UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number 0-27996
BATTERIES BATTERIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-383-5420
(State of other jurisdiction (IRS Employer incorporation
or organization) Identification No.)
Building IEB
Chimney Rock Road
Bound Brook, New Jersey 08805
(Address of principal executive offices)
(732) 764-0619
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of June 30, 1999, there were 5,132,231 shares of common stock
outstanding.
<PAGE 1>
BATTERIES BATTERIES, INC.
FORM 10-Q FOR THE PERIOD ENDED June 30,1999
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Financial Statements
Consolidated Balance sheets June 30, 1999
(unaudited) and December 31, 1998............... 3
Consolidated Statements of Income for the
six months ended June 30, 1999(unaudited)
and 1998 (unaudited)............................ 4
Consolidated Statements of Cash Flows For the
six months ended June 30, 1999 (unaudited)
and 1998 (unaudited)............................ 5
Notes to Consolidated Financial Statements........ 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 12
PART II - OTHER INFORMATION........................... 20
<PAGE 2>
BATTERIES BATTERIES, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share and Per Share Data)
December 31, June 30,
1998 1999
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 330 $ 412
Accounts receivable (net of allowances
of 563 and 756, respectively) 7,151 6,089
Inventories (net of reserves of 697
and 691, respectively) 9,452 7,892
Prepaid expenses and other current
assets 340 452
Current deferred income taxes 211 211
Total current assets 17,484 15,056
PROPERTY AND EQUIPMENT - Net 1,336 1,479
EXCESS OF COST OVER NET ASSETS ACQUIRED 5,110 5,003
OTHER ASSETS 555 564
TOTAL ASSETS $24,485 $22,102
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Current portion of long-term debt $ 600 $ 600
Accounts payable 3,887 2,453
Accrued expenses 1,464 1,462
Total current liabilities $ 5,951 $ 4,515
LONG-TERM DEBT - NET $ 8,865 $ 7,117
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001,
1,000,000 shares authorized
no shares issued or outstanding -- --
Common Stock, par value $.001,
10,000,000 shares authorized,
4,743,000 and 5,132,231 shares,
issued and outstanding, respectively 5 5
Additional paid-in capital 10,716 11,214
Retained (Deficit) (1,052) (749)
Total stockholders' equity 9,669 10,470
TOTAL $24,485 $22,102
See notes to consolidated financial statements.
<PAGE 3>
BATTERIES BATTERIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30,1998 June 30,1999 June 30,1998 June 30,1999
<S> <C> <C> <C> <C>
NET SALES $12,599 $11,540 $25,713 $22,579
COST OF SALES 9,241 7,242 18,474 14,185
GROSS PROFIT 3,358 4,298 7,239 8,394
SELLING, GENERAL AND 4,455 3,858 8,403 7,482
ADMINISTRATIVE EXPENSES
IMPAIRMENT OF EXCESS 575 -- 575 --
COST OVER NET ASSETS
ACQUIRED
INCOME (LOSS) FROM (1,672) 440 (1,739) 912
OPERATIONS
INTEREST EXPENSE, NET 193 153 395 329
INCOME (LOSS) BEFORE (1,865) 287 (2,134) 583
PROVISION (BENEFIT)
FOR INCOME TAXES
PROVISION (BENEFIT) FOR
NET INCOME TAXES (526) 134 (651) 280
NET INCOME (LOSS) (1,339) 153 ( 1,483) 303
EARNINGS (LOSS) PER
SHARE BASIC AND DILUTED $(0.28) $ 0.03 $ (0.31) $ 0.06
BASIC WEIGHTED AVERAGE 4,743,000 5,038,131 4,743,000 4,892,205
COMMON SHARES OUTSTANDING
DILUTED WEIGHTED AVERAGE 4,743,000 5,049,036 4,743,000 4,902,996
COMMON SHARES OUTSTANDING
</TABLE>
<PAGE 4>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In 000's)
SIX MONTHS ENDED
June 30, 1998 June 30, 1999
OPERATING ACTIVITIES:
Net income (loss) $ (1,483) $ 303
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation & amortization expense 386 397
Impairment of excess cost over
net assets acquired 575 ---
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable 1,186 1,062
Inventories 1,824 1,560
Prepaid expenses and other
assets (686) (181)
Accounts payable and accrued
expenses 591 (1,437)
Net cash provided by
operating activities 2,393 1,704
INVESTING ACTIVITIES:
Purchase of property and equipment, net (309) (373)
Net cash used in investing
activities (309) (373)
FINANCING ACTIVITIES:
Proceeds From issuance of Common Stock - 499
Net payments on borrowings (1,915) (1,748)
