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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2002.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______.
COMMISSION FILE NO. 0-27996
WIRELESS XCESSORIES GROUP, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 13-3835420
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State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification Number)
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1840 County Line Road, Huntingdon Valley, PA 19006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: (215) 494-0111
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 $.001 Per Share
Title of Class
Over the Counter
Bulletin Board
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Indicate by check mark whether the Registrant (1) has filed all reports 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The number of outstanding shares of the Registrant's Common Stock, par value
$.001 per share, on March 3, 2003 was 5,222,080.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (computed by reference to the closing price of such stock on Over the
Counter Market on June 28, 2002 of $0.13) was approximately $503,776.
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PART I
ITEM 1. BUSINESS
Wireless Xcessories Group, Inc. ("Wireless Xcessories" or the "Company") was
founded in May 1995. We are engaged in the nationwide sale and distribution of a
wide range of accessories for cellular phones, including batteries, chargers and
antennas (collectively, "Wireless Accessories"). Our products are generally sold
through third party retailers' stores. As discussed more fully below, we have
completed the disposition of our remaining business in the Battery Segment and
have accounted for this segment as discontinued operations. The Battery Segment
involved the assembly and distribution of primarily specialty batteries as well
as a small percentage of cellular phone batteries. Prior to March 20, 2000, our
name was Batteries Batteries, Inc.
On March 13, 2001, Advanced Fox Antenna, Inc.( "Advanced Fox"), Cliffco of Tampa
Bay, Inc.("Cliffco") and AccessorySolutions.Com.("Accessory Solutions") formerly
100% wholly subsidiaries entered into an agreement to combine and merge with
Wireless Xcessories, the surviving entity. This merger has facilitated the
Company's ability to integrate and combine functions to eliminate redundancy,
improve communication and facilitate the development and implementation of
common marketing and operating strategies.
CURRENT OPERATIONS
Our headquarters for all operations are located at 1840 County Line Road,
Huntingdon Valley, Pennsylvania 19006.
The Wireless Accessories industry remains fragmented. Our strategy is to
effectively market one of the broadest and most complete lines of wireless
accessories products. We currently offer in excess of 3,000 different products.
We strive to leverage our distribution channels and relationships and provide
high quality technical expertise and service to our customers.
Our business strategy involves the following components:
o Maintain Diversity of Products and Customers. We distribute a
complete line of wireless accessories. We sell our products to
dealers, other distributors, communications carriers, mass
merchandisers and retail customers.
o Obtain Advantageous Purchasing. All our purchasing for our
distribution is under the direct control of a corporate purchasing
manager who is responsible for assuring that the vendors chosen and
the pricing they offer are the most advantageous for us.
o We offer a full retail solution to our customers providing
specialized private label retail packaging in both proprietary and
custom packaging through our semi- automated warehouse and
production facility. We also provide and offer display and point of
sale merchandising aids to an increasing proportion of our
customers.
2
o We offer an e-commerce solution to our dealer agents for cellular
phone accessories. The solution includes a full custom retail web
site help desk and order fulfillment. In addition the dealer agents
get a 30% commission check quarterly for all e-commerce sales.
o We also offer a wholesale web site where our dealer agents and
retail stores can order online to commit inventory. This has
streamlined our internal order process and facilitates the customer
reorder process.
o Strategic acquisitions, if feasible, in regional markets other than
the East Coast markets of the U.S. in which the Company is already
operating.
Products. We currently market over 3,000 wireless accessories. The product
category offerings include rechargeable batteries, personal and portable hands
free kits, hands free installation kits, portable and vehicle antennas, in-car
and travel chargers, fashionable accessory faceplates and colored housings for
cellular phones, plain and colored phone carrying cases.
Purchasing. We purchase approximately 75% of our wireless accessory products
from manufacturers located overseas, principally in the Far East. In 2002, the
Company purchased approximately 52% of its products from three Far East
suppliers with two each at 19% and one at 14% of total purchases. No other
vendor accounted for 10% or more of our purchases.
Sales. We market and sell the majority of our products to dealers, other
distributors, communications carriers, mass merchandisers and retail customers.
Additionally, we produce one product line catalog that is circulated nationally
and internationally.
Concentration. During the twelve months ended December 31, 2002, we effected
sales to more than 3,000 commercial, and retail customers. In that same period,
our two largest customers accounted for 3.6% and 3.3% of our net sales,
respectively. No customer of ours accounted for 10% or more of our net sales.
Export sales accounted for less than 3% of net sales for the period.
EMPLOYEES
As of March 3, 2003, we employed approximately 70 persons. These employees work
in the following areas of our business: one in technical operations; 20 in
telemarketing and commercial sales; 33 in packaging; warehousing, inventory
control, shipping and receiving; two in purchasing, and 14 in management and
administration. None of the employees are represented by a labor union. We
consider our relations with our employees to be satisfactory.
