SECURITIES AND EXCHANGE COMMISSION
Washington, DC 25049
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FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended December 31, 1998
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to
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Commission File Number 0-21903
ORA ELECTRONICS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4607830
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(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
9410 Owensmouth Avenue, Chatsworth, CA 91311
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(Address of Principal Executive Offices)(Zip Code)
(818) 772-2700
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(Registrant's Telephone Number, Including Area Code)
(No Change)
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(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 .....
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
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Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ..... No ..... Not Applicable ..X..
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 12, 1999
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Common Stock, $.001 par value 6,909,913 shares
Exhibit Index on page 21
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ORA ELECTRONICS, INC.
Form 10-Q
December 31, 1998
TABLE OF CONTENTS
Page
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PART I - Financial Information. 4
Item 1. Financial Statements 4
Balance Sheets as of December 31, 1998 and
March 31, 1998 4
Statements of Operations and Retained Deficit
for the three month and nine month periods ended
December 31, 1998 and 1997 6
Statements of Cash Flows for the nine month
periods ended December 31, 1998 and 1997 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 11
PART II - Other Information. 17
Item 6. Exhibits and Reports on Form 8-K. 17
Signatures 20
Exhibit Index 21
Exhibits 22-23
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PART I -FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
ORA ELECTRONICS, INC.
Balance Sheets
December 31, March 31,
1998 1998
(Unaudited) (Audited)
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ASSETS
Current assets:
Cash and cash equivalents $ 1,469,265 $ 407,694
Trade accounts receivable, less
allowance for sales returns and
doubtful accounts of $499,692
($1,022,043 at March 31, 1998) 1,931,601 3,112,292
Inventories 3,305,124 4,627,251
Prepaid expenses 195,948 74,276
------------ ------------
Total current assets 6,901,938 8,221,513
Property and equipment, net 6,111,558 6,231,494
Other assets:
Loan receivable, officer 602,168 579,833
Deferred expenses 298,021 304,875
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Total assets $ 13,913,685 $ 15,337,715
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 552,951 $ 488,604
Notes payable 705,493 1,355,847
Trade payables 1,652,814 2,925,677
Accrued interest 92,447 101,648
Other accounts payable and accrued
expenses 2,115,616 2,218,582
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Total current liabilities 5,119,321 7,090,358
Long-term debt 5,920,475 6,105,477
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Total liabilities 11,039,796 13,195,835
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See accompanying notes to financial statements.
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Stockholders' equity:
Preferred stock, $.001 par value,
5,000,000 shares authorized,
none issued - -
Common stock, par value $.001 per share,
authorized 30,000,000 shares, issued
and outstanding 6,909,913 shares at
December 31, 1998 and 6,908,722
shares at March 31, 1998 6,910 6,909
Additional paid in capital 6,125,379 6,125,380
Retained (deficit) (3,258,400) (3,990,409)
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Total stockholders' equity 2,873,889 2,141,880
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Total liabilities and stockholders'
equity $ 13,913,685 $ 15,337,715
============ ============
See accompanying notes to financial statements.
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<TABLE>
ORA ELECTRONICS, INC.
Statements of Operations and Retained Deficit
For the Three Month and Nine Month Periods
Ended December 31, 1998 and 1997
(Unaudited)
<CAPTION>
Three months Nine months
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 3,101,102 $ 3,447,512 $10,644,519 $11,691,492
Cost of goods sold 2,096,956 1,690,510 6,387,692 6,761,814
----------- ----------- ----------- -----------
Gross profit 1,004,146 1,757,002 4,256,827 4,929,678
----------- ----------- ----------- -----------
Operating expenses:
Selling and shipping 566,058 597,201 1,804,935 1,785,605
Administrative and general 581,249 1,005,373 2,952,377 3,518,708
----------- ----------- ----------- -----------
Total operating expenses 1,147,307 1,602,574 4,757,312 5,304,313
----------- ----------- ----------- -----------
Operating income (loss) (143,161) 154,428 (500,485) (374,635)
Interest expense 166,995 161,158 534,262 539,708
Other income (Note 6) 26,493 10,541 1,766,756 486
----------- ----------- ----------- -----------
Income (loss) before income taxes (283,663) 3,811 732,009 (913,857)
Provision for income taxes - - - -
----------- ----------- ----------- -----------
Net income (loss) (283,663) 3,811 732,009 (913,857)
Retained deficit, beginning
of period (2,974,737) (2,330,394) (3,990,409) (1,412,726)
----------- ----------- ----------- -----------
Retained deficit, end
of period $(3,258,400) $(2,326,583) $(3,258,400) $(2,326,583)
=========== =========== =========== ===========
Per common share information:
Net earnings (loss) $ (283,663) $ 3,811 $ 732,009 $ (913,857)
=========== =========== =========== ===========
Earnings (loss) per share:
Basic and diluted $ (0.04) $ 0.00 $ 0.11 $ (0.14)
=========== =========== =========== ===========
Weighted average shares outstanding
used in the per share calculation:
Basic and diluted 6,909,480 6,606,414 6,909,077 6,606,414
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
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ORA ELECTRONICS, INC.