Net proceeds used in
financing activities (1,915) (1,249)
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 169 82
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 540 330
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 709 $ 412
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during period for:
Interest $ 449 $ 307
Income taxes $ 362 $ 120
See notes to consolidated financial statements. <PAGE 5>
<PAGE 6>
BATTERIES BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
1. BUSINESS
Batteries Batteries, Inc. (the "Company" or "Batteries
Batteries") was founded in May 1995 to create a nationwide
battery distribution business serving the commercial, industrial
and retail markets. Through a series of acquisitions for cash,
notes and securities, Batteries Batteries acquired (i) in
June, 1995 Specific Energy, Inc. ("Specific Energy") based in
Phoenix, Arizona (which was sold in September, 1998), (ii) in
April, 1996, Advanced Fox Antenna, Inc. ("Advanced Fox") based in
Huntingdon Valley, Pennsylvania and Tauber Electronics, Inc.
("Tauber") based in San Diego, California, (iii) in January, 1997
Battery Network, Inc. and affiliate companies ("Battery Network")
based in Chicago, Illinois, North Branch, New Jersey and
Escondido, California, and (iv) in May, 1997 Cliffco of Tampa
Bay, Inc. ("CTB") based in Tampa Bay, Florida.
The Company's operations are presently organized into two
business groups: battery assembly and distribution (the "Battery
Group") and cellular and wireless accessory distribution (the
"Wireless Products Group").
The Battery Group is headquartered in Escondido, California
and is comprised of:
- Tauber Electronics which engineers, manufactures, and
distributes battery packs and battery systems to
original equipment manufacturers throughout the United
States.
- Battery Network is a national distributor of specialty
batteries to the commercial, industrial, and
government/institutional markets.
The Wireless Products Group is headquartered in Huntingdon
Valley, Pennsylvania and is comprised of:
- Advanced Fox Antenna, based in Huntingdon Valley,
Pennsylvania with sales offices and warehouse
facilities in Miami, Florida, and Escondido,
California, Advanced Fox distributes over 1,600
cellular accessory products, including batteries,
chargers, and antennas to customers throughout North
and South America.
- Cliffco of Tampa Bay, Florida is a distributor of
cellular products to a variety of customers including
the large communication carriers.
<PAGE 7>
The accompanying consolidated financial statements as of the
six month period ended June 30, 1999 and June 30,1998, are
unaudited; but in the opinion of management, the information
contained herein reflects all adjustments necessary to make the
results of operations for the interim periods a fair statement of
such operations. All such adjustments are of a normal recurring
nature. Operating results for interim periods are not
necessarily indicative of results which may be expected for the
year as a whole. These consolidated financial statements should
be read in conjunction with the audited financial statements and
footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
2. ACQUISITIONS AND LOAN FACILITY
On January 7, 1997, effective January , 1997 the Company
acquired the business and related assets of Battery Network (the
"BN Acquisition") which operates principally in California, New
Jersey and Illinois. The purchase price of approximately
$11.2 million consisted of (i) approximately $8.3 million in
cash, subject to adjustment to the extent that the net worth, as
defined of Battery Network, exceeded or was less than
$7.3 million; (ii) 550,000 shares of Common Stock valued at a
price of $4.125 per share and five year options to purchase an
additional 225,000 shares at an exercise price of $4.50 per
share, and (iii) approximately $590,000 in transaction costs.
On May 12, 1997, the Company acquired the business and
related assets of Cliffco. The purchase price of approximately
$615,000 consisted of (i) cash of approximately $75,000;
(ii) 193,000 shares of common stock valued at $2.35 per share or
$446,985; and (iii) approximately $93,000 in transaction costs.