ENVIRONMENTAL MATTERS
Although batteries have become a very small percentage of our business as a
result of the discontinued battery operations, we continue to purchase and
distribute batteries, which contain chemicals such as lithium ion. We do not
manufacture the batteries but rather purchase the items in their finished state.
Our operations do not involve the alteration or penetration of the batteries.
Returns of our batteries are made to a recycler for disposition. We believe that
we have operated our present and former respective facilities in compliance with
applicable environmental laws and regulations. Accordingly, we do not believe
that it has any material risk of environmental liability.
3
We currently are not aware of any environmental conditions relating to present
or past waste generation at or from any of our present or former facilities or
operations, that would likely have a material adverse effect on our financial
condition or our results of operations and does not anticipate any material
expenditures to comply with environmental laws, regulations or ordinances.
However, there can be no assurance that environmental liabilities in the future
will not be incurred and that they will not have a material adverse effect on
our financial condition or our results of operations.
INTELLECTUAL PROPERTY
We believe that we have all rights to trademarks and trade names necessary for
the conduct of our business. See discussion relating to the Company facing
possible patent infringement legal action in selected products in following
paragraph titled " WE FACE PATENT INFRINGEMENT LEGAL ACTIONS IN SELECTED
PRODUCTS".
DISCONTINUED OPERATIONS
Management, upon approval of the Board of Directors, disposed all of the
subsidiaries within our Battery Segment. As a result of this decision, the
Battery Segment has been accounted for as discontinued operations for all
periods presented.
On January 27, 2000, we consummated the sale of substantially all of the assets
of Tauber to Nexergy Tauber, Inc. ("NT"), a wholly owned subsidiary of Nexergy
Inc. ("Nexergy"). As consideration for the sale, we received a cash payment of
$1,005,894 on February 1, 2000 and a note in the amount of $519,708 due in 2005
with interest payments beginning upon the closing of the transaction and
principal payments commencing during the first quarter of 2002. The principal
amount of this note was subsequently reduced to $483,573 effective on March 15,
2000 to reflect a final valuation of transferred assets. The note was subject to
upward adjustment during the first quarter of 2001 based on the valuation of
certain inventory reserves. In March 2001 it was determined based on a full
valuation provided by the purchaser to us, that no adjustment was required. In
addition, NT assumed $705,669 of Tauber's liabilities. In a related transaction,
NT entered into a sub-lease with the Company to occupy approximately 19,000
square feet of our leased facility in Escondido, California, which terminated in
August 2000.
On November 6, 2000, effective October 31, 2000, the Battery Network sold
selective inventory and substantially all of its machinery and equipment, trade
names and customer lists to Ohlin Sales Corp. for a total of $200,000 in cash
and a note totaling $125,000. The note provides for twenty-four consecutive
equal monthly payments of $5,655, including interest at 8% and principal
starting on December 1, 2000 and ending on November 1, 2002. The note has a
total of $22,060 that is past due which is being held by the debtor subject to
the resolution of certain obligations which the debtor claims are due him from
the Company. On December 16, 2000 the Company sold selected remaining inventory,
and trade names related to Absolute Battery (a division and trade name of
Battery Network principally involved in the laptop battery and accessories
business) to Battery Universe for cash of $40,000 and a $10,000 note. The note,
which was paid in full effective July 2001, provided for interest at 8% along
with equal monthly principal payments commencing on January 1, 2001 and ending
on June 1, 2001.
We came to the conclusion to dispose of these operations as a result of a
shrinking sales base and continued losses in this segment. After assessing the
magnitude of the efforts that would be required to improve the profitability of
this segment, we determined that our limited managerial and financial resources
should be focused on continuing to enhance the business and profitability of the
Wireless Products Segment.
4
MANAGEMENT
In November 1999, Kenneth Rickel's term as a member of our Board of Directors
expired and Christopher C. Cole was subsequently elected by the Board to fill
the resulting vacancy in February 2000.
In November 2000, Robert Tauber's term as a member of our Board of Directors
expired and presently remains vacant.
Effective February 26, 2002 Barbara M. Henagan resigned from our Board of
Directors due to increased outside business commitments.
On and effective June, 2002 our Board elected Stephen Rade to be the Chairman of
the Board of Directors of the Company. Christopher F.McConnell, who previously
held this position, will continue to serve the Company in a director capacity.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") provide companies with a "safe harbor" when making forward-looking
statements. This "safe harbor" encourages companies to provide prospective
information.
We wish to take advantage of the "safe harbor" provisions of the Act and are
including this section in our Annual Report on Form 10-K in order to do so.
Forward-looking statements also appear in other sections of this report.
