<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1999
( ) Transition Report under Section 13 or 15(d) of the Exchange Act
For the transition period from ___________ to ___________.
Commission File Number: 000-22251
BOBBY ALLISON WIRELESS CORPORATION f/k/a 2CONNECT EXPRESS, INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
FLORIDA 65-0674664
- ------------------------------- -------------------------------
(State of Incorporation (I.R.S. Employer
or Organization) Identification No.)
2055 LAKE AVENUE, S.E., SUITE A, LARGO, FLORIDA 33771
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the Company was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 480,000 shares of Common
Stock, par value $.01 per share, as of November 5, 1999.
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BOBBY ALLISON WIRELESS CORPORATION AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated balance sheets -
September 30, 1999 and December 31, 1998 3
Consolidated statements of operations-
three months and nine months ended September 30, 1999 and September 30, 1998 5
Consolidated statements of cash flows-
nine months ended September 30, 1999 and September 30, 1998 6
Notes to consolidated financial statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. 8
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 14
ITEM 2. CHANGES IN SECURITIES. 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 14
ITEM 5. OTHER INFORMATION. 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 17
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BOBBY ALLISON WIRELESS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT:
Cash $ 50,142 $ 125,155
Accounts receivable, less allowance for doubtful accounts of
$86,454 and $76,144 1,135,123 684,344
Prepaid expenses 190,005 29,091
Inventories 903,314 645,976
Deferred tax asset 24,000 24,000
---------- ----------
TOTAL CURRENT ASSETS 2,302,584 1,508,566
---------- ----------
LEASEHOLD IMPROVEMENTS AND EQUIPMENT, AT COST: 1,977,012 950,068
Less accumulated depreciation 479,566 265,491
---------- ----------
NET LEASEHOLD IMPROVEMENTS AND EQUIPMENT 1,497,446 684,577
---------- ----------
OTHER ASSETS:
Goodwill and other intangible assets, net of accumulated
amortization of $166,751 and $135,442 324,071 350,397
Deferred tax asset 37,300 156,000
Deposits 48,816 25,038
---------- ----------
TOTAL OTHER ASSETS 410,187 531,435
---------- ----------
$4,210,217 $2,724,578
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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BOBBY ALLISON WIRELESS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ ----------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,282,533 $ 550,156
Accrued expense 266,452 266,624
Deferred income 443,988 315,528
Current maturities of long-term debt 166,111 168,877
Convertible debenture -- 125,000
----------- -----------
TOTAL CURRENT LIABILITIES 2,159,084 1,426,185
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 827,281 441,961
----------- -----------
TOTAL LIABILITIES 2,986,365 1,868,146
----------- -----------
SERIES A AND B PREFERRED STOCK:
Series A convertible preferred stock, $1.00 par, shares
authorized 20; outstanding 15 375,000 375,000
Series B convertible preferred stock, $1.00 par, shares
authorized 50; outstanding 50 1,250,000 1,250,000
----------- -----------
TOTAL SERIES A AND B PREFERRED STOCK 1,625,000 1,625,000
----------- -----------
CAPITAL DEFICIT:
Common stock, $.01 par; shares authorized 25 million;
outstanding 480,000 4,800 4,800
Series C convertible preferred stock, $1.00 par, shares
authorized 250; outstanding 10 250,000 --
Additional paid-in capital 100,405 100,405
Deficit (756,353) (873,773)
----------- -----------
TOTAL CAPITAL DEFICIT (401,148) (768,568)
----------- -----------
$ 4,210,217 $ 2,724,578
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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BOBBY ALLISON WIRELESS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Product sales 1,964,907 679,428 $ 4,788,521 $ 1,875,316
Activation commissions 938,115 1,140,772 2,582,737 3,148,689
Pager services 247,836 264,603 694,011 580,839
---------- ---------- ----------- -----------
Total revenues 3,150,858 2,084,803 8,065,269 5,604,844
---------- ---------- ----------- -----------
COST OF SALES 1,166,505 992,220 2,907,003 2,991,125
---------- ---------- ----------- -----------
Gross profit 1,984,353 1,092,583 5,158,266 2,613,719
---------- ---------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses 1,818,438 931,309 4,546,853 2,316,789
Depreciation and amortization 124,425 48,985 240,116 149,214
---------- ---------- ----------- -----------
Total operating expenses 1,942,863 980,294 4,786,969 2,466,003
---------- ---------- ----------- -----------
Operating income (loss) 41,490 112,289 371,297 147,716
OTHER INCOME (EXPENSE):
Interest expense (61,435) (103,491) (146,915) (237,633)
Interest income 3,921 (653) 9,967 5,014
Other 131,278 1,796 95,279 (29,254)
---------- ---------- ----------- -----------
Total other income (expense) 73,764 (102,348) (41,669) (261,873)
---------- ---------- ----------- -----------
INCOME (LOSS)BEFORE TAXES ON INCOME 115,254 9,941 329,628 (114,157)
INCOME TAX (EXPENSE) BENEFIT (41,200) (4,000) (118,700) 41,000
---------- ---------- ----------- -----------
NET INCOME (LOSS) 74,054 5,941 210,928 (73,157)
PREFERRED STOCK DIVIDENDS 33,367 -- 93,508 --
---------- ---------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS 40,687 5,941 $ 117,420 $ (73,157)
========== ========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE (BASIC AND DILUTED) $ 0.08 $ 0.24
WEIGHTED AVERAGE SHARES OUTSTANDING 480,000 480,000
PRO FORMA EARNINGS (LOSS) PER COMMON SHARE (BASIC AND DILUTED) $ 0.01 $ (0.15)
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC AND DILUTED) 480,000 480,000
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
BOBBY ALLISON WIRELESS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 117,420 $ (73,157)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization 240,116 149,214
