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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission File Number 0-27996
WIRELESS XCESSORIES GROUP, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3835420
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1840 COUNTY LINE ROAD
HUNTINGDON VALLEY, PA 19006
(Address of principal executive offices)
(215) 494-0111
(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 August 10, 2000, there were 5,222,080 shares of the registrant's Common
Stock, par value $.001 per share, outstanding.
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WIRELESS XCESSORIES GROUP, INC.
FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2000
INDEX
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<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Condensed Balance Sheet June 30, 2000 (unaudited)
and December 31, 1999......................................................... 3
Consolidated Condensed Statements of Operations for the six months ended
June 30, 2000 (unaudited) and 1999 (unaudited)................................ 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 (unaudited) and 1999 (unaudited).......................... 5
Notes to Consolidated Condensed Financial Statements.......................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 8
ITEM 3. Quantitative and Qualitative Disclosures
about Market Risk............................................................. 10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.............................................. 11
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
WIRELESS XCESSORIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA )
<TABLE>
<CAPTION>
December 31, 1999 June 30, 2000
----------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $366 $503
Accounts receivable (net of allowance of
$120 and $492, respectively) 5,119 4,090
Inventories 5,204 5,136
Prepaid expenses and other current assets 188 310
Income tax refund receivable 587 68
Current deferred income taxes 379 379
Net current assets held for sale 1,985 669
------- -------
Total Current Assets 13,828 11,155
PROPERTY AND EQUIPMENT - Net 999 1,428
EXCESS OF COST OVER NET ASSETS
ACQUIRED (Net of accumulated amortization of $111 and $132, respectively, 949 928
NET NONCURRENT ASSETS HELD FOR SALE 737 505
OTHER ASSETS 172 676
------- -------
TOTAL ASSETS $16,685 $14,692
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $600 $600
Current portion- Capital leases payable -- 35
Bank overdraft 344 116
Accounts payable 1,000 573
Accrued payroll and related benefits 1,014 781
Other accrued expense 1,504 1,517
------- -------
Total Current Liabilities 4,462 3,622
------- -------
LONG-TERM DEBT INCLUDING CAPITAL LEASE OBLIGATION: 5,505 4,049
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001, 1,000,000 shares -- --
authorized, no shares issued or outstanding
Common Stock, par value $.001, 10,000,000 shares authorized, 5,132,732 and
5,222,080 shares, issued and outstanding,
respectively 5 5
Additional paid-in capital 11,204 11,331
Accumulated Deficit (4,491) (4,315)
------- -------
Total Stockholders' Equity 6,718 7,021
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,685 $14,692
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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WIRELESS XCESSORIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 7,159 $ 7,020 $ 13,305 $ 14,157
COST OF SALES 3,670 3,484 6,610 7,044
---------- ---------- ---------- ----------
Gross profit 3,489 3,536 6,695 7,113
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ...................... 2,511 3,291 4,853 6,485
INTEREST EXPENSE, net 106 97 210 174
---------- ---------- ---------- ----------
Income from continuing operations before income taxes ......... 872 148 1,632 454
INCOME TAX EXPENSE 388 63 738 195
---------- ---------- ---------- ----------
Net income from continuing operations 484 85 894 259
LOSS FROM DISCONTINUED OPERATIONS (net of tax benefit of $204 and
$70,and $438 and $70 for the three months and six months,
respectively, ..................................................... (331) (82) (591) (82)
---------- ---------- ---------- ---------
Net income $ 153 $ 3 $ 303 $ 177
========== ========== ========== =========
Earning (loss) per common share - Basic and Diluted:
Income from continuing operations $ .10 $ .02 $ .18 $ .05
Loss from discontinued operations (.06) (.02) (.12) (.02)
---------- ---------- ---------- ---------
Net income per common share $ .04 $ .00 $ .06 $ .03
========== ========== ========== =========
Basic weighted average common shares outstanding 5,038,131 5,196,860 4,892,205 5,165,070
========== ========== ========== =========
Diluted weighted average common shares outstanding 5,049,036 5,212,890 4,902,996 5,243,681
========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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WIRELESS XCESSORIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1999 2000
