<PAGE>
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 September 30, 1999
Commission File Number 0-27996
BATTERIES BATTERIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3835420
(State or 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 September 30, 1999, there were 5,132,231 shares of common stock
outstanding.
(1)
<PAGE>
BATTERIES BATTERIES, INC.
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30,1999
INDEX
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Page No.
--------
PART I - FINANCIAL INFORMATION
Consolidated Financial Statements
Consolidated Balance sheets as of September 30, 1999
(unaudited) and December 31, 1998...................................3
Consolidated Statements of Operations for the
nine months ended September 30, 1999(unaudited)
and 1998 (unaudited)................................................4
Consolidated Statements of Cash Flows for the
nine months ended September 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.................................................19
(2)
<PAGE>
BATTERIES BATTERIES, Inc
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per and data)
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
----------------- ------------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 330 $ 408
Accounts receivable (net of allowances of $563 7,151 6,750
and $884, respectively)
Inventories (net of reserves of $697 and 9,452 8,728
$968, respectively)
Prepaid expenses and other current assets 340 386
Current deferred income taxes 211 211
-------- --------
TOTAL CURRENT ASSETS 17,484 16,483
PROPERTY AND EQUIPMENT - Net 1,336 1,529
EXCESS OF COST OVER NET ASSETS ACQUIRED 5,110 4,949
OTHER ASSETS 555 463
-------- --------
TOTAL ASSETS $ 24,485 $ 23,424
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 600 $ 600
Accounts payable 3,887 3,721
Accrued expenses 1,464 1,822
-------- --------
TOTAL CURRENT LIABILITIES 5,951 6,143
-------- --------
LONG-TERM DEBT - NET 8,865 6,577
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 5 5
authorized, 4,743,000 and 5,132,231 shares, - -
issued and outstanding, respectively
Additional paid-in capital 10,716 11,203
Accumulated Deficit (1,052) (504)
-------- --------
Total stockholders' equity 9,669 10,704
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,485 $ 23,424
======== ========
</TABLE>
See notes to consolidated financial statements.
(3)
<PAGE>
BATTERIES BATTERIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1999 September 30, 1998 September 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
NET SALES $ 13,126 $ 11,899 $ 38,839 $ 34,478
COST OF SALES 8,869 7,273 27,343 21,458
----------- ----------- ----------- -----------
GROSS PROFIT 4,257 4,626 11,496 13,020
SELLING, GENERAL AND ADMINISRATIVE EXPENSES 3,902 4,002 12,305 11,484
IMPAIRMENT OF EXCESS COST OVER NET ASSETS
ACQUIRED -- -- 575 --
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 355 624 (1,384) 1,536
INTEREST EXPENSE , NET 213 152 608 481
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 142 472 (1,992) 1,055
PROVISION (BENEFIT) FOR INCOME TAXES
102 227 (548) 507
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 40 $ 245 $ (1,444) $ 548
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ 0.01 $ 0.05 $ (0.30) $ 0.11
----------- ----------- ----------- -----------
BASIC WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,743,000 5,132,231 4,743,000 4,973,390
=========== =========== =========== ===========
DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,743,000 5,145,834 4,743,000 4,984,181
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
(4)
<PAGE>
BATTERIES BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In 000's)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
September 30, 1998 September 30, 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,444) $ 548
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation & amortization expense 594 604
Impairment of excess cost over net assets acquired 575 --
Changes in assets and liabilities net of effects
from dispositions:
Accounts receivable 863 401
Inventories 2,221 724
Prepaid expenses and other assets (542) (46)
Accounts payable and accrued expenses (549) 192
------- -------
Net cash provided by operating activities 1,718 2,423
------- -------
CASH FLOW INVESTING ACTIVITIES:
Proceeds from sale of Specific Energy assets 715
Purchase of property and equipment, net (464) (544)
------- -------
Net cash provided by ( used) in investing
activities 251 (544)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 487
Net payments on borrowings (1,642) (2,288)
------- -------
Net cash proceeds used in financing activities (1,642) (1,801)
------- -------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 327 78
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 540 330
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 867 $ 408
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period for:
Interest $ 662 $ 447
======= =======
Income taxes $ 420 $ 153
======= =======
</TABLE>
See notes to consolidated financial statements.
(5)
<PAGE>
BATTERIES BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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.
On August 26, 1999, the Company incorporated Accessory Solutions.Com, Inc.,
"Accessory Solutions" a new operating subsidiary based at the Advanced Fox
facility in Huntingdon Valley, Pennsylvania.
The Company's operations are presently organized into two business segments:
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.
- Accessory Solutions designs, develops and hosts websites for client
companies which desire to sell wireless accessories on-line and
provides ordering, warehouse and distribution services to client
companies.
