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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 September 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 November 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 SEPTEMBER 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Condensed Balance Sheet September 30, 2000
(unaudited) and December 31, 1999................................... 3
Consolidated Condensed Statements of Operations for the nine
and three months ended September 30, 2000 (unaudited) and
1999 (unaudited).................................................... 4
Consolidated Statements of Cash Flows for the nine months
ended September 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.......... 11
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION................................................... 12
ITEM 6. Exhibits and Reports on Form 8-K.................................... 12
2
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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 September 30, 2000
----------------- ------------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 366 $ 655
Accounts receivable (net of allowance of
$120 and $546, respectively) 5,119 3,964
Inventories 5,204 4,962
Prepaid expenses and other current assets 188 404
Income tax refund receivable 587 20
Current deferred income taxes 379 379
Net current assets held for sale 1,985 245
-------- --------
Total Current Assets 13,828 10,629
PROPERTY AND EQUIPMENT - Net 999 1,635
EXCESS OF COST OVER NET ASSETS
ACQUIRED (Net of accumulated amortization of $111 and $142 respectively) 949 918
NET NONCURRENT ASSETS HELD FOR SALE 737 513
OTHER ASSETS 172 671
-------- --------
TOTAL ASSETS $ 16,685 $ 14,366
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 600 $ 440
Current portion- Capital leases payable -- 41
Bank overdraft 344 501
Accounts payable 1,000 1,230
Accrued payroll and related benefits 1,014 848
Other accrued expense 1,504 1,814
-------- --------
Total Current Liabilities 4,462 4,874
-------- --------
LONG-TERM DEBT INCLUDING CAPITAL LEASE OBLIGATION 5,505 2,595
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 11,332
Accumulated Deficit (4,491) (4,440)
-------- --------
Total Stockholders' Equity 6,718 6,897
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,685 $ 14,366
======== ========
</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 SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 8,405 $ 7,692 $ 21,710 $ 21,849
COST OF SALES 4,065 3,958 10,675 11,002
--------- --------- --------- ---------
Gross profit 4,340 3,734 11,035 10,847
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,947 3,198 7,800 9,683
INTEREST EXPENSE, net 96 69 306 243
--------- --------- --------- ---------
Income from continuing operations before income taxes 1,297 467 2,929 921
INCOME TAX EXPENSE 613 220 1,351 415
--------- --------- --------- ---------
Net income from continuing operations 684 247 1,578 506
DISCONTINUED OPERATIONS
(Loss) from operations (net of tax benefit of $223, $69,
and $661, $139, for the three months and nine months,
respectively) (439) (103) (1,030) (185)
Estimated loss on sale of subsidiaries (net of tax
benefit of $0, $203 and $0, $203, for the three and
nine months, respectively) -- (270) -- (270)
---- ----- ---- ----
Net (loss) income from discontinued operations (439) (373) (1,030) (455)
---- ----- ---- ----
Net income (loss) $245 ($126) $548 $ 51
==== ===== ==== ====
Earning (loss) per common share - Basic and Diluted:
Income from continuing operations $.14 $.05 $.32 $.10
Loss from discontinued operations (.09) (.07) (.21) (.09)
---- ----- ---- ----
Net income loss per common share $.05 $(.02) $.11 $.01
==== ===== ==== ====
Basic weighted average common shares outstanding 5,132,231 5,222,080 4,973,390 5,184,213
========= ========= ========= =========
Diluted weighted average common shares outstanding 5,145,834 5,222,080 4,984,181 5,240,921
========= ========= ========= =========
</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>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1999 2000
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 548 $ 51
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization 604 545
Allowance for doubtful accounts provision 392 433
Change in Assets and Liabilities, net of effects from sale of
Tauber --
Income tax refunds -- 567
Accounts receivable 9 1,447
Inventories 724 741
Prepaid expenses and other assets (46) (334)
Accounts payable and accrued expenses 192 (208)
------- -------
Net cash provided by operating activities 2,423 3,242
------- -------
INVESTING ACTIVITIES:
Purchase of property and equipment (544) (1,057)
Net cash proceeds from sale of Tauber assets -- 1,006
------- -------
Net Cash used in investing activities (544) (51)
------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 487 --
Net payments on borrowings (2,288) (3,029)
Issuance of common stock options -- 127
------- -------
Net cash used in financing activities (1,801) (2,902)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 78 289
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 330 366
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 408 $ 655
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period for-
Interest $ 307 $ 288
======= =======
Income taxes net of refunds $ 120 $ (41)
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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WIRELESS XCESSORIES GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The consolidated 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. The
Company is in the final stages of disposing and shutting down its wholly owned
subsidiary Battery Network, Inc. ("Battery Network") which is expected to be
completed by December 31, 2000.
