstanding at December 31, 2002 302,152 $ 1.18 256,152 $ 1.21
======== ======== ======== ========
The following table summarizes information as of December 31, 2002
concerning currently outstanding and exercisable options:
Option Outstanding Options Exercisable
------------------------------------------------ -----------------------------------
Weighted
Average
Remaining
Contractual Weighted Weighted
Range of Number Life Average Number Average
(Years) Outstanding (Years) Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------
$0.28-$0.375 109,000 8.7 $ 0.33 83,500 $ 0.35
$1.01-$2.00 182,152 5 $ 1.43 161,652 $ 1.43
$4.01-$5.00 11,000 7.1 $ 4.44 11,000 $ 4.44
F-22
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
The outstanding stock options as of December 31, 2002 vest as follows:
(a) half of the options shares are vested on the date of the grant
with an additional one-half vesting in the first anniversary therefrom
(230,652 options outstanding at December 31, 2002); or (b) one-third
of the option shares are vested on the date of the grant with an
additional one-third vesting on the first and second anniversaries
there from, respectively (15,000 options outstanding at December 31,
2002); or (c) one-fifth of the options shares are vested on the date
of grant with an additional one-fifth vesting on the first, second,
third, and forth anniversaries therefrom, respectively (56,500 shares
outstanding at December 31, 2002).
As provided for in SFAS No. 123, "According for Stock-Based
Compensation," The Company utilizes the intrinsic value method of
expense recognition under APB No. 25. Accordingly, no compensation
cost has been recognized for the stock option plans as all options
have been issued with exercise prices equal to fair market value. Had
compensation expense for the stock option plans been determined
consistent with the provisions of SFAS No. 123 and SFAS No. 148, the
Company's net income and net income per share would have been the pro
forma amounts indicated below:
2002 2001 2000
------------- ------------- -------------
As reported (loss) income
from continuing operations:
Add: Stock-based compensation $ (541,152) $ (2,922,686) $ 825,216
expense included in reported (loss)
income from continuing operations
net of related tax effects -- -- --
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of related
tax effects (24,086) (46,612) (82,054)
------------- ------------- -------------
Pro forma (loss) income from
continuing operations $ (565,238) $ (2,969,298) $ 743,162
============= ============= =============
Basic (loss) income from
continuing operations per
common share:
As reported $ (0.11) $ (0.56) $ 0.16
Pro forma (0.11) (0.57) 0.14
Diluted (loss) income from
continuing operations per
common share:
As reported $ (0.11) $ (0.56) $ 0.16
Pro forma (0.11) (0.57) 0.14
F-23
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
The weighted average fair value of those options granted during the
years ended December 31, 2002, 2001, and 2000 was estimated as $ 0.26,
$0.34, and $1.07, respectively. The fair value of each option grant
was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
risk-free interest rate of 5.7%, 5.6%, and 6.6% for 2002, 2001, and
2000, respectively; expected dividend yield of 0%; expected life of
6.9 years; and expected volatility of 100%, 100%, and 119% for 2002,
2001, and 2000, respectively.
Additionally, in connection with the Battery Network acquisition in
1997, the Company issued options to purchase 225,000 shares of common
stock at an exercise price of $4.50 per share, and, in connection with
the Tauber acquisition in 1996, issued options to purchase 50,000 at
an exercise price of $5.00 per share.
WARRANTS- In connection with their initial public offering, the
Company sold 2,300,000 redeemable warrants to purchase the Company
Common Stock.
Each warrant was exercisable at a price of $5.00 per share after April
8, 1997 and is redeemable by the Company thereafter at a price of
$0.01 per warrant upon not less than 30 days' prior written notice if
the last sale price of the Common Stock has been at least $7.50 per
share on the 20 consecutive trading days ending on the third day prior
to the date on which the notice of redemption is given. On April 8,
2000, the warrants expired at the close of trading in accordance with
the terms of the warrant agreement.
Also, in connection with the acquisition of Battery Network, on
January 7, 1997 the Company issued five-year warrants to purchase
100,000 shares of Common Stock at a price of $4.125 per share. No such
warrants have been exercised and expired January 2002.