Statements that are not historical facts, including statements about
management's expectations for fiscal year 2003 and beyond, are forward-looking
statements and involve various risks and uncertainties. Factors that could cause
the actual results to differ materially from management's projections,
forecasts, estimates and expectations include, but are not limited to, the
following:
WE MAY NOT SUCCESSFULLY OFFER ATTRACTIVE MERCHANDISE TO OUR CUSTOMERS.
In order to meet our strategic goals, we must successfully locate and offer our
customers new, innovative and high quality products. Our product offerings must
be affordable, useful to the customer, well made, distinctive in design, and not
widely available from other sources. We cannot predict with certainty that we
will successfully offer products that meet these requirements in the future.
5
If our products become less popular with our customers or our competitors offer
the same or similar products as we offer at lower prices, our sales may decline
or we may decide to offer our products at lower prices. If customers buy less of
our products or if we have to reduce our prices, our revenues and profits will
decline which will have a material adverse effect on our results of operations.
In addition, we must offer our merchandise in sufficient quantities to meet the
demands of our customers and deliver this merchandise to customers in a timely
manner. We must be able to maintain sufficient inventory levels, particularly
during peak selling seasons. Our future results may be affected if we are not
successful in achieving these goals.
WE MAY NOT SUCCESSFULLY DESIGN AND DEVELOP PROPRIETARY PRODUCTS.
We are dependent to some extent on the success of our proprietary products that
the Company has designed and developed for our customers. We must in certain
cases design products that meet the demands of our customers and have these
products manufactured cost-effectively. In addition, we must rely on contracted
manufacturing resources to produce these products in sufficient quantities to
meet customer demand and deliver these products in a timely manner to our
customers. The Company relies solely on its contracted manufacturers to produce
and timely deliver these proprietary products. If we are unable to successfully
design, develop, and timely deliver our proprietary products, our operating
results may be materially adversely affected.
WE FACE CERTAIN RISKS ASSOCIATED WITH EXPANSION.
We plan to continue to increase the number of retail outlets and web sites
operated by third parties in which our products are sold. Our ability to expand
will depend in part on the following factors:
o our ability to persuade retail stores to carry our products in their
stores and web sites;
o general economic conditions; and
o the availability of sufficient funds for expansion.
We need to expand our management information systems and distribution systems to
facilitate possible future expansion plans. If we are unable to grow our
existing system, it may hinder future expansion efforts.
6
WE DEPEND ON OUR VENDORS.
Our performance depends on our ability to purchase our products in sufficient
quantities at competitive prices and on our vendors' ability to make and deliver
high quality products in a cost effective, timely manner. Some of our smaller
vendors have limited resources, production capacities and limited operating
histories. We have no long-term purchase contracts or other contracts that
provide continued supply, pricing or access to new products and any vendor or
distributor could discontinue selling to us at any time. There can be no
assurance that we will be able to acquire the products that we desire in
sufficient quantities or on terms that are acceptable to us in the future. In
addition, there can be no assurance that our vendors will make and deliver high
quality products in a cost effective, timely manner. We may also be unable to
develop relationships with new vendors. Also, all products we purchase from
vendors in the Far East must be shipped to our warehouses by freight carriers
and there can be no assurance that we will be able to obtain sufficient capacity
at favorable rates. Our inability to acquire suitable products in a cost
effective, timely manner or the loss of one or more key vendors or freight
carriers could have a negative impact on our business.
WE FACE CERTAIN RISKS RELATING TO CUSTOMER SERVICE.
Any material disruption or slowdown in our order processing systems resulting
from labor disputes, telephone down times, electrical outages, mechanical
problems, human error or accidents, fire, natural disasters, or comparable
events could cause delays in our ability to receive and distribute orders and
may cause orders to be lost or to be shipped or delivered late. As a result,
customers may cancel orders or refuse to receive goods on account of late
shipments, which would result in a reduction of net sales and could mean
increased administrative and shipping costs.
7
WE FACE RISKS ASSOCIATED WITH DISTRIBUTION.
We conduct all of our distribution and packaging operations and Internet order
processing fulfillment functions from one facility in Huntingdon Valley,
Pennsylvania. Any disruption in the operations at the distribution center could
have a negative impact on our business. In addition, we rely upon third party
carriers for our product shipments. As a result, we are subject to certain
risks, including employee strikes and inclement weather, associated with such
carriers' ability to provide delivery services to meet our shipping needs.
WE FACE PATENT INFRINGEMENT LEGAL ACTIONS IN SELECTED PRODUCTS.
We were notified in the fall of 2000 that certain of our products might have
infringed the patents of an original equipment manufacturer (OEM). We have
discontinued the sale of such products in question, and in early 2001 developed
alternative products to meet our customer needs that we believe do not infringe.