The accompanying consolidated financial statements for the nine month
period ended September 30, 1999 and September 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
(6)
<PAGE>
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 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 rate 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
borrower and a pledge of the outstanding capital stock of the subsidiaries of
the Company. As of September 30, 1999, the principal amounts outstanding on the
Term Loan was $1.0 million and the Revolver Loan was $6.2 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
(7)
<PAGE>
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. As of September 30, 1999 the Company was in violation of one of these
covenants. On November 10, 1999, the Bank waived compliance with the violated
covenant.
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 Statement of Financial Accounting Standards No. 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 their 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
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 and 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 September 30, 1999 and 1998 and
quarters ended September 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.
(8)
<PAGE>
<TABLE>
<CAPTION>
The Battery Group Location Nature of Operation
- ----------------- -------- -------------------
<S> <C> <C>
Battery Network Escondido, CA Headquarters-Battery Network
Battery Network Bound Brook, NJ Branch Sales and Warehousing
Tauber Electronics Escondido, CA Headquarters-Tauber Electronics
The Wireless Group Location Nature of Operation
- ------------------ -------- -------------------
Advanced Fox Antenna Huntingdon Valley, PA Headquarters - Advanced Fax Cellular
Advanced Fox Antenna Miami, FL Branch Sales and Warehousing
Cliffco of Tampa Bay, Inc. Tampa Bay, FL Headquarters-Cliffco of Tampa Bay, Inc.
</TABLE>
Listed below is certain summary operating data as of and for the nine months
ended September 30, 1999 and 1998, and as of December 31, 1998 and
September 30, 1999.
<TABLE>
<CAPTION>
(In Thousands)
Corporate
Battery Wireless And Total
Segment Segment Unallocated Consolidated
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 1999 $12,767 $21,711 -- $34,478
1998 21,523 17,316 -- 38,839
Operating income (loss) 1999 (1,680) 4,032 (816) 1,536
1998 (1,989) 1,504 (899) (1,384)
Total Assets 1999 13,247 14,434 (4,257) 23,424
1998 15,835 9,735 (1,085) 24,485
Depreciation and 1999 234 280 90 604
Amortization 1998 282 214 98 594
Interest expense, net 1999 -- -- 481 481
1998 -- -- 608 608
Income (loss) before taxes 1999 (1,680) 4,032 (1,297) 1,055
1998 (1,989) 1,504 (1,507) (1,992)
- --------------------------------------------------------------------------------------
</TABLE>
Following is the composition of corporate and unallocated assets as of
December 31, 1998 and September 30, 1999.
<TABLE>
<CAPTION>
(In Thousands)
1998 1999
---- ----
<S> <C> <C>
Cash $(42) $8
Due to subsidiaries (1,438) (4,534)
Deferred organization cost 60 38
Deferred income taxes 187 186
Deferred Finance Cost 90 26
Other 58 19
-- --
Total $(1,085) $(4,257)
====== ========
</TABLE>
(9)
<PAGE>
Listed below is certain summary operating data for the three months ended
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
(In Thousands)
Corporate
Battery Wireless And Total
Segment Segment Unallocated Consolidated
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 1999 $3,493 $8,406 -- $11,899
1998 6,990 6,136 -- 13,126
Operating income (loss) 1999 (797) 1,749 (328) 624
1998 (299) 950 (296) 355
Depreciation and 1999 81 96 30 207
Amortization 1998 99 79 30 208
Interest expense, net 1999 -- -- 152 152
1998 -- -- 213 213
Income (loss) before taxes 1999 (797) 1,749 (480) 472
1998 (299) 951 (510) 142
- --------------------------------------------------------------------------------------
</TABLE>
(10)
<PAGE>
Additional information regarding revenue by products and service groups for
the nine months ended September 30, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
(In thousands)
1998 1999
---- ----
<S> <C> <C>
OEM Value Added Sales $ 4,032 $ 5,304
Wireless Products and Accessories 21,820 17,721
Other Battery Products 8,626 15,814
------- -------
Total Sales $34,478 $38,839
======= =======
</TABLE>
All revenue and essentially all long-lived assets were related to operations
in the United States as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999.
Export sales for the nine months ended September 30, 1998 and 1999 are as
follows:
<TABLE>
<CAPTION>
(In Thousands)
1998 1999
---- ----
<S> <C> <C>
Europe, Middle East & Afrida $ 282 $ 288
Asia and Pacific 7 9
Americas Excluding USA 1,487 782
------- -------
Total Export Sales $ 1,776 $ 1,079
------- -------
</TABLE>
Receivables from export sales for the Wireless Products Group and the
Battery Group at September 30, 1999 and 1998 were approximately $403,000 and
$396,000 respectively.