F-24
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - INCOME TAXES
The provision (benefit) for income taxes on continuing operations
consists of:
2002 2001 2000
--------- --------- ---------
Current:
Federal $(181,271) $(582,751) $ 718,124
State (21,379) (48,457) 183,659
--------- --------- ---------
(202,650) (631,208) 901,783
--------- --------- ---------
Deferred:
Federal 181,271 559,006 (257,015)
State 21,379 142,968 (65,732)
--------- --------- ---------
202,650 701,974 (322,747)
--------- --------- ---------
Total provision
for income taxes $ -- $ 70,766 $ 579,036
========= ========= =========
In conformity with SFAS No. 109, deferred tax assets and liabilities
are classified based on the financial reporting classification of the
related assets and liabilities, which give rise to temporary book/tax
differences. Deferred taxes related to the following temporary
differences:
DECEMBER 31,
2002 2001
---------- ----------
Deferred income tax assets:
Benefit of net operating loss carryforward $ 769,181 $ 155,789
Accrued compensation 79,539 104,081
Inventory reserve 80,073 372,406
Bad debts reserve 203,811 163,999
Sales returns and allowances 35,090 54,857
Goodwill 305,790 324,713
Other 11,571 46,285
---------- ----------
1,485,055 1,222,130
Deduct: Deferred income tax liabilities:
State taxes 25,713 38,164
---------- ----------
Valuation allowance 1,459,342 1,183,966
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
F-25
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - INCOME TAXES (CONTINUED)
The effective income tax rate varied from the U.S. Federal statutory
tax rate as follows:
2002 2001 2000
----- ----- -----
Statutory income tax rate (34.0%) (34.0%) 34.0%
State income (benefit) taxes,
net of federal tax benefit (4.0) (4.0) 5.5
Meals and entertainment -- -- 0.7
Other (0.5) (1.0) 1.0
Valuation allowance 38.5 41.5 --
----- ----- -----
Effective tax rate 0% 2.5% 41.2%
===== ===== =====
As of December 31, 2002, the Company has federal and state net
operating loss carry forward amounts of approximately $1,877,000 and
$3,270,000 respectively. These net operating loss carryforward amounts
begin to expire in 2011. SFAS No. 109 requires the establishment of a
deferred tax asset for all deductible temporary difference including
operating loss carryforwards. The Company has provided a valuation
allowance for all of its deferred tax assets 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 $1,459,000. At December 31, 2002, the deferred tax asset
has been offset by a valuation allowance of the same amount.
Under the Tax Reform Act of 1986, the utilization of a corporation's
net operating loss carryforward is limited following a greater than
50% change in ownership. Due to the Company's prior and current equity
transactions, the Company's net operating loss carryforwards may be
subject to an annual limitation generally determined by multiplying
the value of the Company on the date of the ownership change by the
federal long-term tax exempt rate. Any unused annual limitation may be
carried forward to future years for the balance of the net operating
loss carryforward period.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
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). The Company discontinued the sale of such products
in question, and in early 2001 developed alternative products to meet
its customer needs that it believes do not infringe.
F-26
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Several other distributors have either settled or are in the process
of litigating similar claims with the OEM. The Company has outside
counsel to assist it in resolving all financial issues relating to the
Company's sales prior to the discontinuance of alleged patent
infringement. At this point, the Company is still involved in the
information discovery phase with the OEM, which hopefully will lead to
a reasonable resolution of any and all outstanding issues.
The amount of any claim if any should arise is unknown at this time
and management cannot reasonably assess our liability exposure, if
any. The Company believes that the possibility of an unfavorable
outcome will not have a material adverse effect on its financial
position.
The Company is, from time to time, party to litigation arising in the
normal course of its business. Based on consultation with legal
counsel, management of the Company does not believe that any such
claims or litigation will have a material adverse effect on the
financial position or results of operations of the Company.