Cash provided by (used for):
Accounts receivable (450,779) (27,262)
Prepaid expenses (160,914) (5,271)
Inventories (257,340) 98,736
Deposits (23,778) (3,849)
Deferred Tax Asset 118,700 (41,000)
Accounts payable 732,377 (466,278)
Deferred Revenue 128,460 4,424
Accrued expenses (172) (15,965)
----------- ---------
Net cash provided by (used for) operating activities 444,090 (380,408)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of leasehold improvements and equipment (1,026,658) (111,112)
----------- ---------
Net cash used for investing activities (1,026,658) (111,112)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease)in long-term debt -- 292,430
Proceeds from issuance of preferred stock 250,000 --
Proceeds from line of credit 382,555 --
Proceeds from (Repayment of) issuance of convertible debt (125,000) 300,000
Cancellation of Treasury Stock -- --
----------- ---------
Net cash provided by financing activities 507,555 592,430
----------- ---------
NET INCREASE (DECREASE) IN CASH: (75,013) 100,910
CASH, beginning of period 125,155 2,050
----------- ---------
CASH, end of period $ 50,142 $ 102,960
=========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 146,915 $ 237,633
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
BOBBY ALLISON WIRELESS CORPORATION AND SUBSIDIARY
(Notes to Consolidated Financial Statements)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
BASIS OF PRESENTATION
The unaudited consolidated financial statements have been prepared in
conformity with instructions to Form 10-QSB and therefore do not include all the
information and footnotes required by generally accepted accounting principals
for complete financial statements. Certain items included in these statements
are based upon management estimates. In the opinion of management, the
accompanying financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary for fair presentation. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of the operating results expected for the fiscal year ending December
31, 1999. These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998. See Note 1 to
those financial statements for a discussion of the recapitalization and merger
with Bobby Allison Cellular Systems of Florida, Inc.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Bobby
Allison Wireless Corporation and its wholly-owned subsidiary (the "Company").
All significant intercompany accounts and transactions have been eliminated in
consolidation.
NET INCOME (LOSS) PER COMMON SHARE
Basic EPS is calculated by dividing the income (loss) available to
common shareholders by the weighted average number of common shares outstanding
for the period without consideration for potential common shares. Potential
common shares were not included for the nine months ended September 30, 1999 and
1998 since their effects are antidilutive under the treasury stock method for
options and warrants and if-converted method for convertible preferred stock.
For 1998, the Company has presented earnings per share on a pro forma basis as
if the merger, which occurred December 31, 1998, had occurred on January 1,
1998.
STORE PROPERTY AND DEVELOPMENT COSTS
Costs incurred prior to the opening of a store and certain costs
related to the implementation of corporate sales programs are capitalized and
amortized over a period of twelve months starting with the month of commencement
of such programs and new stores.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 122,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS
133 requires companies to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognized income in the period of change.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2000 to
affect its financial statements.
7
<PAGE> 8
DEFERRED INCOME
During 1998, the Company negotiated an agreement with a supplier
whereby the supplier agreed to forgive a note payable with an outstanding
balance of $262,022. Under the terms of the agreement, the forgiveness is
cancelable if certain events occur, including the termination of a related
agreement with cause. The Company has deferred the recognition of debt
forgiveness income until the risk of repayment no longer exists and is expected
to recognize 50% of the deferred income on November 30, 1999 and the balance on
November 30, 2000, provided the agreement is still in effect on those dates. The
agreement also provides for $200,000 of supplier marketing development funds
received in January 1999 to be deferred over two years and recognized using the
same percentages. Deferred income also includes billed but unearned beeper
service revenue.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward looking
statements. The Company wishes to caution investors that any forward looking
statements made by or on behalf of the Company are subject to uncertainties and
other factors that could cause actual results to differ materially from such
statements. The uncertainties and other factors include, but are not limited to,
the factors listed in the Company's Form 10-KSB for the year ended December 31,
1998 (many of which have been discussed in prior SEC filings by the Company.)
Though the Company has attempted to list the factors it believes to be important
to its business, the Company wishes to caution investors that other factors may
prove to be important in affecting the Company's results of operations. New
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess how each of such factors may
cause actual results to differ materially from forward looking statements.
Investors are further cautioned not to place undue reliance on any
forward looking statements as they speak only of the Company's view as of the
date the statement was made. The Company undertakes no obligation to publicly
update or revise any forward looking statements, whether as a result of new
information, future events, or otherwise.