Statements of Cash Flows
For the Nine Month Periods Ended December 31, 1998 and 1997
(Unaudited)
Nine Months Ended December 31,
1998 1997
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Cash flows from operating activities:
Net income (loss) $ 732,009 $ (913,857)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 177,616 227,012
Provision for sales returns and doubtful
accounts (522,351) 284,187
Changes in assets and liabilities:
Trade accounts receivable 1,703,042 1,741,341
Inventories 1,322,127 492,193
Prepaid expenses (121,672) 205,183
Trade payables (1,272,863) (1,174,877)
Accrued interest (9,201) (16,776)
Other accounts payable and
accrued expenses (102,966) 67,784
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Net cash provided by operating activities 1,905,741 912,190
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Cash flows from investing activities:
Capital expenditures (50,826) (164,470)
Loan receivable, officer (22,335) (21,237)
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Net cash (used in) investing activities (73,161) (185,707)
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Cash flows from financing activities:
Repayment of line of credit (650,354) (1,051,485)
Borrowing (repayment) of long-term debt (120,655) 38,122
Common stock 1 17
Additional paid in capital (1) 18,773
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Net cash (used in) financing activities (771,009) (994,573)
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Net increase (decrease) in cash and cash
equivalents 1,061,571 (268,090)
Cash and cash equivalents, beginning of period 407,694 321,647
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Cash and cash equivalents, at end of period $ 1,469,265 $ 53,557
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 464,589 $ 433,377
=========== ===========
Income taxes paid $ - $ -
=========== ===========
See accompanying notes to financial statements.
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ORA ELECTRONICS, INC.
Notes to Financial Statements
(Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS
ORA Electronics, Inc. (the "Company") is a developer and supplier of
interface, connectivity solutions and peripheral accessories for wireless
communication devices. The Company's products supplement the effectiveness of
cellular telephones, personal communications systems ("PCS"), pagers, computing
devices and the intelligent transportation systems industry. The Company
currently carries over 1,200 products which are sold to over 500 customers in
the United States, and throughout North, Central and South America. Among the
Company's customers are major national and regional retailers, service providers
and wireless carriers, original equipment manufacturers ("OEMs"), auto
manufacturers, regional distributors and dealers.
NOTE 2 - BASIS OF INTERIM PRESENTATION
Interim financial statements and information are unaudited; however, in the
opinion of management all adjustments necessary for a fair presentation of the
interim results have been made. All such adjustments were of a normal recurring
nature. The results for the three month and nine month periods ended December
31, 1998 are not necessarily an indication of results to be expected for the
entire fiscal year. The accompanying financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and the footnotes required by generally accepted accounting
principles for complete statements. All information reported in this Form 10-Q
should be read in conjunction with the Company's annual financial statements and
notes thereto for the fiscal year ended March 31, 1998 filed with the Securities
and Exchange Commission on June 29, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
For comparative purposes, certain amounts in the financial statements from
the prior periods ended March 31, 1998 and December 31, 1997 have been
reclassified.
NOTE 3 - LEGAL PROCEEDINGS
The Company was involved in a lawsuit titled ALLIANCE RESEARCH CORPORATION
V. TELULAR CORPORATION; including the counterclaim entitled TELULAR CORPORATION
V. ALLIANCE RESEARCH CORPORATION, United States District Court for the Central
District of California, Case No. CV 94-1065-JSL.
The Company and Telular Corporation ("Telular") settled the lawsuit
pursuant to a Settlement Agreement and Mutual General Release dated March 2,
1998. According to the terms of the settlement, Telular Corporation will receive
from the Company cash payments totaling $1,500,000 over a two year period and
300,000 shares of the Company's common stock and may receive additional shares
of common stock on February 1, 2000, if necessary to ensure that the total
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shares of common stock received by Telular have a market value of $1,500,000 as
of such date. Pursuant to the settlement, the lawsuit was dismissed with
prejudice, although the Company is enjoined from selling its CDL line of
products. The Company has had no sales of such product line since before April
1, 1996.