Several other distributors have either settled or are in the process of
litigating similar claims with the OEM. We have hired outside counsel to assist
us in resolving all financial issues relating to our sales prior to the
discontinuance of alleged patent infringement. At this point, we are involved in
the information discovery phase with the OEM, which hopefully will lead to a
reasonable resolution of any and all outstanding issues.
The amount of any possible claim is unknown at this time and management cannot
reasonably assess our liability exposure. We believe that the possibility of an
unfavorable outcome will not have a material adverse effect on our financial
position.
WE EXPERIENCE INTENSE COMPETITION IN OUR MARKETS.
We operate in a highly competitive environment. We principally compete with a
variety of small distributors of cellular phone accessories that focus on a
particular segment of the market, as well as a few single large distributors
that offer a broad range of such products.
Competition in the industry is based on maintenance of product quality,
competitive pricing, delivery efficiency, customer service and satisfaction
levels, maintenance of satisfactory dealer relationships and training programs,
and the ability to anticipate technological changes and changes in customer
preferences. No assurance can be given that any of our major suppliers
(primarily located in the Far East) whose products we distribute or major
cellular phone manufacturers will not acquire, startup, and or expand their own
distribution systems to sell directly to commercial and retail customers.
8
WE MAY FAIL TO ANTICIPATE AND ADAPT TO CHANGING CONSUMER TRENDS.
Our success depends on our ability to anticipate and respond to changing product
trends and consumer demands in a timely manner. Our products must appeal to a
broad range of consumers whose preferences cannot always be predicted with
certainty and may change between sales seasons. If we misjudge either the market
for our products or our customers' purchasing habits, our sales may decline or
we may be required to sell our products at lower prices. This would result in a
negative impact on our business.
POOR ECONOMIC CONDITIONS MAY HURT OUR BUSINESS.
Certain economic conditions affect the level of consumer spending on our
products, including, among others, the following:
o general business conditions;
o interest rates;
o tax law changes;
o consumer confidence in future economic conditions.
Our business could be negatively impacted by a protracted recession or poor
economic conditions and any related decline in consumer demand for discretionary
items such as our products. Because we purchase merchandise from foreign
entities, we are subject to risks resulting from fluctuations in the economic
conditions in foreign countries. The majority of our foreign vendors and
manufacturers are located in the Far East, and as a result, our business may be
particularly impacted by changes in the political, social, legal, and economic
conditions in the Far East. Additionally, foreign weather and product
transportation problems could affect our ability to maintain adequate inventory
levels and adversely affect our future results.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL.
Our success depends to a significant extent upon the abilities of our senior
management. The loss of the services of any of the members of our senior
management or of certain other key employees could have a significant adverse
effect on our business. In addition, our performance will depend upon our
ability to attract and retain qualified management, merchandising and sales
personnel. There can be no assurance that the members of our existing management
team will be able to manage the Company or our growth or that we will be able to
attract and hire additional qualified personnel as needed in the future.
WE MUST SUCCESSFULLY RESPOND TO CHANGES IN THE RETAIL INDUSTRY.
The United States retail industry, and the specialty retail industry in
particular, are dynamic by nature and have undergone significant changes over
the past several years. Our ability to anticipate and successfully respond to
continuing challenges is critical to achieving our expectations.
9
WE COULD BE LIABLE FOR BREACHES OF SECURITY ON OUR WEB SITE AND THE WEB SITES OF
OUR PARTNERS AND FRAUDULENT ACTIVITIES OF USERS OF OUR INTERNET PAYMENT SYSTEM.
A fundamental requirement for electronic commerce is the secure transmission of
confidential information over public networks. Although we have developed
systems and processes to prevent fraudulent credit card transactions and other
security breaches, failure to mitigate such fraud or breaches may negatively
impact our financial results. The law relating to the liability of providers of
online payment services is currently unsettled.
OUR COMMON STOCK PRICE IS VOLATILE.
Our common stock was de-listed from Nasdaq National Market in 2000 and currently
trades on the Over the Counter Bulletin Board. The price of our common stock has
experienced, and is likely to experience in the future, significant price and
volume fluctuations, which could reduce the market price of the common stock
without regard to our operating performance. We believe that among other
factors, any of the risk factors outlined in the preceding paragraphs if
realized, could cause the price of the common stock to fluctuate substantially.
ITEM 2. PROPERTIES
All of our real properties are held under leases. The following table provides
certain information concerning our leased properties:
APPROXIMATE LEASE
AREA EXPIRATION
OPERATION NATURE LOCATION (SQ.FT.) DATE
-------- -------- -------- -----
Main Facility Warehouse and Huntingdon Valley, PA 52,000 5/31/05
Office 13,100 3/31/05
ITEM 3. LEGAL PROCEEDINGS
Pursuant to a Management Agreement with The Founders Management Services, Inc.