GENERAL
The Company, headquartered in Largo, Florida, is an enclosed regional
mall-based specialty retailer of wireless communications products and services
for the individual and small business customer which, as of November 5, 1999,
had forty-six (46) sales locations including twenty-six (26) in-line stores,
nineteen (19) kiosks and one (1) direct sales location located primarily in
Central and South Florida. The Company's products, which range in price up to
approximately $699, cover a broad assortment of over two hundred fifty (250)
stock-keeping units and a wide range of service plans offered by six (6)
cellular/PCS service providers and four (4) paging carriers.
In accordance with its business plan, the Company is proceeding with
the expansion of its operations beyond the State of Florida. As of November 5,
1999, the Company had opened seven (7) sales locations in Georgia, five (5) in
Atlanta, one (1) in Augusta and one (1) in Centerville, one (1) sales location
in Wilmington, North Carolina and two (2) sales locations in South Carolina, one
(1) in Columbia and one (1) in Aiken. The Company is scheduled to open
approximately fourteen (14) more sales locations by the end of the year in
Georgia, South Carolina, North Carolina, Virginia and the pan handle of Florida.
Furthermore, the Company is currently negotiating leases for additional sales
locations in Georgia, North Carolina, South Carolina, Virginia and Tennessee.
The Company's continued expansion plans are dependent, however, upon the success
of the Company's current negotiations for an additional line of credit of up to
$1 million and its on-going offering of $1 million of Series C Convertible
Preferred Stock. The Company has sold $475,000 of its Series C Convertible
Preferred Stock ($250,000 as of September 30, 1999) and expects to complete the
sale of $1,000,000 thereof by the end of the year. However, there is no
assurance that the Company will be able to obtain the proposed debt financing
or, that if available, it will be on acceptable terms, and furthermore, there is
no assurance that the Company will complete such sales of its Series C Preferred
Stock by year end or ever. See Item 5.
8
<PAGE> 9
During 1998, the Company planned and implemented a re-structuring which
included:
o the January 12, 1998 filing of a voluntary petition for protection
under Chapter 11 of the U.S. Bankruptcy Code to restructure the
business
o significantly reducing corporate overhead
o pursuant to the Chapter 11 proceedings, rejecting the leases and
closing all of its stores except for its one profitable location Coral
Square mall
o settling all claims of creditors and emerging from bankruptcy on
October 27, 1998
o entering into a merger agreement on May 14, 1998 and consummating a
merger with Bobby Allison Cellular Systems of Florida, Inc. on
December 31, 1998
SOURCES OF REVENUE
The Company's revenues are generated principally from three sources:
(i) RETAIL SALES. The Company sells cellular and wireless products,
such as phones, pagers and related accessories in the Company's retail outlets.
(ii) ACTIVATION COMMISSIONS. The Company receives an activation
commission from the applicable cellular carrier when a customer initially
subscribes for the cellular carrier's service. The amount of the activation
commission paid by cellular carriers is based upon the service plan offered by
the carrier and is recognized by the Company at the time of sale. New
subscription activation commissions are fully refundable if the subscriber
cancels its subscription prior to completion of a minimum period of continuous
active service (generally 90 days). Customers generally sign a service agreement
with the Company that the customer reimburse the Company for lost activation
commissions in the event of the early cancellation of service. The Company
accrues for estimated deactivation losses, net of cancellation fees, by creating
a reserve against carrier accounts receivable. The reserve is reflective of the
historical cancellation experience.
As stated above, the Company has expanded into the States of Georgia,
South Carolina and North Carolina. The Company is currently under contracts with
AT&T Wireless Services of Florida and Georgia, Triton PCS, Inc., Powertel,
Nextel and AirTouch. The Company is under an exclusive contract with AT&T
Wireless Services of Florida in Central and South Florida and consequently may,
during the term of such contract, only sell the services of AT&T Wireless
Services in Central and South Florida with the exception of prepaid cellular
service for which the Company is currently negotiating a contract with a prepaid
cellular provider. In South Carolina, North Carolina and Virginia, the Company
has entered into a contract with Triton PCS, Inc. The Triton PCS contract
provides that the Company may only provide Triton PCS's service (marketed as
"SunCom") in Triton PCS's market area in the states of South Carolina, North
Carolina and Virginia for a period of 18 months which period expires in February
2001. In return, the Company is receiving certain market development assistance
with respect to the opening of twenty (20) sales locations during such 18 month
period of which the Company has already opened four (4). Triton PCS is partnered
with AT&T Wireless Services and operates in areas not currently serviced by AT&T
Wireless Services. Consequently, Triton PCS's market area does not include the
major metropolitan areas in those states such as Charlotte and Raleigh-Durham,
North Carolina and the Company has no current limitations on service providers
in those areas. Finally, the Company offers service from AT&T Wireless Services,
Powertel, Nextel and AirTouch in its Georgia and Florida pan handle sales
locations. For the nine months ended September 30, 1999, AT&T Wireless Services'
activation commissions still represented the largest amount of the Company's
activation commissions accounting for approximately 31% of net revenues and
approximately 56% of the Company's net accounts receivables but which has
decreased from approximately 51% and approximately 75%, respectively, for the
year ended December 31, 1998.