The Company leases various types of warehouse and other space and
equipment, furniture, and fixtures under non-cancelable operating
lease agreements, which expire at various dates. Certain leases for
warehouse and other space contain rental escalation clauses based on
the Consumer Price Index. Future minimum lease payments under
non-cancelable operating leases for the years ending December 31 are
as follows:
2003 $429,013
2004 254,286
2005 32,370
thereafter --
--------
Total: $715,669
========
Rent expense exclusive of common area maintenance, where applicable
for all operating leases for the years ended December 31, 2002, 2001
and 2000 was $378,950, $533,035, and $452,707, respectively.
During 2000, the Company entered into certain capital leases for
equipment and office furniture. Total future lease payments under
these lease obligations are $33,603 and $7,014 in 2003 and 2004,
respectively.
F-27
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company leases certain office space in Pennsylvania from an
affiliate of the current Chief Executive Officer. The lease expired on
December 31, 1999 and was on a month-to-month basis until the mutually
agreed termination date of April 30, 2000. Rent expense related to
this lease was $0, $0, and $76,000 in 2002, 2001, and 2000,
respectively.
The Company employs Susan Rade, wife of Stephen Rade, current Chief
Executive Officer of the Company, as a sales person with certain
administrative duties. In this role, Mrs. Rade earns the bulk of her
compensation as part of the Company's sales incentive commission
programs earning $229,047, $253,760, and $329,981, in 2002, 2001, and
2000, respectively, including draws, commission and a $36,000 salary
for administration duties.
Messrs. Warren H. Haber, the former Chairman of the Board, and John L.
Teeger, the former Vice President, Secretary and Director of the
Company, were the sole stockholders, officers and directors of
Founders Management. Pursuant to the Management Agreement between
Founders and the Company date as of June 6, 1995, as subsequently
amended, Founders was to provide advice and consultative services
regarding management, overall strategic planning, acquisition policy,
relations with commercial and investment banking institutions, and
stockholder matters to or on behalf of the Company. In addition to an
annual base fee of $150,000 and a fee based on the Company's profits,
Founders was entitled to receive originating fees with respect to
acquisitions or financings for which it performed originating
services.
In February 1998, the Management Agreement was revised by mutual
consent to, among other things, eliminate the origination and
incentive fee provisions of the original agreement. The revised
agreement thereby limited fees that were payable to Founders to an
annual fee of $150,000, payable monthly
In addition to an annual fee, Founders was issued five-year warrants
to purchase 100,000 shares of the Company's Common Stock, at a price
of $4.125 per share. These warrants expired on January 7, 2002.
Since May 1998, when Messrs. Haber and Teeger resigned as officers and
directors of the Company, Founders has provided no services to the
Company and the Company has not paid any fees to Founders. Although
neither the Company nor Founders has formally terminated the
Management Agreement, both parties have acted as if the Management
Agreement has been terminated. Founders alleged that the Company
improperly repudiated this Management Agreement and sought damages. In
March 2000, the Company filed an answer to the lawsuit and asserted
counterclaims against Founders related to the Management Agreement.
F-28
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - RELATED PARTY TRANSACTIONS (CONTINUED)
In October 2001, the Company settled in full all matters relating to
this lawsuit for $228,000, effectively ending any Founders current or
future claims relating to the Management Agreement.
NOTE 9 - SEGMENT DISCLOSURE
As a result of the decision to exit the Battery Segment, the Company
effectively operates in one business segment, the Wireless Products
Segment, which distributes cellular telephone accessory products
including batteries, chargers, and antennas throughout North and South
America. The Wireless Products Segment is headquartered in Huntingdon
Valley, Pennsylvania and through March 28, 2001 consisted of Advanced
Fox Antenna, Cliffco of Tampa Bay, Inc. and AccessorySolutions.com,
Inc. Effective on March 1, 2001, the Companies merged with Wireless
Xcessories Group, Inc. (The Surviving Company) and fully consolidated
its operations during 2001. All revenue and essentially all long-lived
assets were related to operations in the United States as of and for
the years ended December 31, 2002, 2001, and 2000.