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 303 $ 177
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization 397 339
Allowance for doubtful accounts provision 183 372
Change in Assets and Liabilities, net of effects from sale of
Tauber Electronics
Income tax refunds -- 519
Accounts receivable 879 1,191
Inventories 1,560 454
Prepaid expenses and other assets (181) (133)
Accounts payable and accrued expenses (1,437) (1,796)
------- -------
Net cash provided by operating activities 1,704 1,123
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INVESTING ACTIVITIES:
Purchase of property and equipment (373) (698)
Net cash proceeds from sale of Tauber assets -- 1,006
------- -------
Net Cash (used in) provided by investing activities (373) 308
------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 499
Net payments on borrowings (1,748) (1,421)
Issuance of common stock options -- 127
------- -------
Net cash used in financing activities (1,249) (1,294)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 82 137
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 330 366
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $412 $503
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period for-
Interest $307 $199
======= =======
Income taxes $120 $408
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
5
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WIRELESS XCESSORIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by
Wireless Xcessories Group, Inc. (the "Company") without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These statements
include all adjustments that, in the opinion of management, are necessary to
provide a fair statement of the results for the periods covered. All such
adjustments are of a normal recurring nature. These financial statements should
be read in conjunction with the audited financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. The results of operations for the interim periods presented
are not necessarily indicative of the results for the full year.
2. DISCONTINUED OPERATIONS
On January 27, 2000, the Company sold substantially all of the assets and
transferred certain liabilities of its wholly owned subsidiary, Tauber
Electronics, Inc. ("Tauber"). As consideration for the sale, the Company
received a cash payment of $1,005,854 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 the final valuation of transferred
assets. The note is subject to further adjustment (only upward) during the first
quarter of 2001 based on the valuation of certain inventory reserves. In
addition, the Company has developed a plan, which has been approved by the Board
of Directors of the Company, to dispose of Battery Network, Inc. The Company
intends to, but cannot guarantee that it will, complete this disposition during
calendar year 2000. As these two companies represent all of the Company's
remaining businesses within its battery assembly and distribution segment (the
"Battery Segment"), the Company has 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 condensed
statements of operations and balance sheets. The assets and liabilities of the
discontinued operations have been classified in the accompanying consolidated
balance sheets as "Net current assets held for sale" and "Net noncurrent assets
held for sale." 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 $4,381,429 and $507,831 for
the three months ended June 30, 1999 and 2000, respectively, and $9,274,000 and
$2,016,613 for the six months ended June 30, 1999 and 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 $46,000 and $16,000 for the three months ended June
30, 1999 and 2000, respectively and $118,000 and $43,000 for the six months
ended June 30, 1999 and 2000, respectively.
3. LOAN FACILITY
The Company entered into a Revolving Credit, Term Loan and Security Agreement,
dated January 6, 1997, as subsequently amended March 30, 2000, (the "Loan
Facility"), with IBJ Whitehall-Financial Group (formerly known as IBJ Schroder
Bank and Trust Company), as agent ("IBJ"). The Loan Facility consists of a
$3,000,000 Term Loan (the "Term Loan") payable in 35 monthly installments of
$50,000 each with the balance to be paid at maturity and a Revolving Credit
Facility (the "Revolver Loan") of up to $10,000,000 to be advanced at the rate
of 80% of eligible accounts receivable and 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, (iii) 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, 2000, the principal amount outstanding of the Term
Loan was $590,000 and the Revolver Loan was $3,993,000. The Loan Facility
contains certain covenants, which include maintenance of certain financial
ratios, maintenance of certain amounts of working capital, and net worth as well
as other affirmative and negative covenants. It also prohibits the payment of
dividends of common stock without consent. As of June 30, 2000, the Company was
in compliance with these covenants. The Loan Facility is due to expire on
January 7, 2002.