The Company has estimated the current value of the final settlement at
$1,685,797, all of which has been recognized and included in Administrative and
General expenses in periods prior to fiscal year 1999.
The Company is involved in other legal proceedings, many of which arise in
the ordinary course of its business. While any litigation contains an element of
uncertainty, management believes that the outcome of such proceedings will not
have a material adverse effect on the Company's results of operations.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information", ("SFAS 131") effective for fiscal years
beginning after December 15, 1997. The new rules establish revised standards for
public companies relating to the reporting of financial and descriptive
information about their operating segments in financial statements. SFAS 131 is
effective for the Company in fiscal 1999. The Company currently evaluates its
operations as one segment.
NOTE 5 - YEAR 2000 ISSUE
Many computer systems and other equipment with embedded chips or processors
in use today were designed and developed using two digits, rather than four, to
specify the year. As a result, such systems will recognize the Year 2000 as "00"
and may assume that the year is 1900 rather than 2000. This is commonly known as
the Year 2000 issue, which could potentially result in a system failure or in
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in other
similar normal business activities. The Company has been informed that the
portion of the Company's computer software systems relating to the general
ledger, payroll and other employee records is presently Year 2000 compliant. The
Company is in the process of evaluating the potential cost to it in addressing
the Year 2000 issue with respect to its other software and the potential
consequences of an incomplete or untimely resolution of the Year 2000 issue. The
Company has been given estimates in the $100,000 to $150,000 range to purchase
and implement new Year 2000 compliant software for those systems that the
Company is aware require such replacement. Although the Company believes that it
will not incur significant costs above these estimates to become completely Year
2000 compliant, no assurance can be given that the Company will not incur
significant costs in addressing the Year 2000 issue or that the failure to
adequately address the Year 2000 issue will not have a material adverse effect
upon the Company.
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The Company is contacting its major suppliers, major customers, financial
institutions and others with whom it conducts business to determine that they
will be able to resolve the Year 2000 issue in matters affecting the Company.
The Company at this time cannot make any predictions as to the degree of
compliance by such third parties or the consequences of their noncompliance.
However, if those third parties with whom the Company conducts business are
unsuccessful in implementing timely solutions, the Year 2000 issue could have a
material adverse effect on the Company's business, financial condition and
results of operations.
NOTE 6 - SALE OF CERTAIN TRADEMARKS
In April, 1998, pursuant to the terms of a Second Deed of Amendment, the
Company granted ORA Electronics (UK) Limited ("ORA UK") an exclusive
royalty-free right to use certain of the Company's trademarks, including,
without limitation, the "ORA" name, in perpetuity worldwide except for North,
Central and South America. The total consideration paid by ORA UK to the
Company for such perpetual right was 1,000,000 GRP, or approximately
$1,675,000, which is included in Other Income on the Statement of Operations and
Retained Deficit for the nine months ended December 31, 1998. Gershon N.
Cooper, President and Chief Executive Officer of the Company, is a former
member of the Board of Directors of ORA UK.
NOTE 7 - SUBSEQUENT EVENTS
Significant uncertainties have arisen, subsequent to the quarter ended
December 31, 1998, with respect to the Company's ability to maintain adequate
working capital sufficient to meet operating needs and capital expenditure
requirements for the immediate future. As previously noted above in Management's
Discussion of Net Sales, the Company has been notified by its largest customer,
Circuit City, that continuing product orders will be substantially reduced
beginning with the month of May, 1999. Net sales to Circuit City for the nine
months of fiscal 1999 were $5,493,073, or 51.6% of the total nine-month period
net sales of $10,644,519. Net sales to Circuit City during the third quarter of
fiscal 1999 were $1,390,607, or 44.8% of the total quarterly net sales of
$3,101,102. Current expectations are that business with Circuit City may be
reduced by as much as 80%, or greater, from its current levels. The Company is
actively exploring ways to replace this expected reduction in net sales,
including alternative sources of distribution, however, no assurances can be
given that the Company will be able to do so. In addition, the Company has been
notified by FINOVA, the Company's source for its revolving line of credit, that
such revolving line of credit will not be extended after its scheduled
expiration date of April 4, 1999. The Company is attempting to find a
replacement credit facility, but no assurances can be given that the Company
will be able to do so. The outstanding balances owed to FINOVA at December 31,
1998 and February 12, 1999 are $705,493 and $926,574, respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Management's discussion and analysis should be read in conjunction with the
Company's financial statements and the notes thereto.