Export sales for the years ended December 31, 2002, 2001, and 2000
were as follows:
2002 2001 2000
-------- -------- --------
Europe, Middle East & Africa $ -- $101,792 $111,677
Asia and Pacific -- 130,965 7,387
Americas excluding United States 285,703 333,899 452,857
-------- -------- --------
$285,703 $566,656 $571,921
======== ======== ========
Receivables from export sales at December 31, 2002 and 2001 were
$37,344 and $36,866 respectively.
F-29
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - QUARTERLY RESULTS (UNAUDITED)
The following table summarizes selected quarterly financial data for
2002 and 2001: (Dollars in thousands)
2002 3/31 6/30 9/30 12/31
---- ----------- ----------- ----------- -----------
Net sales $ 3,514 $ 3,644 $ 3,657 $ 3,253
Gross Profit 1,476 1,712 1,689 1,357
Net (loss) income (362) (48) 98 (229)
Basic and diluted net (loss) income per share $ (0.07) $ (0.01) $ 0.02 $ (0.05)
Weighted average common shares
outstanding (Basic and Diluted) 5,127,329 5,079,799 5,031,805 4,926,003
2001
----
Net sales $ 5,855 $ 4,897 $ 4,867 $ 5,271
Gross Profit 2,696 2,108 1,936 1,704
Net loss (106) (291) (1,226) (1,300)
Basic and diluted net (loss) per share $ (0.02) $ (0.06) $ (0.24) $ (0.25)
Weighted average common shares
outstanding (Basic and Diluted) 5,217,747 5,197,009 5,175,005 5,151,350
F-30
SCHEDULE II
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THREE YEARS ENDED DECEMBER 31, 2002
Balance at Balance
Beginning At End
Description of Year Additions Deductions of Year
- -------------------------------------------------------------------------------------------
Inventory reserves 2000 $ 282,492 615,046 (373,258) $ 524,280
2001 524,280 1,527,009 (1,071,272) 980,017
2002 980,017 440,667 (1,209,985) 210,699
Allowance for doubtful
accounts 2000 120,467 647,758 (504,949) 263,276
2001 263,276 361,196 (192,895) 431,577
2002 431,577 304,206 (199,438) 536,345
S-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On December 26, 2002 , the Company engaged Bagell, Josephs & Company, L.L.C., as
the Company's independent accountants for the fiscal year ended December 31,
2002, replacing BDO Seidman, LLP, as the current auditors. As of December 31,
2002 there are no changes in or disagreements with Bagell, Josephs & Company,
L.L.C. nor BDO Seidman LLP on accounting practices or financial disclosures. See
Company's Current Report on Form 8-K on December 26, 2002 for further
discussion.
On April 17, 2001, the Company engaged the accounting firm of BDO Seidman, LLP
as independent public accountants for the fiscal year ended December 31, 2001
replacing Arthur Andersen LLP, as the current auditors. As of December 31, 2001,
there are no changes in and disagreements with BDO Seidman, LLP nor Arthur
Andersen, LLP on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth as of March 1, 2003, the name of each of our
directors and executive officers, his principal occupation and the nature of all
positions and offices with us held by him. Our directors will hold office until
the next Annual Meeting of Stockholders.
FIRST
BECAME
NAME AGE OFFICE DIRECTOR
- ----- --- ------ --------
Stephen Rade 65 President, Chief Executive 1996
Officer and Chairman of the Board
Christopher F. McConnell 49 Director 1998
Ronald E. Badke 57 Chief Financial Officer and Secretary 1995
Allan Kalish 77 Director 1998
Christopher C. Cole 47 Director 2000
Bradley T. MacDonald 55 Director 1999
Each executive officer serves at the discretion of the Board of Directors.
Mr. Rade has been our Chairman of the Board since June, 2002 and President and
Chief Executive Officer since June 1998. From 1996 until June 1998, he was
Executive Vice President of the Company. He has been a director since April
1996. He has been the President, Chief Executive Officer and a director of
Advanced Fox Antenna, Inc. since he founded that company in 1990.