4. MANAGEMENT AGREEMENT
In February 1998, the Management Agreement with Founders Management Services,
Inc. ("Founders") was revised by mutual consent to, among other things,
eliminate the origination and incentive fee provisions of the original
agreement. On May 5, 1998, both active
6
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principals of Founders resigned as officers and directors of the Company,
effectively terminating the relationship between the Company and Founders. In
December 1999, Founders filed a lawsuit in the United States District Court for
the Southern District of New York against the Company alleging the Company owed
Founders the amount of approximately $493,000 for a purportedly improper
termination of the Management Agreement. The Company believes its early
termination of the agreement was proper and therefore believes that the alleged
amount claimed is not due to Founders. In addition, the Company has asserted
counterclaims related to Founders' services under the Management Agreement.
5. PRIVATE PLACEMENT
On April 23, 1999, the Company raised $498,800 (net of costs of $10,434) through
a private placement of 389,732 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
As a result of its decision to exit the Battery Segment, the Company effectively
operates in one business segment, referred to as 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 consists of
Advanced Fox Antenna, Cliffco of Tampa Bay, Inc. and AccessorySolutions.com,
Inc. All revenue and essentially all long-lived assets were related to
operations in the United States as of June 30, 2000 and for the three and six
month periods.
Export sales for the three and six months ended June 30, 1999 and 2000 were as
follows:
<TABLE>
<CAPTION>
(In Thousands)
Three Months Ended June 30 Six Months Ended June 30
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Europe, Middle East & Africa 214 52 221 80
Asia and Pacific 4 2 5 3
Americas excluding United States 223 131 342 289
------ ------ ------ ------
Total Export Sales 441 185 568 372
====== ====== ====== ======
</TABLE>
Receivables from export sales at June 30, 1999 and 2000 were $418,363 and $
279,208, respectively.
7. EARNINGS PER SHARE
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share." The calculation of basic and diluted
earnings per share ("EPS") is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <S> <C> <C> <C>
Shares:
Weighted average number of common shares
outstanding used in basic earnings per share
calculation 5,038,131 5,196,860 4,892,205 5,165,070
Dilutive effect of stock options and warrants 10,905 16,030 10,791 78,611
--------- --------- --------- ---------
Total shares used in diluted earnings per
share calculation 5,049,036 5,212,890 4,902,996 5,243,681
========= ========= ========= =========
</TABLE>
Options to purchase 215,855 and 107,960 shares with exercise prices ranging from
$1.38 to $5.00 and warrants to purchase 2,400,000 and 100,000 shares with
exercise prices ranging from $4.13 to $5.00 and $4.13 were outstanding as of
June 30, 1999 and June 30, 2000, respectively, but were not included in the
computation of diluted EPS because the exercise price of the options and
warrants was greater than the average market price of the common shares.
On June 30, 2000, warrants to purchase 2,300,000 shares with an exercise price
of $5.00 per share expired.
On May 24, 2000, the Board of Directors granted 127,500 stock options to certain
Directors, an Officer of the Company and key employees at an option price equal
to the fair market value.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
The following table represents the Company's statement of operations data
expressed as a percentage of net sales for the respective periods:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 51.3 49.6 49.7 49.8
---- ---- ---- ----
Gross Profit 48.7 50.4 50.3 50.2
---- ---- ---- ----
Selling, General &
Administrative Expenses 35.1 46.9 36.5 45.8
Interest Expense, net 1.5 1.4 1.6 1.2
---- ---- ---- ----
Income from continuing operations
before income taxes 12.1 2.1 12.2 3.2
Income Tax Expense 5.4 .9 5.5 1.4
---- ---- ---- ----
Net income from continuing operations 6.7 1.2 6.7 1.8
Loss from discontinued operations
(net of tax benefit) (4.6) (1.2) (4.4) (.6)
---- ---- ---- ----
Net Income 2.1% 0.0% 2.3% 1.2%
==== ==== ==== ====
</TABLE>
Three Months Ended June 30, 2000 ("2000") Compared to Three Months ended June
30, 1999 ("1999").