The following table sets forth, for the periods indicated, certain
statements of operations and retained deficit data for the Company expressed as
a percentage of net sales:
Three months Nine months
ended December 31, ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 67.6 49.0 60.0 57.8
----- ----- ----- -----
Gross profit 32.4 51.0 40.0 42.2
Selling and shipping expenses 18.3 17.3 17.0 15.5
Administrative and general expenses 18.7 29.2 27.7 29.9
----- ----- ----- -----
Income (loss) from operations (4.6) 4.5 (4.7) (3.2)
Interest expense 5.4 4.7 5.0 4.6
Other income 0.9 0.3 16.6 0.0
----- ----- ----- -----
Income (loss) before income taxes (9.1) 0.1 6.9 (7.8)
Provision for income taxes - - - -
----- ----- ----- -----
Net income (loss) (9.1)% 0.1% 6.9% (7.8)%
===== ===== ===== =====
RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1998 TO
THREE MONTHS ENDED DECEMBER 31, 1997
Net Sales. Net sales decreased by $346,410, or 10.0%, to $3,101,102 for the
third quarter of fiscal 1999 compared to $3,447,512 for the same period of the
prior year. This decrease primarily reflects a continuation of a trend of lower
orders being received by consumer electronics retailers who have reported same
store sales decreases and reductions in wireless telephone activations as
compared with the prior year. Retailers have reported that their wireless
telephone activations are lower as a result of reduced financial incentives
offered to them by wireless telephone carriers. The Company believes that its
traditional retail customers may face increased competitive pressures from
wireless service providers and that, consequently, orders for its wireless
products from such retailers may continue to decline. In addition, the Company
has been notified by its largest customer, Circuit City, that continuing product
orders will be substantially reduced beginning with the month of May, 1999. Net
sales to Circuit City during the third quarter of fiscal 1999 were $1,390,607,
or 44.8% of the total quarterly net sales of $3,101,102. Net sales to Circuit
City during the third quarter of fiscal 1998 were $963,585, or 28.0% of the
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total quarterly net sales of $3,447,512. Current expectations are that business
with Circuit City may be reduced by as much as 80%, or greater, from its current
levels. The Company is actively exploring ways to replace this expected
reduction in net sales, including alternative sources of distribution, however,
no assurances can be given that the Company will be able to do so.
Gross Profit. Gross profit decreased by $752,866, or 42.8%, to $1,004,146
for the third quarter of fiscal 1999 compared with $1,757,002 for same period of
the prior year, while gross profit as a percentage of net sales decreased to
32.4% from 51.0%. The decreases in gross profit and gross profit as a percentage
of net sales are primarily attributable to a continuation of competitive
pressures among the Company's large retail customers and the resulting pressure
on wholesale prices during the quarter ended December 31, 1998.
Selling and Shipping Expense. Selling and shipping expense decreased by
$31,143, or 5.2%, to $566,058 for the third quarter of fiscal 1999 compared
with $597,201 in the same period of the prior year. The decrease in selling and
shipping expense is primarily attributable to lower sales commissions resulting
from lower sales volume partially offset by an increase in promotion and travel
expense of approximately $30,000 incurred by the Company's sales force in its
effort to acquire new customers.
Administrative and General Expense. Administrative and general expense
decreased by $424,124, or 42.2%, to $581,249 for the third quarter of fiscal
1999 compared with $1,005,373 in the same period of the prior year. The decrease
is primarily attributed to a reduction in legal fees based on the settlement
of certain litigation during fiscal 1998.
Interest Expense. Interest expense for the third quarter of fiscal 1999 was
$166,995 compared with $161,158 in the same period of the prior year. This
increase is primarily a result of imputed interest on debt owed to Telular
Corporation (see Note 3 to Financial Statements) of $19,561, partially offset by
decreased short-term borrowings under the Company's revolving line of credit.
Other Income. Other income for the third quarter of fiscal 1999 was $26,493
compared with $10,541 in the same period of the prior year. The increase of
$15,952, or 151.3% is primarily attributed to a partial refund of property taxes
and insurance premiums during the quarter ended December 31, 1998 which were
related to prior periods.
Income Taxes. The Company has made no provision for income taxes as it has
a history of net losses, which has resulted in tax loss carryforwards. At
December 31, 1998, the Company had available federal net operating loss
carryforwards of approximately $3,217,000, which expire in 2012 through 2013,
and state net operating loss carryforwards of approximately $1,466,000, which
expire in 2002 through 2003.
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1998 TO NINE MONTHS ENDED
DECEMBER 31, 1997
Net Sales. Net sales decreased by $1,046,973, or 9.0%, to $10,644,519 for
the nine months of fiscal 1999 ended December 31, 1998, compared with
$11,691,492 for the same period of the prior year. This decrease primarily
reflects a continuation of a trend of lower orders being received by consumer
electronics retailers who have reported same store sales decreases and
reductions in wireless telephone activations as compared with the prior year.