25
Mr. McConnell has been a director of the Company since December 1998 while
holding the title of Chairman of the Board through June 2002. In addition, he is
principal of The Founders Group, an organization dedicated to helping launch
new, technology-based companies. Mr. McConnell also co-founded CFM Technologies,
Inc., a semiconductor capital equipment company and until it merged into Matson
Technology in March 2001. He currently serves as a director of Mi8 Corporation,
a leading application software provider (ASP), where he had previously been
Chairman of the Board.
Mr. Badke has been our Chief Financial Officer since November 1995 and Secretary
since March 1999. He was a Senior Vice President and the Chief Financial Officer
of Shoe Town Inc. from 1984 through September 1994, positions he later held
(September to November 1995) with Natures Elements. Mr. Badke, a certified
public accountant, had been a consultant from October 1994 through August 1995.
Mr. Kalish has been a director since 1998. He is the owner of Kalish &
Associates, a consulting firm specializing in marketing, advertising and public
relations, which he founded in 1986. Kalish & Associates serves advertisers,
marketers and advertising agencies throughout the country, including three New
York Stock Exchange companies. Prior to founding Kalish & Associates, Mr. Kalish
managed Kalish & Rice, Inc., one of the largest advertising agencies in
Philadelphia. Mr. Kalish served as a member of the Board of Directors of
Checkpoint Systems, Inc., a New York Stock Exchange company, from 1993 to 1997.
Mr. MacDonald was elected a director in March 1999. He is the Chairman of the
Board and Chief Executive Officer of Medifast, Inc (MDFT.OB), a position he has
held since January 1998. Prior thereto, he was appointed as Program Director of
the U.S. Olympic Coin Program of the Atlanta Centennial Olympic Games. Mr.
MacDonald was previously employed by HealthRite as its Chief Executive Officer
from September 1996 to August 1997. From 1991 through 1994, Mr. MacDonald was
Deputy Director and Chief Financial Officer of the Retail, Food and Hospitality
and Recreation Business for the United States Marine Corps.
Mr. Cole was elected as a director in February 2000. He is currently the CEO of
Intelligrated, Inc., a position he has held since June of 2001. From April 2000
to June 2001 Mr. Cole served as President of Cole Consulting. Until the
acquisition of Pinnacle Automation by FKI, Plc. in early 2000, Mr. Cole was
employed by Pinnacle Automation as its Chief Operating Officer and served as a
director of Pinnacle Automation since June 1997 and as Executive Vice President
from March 1994 to June 1997. Mr. Cole served as Vice President of Cincinnati
Milacron, from 1987 through March of 1994.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers and persons who own more than ten
percent of its Common Stock to file with the Securities and Exchange Commission
and The Nasdaq Stock Market initial reports of ownership and reports of changes
in ownership of Common Stock and other equity securities of the Company.
26
To the best of our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations with respect to the year
ended December 31, 2002, our officers, directors and greater than ten percent
shareholders were in compliance with all applicable Section 16(a) filing
requirements.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the years ended December 31, 2002, 2001, and
2000; the compensation for services rendered in all capacities to the Company
and subsidiaries by the Chief Executive Officer and the Company's other
executive officer for the year ended December 31, 2002.
SUMMARY COMPENSATION TABLE
--------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY
--------------------------- ---- ------
Stephen Rade 2002 $198,000
Chief Executive Officer 2001 198,000
President and Chairman of the Board 2000 198,000
Ronald E. Badke 2002 $146,000
Chief Financial Officer and 2001 135,000
Secretary 2000 135,000
EMPLOYMENT AGREEMENTS
The employment agreements between the Company and each of Messrs. Rade and Badke
terminated on April 1998 and March 1999, respectively.
COMPENSATION OF DIRECTORS
The Company does not pay a fee to its directors. It reimburses those directors
who are not employees of the Company for their expenses incurred in attending
meetings.
The Company previously had approved the annual grant of stock options to
purchase the Company's common stock to certain directors in accordance with the
1995 Stock Option Plan. Specifically, the board approved the following grants:
o to the chairperson of the board (if not also an employee of the
Company): 15,000 options to purchase shares of common stock (the
"Chairperson Options");
o to every other director (if not also an employee of the Company):
8,000 options to purchase shares of common stock (the "Director
Options"); and
27
o to each director who is a member of the board committee: 3,000
options to purchase shares of common stock multiplied by the number
of committees on which the director sits ("Committee Options").