Net sales decreased by $.1 million or 2%, from $7.1 million in 1999 to $7.0
million in 2000. The decrease in sales is attributable to Cliffco who registered
a decrease of approximately $648,000 or 31% over the same period in 1999 which
was offset in part by Advanced Fox, which continued the expansion of its
customer base by registering an increase of $ 362,000 or 7% from $5,136,000 in
1999 to $5,498,000 for the same period in 2000. In addition,
AccessorySolutions.com, Inc. contributed approximately $147,000 of sales for the
current quarter (its business started up late in the third quarter of 1999).
Cliffco sales were off primarily as a result of a large drop in its carrier
business resulting from the loss of key sales personnel earlier in the year. In
that regard , the Company is challenging two former employees on non-compete
provisions and is actively re-organizing and upgrading its sales and marketing
programs to restore lost business.
Gross profit remained at $3.5 million in both the three months ended June 30,
1999 and 2000 but as a percentage of sales increased from 48.7% to 50.4%. The
small increase in gross profit percentage was a result of improved initial
selling margins on selected new products and outbound freight cost reductions
which more than offset additional incentives given to customers in the form of
expanded volume incentives and more specialized and customized services to
attract new customers and expand current business to offset lower average unit
selling prices and aggressive competition.
Selling, general and administrative (SG&A) expenses increased from $2,511,000 in
1999 to $3,291,000 in 2000. As a percentage of sales, SG&A expenses increased
from 35.1% in 1999 to 46.9% in 2000. The increase in SG&A was attributable to
costs of $193,000 at AccesorySolutions.com in 2000 and an increase of
approximately $600,000 at Advanced Fox in marketing, selling, and distribution
costs to support the current and anticipated sales growth. The increase at
Advanced Fox was due primarily to:
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- Occupancy costs due to the continued expansion of the Advanced Fox main
distribution facility to handle substantially higher volume. Shipping
volume in terms of both units and number of packages is rising at a much
higher comparative percentage than the Company's overall sales rate due to
lower average sales per unit and changes in customer sales mix.
- Additional labor to handle increased customized packaging and labeling and
sharply increased unit growth and to accommodate changes in the Company's
customer needs and product mix.
- Additional information systems and other professional costs to plan and
implement upgrades to our information technology infrastructure and
business system in conjunction with the planned automation of our
packaging, shipping, picking and receiving processes.
- An additional $275,000 charge to bad debts for our potential exposure as
a result of a Chapter 11 by a major customer during the quarter. The
Company is continuing to ship goods to the customer in bankruptcy on
a C.O.D basis and is attempting to negotiate a possible credit arrangement
which would enable the Company to begin to recover some, if not all, of
its pre-petition exposure.
Interest expenses decreased from $106,000 in 1999 to $97,000 in 2000 due
primarily to decreased borrowings under the Company's Loan Facility resulting
from the sale of 389,732 shares of common stock in April, 1999, the sale of
Tauber in January, 2000, and cash provided from operations offset ,in part, by
higher effective interest rates.
The Company's effective income tax rate in 2000 is 42.6%, compared to 44.5% in
1999. The difference in tax rate is attributable to the effect of state income
expense in the various states in which the entity operates.
Six Months Ended June 30 , 2000 ("2000") Compared to Six Months ended June 30 ,
1999 ("1999").
Net sales increased by $.9 million or 6%, from $13.3 million in 1999 to $14.2
million in 2000. The increase in sales is mainly attributable to Advanced Fox
which registered an increase of approximately $1,189,000 or 12.3% over the same
period in 1999. Advanced Fox achieved this increase by continuing its expansion
of its customer base through aggressive selling and marketing strategies, which
resulted in higher product sales volume. In addition, AccessorySolutions.com,
Inc. contributed approximately $307,000 of sales for the six months to date 2000
(its business started up late in the third quarter of 1999), while Cliffco's net
sales in 2000 declined by approximately 18% or $644,000 from $3,658,000 in 1999
to $3,014,000 in 2000. The Cliffco decline was attributable to a decline in our
carrier business.