(11)
<PAGE>
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 Nine Months Ended
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net of Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 67.6 61.1 70.4 62.2
----- ----- ----- -----
Gross profit 32.4 38.9 29.6 37.8
----- ----- ----- -----
Selling, general & 29.7 33.6 31.7 33.3
administrative Expenses
Impairment of excess cost over -- -- 1.5 --
net assets acquired ----- ----- ----- -----
Operating income (loss) 2.7 5.3 (3.6) 4.5
Interest expense, net 1.6 1.3 1.6 1.4
----- ----- ----- -----
Income (Loss) before provision 1.1 4.0 (5.1) 3.1
(benefit) for income taxes
Income tax provision 0.8 1.9 (1.4) 1.5
(benefit) ----- ----- ----- -----
Net Income (Loss) 0.3% 2.1% (3.7)% 1.6%
----- ----- ----- -----
</TABLE>
Three Months Ended September 30, 1999 ("1999") Compared to Three Months
ended September 30, 1998 ("1998").
Consolidated net sales for the quarter decreased 9.3% or $1.2 million, from
$13.1 million in 1998 to $11.9 million in 1999. The decrease in sales was due
primarily to a substantial decrease in sales of Battery Network and Tauber
Electronics, which decreased approximately 64% or $2.3 million and 25.0% or $.7
million, respectively.
The sales decrease was partially offset by the continued growth of the
Wireless Products Group, which had a sales increase for 1999 of approximately
37% or $2.2 million compared to 1998. The Wireless Products Group's two
operating entities, Advanced Fox and Cliffco had sales increases of 32.6% or
$1.5 million and 49.0% or $.8 million, respectively. Accessory Solutions had no
sales to date.
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.
During the past few months, the Battery Group has reorganized their sales
forces, added new incentives, focused on improving customer value, and service
and to
(12)
<PAGE>
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 within the Battery Group(Specific Energy had sales of
$.5 million in the three months ended September 30, 1998).
Gross profit increased by $.3 million from $ 4.3 million in 1998 to $ 4.6
million in 1999 and gross profit as a percentage of sales increased from 32.4%
to 38.9%. 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
Group's sales declines. 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 47% to 71% 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;
- Offset in part by reductions in the the Battery Group gross margin
percentage attributable to the Tauber sales and production fall off,
and its negative effect on labor and overhead absorption coupled with
higher than normal markdowns required to maintain inventory levels.
Selling, general and administrative (SG&A) expenses increased slightly from
$3.9 million in 1998 to $ 4.0 million in 1999. As a percentage of sales,
SG&A expenses increased from 29.7% in 1998 to 33.6% in 1999. The increase in
SG&A was attributable to:
- an increase of approximately $.8 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.
- offset in part by a reduction of $.5 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 shrinking in Battery Network's
sales base.
(13)
<PAGE>
- the sale of Specific Energy retail division on September 14, 1998
(Specific Energy incurred approximately $.2 million of SG&A during the
third quarter of 1998);
Interest expense, net decreased from $213,000 in 1998 to $152,000 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 48.1%. In 1998, the
Company's effective income tax rate was 71.8%. 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.
Nine Months ended September 30, 1999 ("1999") Compared to Nine Months ended
September 30, 1998 ("1998").
Consolidated net sales decreased 11.2% or $4.3 million, from $38.8 million
in 1998 to $34.5 million in 1999. The decrease in sales was due primarily to a
decrease in sales of the Battery Group (Battery Network and Tauber) of
approximately 35.9% or $7.1 million. 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 $1.6 million in the nine months ended September 30, 1998). The
sales decrease was partially offset by the continued growth of the Wireless
Products Group, which had a sales increase of approximately 25.4%, or $4.4
million. The Wireless Products Group's two operating entities, Advanced Fox and
Cliffco had sales increases of 23.2% or $2.9 million and 31.3% or $1.5 million,
respectively.
Gross profit increased by $1.5 million from $11.5 million in 1998 to $13.0
million in 1999, and gross profit as a percentage of sales increased from 29.6%
to 37.8 %. Specifically, the Wireless Products Group's increase in gross profit
of $4.0 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 Group's reduced sales of approximately $7.0 million.
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
$.7 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 45% to 63% in comparing the
nine 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;
(14)
<PAGE>
Selling, general and administrative (SG&A) expenses decreased from $12.3
million in 1998 to $11.5 million in 1999. However, as a percentage of sales,
SG&A expenses increased from 31.7% in 1998 to 33.3% in 1999. The decrease in
SG&A was attributable to:
- an approximate increase of $1.5. 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 $1.5 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 $.1 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 approximately $.7 million of SG&A during the
period).