A director who receives Chairperson Options may not also receive Director
Options, unless the board determines otherwise.
Half of any options granted vest on the date they are granted, with the
remaining half vesting one year later; provided that these options will
terminate and never vest if the director receiving them does not attend at least
75% of the meetings of the board (or meetings of the applicable board committee,
in the case of Committee Options) held during the one year period following the
date the options are granted.
In June 2002, the Board approved the issuance of 40,000 shares of the Company's
Common Stock to its non-employee directors for service on the Board and its
various committees. This includes a total of 10,000 shares each to Christopher
McConnell, Christopher Cole, Bradley MacDonald and Alan Kalish, respectively. As
of March 24, 2003, these shares had not yet been issued.
STOCK OPTIONS
Under the Company's 1995 Stock Option Plan (the "Plan"), the Company's board of
directors or a stock option committee appointed by the board may grant stock
options to officers, key employees, directors, and independent consultants of
the Company. Currently, 1,000,000 shares of the Company's common stock are
reserved for issuance under the Plan.
The following table sets forth the details of the options held at the end of the
year December 31, 2002 by the executive officers set forth in the Summary
Compensation Table. Mr. Rade and Mr. Badke were not granted options under the
Plan during the year 2002.
FISCAL YEAR END OPTION VALUES
NUMBER OF SHARES UNDERLYING
UNEXERCISED OPTIONS AT FISCAL
YEAR END (1)
--------------------------------
NAME EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------
Stephen Rade 25,000 0
Ronald E. Badke 12,000 8,000
(1) The exercise price of all outstanding options at December 31, 2002 was
greater than the market value of the shares covered by those options.
28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 3, 2003, as
supplied to the Company, regarding the beneficial ownership of the Common Stock
by all persons known to the Company who own more than 5% of the outstanding
shares of the Company's Common Stock, each director of the Company, each
executive officer of the Company named in the Summary Compensation Table
included elsewhere in this report and all executive officers and directors as a
group. Unless otherwise indicated, based on information provided to the Company
by the directors, executive officers and principal shareholders, the persons
named in the table below have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them.
NUMBER OF SHARES
NAME* BENEFICIALLY OWED (1) PERCENTAGE (2)
- ----- --------------------- --------------
Christopher F. McConnell (3) 201,067 3.9%
Stephen Rade (4) 1,198,000 22.9%
Ronald E. Badke (5) 12,000 --**
Christopher C. Cole (6) 75,312 1.4%
Allan Kalish (7) 71,500 1.4%
Bradley T. MacDonald (8) 33,000 --**
Directors and Officers as a group 1,590,879 30.5%
(6 persons)(9)
*The business address of each shareholder named in this table, is Wireless
Xcessories Group, Inc., 1840 County Line Road, Huntingdon Valley, PA 19006.
**Less than 1%.
(1) For purposes of this table, a person or group is deemed to have "beneficial
ownership" of any shares which such person has the right to acquire within 60
days.
(2) Percentage ownership is based on 5,222,080 shares of Common Stock
outstanding on March 3, 2003. For purposes of computing the percentage of
outstanding shares held by each such person or group of persons named above, any
security which such person or group of persons has the right to acquire within
60 days is deemed to be outstanding, but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
(3) Includes exercisable options to purchase 45,000 shares.
(4) Includes exercisable options to purchase 25,000 shares.
(5) Includes exercisable options to purchase 12,000 shares.
(6) Includes exercisable options to purchase 42,000 shares.
(7) Includes exercisable options to purchase 64,000 shares.
(8) Includes exercisable options to purchase 33,000 shares.
(9) Includes exercisable options to purchase 221,000 shares.
29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We employ Susan Rade, wife of Stephen Rade, current CEO, as the highest volume
sales person with certain administrative functions. In this role, Mrs. Rade
earns the bulk of her compensation as part of our sales incentive commission
programs earning $229,047, $253,760, and $329,981 in the twelve months December
31, 2002, 2001 and 2000, respectively, including draws, commission and a $36,000
salary for administrative duties.