In addition, the Company assumed liabilities of $1,162,000. As
part of its assumption of liabilities, the Company paid at the
closing indebtedness of Cliffco of approximately $560,000. The
Cliffco agreement included a three-year employment contract with
the president and sole stockholder of the seller. The operations
of Cliffco have been included in the consolidated results of
operations of the Company from the date of its acquisition.
The cash portion of the purchase price of each transaction,
as well as the repayment of Cliffco debt of $560,000 to its
collateralized lender was funded with a portion of the proceeds
of a borrowing pursuant to a Revolving Credit, Term Loan and
Security Agreement, dated January 6, 1997, as amended May 13,
1997, (the "Loan Facility"), between IBJ Schroder Bank & Trust
Company, as Agent ("IBJ") and the Company and all its
subsidiaries. The Loan Facility consists of a $3,000,000 Term
Loan (the "Term Loan") payable in 35 monthly installments of
$50,000 each with the balance to be paid at maturity and a
Revolving Credit Facility (the "Revolver Loan") of up to
$10,000,000 to be advanced at the rate of 80% of eligible
accounts receivable and 50% of inventories. The Revolver Loan
bears interest at the rate of 1/4 of 1% plus the higher of
(i) the base commercial lending rate of IBJ or (ii) the weighted
<PAGE 8> average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged
by Federal funds brokers plus 1/4 of 1%, or, at the option of the
Company at the Eurodollar rate plus 2%. The Eurodollar rate is
defined as Libor for a designated period divided by one less the
aggregate reserve requirements. The interest on the Term Loan is
1/2% higher than the interest rate on the Revolver Loan. The
Loan Facility is secured by a pledge of the assets of the
borrowers and a pledge of the outstanding capital stock of the
subsidiaries of the Company. As of June 30, 1999, the principal
amounts outstanding on the Term Loan was $1.2 million and the
Revolver Loan was $6.5 million.
The Loan Facility contains certain covenants that include
maintenance of certain financial ratios, maintenance of certain
amounts of working capital and net worth as well as other
affirmative and negative covenants. At December 31, 1998, the
Company was not in compliance with certain of these covenants.
On March 31, 1999, the Company entered into an amended credit
agreement whereby the non-compliance at December 31, 1998 was
waived, and the loan facility was extended for an additional one
year period to January 7, 2001 and new financial covenants were
negotiated through December 31, 2000 which reflect the Company's
current projections. As of March 31, 1999 and June 30, 1999, the
Company was in compliance with these covenants.
3. MANAGEMENT AGREEMENT
In February 1998, the management agreement with Founders
Management Services, Inc. ("Founders") was revised by mutual
consent to delete provisions relating to the rights of Founders
to an incentive fee and to an origination fee (thereby limiting
its fees to an annual management fee of $150,000) and to move up
the expiration date of the Agreement to April 30, 1999. On
May 5, 1998, both active principals of Founders resigned as
officers and directors of the Company, effectively terminating
the relationship between the Company and Founders. Founders has
recently filed a lawsuit against the Company seeking payment of
damages equal to the monthly management fee subsequent to the
termination to the end of the contract term plus certain
unidentified expenses.
4. RESTRUCTURING CHARGES
In September 1998, the Company exited the retail battery
business by selling the assets of Specific Energy Corp. in
Phoenix, Arizona for a total of $715,000. In accordance with
FASB Statement 121 "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of," the Company reduced the
carrying amount of the retail assets of Specific Energy to its
net realizable value in the second quarter of 1998 by $575,000
which principally represented the remaining goodwill resulting
from the Specific Energy acquisition in 1995.
5. PRIVATE PLACEMENT <PAGE 9>
On April 23, 1999 the Company raised $498,800 through a
private placement of 389,231 shares of its common stock to two of
its Board Members Christopher F. McConnell, Board Chairman,
Barbara M. Henagan and to one other related party as part of up
to a 500,000 share private offering exclusively to directors,
officers and related parties.
6. SEGMENT DISCLOSURE
Summary information by segment as of June 30, 1999 and 1998
and the quarters ended June 30, 1998 and 1999 is as follows:
The Company's operations are presently organized into two
business groups: The Battery Group and the Wireless Products
Group (See Note 1 to Consolidated Financial Statements). The
business groups were established based primarily on commonality
and synergies in product offering and market focus,and management
expertise.