("Founders"), we paid Founders, for its origination and negotiating services in
connection with the acquisitions of Battery Network and a loan facility, the sum
of $240,000. We also issued to certain designees of Founders warrants to
purchase 100,000 shares of our Common Stock at a price of $4.125 per share.
Since June 1998 when Messrs. Haber and Teeger resigned as officers and directors
of the Company, Founders has provided no services to us and we have not paid any
fees to Founders. Although neither we nor Founders had formally terminated the
Management Agreement, we believed that both parties have conducted themselves as
if the Management Agreement had been terminated.
In December 1999, Founders filed a lawsuit in the United States District Court
for the Southern District of New York against us alleging that we owed Founders
approximately $493,000 for a purportedly improper early termination of the
Management Agreement. We settled in full all matters relating to this case with
Founders in October 2001 for a total of $228,000 of which $150,000 was paid
shortly after settlement and the balance on January 15, 2002, with mutual
releases issued and obtained by all concerned parties.
We, from time to time, are a party to other litigation arising in the normal
course of our business, most of which involves claims for amounts due from
merchandise or services purchased or merchandise sold to third parties We
believe that none of these actions will have a material adverse effect on our
financial condition or our results of operations.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was held on June 11, 2002. The following are
results of the voting on the proposals submitted to the stockholders at the
annual meeting:
Proposal No. 1: Election of Directors.
The following individuals were elected as directors:
NAME FOR AGAINST
----- --- -------
Christopher F. McConnell 4,239,735 263,148
Stephen Rade 4,239,735 263,148
Bradley T. MacDonald 4,199,535 303,348
Allan Kalish 4,239,735 263,148
Christopher C. Cole 4,239,735 263,148
There were no broker non-votes or abstentions or votes withheld with respect to
this proposal.
Proposal No. 2: Proposal to ratify the appointment by our Board of Directors of
BDO Seidman, LLP as the Company's independent auditors for the fiscal year
ending December 31, 2002.
FOR: 4,222,393
AGAINST: 62,700
ABSTAIN: 217,790
The proposal passed by a majority of the votes casts as dictated by our by-laws.
There were no broker non-votes or votes withheld with respect to this proposal.
This passed proposal was overturned when BDO Seidman, LLP was replaced with
Bagell, Josephs & Company, L.L.C. as the Company's independent auditors in
conjunction with the Current Form 8-K which was filed on December 26, 2002 (See
Item 9 and Item 15).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock and Redeemable Common Stock Purchase Warrants started trading
on the Nasdaq National Market (the "NMS") on April 8, 1996 under the symbol
"BATS" and "BATSW", respectively. On March 20, 2000, as a result of a change of
our name from Batteries Batteries, Inc. to Wireless Xcessories Group, Inc., our
Common Stock began trading under the symbol "WIRX" and the Warrants under the
symbol "WIRXW." The Warrants expired on April 8, 2000 in accordance with the
Warrant agreement and are no longer actively traded. Effective, December 19,
2000, our Common Stock began trading on the Over The Counter Bulletin Board
("OTC") resulting from a de-listing action taken by Nasdaq removing our
securities from the NMS for failure to meet certain listing requirements. The
following tables set forth the range of high and low closing prices for the
quarters indicated for the Common Stock on the NMS as reported by NMS for
calendar year 2001 and 2002 on the OTC.
11
COMMON STOCK
2001 HIGH LOW
- ----- ---- ---
FIRST QUARTER 0.59 0.125
SECOND QUARTER 0.52 0.34
THIRD QUARTER 0.52 0.02
FOURTH QUARTER 0.40 0.12
2002
- ----
FIRST QUARTER 0.37 0.10
SECOND QUARTER 0.29 0.10
THIRD QUARTER 0.29 0.12
FOURTH QUARTER 0.27 0.15
The OTC prices reflect inter-dealer quotations, without retail mark-ups,
markdowns or other fees or commissions, and may not necessarily represent actual
transactions.
There were 56 record holders of the Company's Common Stock as of March 1, 2003.
A substantially larger number of beneficial owners hold such shares of Common
Stock in depository or nominee form.
No dividends have been paid on the outstanding shares of Common Stock. Our
Revolving Credit, Term Loan and Security Agreement prohibits the payment of
dividends on our Common Stock without the consent of the lender that is a party
to that agreement. A discussion of this agreement can be found in Item 7 below.
On April 23, 1999, we offered and sold a total of 389,732 shares of its Common
Stock to Christopher McConnell, and Barbara Henagan, two directors of the
Company respectively, as well as to two other related parties. Ms Henagan
subsequently resigned her position as a Director as of February 26, 2002. The
aggregate offering price for these shares was $498,800. This offering was made
pursuant to an exemption from registration under Section 4(2) of the Securities
act of 1933, as amended.