We lease certain office space in Pennsylvania from an affiliate of our current
Chief Executive Officer Stephen Rade. The lease expired on December 31, 1999 and
was on a month-to-month basis until the mutually agreed termination date of
April 30, 2000. Rent expense related to this lease was $0, $0, and $76,000 in
2002, 2001, and 2000, respectively.
Rental payments under the lease for the twelve months ended December 31, 2002,
2001 and 2000 were $0, $0, and $25,704, respectively.
PRIOR MANAGEMENT
Messrs. Warren H. Haber, the former Chairman of the Board, and John L.Teeger,
the former Vice President, Secretary and Director of the Company, were the sole
stockholders, officers and directors of Founders. Pursuant to the Management
Agreement between Founders and us dated as of June 6, 1995, as subsequently
amended, Founders was to provide advice and consultative services regarding
management, overall strategic planning, acquisition policy, relations with
commercial and investment banking institutions, and stockholder matters to or on
behalf us. In addition to an annual base fee of $150,000 and a fee based on our
profits, Founders was entitled to receive originating fees with respect to
acquisitions or financings for which it performed originating services.
In February 1998, the Management Agreement was revised by mutual consent to,
among other things, eliminate the origination and incentive fee provisions of
the original agreement. The revised agreement thereby limited fees that were
payable to Founders to an annual fee of $150,000, payable monthly.
In addition to an annual fee, Founders was issued five-year warrants to purchase
100,000 shares of our Common Stock, at a price of $4.125 per share. These
warrants expired on January 7, 2002.
Since May 1998, when Messrs. Haber and Teeger resigned as officers and directors
of the Company, Founders has provided no services to the Company and the Company
has not paid any fees to Founders. Although neither us nor Founders has formally
terminated the Management Agreement, both parties have acted as if the
Management Agreement has been terminated. Founders have initiated a lawsuit
against us with respect to this Management Agreement. In a lawsuit filed in
November 1999, Founders alleged that we improperly repudiated this Management
Agreement and sought damages. In March 2000, we filed an answer to the lawsuit
and asserted counterclaims against Founders related to the Management Agreement.
In October 2001 we settled in full all matters relating to this lawsuit,
effectively ending any Founders current or future claims relating to the
Management Agreement.
30
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As of March 25, 2003, we completed an evaluation, under the supervision and with
the participation of our management, including our chief executive officer and
chief financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, our chief executive
officer and chief financial officer concluded that the Company's disclosure
controls and procedures were effective.
Changes in Internal Controls
There have not been any significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report.
1. and 2. FINANCIAL STATEMENTS -- The financial statements and
schedules required by this item begin on page F-1 of this report. The
Reports of Independent Certified Public Accountants appear on pages
F-2, F-3 and F-4 of this report.
3. EXHIBITS -- The following is a list of exhibits. Where so
indicated by footnote, exhibits, which were previously filed, are
incorporated by reference.
(b) REPORTS ON FORM 8-K
On December 26, 2002, we filed a Current Form 8-K with respect to the
fact that on December 26, 2002 we replaced BDO Seidman LLP as the
Company's independent auditors and appointed Bagell, Josephs &
Company, L.L.C. to audit the Company's consolidated financial
statements for the year ended December 31, 2002.
31
EXHIBIT
NUMBER
3.1 Certificate of Incorporation of Company and amendments thereto*
3.2 By-Laws*
4.1 Form of Common Stock Certificate*
4.2 Form of Warrant*
10.1 Warrant Agreement related to Redeemable Stock Purchase Warrants*
10.2 Form of Purchase Option issued to underwriter of initial public
offering*
10.3 Form of Preferred Stock, Series A Certificate*
10.4 1995 Stock Option Plan of Company*
10.5 Forms of Option Agreement under the Plan
10.6 Option issued to Mr. Robert W. Tauber*
10.7 Management Services Agreement between the Company and Founders
Management Services, Inc., as amended*
10.8 Lease between Advanced Fox Antenna, Inc. and Rade Limited Partners*
10.9 Registration Rights Agreement between the Company and Messrs. Tauber
and Rade*
10.10 Revolving Credit, Term Loan and Security Agreement, dated January 6,
1997 among IBJ Schroder Bank & Trust Company as Agent and the Company,
Advanced Fox Antenna, Inc., Tauber Electronics Inc., Battery
Acquisition Corp., Specific Energy Corporation, Battery Network, Inc.