(iii) RESIDUAL PAYMENTS. The Company receives monthly payments directly
from customers for the pager airtime that the Company buys wholesale from paging
carriers and then resells to individuals and small businesses.
A change in sales and commissions policies at AT&T Wireless Services
effective in October of 1998 has had a negative effect on the Company's gross
9
<PAGE> 10
revenues and will continue to have a negative effect on the Company's gross
revenues through 1999 and beyond but has not and is not expected to have any
material effect on the Company's gross profit or net income. Prior to October of
1998, the Company would pay AT&T Wireless Services a high price for a telephone
and sell the same telephone to the consumer for a substantial loss. A
substantial activation commission paid to the Company by AT&T Wireless Services
would convert this loss into a profit. Effective October 1998, AT&T Wireless
Services has changed its policy. It has substantially reduced the activation
commission previously payable to the Company, but at the same time, has
substantially reduced the price of the wireless telephones it sells to the
Company by an amount approximately equal to the reduction of the activation
commission. As a result, the Company makes a profit rather than incurring a loss
on the sale of the wireless telephones but at the same time receives a lower
activation commission. In summary, AT&T Wireless Services has simply shifted its
subsidy for the cost of the wireless telephones from the activation commission
to the actual sales price of the wireless telephone. As a result, this payment
shift materially decreases both gross revenues and cost of goods sold but has no
material effect on the Company's gross profit or its net income.
The reduction in revenues negatively affected the Company's same store
sales growth which were up approximately 0.7% from the quarter ended September
30, 1998 to the quarter ended September 30, 1999 and 1.3% from the nine months
ended September 30, 1998 to the nine months ended September 30, 1999. This
increase in same store sales results is also effected by unusually high sales in
the quarter ended September 30, 1998 due to the implementation and accompanying
marketing campaign by AT&T Wireless of its One Rate Plan. Same store sales
include only stores owned and operated by the Company for all periods of time
included in the comparison and are comprised of only retail sales and activation
commissions.
Since gross profit represents a greater percentage of revenues after
the change in AT&T Wireless Services' sales and commission policy, the Company's
gross profit margin increased from approximately 46.6% in the nine months ended
September 30, 1998 to approximately 63.9% in the nine months ended September 30,
1999 (which only reflected this change for a short period of time in 1998). The
gross profit margin is expected to be approximately 64% (absent unexpected
changes in market conditions and Company operations) throughout 1999.
To date, the cost of wireless products has gradually decreased over
time. With such lower cost, the Company typically has offered lower prices to
attract more subscribers, which has increased its total activation commissions
and contributed to gross profit improvements. Consequently, the Company believes
that, as prices of wireless products decrease, they become more affordable to
consumers thereby expanding the wireless communications market and creating an
opportunity to attract new subscribers and increase activation commissions.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $143,500 at September 30,
1999 compared to a working capital deficit of $497,392 at September 30, 1998.
The increase in net working capital was due primarily to the issuance of
securities, the draw down of the remainder of its line of credit and profits,
the proceeds of which were used to increase inventory levels, fund leasehold
improvements and purchase equipment. Deferred income increased $128,460 between
December 31, 1998 and September 30, 1999 which related primarily to the receipt
of certain supplier marketing development funds received in January 1999. The
deferred revenue related to supplier development funds will be recognized as
income 50% on November 30, 1999 and 50% on November 30, 2000 provided the terms
of the related supplier agreement remain in effect on those dates. Also, on
February 24, 1999, the Company consummated a line of credit with SouthTrust Bank
by which the Company may borrow up to $500,000 for working capital. As of August
10, 1999, the Company has drawn down all $500,000 of the line of credit. To
finance its expansion, the Company is currently negotiating with a commercial
bank for additional debt financing of $1,000,000 and continues to sell its
Series C Convertible Preferred Stock. The Company has sold $475,000 of its
Series C Convertible Preferred Stock ($250,000 as of September 30, 1999) and
expects to complete the sale of $1,000,000 thereof by the end of the year.
However, there is no assurance that the Company will be able to obtain the
proposed debt financing or, that if available, it will be on acceptable terms,
and furthermore, there is no assurance that the Company will complete such sales
of its Series C Preferred Stock by year end or ever.
10
<PAGE> 11
The Company's net cash provided by operating activities for the nine
months ended September 30, 1999 was $444,090 as compared to net cash used for
operating activities of $380,408 for the nine months September 30, 1998. The
change in cash from operations was primarily due to an increase in accounts
payable, a decrease in deferred tax assets and an increase in deferred revenue.
The net cash used in investing activities for the nine months ended September
30, 1999 increased to $1,026,658 related primarily to the purchase of leasehold
improvements and equipment required to support new store growth. The net cash
provided by financing activities for the nine months ended September 30, 1999
was $507,555 as compared to $592,430 for the nine months ended September 30,
1998. The decrease related primarily to the issuance of preferred stock and
borrowing on a line of credit.
The Company expects to satisfy its anticipated demands and commitments
for cash in the next 12 months from internally generated cash, borrowings
through its line of credit and the issuance of additional securities. However,
there is no assurance that the Company will be able to find a purchaser for its
securities or, if a purchaser is found, that an adequate price for the Company's
securities can be obtained or that the Company's shareholders will not be
diluted by any such issuance.