0n January 11, 2001, our Board approved a stock buyback plan whereby we will
repurchase a maximum of 500,000 shares of our Common Stock at a total cost not
to exceed $250,000 through July 20, 2003. As of December 31, 2002, we have
repurchased 344,810 shares at an average cost of $0.26 per share.
ITEM 6. SELECTED FINANCIAL DATA
INTRODUCTION
The following table sets forth the selected financial data for Wireless
Xcessories and its subsidiaries. The Income Statement Data includes the results
of operations for us and each of our subsidiaries since their dates of
acquisition (see Item 1 -- Business). The subsidiaries within the Battery
Segment (Tauber, Battery Network and Specific Energy) have been accounted for as
discontinued operations. This information should be read in conjunction with the
Consolidated Financial Statements and Notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that appear elsewhere
in this document.
12
The Selected Financial Data as of and for the years ended December 31, 1998 and
1999 have been derived from the consolidated financial results for the year
ended December 31, 1998 and 1999 audited by Deloitte & Touche LLP, and Arthur
Andersen LLP, respectively, and appear only in this section. The Selected
Financial Data as of and for the years ended December 31, 2000, 2001 and 2002
have been derived from the financial statements audited by Arthur Andersen LLP,
BDO Seidman LLP and Bagell, Josephs & Company, L.L.C., respectively, that appear
elsewhere in this report.
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME STATEMENT DATA:
NET SALES $ 24,852 $ 31,653 $ 30,128 $ 20,890 $ 14,068
COST OF SALES 13,776 16,034 15,440 12,446 7,834
-------- -------- -------- -------- --------
GROSS PROFIT 11,076 15,619 14,688 8,444 6,234
-------- -------- -------- -------- --------
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES (1) 8,906 11,558 13,010 11,179 6,757
INTEREST EXPENSE, NET 311 395 274 117 17
-------- -------- -------- -------- --------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES 1,859 3,666 1,404 (2,852) (541)
INCOME TAX EXPENSE 880 1,323 579 71 0
-------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 979 2,343 825 (2,923) (541)
DISCONTINUED OPERATIONS:
(LOSS) FROM OPERATIONS
(NET OF TAX (PROVISION)
OF $1,259, $847, $188 and $0 and $0) (2,483) (1,504) (293) 0 0
ESTIMATED LOSS ON SALE OF
SUBSIDIARIES (NET OF TAX
BENEFITS OF $0, $225, $187, $0, $0) (558) (4,277) (286) 0 0
-------- -------- -------- -------- --------
(LOSS) FROM DISCOUNTED
OPERATIONS (3,041) (5,781) (579) 0
-------- -------- -------- -------- --------
0
NET (LOSS) INCOME (2,062) (3,438) 246 (2,923) (541)
PREFERRED STOCK DIVIDEND
REQUIREMENTS 0 0 0 0 0
-------- -------- -------- -------- --------
NET (LOSS) INCOME ATTRIBUTABLE
TO COMMON SHAREHOLDERS $ (2,062) $ (3,438) $ 246 $ (2,923) $ (541)
======== ======== ======== ======== ========
13
SELECTED FINANCIAL DATA (CONTINUED)
FISCAL YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NET (LOSS) INCOME PER SHARE OF
COMMON STOCK (BASIC) $ 0.21 $ 0.47 $ 0.16 $ (0.56) $ (0.11)
======== ======== ======== ======== ========
NET (LOSS) PER SHARE OF
COMMON STOCK (BASIC)
FROM DISCONTINUING OPERATIONS $ (0.64) $ (1.15) $ (0.11) $ 0.00 $ 0.00
======== ======== ======== ======== ========
NET (LOSS) INCOME PER SHARE
ATTRIBUTABLE TO COMMON
STOCKHOLDERS (BASIC) $ (0.43) $ (0.69) $ .05 $ (0.56) $ (0.11)
======== ======== ======== ======== ========
NET (LOSS) INCOME PER SHARE OF
COMMON STOCK (DILUTED)
FROM CONTINUING OPERATIONS $ 0.21 $ 0.46 $ .16 $ (0.56) $ (0.11)
======== ======== ======== ======== ========
NET (LOSS) PER SHARE OF
COMMON STOCK (DILUTED)
FROM DISCONTINUING OPERATIONS $ (0.64) $ (1.15) $ (0.11) $ 0.00 $ 0.00
======== ======== ======== ======== ========
NET INCOME (LOSS) PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS
(DILUTED) $ (0.43) $ (0.69) $ 0.05 $ (0.56) $ (0.11)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
AS OF ENDED DECEMBER 31,
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
WORKING CAPITAL $ 11,532 $ 9,366 $ 6,535 $ 3,613 $ 2,512
TOTAL ASSETS 21,320 16,685 13,939 7,218 4,770
LONG TERM DEBT 8,865 5,505 2,859 1,155 9
STOCKHOLDERS' EQUITY 9,668 6,718 7,092 4,138 3,540
(1) During the first quarter of 2000, the Company sold most of its assets
and transferred certain liabilities of Tauber Electronics, Inc. During
the fourth quarter of 2000, the Company sold the remaining assets of
Battery Network, Inc. As these two companies represented all of the
company's remaining business within its Battery Segment, the Company
has accounted for this segment as a discontinued operation which is
reflected in all periods reported above.