and W.S. Battery & Sales Company, Inc.**
10.11 Amendment No. 1 and Joinder Agreement dated __________ among the
Company, certain of its affiliates and IBJ Schroder Bank & Trust
Company***
10.12 Waiver and Amendment to Revolving Credit, Term Loan and Security
Agreement dated __________ by and among the Company, certain of its
affiliates and IBJ Schroder Bank & Trust Company****
10.13 Waiver and Amendment to Revolving Credit, Term Loan and Security
Agreement dated __________ by and among the Company, certain of its
affiliates and IBJ Schroder Bank & Trust Company*****
32
10.14 Asset Purchase Agreement dated Jan 26, 2000 with respect to the sale of
substantially all of the assets of Tauber Electronics, Inc.******
10.15 Agreement and Plan of Merger dated February 28, 2001, by and among
Wireless Xcessories Group, Inc., Accessory Solutions.com Inc., Advanced
Fox Antenna, Inc. and Cliffco of Tampa Bay.
10.16 Waiver and Amendment to Revolving Credit, Term Loan and Security
Agreement dated March 30, 2001 by and among the Company, certain of its
affiliates and IBJ Schroder Bank & Trust Company
10.17 Form of Warrant issued to each of Warren H. Haber and John L. Teeger**
16 Letter re: Change in Certifying Accountant
21 List of Subsidiaries
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 33-80939) and incorporated by reference thereto.
** Filed as an exhibit to the Company's Current Report on Form 8-K for
January 7, 1997 and incorporated by reference thereto.
*** Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the three months ended June 30, 1997 and incorporated by reference
thereto.
**** Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated by reference hereto.
***** Filed as an exhibit to the Company's Quarterly Report for the three
months ended June 30, 1998 and incorporated by reference thereto.
****** Filed as an exhibit to the Company's Current Report on Form 8-K for
January 27, 2000 and incorporated by reference thereto.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of Sarbanes-Oxley Act of 2002
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WIRELESS XCESSORIES GROUP, INC.
By: /s/ Stephen Rade
-------------------------------------
Stephen Rade
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the date indicated.
NAME TITLE DATE
---- ----- ----
/s/ Christopher F. McConnell Chairman of the Board April 14, 2003
- -----------------------------
Christopher F. McConnell
/s/ Ronald E. Badke Chief Financial Officer and April 14, 2003
- ----------------------------- Secretary (principal financial officer)
Ronald E. Badke
/s/ Stephen Rade Chief Executive Officer April 14, 2003
- ----------------------------- President and Director
Stephen Rade (principal executive officer)
/s/ Allan Kalish Director April 14, 2003
- -----------------------------
Allan Kalish
/s/ Christopher C. Cole Director April 14, 2003
- -----------------------------
Christopher C. Cole
/s/ Bradley T. MacDonald Director April 14, 2003
- -----------------------------
Bradley T. MacDonald
34
CERTIFICATION PURSUANT TO RULE 13-A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Stephen Rade, certify that:
1. I have reviewed this annual report on Form 10-K of Wireless Xcessories
Group, Inc. and subsidiaries.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report.
3. Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report:
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared.
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the evaluation date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
35
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: March 25, 2003
/s/ Stephen Rade
-----------------------------------
Stephen Rade
Chairman and Chief Executive Officer
36
CERTIFICATION PURSUANT TO RULE 13-A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Ronald E. Badke, certify that:
1. I have reviewed this annual report on Form 10-K of Wireless Xcessories
Group, Inc. and subsidiaries.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report.
3. Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report:
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared.
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the evaluation date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
37
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: March 25, 2003
/s/ Ronald E. Badke
-----------------------------------
Ronald E. Badke
Chief Financial Officer and Secretary
38