On November 6, 2000, effective October 31, 2000, the Company sold selected
inventory and substantially all of its fixed assets including selected trade
names and customer lists for a total of $200,000 in cash and a note totaling
$125,000. In connection with the sale of Battery Network the Company has
recorded a loss of $270,000 (net of $203,000 tax benefit). The loss includes the
estimated operating losses and cost to dispose of the business from September
30, 2000 until the ultimate wind down including a reserve for the estimated
payments on the operating lease for which the Company is still obligated. In
addition, the Company has received an offer from a another party involving the
sale of selected inventory and trade names related to Absolute Battery (a
division and tradename of Battery Network principally involved in the Laptop
battery and accessories business) for approximately $50,000 in cash. The Company
retained accounts receivable, selected inventory and all outstanding liabilities
as of October 31, 2000. The Company is maintaining certain personnel to collect
receivables, dispose of remaining inventory and assets, and to wind down affairs
in preparation of a total shutdown. 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
under certain captions will not agree with the respective consolidated
statements of operations. Net sales for the Battery Segment were $3,491,429 and
$730,715 for the three months ended September 30, 1999 and 2000, respectively,
and $12,766,955 and $2,747,328 for the nine months ended September 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 $56,000 and $12,000 for the three months ended
September 30, 1999 and 2000, respectively and $174,000 and $55,000 for the nine
months ended September 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
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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 September 30, 2000, the
principal amount outstanding of the Term Loan was approximately $440,000 and the
Revolver Loan was approximately $2,494,050. 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 September 30, 2000, the Company was not in
compliance with certain of these covenants. On November 14, 2000, the Company
entered into an amendment to the Loan Facility, whereby the non-compliance at
September 30, 2000 was waived, and the financial covenants through December 31,
2000 were amended to reflect the Company's current projections. 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 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 September 30, 2000 and for the three and
nine month periods then ended.
Export sales for the three and nine months ended September 30, 1999 and 2000
were as follows:
<TABLE>
<CAPTION>
(In Thousands)
Three Months Ended September 30 Nine Months Ended September 30
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Europe, Middle East & Africa $219 $ 23 $440 $ 71
Asia and Pacific 3 3 8 6
Americas excluding United States 269 74 409 394
---- ---- ---- ----
Total Export Sales $491 $100 $857 $471
==== ==== ==== ====
</TABLE>
Receivables from export sales at September 30, 1999 and 2000 were $418,363 and $
193,321, 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 September 30 Nine Months Ended September 30
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Shares:
Weighted average number of common shares
outstanding used in basic earnings per share
calculation 5,132,231 5,222,080 4,973,390 5,184,213
Dilutive effect of stock options and warrants 13,603 0 10,791 56,708
--------- --------- --------- ---------
Total shares used in diluted earnings per
share calculation 5,145,834 5,222,080 4,984,181 5,240,921
========= ========= ========= =========
</TABLE>
Options to purchase 267,198 and 312,323 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 $1.06 to $5.00 were outstanding as of September 30,
1999 and September 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.
In April 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 79,000 stock options to certain
Directors, an Officer of the Company and key employees at an option price equal
to the fair market value on the date of grant. On August 16, 2000, the Board of
Directors granted 48,500 stock options to certain key employees at an option
price equal to the fair market value on the date of grant.