Listed below is a geographic breakdown of each group by
individual company listing the headquarters and branch
operations.
<TABLE>
<CAPTION>
The Battery Group Location Nature of Operation
<S> <C> <C>
Battery Network Escondido,CA Headquarters - Battery Network
Battery Network North Branch, NJ Branch Sales and Warehousing
Battery Network McHenry, IL Branch Sales Office
Tauber Electronics Escondido,CA Headquarters - Tauber Electronics
<CAPTION>
The Wireless Group Location Nature of Operation
<S> <C> <C>
Advanced Fox Antenna Huntingdon Headquarters - Advanced Fax
Valley, PA Cellular
Advanced Fox Antenna Miami,FL Branch Sales and Warehousing
Cliffco of Tampa Tampa Bay,FL Headquarters - Cliffco of
Bay, Inc. Tampa Bay, Inc.
</TABLE>
Listed below is the composition of corporate and unallocated
assets as of June 30, 1998 and June 30, 1999.
(In Thousands)
1998 1999
Cash (overdraft) $ 50 $ (15)
Due to subsidiaries (377) (3,715)
Deferred organization cost 75 45
Deferred income taxes 186 186
Deferred finance cost 128 50
<PAGE 10>
Other 30 27
Total $ 92 $(3,422)
<TABLE>
<CAPTION>
(In Thousands)
Corporate
Battery Wireless and Total
Segment Segment Unallocated Consolidated
<S> <C> <C> <C> <C> <C>
Net Sales 1999 $ 9,274 $ 13,305 ---------- $ 22,579
1998 $14,533 $ 11,180 ---------- $ 25,713
Operating Income(Loss) 1999 $ (883) $ 2,283 $ (488) $ 912
1998 $(1,690) $ 554 $ (603) $ (1,739)
Assets 1999 $13,468 $ 12,056 $ (3,422) $ 22,102
1998 $18,166 $ 7,473 $ 92 $ 25,731
Depreciation and 1999 $ 153 $ 184 $ 60 $ 397
Amortization 1998 $ 183 $ 135 $ 68 $ 386
Interest expense 1999 $ 0 $ 0 $ 329 $ 329
1998 $ 0 $ 1 $ 394 $ 395
Income before taxes 1999 $ (883)$ 2,283 $ (817) $ 583
1998 $ (1,690)$ 553 $ (997) $ (2,134)
</TABLE>
Additional information regarding revenue by products and
service groups for the six months ended June 30, 1998 and 1999 is
as follows:
(In thousands)
1998 1999
OEM Value Added Sales 3,526 2,900
Wireless Products and Accessories 11,499 13,388
Other Battery Products 10,688 6,291
Total Sales 25,713 22,579
All revenue and essentially all long-lived assets were
related to operations in the United States as of June 30, 1999
and for the quarters ended June 30, 1998 and 1999.
Export sales for the six months ended June 30, 1998 and 1999
are as follows:
(In Thousands)
1998 1999
<PAGE 11>
Europe, Middle East & Africa 206 214
Asia and Pacific 5 6
Americas Excluding U.S.A. 806 383
Total Export Sales 1,017 603
Receivables from export sales for Advanced Fox and Battery
Network at June 30, 1999 and 1998 were approximately $359,000 and
$397,000, respectively.
<PAGE 12>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The following table represents the Company's statement for
operations data expressed as a percentage of net sales for the
respective periods:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost Sales 73.3 62.8 71.8 62.8
Gross Profit 26.7 37.2 28.2 37.2
Selling, General &
Administrative Expenses 35.4 33.4 32.7 33.2
Impairment of excess cost
over net assets acquired 4.6 - 2.3 -
Operating Income (Loss) (13.3) 3.8 (6.8) 4.0
Interest expense, net 1.5 1.3 1.5 1.5
Income (Loss) before provision
(benefit) for income taxes: (14.8) 2.5 (8.3) 2.5
Income tax provision (benefit) (4.2) 1.2 (2.5) 1.2
Net Income (Loss) (10.6) 1.3 (5.8) 1.3
</TABLE>
Three Months Ended June 30, 1999 ("1999") Compared to Three
Months ended June 30, 1998 ("1998")
Consolidated net sales decreased 8.4% or $1.1 million, from
$12.6 million in 1998 to $11.5 million in 1999. The decrease in
sales was due primarily to a substantial decrease in sales of
Battery Network, which decreased approximately 50% or
$1.8 million. The sales decrease was partially offset by the
continued growth of the Wireless Products Group which had a sales
increase of approximately 22% or $1.3 million. The Wireless
Products Group's two operating entities, Advanced Fox and Cliffco
had sales increases of 21.3% or $.9 million and 24.9% or
$.4 million, respectively.