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Retailers have reported that their wireless telephone activations are lower as a
result of reduced financial incentives offered to them by wireless telephone
carriers. The Company believes that its traditional retail customers may face
increased competitive pressures from wireless service providers and that,
consequently, orders for its wireless products from such retailers may continue
to decline. In addition, the Company has been notified by its largest customer,
Circuit City, that continuing product orders will be substantially reduced
beginning with the month of May, 1999. Net sales to Circuit City for the nine
months of fiscal 1999 were $5,493,073, or 51.6% of the total nine-month period
net sales of $10,644,519. Net sales to Circuit City during the nine months of
fiscal 1998 were $4,667,801, or 40.0% of the total nine month period net sales
of $11,691,492. Current expectations are that business with Circuit City may be
reduced by as much as 80%, or greater, from its current levels. The Company is
actively exploring ways to replace this expected reduction in net sales,
including alternative sources of distribution, however, no assurances can be
given that the Company will be able to do so.
Gross Profit. Gross profit decreased by $672,851, or 13.6%, to $4,256,827
for the nine months of fiscal 1999 ended December 31, 1998 compared with
$4,929,678 for the same period of the prior year, while gross profit as a
percentage of net sales decreased to 40.0% from 42.2%. The decreases in gross
profit and gross profit as a percentage of net sales are primarily attributable
to a continuation of competitive pressures among the Company's large retail
customers and the resulting pressure on wholesale prices during the quarter
ended December 31, 1998.
Selling and Shipping Expense. Selling and shipping expense increased by
$19,330, or 1.1%, to $1,804,935 for the nine months of fiscal 1999 ended
December 31, 1998 compared with $1,785,605 in the same period of the prior year.
The increase in selling and shipping expenses is primarily attributable to an
increase in promotion and travel expense of approximately $120,000 incurred by
the Company's direct sales force in its effort to acquire new customers,
partially offset by lower costs of shipping, warehousing, freight and sales
commissions as result of decreased sales volume.
Administrative and General Expense. Administrative and general expense
decreased by $566,331, or 16.1%, to $2,952,377 for the nine months of fiscal
1999 ended December 31, 1998 compared with $3,518,708 for the same period of the
prior year. The decrease is primarily attributable to a reduction in legal fees
based on the settlement of certain litigation during fiscal 1998.
Interest Expense. Interest expense for the nine months of fiscal 1999 ended
December 31, 1998 was $534,262 compared with $539,708 in the same period of the
prior year. This decrease is primarily a result of decreased short-term
borrowings under the Company's revolving line of credit, partially offset by
imputed interest on debt owed to Telular Corporation (see Note 3 to Financial
Statements) of $62,727.
Other Income. Other income for the nine months of fiscal 1999 was
$1,766,756 compared with $486 in the same period of the prior year. The
difference is primarily attributable to approximately $1,675,000 in royalty
income received in the quarter ended June 30, 1998 as a result of the Company
granting to ORA Electronics (UK) Limited, an unaffiliated company, an exclusive
royalty-free right to use certain of the Company's trademarks, including the
"ORA" name, in perpetuity worldwide, excepting North, Central and South America.
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Income Taxes. The Company has made no provision for income taxes as it has
a history of net losses, which has resulted in tax loss carryforwards. At
December 31, 1998, the Company had available federal net operating loss
carryforwards of approximately $3,217,000, which expire in 2012 through 2013,
and state net operating loss carryforwards of approximately $1,466,000, which
expire in 2002 through 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are to fund working capital needs,
primarily accounts receivable and inventories. Historically, the Company has
satisfied these working capital requirements principally through cash flow from
operations and bank borrowings.
At December 31, 1998, the Registrant had $1,469,265 in cash and cash
equivalents with a working capital surplus of $1,782,617, contrasted to $407,694
in cash and cash equivalents with a working capital surplus of $1,131,155 at
March 31, 1998. Net cash provided by operating activities was $1,905,741 for the
nine months ended December 31, 1998, compared with net cash used in operating
activities of $912,190 for the nine months ended December 31, 1997. The increase
in cash during the nine-month period ended December 31, 1998 is primarily due to
the liquidation of slow moving inventory during the period at or near its
carrying value of approximately $1,000,000. Working capital may vary from time
to time as a result of seasonality, new product introductions, capital
expenditures and changes in inventory levels.