Gross profit increased by $0.4 million from $6.7 million in 1999 to $7.1 million
in 2000 and gross profit as a percentage of sales decreased negligibly from
50.3% to 50.2%. Increased selling margins on selected categories of new product
and decreased freight cost helped to offset added expenses due to more
incentives given to customers in the form of expanded volume incentives and more
specialized and customized services to attract new customers and expand current
business to offset lower average unit selling prices and aggressive competition.
Selling, general and administrative (SG&A) expenses increased from $4.9 million
in 1999 to $6.5 million in 2000. As a percentage of sales, SG&A expenses
increased from 36.5% in 1999 to 45.8% in 2000. The increase in SG&A was
attributable to costs of approximately $329,000 at AccesorySolutions.com in 2000
and an increase of approximately $1,200,000 at Advanced Fox in marketing,
selling, and distribution costs to support the current and anticipated sales
growth. The increase at Advanced Fox was due primarily to:
- Occupancy costs due to the continued expansion of the Advanced Fox main
distribution facility to handle substantially higher volume. Shipping
volume in terms of both units and number of packages is rising at a much
higher comparative percentage than the Company's overall sales rate due to
lower average sales per unit and changes in customer sales mix.
- Additional labor to handle increased customized packaging and labeling
and sharply increased unit growth and to accommodate changes in the
Company's customer needs and product mix.
- Additional information systems and other professional costs to plan and
implement upgrades to our information technology infrastructure and
business systems in conjunction with the planned automation of our
packaging, shipping, picking and receiving processes.
- An additional $275,000 charge to bad debts for our potential exposure as
a result of a Chapter 11 filing by a major customer during the quarter. The
Company is continuing to ship goods to the customer in bankruptcy on a
C.O.D basis and is attempting to negotiate a possible credit arrangement
which would enable the Company to begin to recover some, if not all, of its
pre-petition exposure.
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Interest expenses decreased from $210,000 in 1999 to $174,000 in 2000 due
primarily to decreased borrowings under the Company's Loan Facility resulting
from the sale of Tauber in January, 2000, and cash provided from operations
offset in part by increasing effective interest rates.
The Company's effective income tax rate in 2000 is 43.0%, compared to the
Company's effective income tax rate in 1999 was 45.2.%. The difference in tax
rate is attributable to 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 fund (i) sales growth and (ii)
financing for acquisitions. Among other things, the funding of sales growth will
involve capital equipment expenditures mainly related to: (a) business system
upgrades, and (b) purchase of machinery and equipment in order to streamline
receiving, shipping, and packaging operations. Future sales growth will also
necessitate further investment in the development and enhancement of the
Company's Web site and supporting systems. The Company's primary sources of
financing during the twelve months ending June 30, 2000 were cash flow from
operations, the sale of 389,732 shares of common stock in April, 1999, the sale
of Tauber in January, 2000 and bank borrowings.
The Company's working capital as of June 30, 2000 was $7,533,000. Net cash
provided by operating activities for the six months ended June 30, 2000 and 1999
was $960,000 and $1,704,000, respectively. The Company was able to provide cash
from operations of $888,000 from its net income of $177,000 as adjusted for
non-cash items of depreciation and amortization of $339,000 and bad debt
provision of $372,000. Cash provided from changes in assets and liabilities
totaled $72,000 resulting from collections of income tax refunds of $519,000
and net decreases in accounts receivable of $1,191,000 and inventory of $454,000
less a decrease in accounts payable and accrued expenses of $1,796,000 and an
increase in prepaid expenses of $296,000.
Net cash provided by investing activities for the six months ended June 30, 2000
was $471,000 from cash proceeds of approximately $1,006,000 from the sale of
substantially all of the assets of Tauber in January, 2000 partially offset by
the purchase of property and equipment in the amount of $535,000. Net cash used
in investing activities for the six months ended June 30, 1999 was $373,000, for
the purchase of property and equipment.