Battery Network continued its downward sales trend, which
management believes is the result of an increasingly competitive
market, particularly with Original Equipment Manufacturers
("OEM") becoming more price competitive along with added
competition from other distributors.
<PAGE 13>
During the quarter, Battery Network reorganized its sales
force, added new incentives, focused on improving customer value,
and service and in June, 1999 added a new Sales Manager, to more
aggressively compete. These management changes have not as yet
resulted in sales increases.
Additionally, the sale of the Specific Energy retail
division in September 1998, and the resulting loss of its sales
volume contributed to the overall decrease in total sales
(Specific Energy had sales of $.6 million in the three months
ended June 30, 1998).
Gross profit increased by $1.0 million from $3.3 million in
1998 to $4.3 million in 1999 and gross profit as a percentage of
sales increased from 26.7% to 37.2%. The Wireless Product
Group's increase in gross profit of $1.4 million was the major
factor for the overall gross profit improvement; however, this
was partially offset by the decrease in gross profit attributable
to the Battery Network sales decline. Additionally, the sale of
the Specific Energy retail division, and the resulting loss of
that entity's contribution to gross profit affected the Company's
overall gross profit increase (Specific Energy had gross profit
of $.3 million in 1998). The substantial increase in gross
profit percentage was a result of the following:
- the Wireless Products Group which operates at a
substantially higher gross margin percentage than the
Battery Group increased its percentage of total Company
sales from approximately 46% to 62% in comparing the
three months of 1998 to 1999;
- both Advanced Fox and Cliffco substantially improved
their gross margin percentage due to a continued
economically advantageous Far East purchasing policy.
The consolidation of the two wireless companies'
purchasing efforts, which began in June, 1998, resulted
in a more economical purchasing system for both
wireless companies;
- The Battery Group was able to improve its gross profit
percentage due to increased markup on the Tauber OEM
value added business and the effect at Battery Network
of improved initial mark-ups on recent purchases,
offset in part by markdowns required to move slower
turn product.
Selling, general and administrative (SG&A) expenses
decreased from $4,455,000 in 1998 to $3,858,000 in 1999. As a
percentage of sales, SG&A expenses decreased from 35.4% in 1998
to 33.4% in 1999. The decrease in SG&A was attributable to:
- a reduction of $.7 million in the Battery Group of
selling costs and general and administrative expenses
as a result of a downsizing of its cost structure and
imposition of stringent expense controls in reaction to
<PAGE 14> the continuing shrinking in Battery Network's
sales base.
- a reduction of approximately $.1 million in corporate
expense principally in salaries.
- the sale of Specific Energy retail division on
September 14, 1998 (Specific Energy incurred
approximately $.2 million of SG&A during the first
quarter of 1998);
- offset in part by an increase of approximately
$.4 million in the Wireless Product Group principally
in marketing, selling, and distribution costs to
support the current and anticipated sales growth. This
includes the continued expansion of the Advanced Fox
main distribution facility and its Miami distribution
facility. The Company also experienced increased sales
and telemarketing costs, and increased costs in
providing services to other divisions.
Interest expenses decreased from $193,000 in 1998 to
$153,000 in 1999 due primarily to decreased borrowings under the
Company's loan facility resulting from the sale of Specific
Energy, the sale of 389,231 shares of common stock in April,
1999, and cash provided from operations. Additionally, the
Company benefited from lower interest rates.
The Company's effective income tax rate in 1999 is 46.7%.