To supplement cash flow from operations, if necessary, the Company
maintains a $5,000,000 revolving credit facility to be used for general working
capital purposes. The credit agreement (dated April 4, 1997) with FINOVA Capital
Corporation ("FINOVA") allows the Company to borrow funds at Citibank N.A.'s
reference rate plus 1% and there is an unused line fee of 0.5%. The Company's
funds are swept daily and capital is made available based on 70% of eligible
accounts receivable and 35% of eligible inventory. Based on the Company's level
of underlying collateral and the formulas utilized to calculate eligible
collateral, the Company had borrowing capacity of approximately $1,000,000 at
December 31, 1998.
Under the FINOVA facility, the Company is required to maintain various
covenants, including meeting certain net worth requirements, a liquidity ratio,
a debt service coverage ratio and restrictions of capital expenditures,
additional indebtedness and the payment of dividends. At all times during the
quarter ended December 31, 1998, the Company was in compliance with all
covenant requirements.
A loan from the Aid Association for Lutherans ("AAL") obtained by the
Company to purchase its headquarters and distribution facility in Chatsworth,
California is, by its terms, callable by AAL upon six months notice. As of
December 31, 1998, the outstanding principal balance of such loan was
$4,549,877. Such loan bears interest at 9.875% per year, is payable in monthly
installments of $43,418, representing both principal and interest, matures in
February 2019 and is secured by the real property on which the facility is
located.
Net cash used in investing activities was $73,161 for the first nine months
of fiscal 1999, compared with net cash used in investing activities of $185,707
for the first nine months of fiscal 1998. The decrease in net cash used is
primarily attributable to lower capital expenditures for computer equipment
during the nine month period ended December 31, 1998 as compared to the nine
month period ended December 31, 1997.
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Cash flows used in financing activities were $771,009 for the first nine
months of fiscal 1999, compared with cash flows used in financing activities of
$994,573 for the first nine months of fiscal 1998. The decrease in cash flows
used in financing activities is primarily attributable to approximately $400,000
of lower net short-term debt repayments during the nine month period ended
December 31, 1998 as compared to the nine month period ended December 31, 1997,
partially offset by principal payments to Telular Corporation relating to debt
incurred by the Company as a result of the settlement of certain patent
litigation.
Significant uncertainties have arisen, subsequent to the quarter ended
December 31, 1998, with respect to the Company's ability to maintain adequate
working capital sufficient to meet operating needs and capital expenditure
requirements for the immediate future. As previously noted above in Management's
Discussion of Net Sales, the Company has been notified by its largest customer,
Circuit City, that continuing product orders will be substantially reduced
beginning with the month of May, 1999. Net sales to Circuit City for the nine
months of fiscal 1999 were $5,493,073, or 51.6% of the total nine-month period
net sales of $10,644,519. Net sales to Circuit City during the third quarter of
fiscal 1999 were $1,390,607, or 44.8% of the total quarterly net sales of
$3,101,102. Current expectations are that business with Circuit City may be
reduced by as much as 80%, or greater, from its current levels. The Company is
actively exploring ways to replace this expected reduction in net sales,
including alternative sources of distribution, however, no assurances can be
given that the Company will be able to do so. In addition, the Company has been
notified by FINOVA, the Company's source for its revolving line of credit, that
such revolving line of credit will not be extended after its scheduled
expiration date of April 4, 1999. The Company is attempting to find a
replacement credit facility, but no assurances can be given that the Company
will be able to do so at comparable terms or pricing. The outstanding balances
owed to FINOVA at December 31, 1998 and February 12, 1999 are $705,493 and
$926,574, respectively.
YEAR 2000 ISSUE UPDATE
Many computer systems and other equipment with embedded chips or processors
in use today were designed and developed using two digits, rather than four, to
specify the year. As a result, such systems will recognize the Year 2000 as "00"
and may assume that the year is 1900 rather than 2000. This is commonly known as
the Year 2000 issue, which could potentially result in a system failure or in
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in other
similar normal business activities. The Company has been informed that the
portion of the Company's computer software systems relating to the general
ledger, payroll and other employee records is presently Year 2000 compliant.
The Company is in the process of evaluating the potential cost to it in
addressing the Year 2000 issue with respect to its other software and the
potential consequences of an incomplete or untimely resolution of the Year 2000
issue. The Company has been given estimates in the $100,000 to $150,000 range
to purchase and implement new Year 2000 compliant software for those systems
that the Company is aware require such replacement. Full implementation and
final testing of new software is targeted for completion by June, 1999. Although
the Company believes that it will not incur significant costs above these
estimates to become completely Year 2000 compliant, no assurance can be given
that the Company will not incur significant costs in addressing the Year 2000
issue or that the failure to adequately address the Year 2000 issue will not
have a material adverse effect upon the Company.