Cash used in financing activities for the six months ended June 30, 2000
totaling $1,294,000 was principally for $1,372,000 net payments under the
Revolver Loan and $150,000 under the Term Loan offset in part by net additions
to capital lease debt of $101,000 and proceeds from common stock options of
$127,000. Cash used by financing activities for the six months ended June 30,
1999 was $1,249,000 was for net payments under the Revolver Loan of 1,598,000
and $150,000 under the Term Loan partially offset by proceeds of $499,000 from
the issuance of Common Stock. The Company had cash and cash equivalents of
approximately $503,000 on June 30, 2000.
The Loan Facility as amended March 30, 2000, contains 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, 1999, the Company was not in compliance with certain
of these covenants. As of June 30, 2000, the Company was in compliance with
these covenants.
The Company estimates that it will incur capital expenditures of approximately
$1,200,000 during the twelve months ended June 30, 2001, principally for the
procurement of a new computer system and the software to upgrade the Company's
business systems 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, and meet the working capital cash
needs of the Company and anticipated capital expenditure needs during the twelve
months ending June 30, 2000.
YEAR 2000 ISSUES
The Company identified its various applications and hardware that required
modification or replacement to be year 2000 ("Y2K") compliant. In addition, the
Company contacted its vendors and significant customers regarding their Y2K
compliance plans. Y2K introduced the potential for errors and miscalculations
related to IT and non-IT systems, which were not designed to accommodate a date
of year 2000 and beyond. As of August 12, 2000, the Company had encountered no
significant Y2K-related problems.
The Company incurred costs related to Y2K for outside consultants and capital
expenditures in 1999, 1998 and 1997, which aggregated approximately $466,000 of
which $256,000 related to the Wireless Products Segment. The Company did not
separately track the internal costs for the Y2K project. This cost is
principally the payroll costs for the information systems department.
The most significant remaining risk to the Company regarding Y2K would be the
interruption of business due to vendor and customer non-compliance. As the
Company has not experienced any major problems to date related to Y2K, it does
not have a contingency plan. However, in the event that the Company develops
future problems, the failure to have a contingency plan could have a material
adverse effect on the Company.
SEASONALITY AND INFLATION
Our quarterly operating results have fluctuated only to a limited extent in the
past. However, with the discontinuation of the Battery Segment, it is likely
that they will fluctuate significantly in the future with lower product revenues
in the first and second quarters as compared with the third and fourth quarters.
This fluctuation is due primarily to the lower demand for wireless accessories
during the winter and spring months and higher demand during the December
holiday season. In addition, our net sales could be affected in the future by
business acquisitions. The impact of inflation on the Company's operations has
not been significant to date. However, a high rate of inflation in the future
poses a risk to the Company and its ability to sustain its operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk - The Company's only financial instruments with interest rate
risk exposure are revolving credit borrowings and variable rate term loans,
which total $4,583,000 at June 30, 2000. 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 , 2000 of $22,915, or 0.004 per share (or $0.002 per
share) net of income tax calculated using the Company's historical statutory
rates, on an annual basis.
These instruments are not entered into for trading purposes and carry interest
at a pre-agreed upon percentage point spread from one of several designated base
rates. The Company's objective in maintaining these variable rate borrowings is
the flexibility obtained regarding early repayment without penalties and lower
overall cost as compared with fixed-rate borrowings.
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Foreign Currency Risk - The Company does not use foreign currency forward
exchange contracts or purchase currency options to hedge local currency cash
flows or for trading purposes. All sales arrangements with international
customers and suppliers are denominated in U.S. dollars. The Company's Wireless
Products Segment purchases over 90% of its products from manufacturers located
overseas, principally in the Far East. The depreciation of the U.S. dollar
against the major Asian currencies could, therefore, cause an increase in the
cost of the Company's products and adversely affect its results of operations or
financial condition.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 -K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8K
None
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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 14, 2000 Stephen Rade
Chief Executive Officer
By: /s/ Ronald E. Badke
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Date: August 14, 2000 Ronald E. Badke
Chief Financial Officer
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