In 1998, the Company's effective income tax rate in calculating
the benefit based on the loss for the quarter was 28.2%. The
substantial difference in tax rate is attributable to the effect
of goodwill acquired through various stock acquisitions that is
non-deductible for income tax purposes and the effect of state
income expense in the various states in which the entity
operates.
Six Months ended June 30, 1999 ("1999") Compared to Six
Months ended June 30, 1998 ("1998").
Consolidated net sales decreased 12.2% or $3.1 million, from
$25.7 million in 1998 to $22.6 million in 1999. The decrease in
sales was due primarily to a decrease in sales of Battery Network
and Tauber which decreased approximately 45% or $3.8 million and
6% or $.3 million respectively. Additionally, the sale of the
Specific Energy retail division on September 14, 1998, and the
resulting loss of its sales volume contributed to the overall
decrease in total sales (Specific Energy had sales of
$1.1 million in the six months ended June 30, 1998). The sales
decrease was partially offset by the continued growth of the
Wireless Products Group which had a sales increase of
approximately 18% or $2.1 million. The Wireless Products Group's
two operating entities, Advanced Fox and Cliffco had sales
increases of 18% or $1.5 million and 21.5% or $.7 million,
respectively. <PAGE 15>
Gross profit increased by $1.2 million from $7.2 million in
1998 to $8.4 million in 1999, and gross profit as a percentage of
sales increased from 28.2% to 37.2%. Specifically, the Wireless
Products Group's increase in gross profit of $2.5 million was the
major factor for the overall gross profit improvement; however,
this was partially offset by the decreases in gross profit
attributable to the Battery Division reduced sales of
approximately $700,000. Additionally, the sale of the Specific
Energy retail division on September 14, 1998, and the resulting
loss of that entity's contribution to gross profit affected our
overall gross profit increase (Specific Energy had gross profit
of $.6 million in 1998). The substantial increase in gross
profit percentage was a result of the following:
- the Wireless Products Group which operates at a
substantially higher gross margin percentage than the
Battery Group increased its percentage of total Company
sales from approximately 43% to 59% in comparing the
three months of 1998 to 1999;
- both Advanced Fox and Cliffco substantially improved
their gross margin percentage due to a continued
economically advantageous Far East purchasing policy.
The consolidation of the two wireless companies'
purchasing efforts, which began in June, 1998, resulted
in a more economical purchasing system for both
wireless companies;
Selling, general and administrative (SG&A) expenses
decreased from $8,403,000 in 1998 to $7,482,000 in 1999; however,
as a percentage of sales, SG&A expenses increased from 32.7% in
1998 to 33.2% in 1999. The decrease in SG&A was attributable to:
- an approximate increase of $.7 million in the Wireless
Product Group principally in marketing, selling, and
distribution costs to support the current and
anticipated sales growth. This included the continued
expansion of the Advanced Fox main distribution
facility and its Miami distribution facility. The
Company also experienced increased sales and
telemarketing costs, and increased costs in providing
services to other divisions;
- a drop of $.8 million in the Battery Group of selling
costs and general and administrative expenses as a
result of a downsizing of its cost structure and
imposition of stringent expense controls in reaction to
the continuing decline in Battery Network's sales base.
- a drop of approximately $.2 million in corporate
expense principally in salaries, rent and management
fees.
- the sale of Specific Energy retail division on
September 14, 1998 (Specific Energy incurred <PAGE 16>
approximately $.6 million of SG&A during the first
quarter of 1998).
Interest expenses decreased from $395,000 in 1998 to
$329,000 in 1999 due primarily to decreased borrowings under the
Company's Loan Facility resulting from the sale of Specific
Energy and the proceeds from the sale of 389,231 shares of its
common stock in April, 1999 and the decrease in need for
additional funds. Additionally, the Company benefitted from
lower interest rates.