-15-
<PAGE>
The Company is contacting its major suppliers, major customers, financial
institutions and others with whom it conducts business to determine that they
will be able to resolve the Year 2000 issue in matters affecting the Company.
The Company at this time cannot make any predictions as to the degree of
compliance by such third parties or the consequences of their noncompliance.
However, if those third parties with whom the Company conducts business are
unsuccessful in implementing timely solutions, the Year 2000 issue could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is currently assessing its mechanical systems (e.g. telephones,
HVAC, etc.) which employ embedded chip technology. Based on initial information
gathered, the Company does not estimate a significant expense will be incurred
to make any non-compliant systems Year 2000 compliant.
The Company plans to test and validate its internal operations, complete
the third party surveys, and finalize and implement any contingency plans
necessary by June 30, 1999.
SEASONALITY
The Company's markets are seasonal with sales typically higher in the
Company's third quarter due to increased demand from mass-market retailers
during the year-end holiday season.
FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of that term in the Private Securities Litigation Reform Act
of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934). Additional written or oral forward-looking
statements may be made by the Company from time to time, in filings with the
Securities Exchange Commission or otherwise. Statements contained herein that
are not historical facts are forward-looking statements made pursuant to the
safe harbor provisions referenced above. The matters discussed herein with
respect to the introduction of new products by the Company, future sales levels,
compliance with financial covenants in loan agreements, the Company's ability to
secure future financing, the ability of the Company to replace the expected loss
of business with its largest customer, Circuit City, the ability of the Company
and its suppliers to address issues relating to the "Year 2000 problem,"
estimated costs of the Company's resolution of the "Year 2000 problem," costs
associated with, and effectiveness of, the Company's proposed new management
information system, and the potential outcome of any pending litigation
involving the Company, among others, are forward looking statements. In
addition, when used in this discussion, the words "anticipates," "expects,"
"intends," "plans" and variations thereof and similar expressions are intended
to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified based on current
expectations. Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements contained in this Quarterly Report. Statements in
this Quarterly Report, particularly in the Notes to Financial Statements, and
"Part 1, Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations" describe certain factors, among others, that could
-16-
<PAGE>
contribute to or cause such differences. Other factors that could contribute to
or cause such differences include, but are not limited to, unanticipated
developments in any one or more of the following areas: the receptivity of
consumers to new consumer electronics technologies, the rate of consumer
acceptance of new product introductions, competition, the Company's ability to
retain existing customers and attract new ones, the number and nature of
customers and their product orders, the Company's patents pending before the
U.S. Patent and Trademark Office, pricing, foreign manufacturing, sourcing and
sales (including foreign government regulation, trade and importation concerns
and fluctuation in exchange rates), borrowing costs, changes in taxes due to
changes in the mix of U.S. and non U.S. revenue, pending or threatened
litigation, the availability of key personnel, the ability of the Company and
the Company's suppliers to address issues relating to the "Year 2000 problem,"
the costs to the Company in addressing the "Year 2000 problem," and other risk
factors which may be detailed from time to time in the Company's Securities and
Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward-looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of unexpected
events.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
Exhibit No. Description
----------- -----------
2.1 Plan of Reorganization of North American Energy of Delaware,
Inc. (1)
2.2 Agreement and Plan of Merger between ORA Electronics, Inc., a
Delaware corporation, and North American Energy of Delaware,
Inc., a Delaware corporation. (2)
3.1 Restated Certificate of Incorporation of ORA Electronics, Inc.
(2)
3.2 Bylaws of ORA Electronics, Inc. (2)
4.1 Specimen Common Stock Certificate of ORA Electronics, Inc. (2)
4.2 Specimen Class A Warrant Certificate. (2)
4.3 Specimen Class B Warrant Certificate. (2)
4.4 Specimen Class C Warrant Certificate. (2)
-17-
<PAGE>
4.5 Specimen Class D Warrant Certificate. (2)
4.6 Warrant Agreement between the Company and Continental Stock
Transfer & Trust Company (the "Warrant Agent"), dated as of
December 20, 1996. (2)
4.7 Letter Agreement, dated June 10, 1997, from Sheppard, Mullin,
Richter & Hampton LLP to the Warrant Agent. (3)
10.1 Loan and Security Agreement, dated April 4, 1997, by and between
the Company and FINOVA Capital Corporation ("FINOVA").