RESULTS OF OPERATIONS
The following table sets forth certain selected income statement data
of the Company expressed as a percentage of net sales:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net Sales ....................................... 100.0% 100.0% 100.0% 100.0%
Cost of Sales ................................... 37.0% 47.6% 36.0% 53.4%
Gross Profit .................................... 62.9% 52.4% 63.9% 46.6%
Selling, General and Administrative Expenses
(Excluding Depreciation)....................... 57.7% 44.7% 56.4% 41.3%
Depreciation and Amortization ................... 3.9% 2.3% 3.0% 2.7%
Operating Income ................................ 1.3% 5.4% 4.6% 2.6%
Other Income (expense) .......................... 2.3% (4.9%) (0.5%) (4.7%)
Provision (Benefit) For Income Taxes ............ (1.3%) (0.2%) (1.5%) 0.7%
Net Income (loss) ............................... 2.4% 0.3% 2.6% (1.3%)
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1998
NET SALES. Net sales were $3,150,858 for the three months ended
September 30, 1999 as compared to $2,084,803 for the three months ended
September 30, 1998, an increase of $1,066,055 or approximately 51.1%. This
increase reflects the increase in store count from fourteen (14) to forty (40)
sales locations as of September 30, 1999. Same store sales for the three months
ended September 30, 1999 increased $9,623 or approximately 0.7% as compared to
the three months ended September 30, 1998. As stated above, same stores sales
include only stores owned and operated by the Company all periods of time
included in the comparison (13 sales locations) and are comprised of only retail
sales and activation commissions. Same store sales were affected by the AT&T
Wireless Services payment shift and the unusually high sales in the quarter
ended September 30, 1998 due to the implementation and accompanying marking
campaign by AT&T Wireless of its One Rate Plan. See "-Sources of Revenue".
GROSS PROFIT. Gross profit was $1,984,353 for the three months ended
September 30, 1999 as compared to $1,092,583 for the three months ended
September 30, 1998 or an increase of $891,770 or approximately 81.6%, largely
reflecting the increase in stores operated during the three months ended
September 30, 1999. Gross profit as a percentage of sales increased from
approximately 52.4% in the three months ended September 30, 1998 to
approximately 62.9% in the
11
<PAGE> 12
three months ended September 30, 1999. This increase was due primarily to the
decrease in revenue resulting from the shift by AT&T Wireless Services of
payments for activation commissions to a reduction in the price that it sells
wireless telephones to the Company thereby increasing the percentage of revenues
represented by gross profits. See "-Sources of Revenue".
OPERATING EXPENSES. Selling, general and administrative expense was
$1,818,438 for the three months end September 30, 1999 as compared to $931,309
for the three months ended September 30, 1998 or an increase of $887,129 or
approximately 95.3%, largely as a result of the Company's store expansion in
1998. Corporate headquarter's expenses, included therein, increased due
primarily to increased costs necessitated by the Company's growth and
anticipated future growth including, but not limited to, support and training,
advertising and marketing and merchandising and allocation/distribution.
INTEREST EXPENSE. Interest expense was $61,435 for the three months
ended September 30, 1999 as compared to $103,491 for the three months ended
September 30, 1998 or a decrease of $42,056 or approximately 40.6% due to
decreased borrowings associated with the conversion of certain debentures into
preferred stock.
OTHER INCOME. The Company receives marketing development funds (MDF)
from several of its cellular service providers to aid in the costs of opening
new stores. In the three months ended September 30, 1999, the Company received
$140,000 in MDF which was credited to other income.
NET INCOME/LOSS. The Company had net income of $40,687 for the three
months ended September 30, 1999 as compared to a net loss of $5,941 for the
three months ended September 30, 1998.
The Company issued preferred stock in the fourth quarter of 1998 and
the second half of 1999 and recorded preferred dividends of $33,367 during the
three months ended September 30, 1999.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1998
NET SALES. Net sales were $8,065,269 for the nine months ended
September 30, 1999 as compared to $5,604,844 for the nine months ended September
30, 1998, an increase of $2,460,425 or approximately 43.9%. This increase
reflects the increase in store count from fourteen (14) to forty (40) sales
locations as of September 30, 1999. Same store sales for the nine months ended
September 30, 1999 increased by $46,698 or approximately 1.3% as compared to the
nine months ended September 30, 1998. As stated above, same stores sales include
only stores owned and operated by the Company for all periods of time included
in the comparison (10 sales locations) and are comprised of only retail sales
and activation commissions. Same store sales were affected by the AT&T Wireless
Services payment shift and the unusually high sales in the quarter ended
September 30, 1998 due to the implementation and accompanying marketing campaign
by AT&T Wireless of its One Rate Plan. See "-Sources of Revenue".
GROSS PROFIT. Gross profit was $5,158,266 for the nine months ended
September 30, 1999 as compared to $2,613,719 for the nine months ended September
30, 1998 or an increase of $2,544,547 or approximately 97.4%, largely reflecting
the increase in stores operated during the nine months ended September 30, 1999.