The Company's effective income tax rate in 1999 is
approximately 48%. In 1998, The Company's effective income tax
rate in calculating the benefit based on the loss for the six
months was 30.5%. The substantial difference in tax rate is
attributable to the effect of goodwill acquired through various
stock acquisitions that is non-deductible for income tax purposes
and the effect of state income expense in the various states in
which the entity operates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's requirement for capital is to provide for:
(i) support of an increase in sales; (ii) capital equipment
expenditures related to: (a) Year 2000 system compliance;
(b) business system upgrade's; (c) warehouse and office upgrades
and expansion; and (d) purchase of machinery and equipment used
to streamline receiving, shipping, packaging and battery pack
assembly operations, and (iii) financing for future acquisitions.
The Company's primary sources of financing during 1998 were bank
borrowings.
The Company's working capital as of June 30, 1999 was
$10.5 million. For the six months ended June 30, 1999, net cash
provided by operating activities was $1,704,000. Cash provided by
operating activities during 1998 was $2,393,000. The increase in
cash provided by operating activities during 1999 was
attributable to net income of $303,000 plus depreciation and
amortization of $397,000 and net decreases in Accounts Receivable
of $1,062,000 and inventory of $1,560,000 less a decrease in
accounts payable and accrued expenses of $1,437,000 and an
increase in prepaid expenses of $181,000. The increase in cash
provided by operating activities during 1998 was attributable to
net decreases in accounts receivable and inventory of $1,186,000
and $1,824,000 respectively, and an increases in accounts payable
and accrued expenses of $591,000, less a net loss of $1,483,000
(offset by depreciation and amortization of $386,000 and a charge
of $575,000 for impairment of excess over net assets acquired)
and an increase in prepaid expense and other assets of $686,000.
Net cash used in investing activities for the six months
ended June 30, 1999 and 1998 was for the purchase of property and
equipment in the amounts of $373,000 and $309,000 respectively.
<PAGE 17>
Cash used in financing activities for the six months ended
June 30, 1999 was $1,249,000 comprised of $1,448,000 net payments
under the Revolving Credit Facility and $300,000 under the Term
Loan Facility partially offset by proceeds of $499,000 proceeds
from the sale of 389,231 shares of common stock to two of its
Board members and one other related party. Cash used by
financing activities for the six months ended June 30, 1998 was
$1,915,000 comprised of $1,615,000 million net payments under the
Revolving Credit Facility and $300,000 under the Term Loan
Facility. The Company had at June 30, 1999 cash and cash
equivalents of approximately $412,000.
The Loan Facility contains certain covenants that include
maintenance of certain financial ratios, maintenance of certain
amounts of working capital and net worth as well as other
affirmative and negative covenants. At December 31, 1998, the
Company was not in compliance with certain of these covenants.
On March 31, 1999, the Company entered into an amended credit
agreement whereby the non-compliance at December 31, 1998 was
waived, and the Loan Facility was extended for an additional one
year period to January 7, 2001 and new financial covenants were
negotiated through December 31, 2000 which reflect the Company's
current projections. As of March 31, and June 30, 1999 the
Company was in compliance with these covenants.
The Company estimates that it will incur capital
expenditures of approximately $500,000 during the twelve months
ended June 30, 2000, principally for the procurement of a new
computer system and the software to upgrade the Company's
business systems and to insure Year 2000 compliance, and to
purchase machinery and equipment to enhance its warehousing,
distribution and assembly operations.
Based upon its present plans, management believes that
operating cash flow, available cash and available credit
resources will be adequate to make the repayments of indebtedness
described herein, meet the working capital cash needs of the
Company and anticipated capital expenditure needs during the
12 months ending June 30, 2000.
YEAR 2000 ISSUES
The ability of computers, software and other equipment
utilizing microprocessors to recognize and properly process data
fields containing a 2-digit year is commonly referred to as the
Year 2000 (Y2K) issue. As the year 2000 approaches, non-Y2K
compatible systems will be unable to accurately process certain
data-based information.
State of Readiness. The Company has identified the
following applications and hardware that have already been
rendered Y2K compliant, or require, modification or replacement
to be Y2K compliant and has implemented plans to modify or repair
the applications and hardware in accordance with the following
schedule. <PAGE 18>
Division System Compliance Date
Battery Group
Battery Network Accounting server 11/1/98
Accounting software 11/1/98
Work stations 7/31/99
Phone systems (except
voice mail) 3/30/99
Voice mail 6/30/99
Other software EDI- 9/31/99
Tauber Electronics Accounting software 10/31/99
Accounting server 10/31/99
Workstations 7/31/99
Phone system (except
voice mail) 5/31/99
Voice mail 6/30/99
Wireless Products Group
Advanced Fox Accounting server 2/1/99
Accounting software 2/1/99
Work stations 2/1/99
Cliffco Accounting software 8/31/99
Workstations 12/31/98
The Company is in the process of contacting its vendors and
significant customers regarding their Y2K compliance plans which
may affect the Company's operations.