(2) During the quarter ended September 30, 2001, the Company recognized an
impairment of the remaining balance of its excess of cost over net
assets acquired of $876,008. The impairment related to the significant
deterioration of Cliffco of Tampa Bay, Inc.'s business. What remained
of Cliffco's operations was merged into Wireless Xcessories Group, Inc.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Year Ended December 31, 2002 ("2002") Compared to Year Ended December 31, 2001
("2001")
Net sales decreased by 32.7% or $6.8 million from $20.9 million in 2001 to $14.1
million in 2002. Overall sales continued to be negatively effected by the
sluggish market demand for new cellular phones and its resultant effect on after
market accessory sales. The industry is still experiencing lower average pricing
per accessory unit sold due in a large part to the highly competitive market
conditions and changes in product mix. This has had a negative financial effect
on a major portion of our dealer and distributor customer base who have
continued to cut back ordering from prior year levels in reaction to lower
sales, and are actively reducing inventories. Additionally, the Company lost two
major customers, and experienced reduced sales to two other key customers due,
respectively to, bankruptcy and financial difficulties which accounted for over
two million dollars of combined sales . The above factors combined with the
Company's conscious decision to drop selected lower volume marginally profitable
accounts combined to more than offset our additional sales generated from our
new overseas vendor direct ship to customer program, and enhanced new product
offerings.
Gross profit decreased by $2.2 million or 26.2% from $8.4 million in 2001 to
$6.2 million in 2002, but as a percentage of sales increased from 40.4% to
44.3%. The increase in gross profit percentage was a result of the following:
o Reductions in charges to earnings to provide for obsolete and slower
moving inventory due primarily to enhanced controls over quantities
of new product purchased.
o The Company was able to either improve pricing and reduce packaging
services and incentives or eliminate selected lower margin or
unprofitable customers which positively effected margins.
o Higher margins on selected newer products,
o Significant reduction in freight costs to customers by tightening
free freight policies to our customers.
o Partially offset by the continued pricing pressure due to the
extremely competitive environment.
Selling, general and administrative ("SG&A") expenses decreased by 39.6% or $4.4
million, from $11.2 million in 2001 to $6.8 million in 2002, and as a percentage
of sales decreased from 53.5% in 2001 to 48.0% in 2002. A major part of the
reduction in SG&A as a percentage of sales is attributable to our recording of
an impairment charge related to the excess of cost over assets acquired related
to the Cliffco operation during the third quarter of 2001 of approximately
$876,000 or 4.2% of 2001 net sales. In factoring out the impairment loss,
operating expenses actually dropped by $3.5 million or 31.7% in comparing year
2001 to year 2002.
15
A major contributing factor in our substantial reduction in expenses was a
result of our consolidation of our warehouse, selling, accounting and most
administrative functions (Cliffco consolidation and shut-down which was fully
completed in last half of 2001). This resulted in major reductions in
duplicative personnel, administrative and occupancy expenses and selling
expenses as the Company was able to combine functions and activities while
achieving savings of direct facility costs such as rent, common area and
utilities. On July 31, 2002, the Company was able to terminate its lease on the
Cliffco facility which had a lease expiration date of August 1, 2004 through an
out of court money settlement with the landlord. The settlement which totaled
approximately $102,000 had been fully reserved in prior reporting periods and
was paid in two installments in August, 2002.
Additionally, through its on-going expense control program the Company was able
to achieve substantial percentage reductions in such areas as corporate related
expenses, professional fees, bank fees, telephone, office and warehouse
supplies, rented equipment, advertising, printing and photograph, and insurance
expense. In addition, the Company was able to reduce its warehouse, packaging
and shipping labor and related expense at a rate substantially in excess of the
sales decline percentage for the year due to reduced packaging services offered
to customers, the effect of having an increased percentage of our product
offerings pre-packaged by our vendors at lower costs, and a larger percentage of
our product drop shipped direct from our vendors to our customers.