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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 September 30 Nine Months Ended September 30
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 48.4 51.5 49.2 50.4
----- ----- ----- -----
Gross Profit 51.6 48.5 50.8 49.6
----- ----- ----- -----
Selling, General &
Administrative Expenses 35.1 41.6 35.9 44.3
Interest Expense, net 1.1 .8 1.4 1.1
----- ----- ----- -----
Income from continuing operations
before income taxes 15.4 6.1 13.5 4.2
Income Tax Expense 7.3 2.9 6.2 1.9
----- ----- ----- -----
Net income from continuing operations 8.1 3.2 7.3 2.3
Discontinued Operations:
Loss from operations (5.2) (1.3) (4.7) (.8)
Estimated loss on sale of subsidiaries -- (3.5) -- (1.2)
----- ----- ----- -----
Net Income 2.9% (1.6)% 2.6% .3%
===== ===== ===== =====
</TABLE>
Three Months Ended September 30, 2000 ("2000") Compared to Three Months ended
September 30, 1999 ("1999").
Net sales decreased by $0.7 million or 8.5%, from $8.4 million in 1999 to $7.7
million in 2000. The decrease in sales is attributable to Cliffco which
registered a decrease of approximately $991,000 or 40% 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 $ 120,000 or 2% from $5,940,000
in 1999 to $6,060,000 for the same period in 2000. In addition,
AccessorySolutions.com, Inc. contributed approximately $160,000 of sales for the
current quarter (its business started up late in the third quarter of 1999).
Cliffco experienced a large drop in its carrier business resulting from the loss
of key sales personnel earlier in the year. In that regard, the Company has
successfully enforced one former employee on its non-compete agreement and is
actively re-organizing and upgrading its sales and marketing programs to restore
lost business.
Gross profit decreased from $4.3 million in 1999 to $3.7 million for the three
months ended September 30, 1999 and 2000, respectively, and as a percentage of
sales decreased from 51.6.% to 48.5%. The decrease in gross profit percentage
which is result of additional incentives given to customers in the form of
expanded volume incentives and more specialized and customized services to
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attract new customers and expand current business to offset lower average unit
selling prices and aggressive competition, partially offset by improved initial
selling margins on selected new products and outbound freight cost reductions.
Selling, general and administrative (SG&A) expenses increased from $2,947,000 in
1999 to $3,198,000 in 2000. As a percentage of sales, SG&A expenses increased
from 35.1% in 1999 to 41.6% in 2000. The increase in SG&A was attributable to
costs of $85,000 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:
- 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.
Interest expense decreased from $96,000 in 1999 to $69,000 in 2000 due primarily
to decreased borrowings under the Company's Loan Facility.
The Company's effective income tax rate in 2000 is 47.1%, compared to 47.3% 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.
Nine Months Ended September 30 , 2000 ("2000") Compared to Nine Months ended
September 30, 1999 ("1999").
Net sales increased by $0.1 million or 1%, from $21.7 million in 1999 to $21.8
million in 2000. The increase in sales is mainly attributable to Advanced Fox
which registered an increase of approximately $1,300,000 or 8.4% 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 $467,000 of sales for the nine 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 27% or $1,635,000 from
$6,123,000 in 1999 to $4,488,000 in 2000. The Cliffco shortfall was attributable
to a decline in our carrier business.
Gross profit decreased by $0.2 million from $11.0 million in 1999 to $10.8
million in 2000 and gross profit as a percentage of sales decreased
from 50.8% to 49.6%. The decline in gross margin was a result of 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 partially offset by increased margins on new product
sales and reductions in freight costs to customers.
Selling, general and administrative (SG&A) expenses increased from $7.8 million
in 1999 to $9.7 million in 2000. As a percentage of sales, SG&A expenses
increased from 35.9% in 1999 to 44.3% in 2000. The increase in SG&A was
attributable to costs of approximately $514,000 at AccesorySolutions.com in 2000
and an increase of approximately $1,300,000 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 June 30, 2000,
quarter. In late September 2000, Company entered into a formal consignment
arrangement with the
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customer in bankruptcy which will provide for a recovery of its pre-petition
exposure over an approximate 5 month period. The Company received $50,000 in
The Third Quarter from the customer who filed chapter 11. The Company
reversed $50,000 of the charge to bad debts in the third Quarter,
accordingly.