Interest expenses decreased from $608,000 in 1998 to $481,000 in 1999 due
primarily to decreased borrowings under the Company's Loan Facility resulting
from the sale of Specific Energy, the proceeds from the sale of 389,231 shares
of its common stock in April, 1999 and cash provided by operations.
Additionally, the Company benefited from lower interest rates.
The Company's effective income tax rate in 1999 is 48.1%. In 1998, the
Company's effective income tax rate in calculating the benefit based on the loss
for the nine months was 27.5%. 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 upgrades; (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 1999 were operations, bank borrowings and the proceeds from the
issuance of 389,231 shares of its common stock.
The Company's working capital as of September 30, 1999 was $10.3 million.
For the nine months ended September 30, 1999, and September 30, 1998 net cash
provided by operating activities was $2.4 million and $1.7 million,
respectively. The increase in cash provided by operating activities during 1999
was attributable to net income of $548,000
(15)
<PAGE>
plus depreciation and amortization of $604,000 and net decreases in Accounts
Receivable of $401,000 and inventory of $724,000 an increase in accounts payable
and accrued expenses of $192,000 less an increase in prepaid expenses of
$46,000. The increase in cash provided by operating activities during 1998 was
attributable to net decreases in accounts receivable and inventory of $863,000
and $2,221,000 respectively, less a net loss of $1,444,000 (offset by
depreciation and amortization of $594,000 and a charge of $575,000 for
impairment of excess over net assets acquired) and a decrease in accounts
payable and accrued expenses of $549,000.00 and an increase in prepaid expense
and other assets of $542,000.
Net cash used in investing activities for the nine months ended September
30, 1999 was for the purchase of property and equipment in the amount of
$544,000. Net cash provided by investing activities for the nine months ended
September 30, 1998 was $251,000 consisting of proceeds from the sale of Specific
Energy's retail assets of $715,000, less $ 464,000, for the purchase of property
and equipment.
Cash used in financing activities for the nine months ended September, 1999
was $1,801,000 comprised of $1,838,000 net payments under the Revolving Credit
Facility and $450,000 under the Term Loan Facility partially offset by net
proceeds of $487,000 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 nine months ended September 30, 1998 was $1,642,000 comprised of
$1,192,000 million net payments under the Revolving Credit Facility and $450,000
under the Term Loan Facility. The Company had at September 30, 1999 cash and
cash equivalents of approximately $408,000.
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. As of September 30, 1999 the Company was in
violation of one of these covenants. On November 10, 1999 the Bank waived
compliance with the violated covenant.
The Company estimates that it will incur capital expenditures of
approximately $600,000 during the twelve months ended September 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 September 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
(16)
<PAGE>
the Year 2000 (Y2K) issue. As the year 2000 approaches, non-Y2K compatible
systems will be unable to accurately process certain date-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.
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 3/30/99
mail)
Voice mail 6/30/99
Other software EDI-9/31/99
Tauber Electronics Accounting Software 11/30/99
Accounting Server 11/30/99
Workstations 7/31/99
Phone system (except voice 5/31/99
mail)
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 Estimated Cost Cost as of 9/30/99
-------------------- ------------------
Division
Battery group:
Battery Network $210,000 $195,000
Tauber Electronics 50,000 15,000
Wireless Products Group:
Advanced Fox 204,000 184,000
Cliffco 138,000 98,000
(17)
<PAGE>
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 the Company could be affected by outside
service providers not being Y2K compliant, 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 believes it will be fully compliant by November 30, 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 $7,177,000
at September 30, 1999. Based on this balance, a change of one percent in the
interest rate would cause a change in interest expense for the nine months ended
September 30, 1999 of approximately $53,828, or 0.01 per share (or $0.006) 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 or 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.
(18)
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
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
(19)
<PAGE>
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 November 15, 1999 Stephen Rade
Chief Executive Officer
By: /s/ Ronald E. Badke
-------------------------------
Date November 15, 1999 Ronald E. Badke
Chief Financial Officer
(20)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999, AND THE UNAUDITED STATEMENT
OF INCOME FOR THE NINE MONTHS THEN ENDED CONTAINED IN THE REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 OF BATTERIES BATTERIES, INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 408
<SECURITIES> 0
<RECEIVABLES> 7,634
<ALLOWANCES> (884)
<INVENTORY> 8,728
<CURRENT-ASSETS> 16,483
<PP&E> 1,529
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,424
<CURRENT-LIABILITIES> 6,143
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0
0
<COMMON> 5
<OTHER-SE> 10,699
<TOTAL-LIABILITY-AND-EQUITY> 23,424
<SALES> 34,478
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<CGS> 21,458
<TOTAL-COSTS> 21,458
<OTHER-EXPENSES> 11,484
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 481
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