Gross profit as a percentage of sales increased from approximately 46.6% in the
nine months ended September 30, 1998 to approximately 63.9% in the nine months
ended September 30, 1999. This increase was due primarily to the decrease in
revenue resulting from the shift by AT&T Wireless Services of payments for
activation commissions to a reduction in the price that it sells wireless
telephones to the Company thereby increasing the percentage of revenues
represented by gross profits. See "-Sources of Revenue".
OPERATING EXPENSES. Selling, general and administrative expense was
$4,546,853 for the nine months end September 30, 1999 as compared to $2,316,789
for the nine months ended September 30, 1998 or an increase of $2,230,064 or
approximately 96.3%, largely as a result of the Company's store expansion in
1998. Corporate headquarter's expenses, included therein, increased due
primarily to increased costs necessitated by the Company's growth and
anticipated
12
<PAGE> 13
future growth including, but not limited to, support and training, advertising
and marketing and merchandising and allocation/distribution.
INTEREST EXPENSE. Interest expense was $146,915 for the nine months
ended September 30, 1999 as compared to $237,633 for the nine months ended
September 30, 1998 or a decrease of $90,718 or approximately 38.2% due to
decreased borrowings associated with the conversion of certain debentures into
preferred stock.
OTHER INCOME. The Company receives marketing development funds (MDF)
from several of its cellular service providers to aid in the costs of opening
new stores. In the nine months ended September 30, 1999, the Company received
$140,000 in MDF which was credited to other income.
NET INCOME/LOSS. The Company had net income of $210,928 for the nine
months ended September 30, 1999 as compared to a net loss of $73,157 for the
nine months ended September 30, 1998.
The Company issued preferred stock in the fourth quarter of 1998 and
the second half of 1999 and recorded preferred dividends of $93,508 during the
nine months ended September 30, 1999.
YEAR 2000 READINESS DISCLOSURE
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "Year 2000" issue and has developed an
implementation plan to resolve the issue. The Year 2000 issue is the result of
the computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's computer programs that have
time/date-sensitive software and hardware may recognize a date using "00" has
the year 1900 rather than the year 2000. This could result in major system
failure or miscalculation. The Company has updated its computer systems,
particularly its point-of-sale systems for a total cost of approximately $40,000
and, based upon assurances from its software vendors, believes that it is
presently Year 2000 compliant. Consequently, the Company believes that the Year
2000 issue will not pose significant operations problems for the Company's
computer systems and the Company does not expect to incur any significant
additional cost regarding the Year 2000 issue. The Company has not and does not
plan to develop a contingency plan for the failure of the equipment or systems.
The Company will resort to manual operations in the event of a failure.
The Year 2000 issue not only creates risk for the Company of unforeseen
problems in its own computer systems but also from third parties on which the
Company relies. In addition, the Company is querying its suppliers as to their
progress in identifying and addressing problems that their computer systems will
face in correctly processing date information as the year 2000 approaches and is
reached. The Company has received such assurances from its vendors, particularly
from AT&T Wireless Services. However, there are no assurances that the Company
will identify all date-handling problems in its business systems or that the
Company or its vendors will be able to successfully remedy Year 2000 compliance
issues that are discovered. To the extent that the Company is unable to resolve
its Year 2000 issues prior to January 1, 2000, operating results could be
adversely affected. In addition, the Company could be adversely affected if
other entities (e.g., vendors) not affiliated with the Company do not
appropriately address their own year 2000 compliance issues in advance of their
occurrence.
13
<PAGE> 14
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 VOTE OF SECURITY HOLDERS.
(1) Unanimous Consent of the Shareholders dated July 27, 1999.
(a) The unanimous consent was in lieu of a special
meeting of the common shareholders and became
effective on July 27, 1999, the date of the last
signed consent. The unanimous consent was first
mailed to the holders of the Company's common stock
on July 22, 1999 along with a definitive Information
Statement as filed with the Commission on the same
date. A preliminary Information Statement was filed
with the Commission on June 29, 1999 and amended on
July 12, 1999.
(b) The unanimous consent was distributed to the common
shareholders for the purpose of voting to adopt the
Fourth Amendment To Amended And Restated Articles of
Incorporation ("Fourth Amendment") which amended the
Company's Articles of Incorporation as follows: (i)
amended the conversion rights of the Series C
Preferred Stock from 4,166 shares of the Company's
common stock to such number of shares of the
Company's common stock to be later determined by
resolution of the Board of Directors and which was so
later determined by the Board of Directors to be
2,500 shares, (ii) improved the liquidation rights
with respect to the Series C Preferred Stock such
that each of the holders of Series B Preferred Stock
and Series C Preferred Stock have equal liquidation
rights or receive distributions in the event of a
liquidation ratably without preference rather than
the Series B Preferred Stock having priority over the
Series C Preferred Stock and (iii) amended certain of
the voting rights of the Series A Preferred Stock and
the Series B Preferred Stock allowing management more
flexibility consistent with that of a typical public
company. See Item 5 for a more detailed discussion of
the Fourth Amendment.
(c) The Amendment was filed with the Florida Department
of State on August 2, 1999 effective on August 11,
1999.
ITEM 5. OTHER INFORMATION.