The Company believes that its approximate total cost to
become Y2K compliant is as follows:
Total Cost as
Division Estimated Cost of 6/30/99
Battery group
Battery Network $210,000 $195,000
Tauber Electronics $100,000 $ 15,000
Wireless Products Group
Advanced Fox $204,000 $184,000
Cliffco $138,000 $ 98,000
The Company does not separately track the internal costs for
its Y2K compliance efforts; however, the primary cost to the
Company's Y2K compliance plan is principally payroll costs for
its internal information systems department employees. The
Company believes it has adequate financial resources to pay for
the balance of the Y2K compliance costs.
The most significant remaining risk to the Company regarding
Y2K would be the interruption of business due to vendors and
customers non-compliance with Y2K issues.
Certain operational aspects of Batteries Batteries could be
affected by outside service providers not being Y2K compliant,
<PAGE 19> including telephone service and other essential utility
services. These risks are not under the control of the Company,
but are universal in nature to all businesses. Any of the
previously discussed Y2K issues, if not addressed, could have a
material adverse effect on the Company.
The Company expects to be fully complaint by October 31,
1999.
The Company believes it will be fully compliant by
October 31, 1999; however, we are developing a contingency plan
in the event we are unable to meet expectations regarding our
self imposed compliance schedule.
SEASONALITY AND INFLATION
The Company's net sales typically show no significant
seasonal variations, although net sales may be affected in the
future by timing of any business acquisitions.
The impact of inflation on the Company's operations has not
been significant to date. However, a high rate of inflation in
the future poses a risk to the Company and its ability to sustain
its operating results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company's only financial instruments with market risk
exposure are revolving credit borrowings and variable rate term
loans, which total $7,717,000 at June 30, 1999. Based on this
balance, a change of one percent in the interest rate would cause
a change in interest expense for the six months ended June 30,
1999 of approximately $38,585, or $0.008 per share (or $0.004)
net of an income tax benefit calculated using the Company's
historical statutory rates), on an annual basis.
These instruments are non-trading in nature (not entered
into for trading purposes) and carry interest at a pre-agreed
upon percentage point spread from either the prime interest rate
of the 90-day Eurodollar Rate (LIBOR). The Company's objective
in maintaining these variable rate borrowings is the flexibility
obtained regarding early repayment without penalties and lower
overall cost as compared with fixed-rate borrowings.
<PAGE 20>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Securities Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8 -K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE 21>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
By:/s/ Stephen Rade
Date August 16, 1999 Stephen Rade
Chief Executive Officer
By:/s/ Ronald E. Badke
Date August 16, 1999 Ronald E. Badke
Chief Financial Officer
<PAGE 22>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted
from the unaudited consolidated balance sheet as of June 30,
1999, and the unaudited statement of income for the three months
then ended contained in the report on Form 10-Q for the six
months ended June 30, 1999 of Batteries Batteries, Inc. and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 412
<SECURITIES> 0
<RECEIVABLES> 6,845
<ALLOWANCES> (756)
<INVENTORY> 7,892
<CURRENT-ASSETS> 15,056
<PP&E> 1,479
<DEPRECIATION> 397
<TOTAL-ASSETS> 22,102
<CURRENT-LIABILITIES> 4,515
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 10,465
<TOTAL-LIABILITY-AND-EQUITY> 22,102
<SALES> 22,579
<TOTAL-REVENUES> 22,579
<CGS> 14,185
<TOTAL-COSTS> 14,185
<OTHER-EXPENSES> 7,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 329
<INCOME-PRETAX> 583
<INCOME-TAX> 280
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<EXTRAORDINARY> 0
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<NET-INCOME> 303
<EPS-BASIC> .06
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