(3)
10.2 Amendment to Loan Agreement, dated April 4, 1997, between the
Company and FINOVA. (3)
10.3 Collateral Assignment, Patent Mortgage and Security Agreement,
dated as of April 4, 1997, by and between the Company and
FINOVA. (3)
10.4 Waiver and Second Amendment to Loan Agreement, dated June 26,
1997, between the Company and FINOVA. (3)
10.5 Waiver and Third Amendment to Loan Agreement, dated
November 13, 1997 between the Company and FINOVA. (4)
10.6 Waiver and Fourth Amendment to Loan Agreement, dated
February 11, 1998 between the Company and FINOVA. (5)
10.7 Waiver and Fifth Amendment to Loan Agreement, dated
March 27, 1998, between the Company and FINOVA. (6)
10.8 Second Deed of Amendment, by and between the Company
and ORA Electronics (UK) Limited ("ORA UK"), dated
as of April 1, 1998. (5)
10.9 Distribution Agreement, by and between Alliance Research
Corporation (predecessor to the Registrant) and Contactace
Limited (doing business as ORA UK), dated as of 1990. (5)
-18-
<PAGE>
11 Statement re: Computation of Earnings Per Share.
27 Financial Data Schedule.
- ---------------
(1) Incorporated by reference from the Form 8-K/A filed on December 20,
1996, by North American Energy of Delaware, Inc., predecessor to the
Registrant.
(2) Incorporated by reference from the Registrant's Form 8-K filed on
December 20, 1996.
(3) Incorporated by reference from the Registrant's Form 10-K filed on
June 30, 1997.
(4) Incorporated by reference from the Registrant's Form 10-Q filed on
February 14, 1998.
(5) Incorporated by reference from the Registrant's Form 8-K filed on
April 17, 1998.
(6) Incorporated by reference from the Registrant's Form 10-K filed on
June 29, 1998.
(b) Reports on Form 8-K.
--------------------
A report on Form 8-K was filed on December 8, 1998, in connection
with the Company's extension of the exercise deadlines relating to
its Class A and Class B Warrants. By their terms, the Company's
Class A Warrants now entitle the holders thereof to purchase shares
of the Company's common stock at an exercise price of $5.00 per share
on or prior to June 30, 1999, and the Company's Class B Warrants now
entitle the holders thereof to purchase shares of the Company's
common stock at an exercise price of $10.00 per share on or prior to
June 30, 1999.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORA ELECTRONICS, INC.
(Registrant)
Dated: February 16, 1999 By: /s/ John M. Burris
---------------------------------
John M. Burris, Duly Authorized
Representative and Chief Financial
Officer
-20-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- --------------------------------------------------------------------------------
11 Statement Re: Computation Of Earnings
Per Share 22
27 Financial Data Schedule 23
-21-
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Three Months Ended December 31,
1998 1997
---- ----
Basic and diluted weighted average
number of shares of common stock
outstanding 6,909,480 6,606,414
=========== ===========
Net earnings (loss) $ (283,663) $ 3,811
=========== ===========
Basic and diluted earnings (loss)
per share $ (0.04) $ 0.00
=========== ===========
Nine Months Ended December 31,
1998 1997
---- ----
Basic and diluted weighted average
number of shares of common stock
outstanding 6,909,077 6,606,414
=========== ===========
Net earnings (loss) $ 732,009 $ (913,857)
=========== ===========
Basic and diluted earnings (loss) $ 0.11 $ (0.14)
per share =========== ===========
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 1,469,265 1,469,265
<SECURITIES> 0 0
<RECEIVABLES> 2,431,293 2,431,293
<ALLOWANCES> 499,692 499,692
<INVENTORY> 3,305,124 3,305,124
<CURRENT-ASSETS> 6,901,938 6,901,938
<PP&E> 8,805,247 8,805,247
<DEPRECIATION> 2,693,689 2,693,689
<TOTAL-ASSETS> 13,913,685 13,913,685
<CURRENT-LIABILITIES> 5,119,321 5,119,321
<BONDS> 0 0
0 0
0 0
<COMMON> 6,910 6,910
<OTHER-SE> 2,866,979 2,866,979
<TOTAL-LIABILITY-AND-EQUITY> 13,913,685 13,913,685
<SALES> 3,101,102 10,644,519
<TOTAL-REVENUES> 3,101,102 10,644,519
<CGS> 2,096,956 6,387,692
<TOTAL-COSTS> 1,147,307 4,757,312
<OTHER-EXPENSES> (26,493) (1,766,756)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 166,995 534,262
<INCOME-PRETAX> (283,663) 732,009
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (283,663) 732,009
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (283,663) 732,009
<EPS-PRIMARY> (0.04) 0.11
<EPS-DILUTED> (0.04) 0.11
</TABLE>