AMENDMENTS TO THE ARTICLES OF INCORPORATION AND
ISSUANCE OF SERIES C CONVERTIBLE PREFERRED STOCK
GENERAL
In June of 1999, the Company began discussions regarding the need to
raise additional capital to meet its expansion
14
<PAGE> 15
plans. These plans included the Company's expected expansion into the State of
Georgia and possibly the States of North Carolina and South Carolina as
indicated in the Company's 1999 Annual Report to the Shareholders. The Company's
first sales location Georgia opened in Augusta, Georgia in late July. The
Company's first sales location in Atlanta, Georgia opened at North Dekalb Mall
on August 5, 1999 a little over a month later than predicted in the 1999 Annual
Report. As of November 5, 1999, the Company has in operation forty-six (46)
sales locations including seven (7) in Georgia, two (2) in South Carolina and
one (1) in North Carolina.
In order to raise the capital needed for its expansion, the Company
decided to seek a line of credit from a commercial bank and issue shares of its
Series C Convertible Preferred Stock ("Series C Preferred Stock"). The Company
is currently negotiating the line of credit with a commercial bank and has sold
$475,000 of its Series C Preferred Stock. See "Commercial Bank Line of Credit
and Series C Preferred Stock Offering" below. Under the Amended and Restated
Articles of Incorporation filed December 1, 1998, the Series C Convertible
Preferred Stock had most all of the same rights as the Series A Preferred Stock
and the Series B Preferred Stock, including, but not limited to, a 7.5%
dividend, a five year mandatory redemption right and the right to convert each
share of Series C Preferred Stock into 4,166 shares of the Company's common
stock. The major difference is that the Series C Preferred Stock was inferior to
the Series A Preferred Stock and the Series B Preferred Stock with respect to
liquidation rights.
THIRD AMENDMENT TO AMENDED AND RESTATED ARTICLES OF INCORPORATION
Before issuing any Series C Preferred Stock, the Company first adopted
the Third Amendment which, as stated above, amended the Company's Articles of
Incorporation with respect to the Series C Preferred stock as follows: (i) to
amend the dividend rate from 7.5% per annum to that certain percentage per annum
as later determined by the resolution of the Board of Directors at the time of
issuance but not to exceed 7.5% and (ii) to eliminate the five year mandatory
redemption provision. The reason for eliminating the five year mandatory
redemption was to allow the proceeds of the Series C Preferred Stock to be
reflected as pure equity on the Company's balance sheet. The five year
redemption provision creates a debt-like quality which has required that the
proceeds of the Series A Preferred Stock and Series B Preferred Stock be
reported on the Company's balance sheet in its own category between debt and
equity rather than simply as equity. See the Company's Balance Sheet as of June
30, 1999 in Part I, Item 1 of this Form 10-QSB.
As reported above in Item 4 of this Form 10-QSB, the Company's
shareholders adopted the Third Amendment by the unanimous consent of the holders
of the Company's common stock (and the subsequent ratification by the holders of
Series A Preferred Stock and the Series B Preferred Stock) during the quarter
ended June 30, 1999.
See the Third Amendment To Amended And Restated Articles of
Incorporation attached as Exhibit 3.2 to the Company's Form 10-QSB for the
quarter ended June 30, 1999.
FOURTH AMENDMENT TO AMENDED AND RESTATED ARTICLES OF INCORPORATION
Subsequent to the Third Amendment, the Company determined that it was
necessary to make further amendments to the Series C Preferred Stock as well as
make certain amendments to the Series A Preferred Stock and the Series B
Preferred Stock which were made in the Fourth Amendment To Amended And Restated
Articles of Incorporation ("Fourth Amendment") filed August 2, 1999 and became
effective August 11, 1999. The Fourth Amendment was adopted by the unanimous
consent of the holders of Series A Preferred Stock on July 28, 1999, the
unanimous consent of the holders of Series B Preferred Stock on the July 27,
1999 and the unanimous consent of the holders of common stock on July 27, 1999.
In connection with the consent by the holders of the Company's common stock, the
Company delivered to each holder of the Company's common stock a definitive
Information Statement filed with the Commission on July 22, 1999 after the
filing of a preliminary Information Statement on June 29, 1999, amended on July
12, 1999.
First, the Company decided that rather than adjust the per share
offering price of each share of Series C Preferred Stock, the Company wanted to
continue to sell the Series C Preferred Stock First at a per share price of
$25,000. Therefore, in order to price the conversion rate in accordance with the
market, the Fourth Amendment amended the conversion rights of the Series C
Preferred Stock from 4,166 shares of the Company's common stock to such number
of shares of the Company's common stock to be later determined by resolution of
the Board of Directors. Second, in order to more effectively market the Series C
Preferred Stock, the Fourth Amendment improved the liquidation rights with
respect to the Series C Preferred Stock such that each of the holders of Series
B Preferred Stock and Series C Preferred Stock have equal liquidation rights or
receive distributions in the event of a liquidation ratably without preference
rather than the Series B Preferred Stock having priority
15
<PAGE> 16
over the Series C Preferred Stock.
The Fourth Amendment further amended certain of the voting rights of
the Series A Preferred Stock and the Series B Preferred Stock allowing
management more flexibility consistent with that of a typical public company.