Interest expenses decreased from $306,000 in 1999 to $243,000 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 45.0%, compared to the
Company's effective income tax rate in 1999 of 46.1.%. 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 September 30, 2000 were cash flow from
operations, sale of Tauber in January, 2000 and bank borrowings.
The Company's working capital as of September 30, 2000 was $5,755,000. Net cash
provided by operating activities for the nine months ended September 30, 2000
and 1999 was $3,242,000 and $2,423,000, respectively. The Company was able to
provide cash from operations of $1,029,000 from its net income of $51,000 as
adjusted for non-cash items of depreciation and amortization of $545,000 and bad
debt provision of $433,000. Cash provided from changes in assets and liabilities
totaled $2,213,000 resulting from collections of income tax refunds of $567,000
and net decreases in accounts receivable of $1,447,000 and inventory of $741,000
less a decrease in accounts payable and accrued expenses of $208,000 and an
increase in prepaid expenses of $334,000.
Net cash provided by investing activities for the nine months ended September
30, 2000 was $51,000 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 $1,057,000.
Net cash used in investing activities for the nine months ended September 30,
1999 was $544,000, for the purchase of property and equipment.
Cash used in financing activities for the nine months ended September 30, 2000
totaling $2,902,000 was principally for $2,680,000 net payments under the
Revolver Loan and $450,000 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 nine months ended September
30, 1999 was $1,801,000 was for net payments under the Revolver Loan of
$1,838,000 and $450,000 under the Term Loan partially offset by proceeds of
$487,000 from the issuance of Common Stock. The Company had cash and cash
equivalents of approximately $655,000 on September 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. On November 14, 2000, the Company entered into an amendment to the
Loan Facility, whereby the non-compliance at September 30, 2000 was waived, and
the financial covenants through December 31, 2000 were amended to reflect the
Company's current projections. The loan facility is due to expire on January 7,
2002.
The Company estimates that it will incur capital expenditures of approximately
$1,000,000 during the twelve months ended September 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 September 30, 2001.
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 November 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
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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 $2,954,000 at September 30, 2000. 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, 2000 of $22,155 or 0.004 per share or
$0.002 per share net of income tax calculated using the Company's historical
statutory rates.
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.
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.
FORWARD LOOKING STATEMENTS
Some of the information presented in this 10Q constitutes forward looking
statements within the meaning of the private Securities Litigation Reform Act of
1995. Statements that are not historical facts, including statements about
management's expectations for fiscal year 2001 and beyond, are forward looking
statements and involve various risks and uncertainties. Although the Company
believes that its expectations are based on reasonable assumptions within the
bounds of its knowledge, there can be no assurance that the actual results will
not differ materially from the Company's expectations. Factors which could cause
the actual results to differ materially from expectations are discussed in the
Company"s Annual Report on Form 10-K and in other filings with the Securities
and Exchange Commission.
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PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
"The Company's common stock is traded on the Nasdaq National Market ("NNM"),
The Company received a letter from Nasdaq dated August 15, 2000 indicating that
Company had failed to maintain a minimum market value of public float of
$5,000,000 over 30 consecutive trading days and that the Company's stock would
be delisted at the opening of business on November 15, 2000 pursuant to NNM
Maintenance Standard 1 (Marketplace Rule 4450(e)(21) if the minimum market
value of public float was not brought into compliance with such Maintenance
Standard. The Company appealed the Staff's determination and requested a
hearing pursuant to the procedures set forth in the Nasdaq Marketplace Rules.
The Nasdaq has scheduled a hearing with the Company for December 8, 2000. The
Company's common stock will remain to be listed on the NNM pending the Nasdaq
listing Qualifications Panel's decision."
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: November 14, 2000 Stephen Rade
Chief Executive Officer
By: /s/ Ronald E. Badke
-----------------------------
Date: November 14, 2000 Ronald E. Badke
Chief Financial Officer