First, the Fourth Amendment eliminated the preferential voting rights of the
Series A Preferred Stock and the Series B Preferred Stock with respect to the
right to vote on mergers and acquisitions. Second, the Fourth Amendment limited
the voting rights of the Series A Preferred Stock and Series B Preferred Stock
with respect to amendments to the Articles of Incorporation to only amendments
which affect the rights of such series of preferred stock rather than other
amendments. The Fourth Amendment did not affect the right of each series of
preferred stock to approve the issuance of any securities with equal or greater
liquidation preferences other than commercial debt in the ordinary course of
business or the right of the holders of the Series B Preferred Stock to elect
1/3 of the members of the Board of Directors.
See the Fourth Amendment To Amended And Restated Articles of
Incorporation attached as Exhibit 3.3 to the Company's Form 10-QSB for the
quarter ended June 30, 1999.
FIFTH AMENDMENT TO AMENDED AND RESTATED ARTICLES OF INCORPORATION
On July 29, 1999, the Board of Directors, in accordance with Florida
corporate law and the terms of the Third Amendment and the Fourth Amendment,
unanimously by consent set the dividend rate and the conversion rate of the
Series C Preferred Stock in the Fifth Amendment To Amended And Restated Articles
of Incorporation filed with the Florida Department of State on August 2, 1999 to
be effective August 11, 1999 ("Fifth Amendment"). The Fifth Amendment set the
dividend rate at 7% per annum and the made each share of Series C Preferred
Stock convertible into 2,500 shares of the Company's common stock.
See the Fifth Amendment To Amended And Restated Articles of
Incorporation attached as Exhibit 3.4 to the Company's Form 10-QSB for the
quarter ended June 30, 1999.
SECOND RESTATED ARTICLES OF INCORPORATION
The Company filed its Second Restated Articles of Incorporation with
the Florida Department of State on August 12, 1999 which incorporates all five
of the amendments to the Amended and Restated Articles of Incorporation into a
single document. See the Second Restated Articles of Incorporation attached as
Exhibit 3.5 to the Company's Form 10-QSB for the quarter ended June 30, 1999.
COMMERCIAL BANK LINE OF CREDIT AND SERIES C PREFERRED STOCK OFFERING
The Company is negotiating for a new line of credit from a commercial
bank for $1 million. This is in addition to the Company's existing term loan in
the amount of $350,000 and line of credit in the amount of $500,000. The Company
commenced its offering of Series C Preferred Stock on August 2, 1999 with the
sale of $250,000 of its Series C Preferred Stock to certain persons affiliated
with Sterne, Agee & Leach, Inc., a principal shareholder of the Company. The
offering is being conducted on a best efforts basis and, as of November 5, 1999,
the Company has sold $475,000 of its Series C Preferred Stock. The Company
expects to sell a total of approximately $1 million of its Series C Preferred
Stock. The offering is being made in a private placement pursuant to the
exemptions from registration contained in Rules 505 and 506 of Regulation D
promulgated under the Securities Act of 1933, as amended ("1933 Act"), Section
18 of the 1933 Act and applicable states securities laws. The Company expects to
complete the offering by the end of 1999.
As stated above, each series of preferred stock has the right to
approve the sale of any securities with equal or greater liquidation preferences
other than commercial debt in the ordinary course of business. As further stated
above, upon the effectiveness of the Fourth Amendment, the Series C Preferred
Stock has the same liquidation rights as the Series B Preferred Stock.
Therefore, the Company had to obtain the approval of the Series B Preferred
Stock before it could issue any Series C Preferred Stock. By unanimous consent
dated July 27, 1999, the holders of the Series B Preferred Stock authorized the
Company to issue up to $2 million of Series C Preferred Stock; however, as
stated above, the Company only expects to issue
16
<PAGE> 17
approximately $1 million of Series C Preferred Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(1) Exhibits:
27 Financial Data Schedule (For SEC use only).
(2) Reports on Form 8-K:
None.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
Date: November 10, 1999 BOBBY ALLISON WIRELESS CORPORATION
/s/ Robert L. McGinnis
--------------------------------
Name: Robert L. McGinnis
Title: Chairman of the Board and
Chief Executive Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-QSB 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-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 50,142
<SECURITIES> 0
<RECEIVABLES> 1,221,557
<ALLOWANCES> 86,454
<INVENTORY> 903,314
<CURRENT-ASSETS> 2,302,584
<PP&E> 1,977,012
<DEPRECIATION> 479,566
<TOTAL-ASSETS> 4,210,217
<CURRENT-LIABILITIES> 2,159,084
<BONDS> 0
1,625,000
250,000
<COMMON> 4,800
<OTHER-SE> (401,148)
<TOTAL-LIABILITY-AND-EQUITY> 4,210,217
<SALES> 4,788,521
<TOTAL-REVENUES> 8,065,269
<CGS> 2,907,003
<TOTAL-COSTS> 2,907,003
<OTHER-EXPENSES> 4,786,969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146,915
<INCOME-PRETAX> 329,628
<INCOME-TAX> 118,700
<INCOME-CONTINUING> 210,928
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 93,508
<NET-INCOME> 117,420
<EPS-BASIC> .24
<EPS-DILUTED> .24
</TABLE>