Interest expense, net of interest income, decreased $99,000 from approximately
$116,000 in 2001 to approximately $17,000 in 2002 due to substantially reduced
bank borrowings under our Loan Facility resulting principally from excess cash
provided by operations principally from the reduction of accounts receivable and
inventory during 2002, and the collection of principal and interest payments
related to notes receivable realized in the sale of the Company's Tauber and
Battery Network subsidiaries, and lower effective interest rates. The weighted
average interest rates in effect on average debt outstanding decreased from
approximately 6.7% in 2001 to 5.9% in 2002.
Our effective income tax rate decreased from 2.5% of taxable income in 2001 to
0% of the taxable loss in 2002. The decrease relates primarily to the effect of
state income taxes in the states in which we operate.
Year Ended December 31, 2001 ("2001") Compared to Year Ended December 31, 2000
("2000")
Net sales decreased by 30.7% or $9.2 million from $30.1 million in 2000 to $20.9
million in 2001. Sales were negatively affected by sluggish market demand for
new cellular phones and its resultant effect on after market accessory sales,
coupled with a continuing industry trend toward significantly lower pricing per
accessory unit sold. These market factors, along with the loss of two major
customers who filed for bankruptcy in year 2000 and reduced sales to other key
customers, combined to more than offset our efforts to replace the lost volume
and expand our customer base through selling and marketing strategies.
16
Gross profit decreased by $6.3 million or 42.5% from $14.7 million in 2000 to
$8.4 million in 2001 and as a percentage of sales from 48.8% to 40.4%. The
decrease in gross profit percentage was due to additional incentives given to
customers in the form of expanded volume allowances and discounts, changes in
customer mix, lost business, price reductions to improve turns on slower moving
inventory, partially offset by improved initial selling margins on selected new
product and outbound freight reductions. In the fourth quarter of 2001 we took
an additional $570,000 (2.7% of net 2001 sales) non-cash charge for a write down
of discontinued excess inventory. This resulted from our effort to focus on
targeted core products and the difficulties of moving older product in a
sluggish and continued lower price market.
Selling, general and administrative ("SG&A") expenses decreased $1.8 million,
from $13.0 million in 2000 to $11.2 million in 2001, and as a percentage of
sales increased from 43.2% in 2000 to 53.5% in 2001. A major part of the rise in
SG&A as a percentage of sales is attributable to our recording of an impairment
charge related to the excess of cost over assets acquired related to the Cliffco
operation during the third quarter of 2001 approximately $876,000 or 4.2% of
2001 net sales. In factoring out the impairment loss, operating expenses
actually dropped by $2.7 million or 21% in comparing year 2000 to year 2001. The
reduction in expenses was primarily a result of our continuous cost cutting
program, aided by the consolidation of our warehouse, selling, accounting and
most administrative functions (Cliffco consolidation and shut-down). This
resulted in substantial reductions in such areas as professional fees, corporate
expenses, office and warehouse supplies, telephone expense, warehouse,
accounting and administrative personnel, and insurance expense. The increase in
the percentage of net sales is a result of the one-time impairment loss and our
not being able to reduce certain of our more fixed expenses, such as occupancy,
to the approximate 31% drop in sales experienced by us in 2001. Additionally,
though warehouse labor was saved through consolidation, continued lower average
prices per unit shipped and increased customized packaging and labeling to
accommodate changes in our customer needs and product mix resulted in less
overall average dollars shipped per warehouse employee.
Interest expense, net of interest income, decreased $157,000 from $273,000 in
2000 to $116,000 in 2001 due to reduced bank borrowings under our Loan Facility
resulting principally from, downsizing of Battery Network's operation during
2000, and subsequent sale of most of its assets in the November-December period
of 2000, interest income related to notes receivable realized in the Tauber
sale, cash provided by operations, and lower effective interest rates. The
weighted average interest rates in effect on average debt outstanding decreased
from 8.69% in 2000 to 6.73% in 2001.
Our effective income tax rate decreased from 41.2% of taxable income in 2000 to
2.5% of the taxable loss in 2001. The decrease is primarily attributable to a
Company decision to set up a tax valuation allowance of $1,183,966 (41.5%) of
the pre-tax loss which covers the amount of the net deferred tax asset. The tax
expense relates primarily to effects of state franchise taxes.
17
NEW ACCOUNTING STANDARDS
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This new pronouncement also amends Accounting Research Bulletin
(ARB) No. 51 "Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired and also
broadens the presentation of discontinued operations to include more disposal
transactions. SFAS 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. Adoption of SFAS 144 on
January 1, 2002, did not have any impact on the Company's financial position,
cash flows or results of operations for the year ended December 31, 2002.
This statement requires that one accounting model be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired.
This statement also broadens the presentation of discontinued operations to
include more disposal transactions. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
Adoption of SFAS 144 on January 1, 2002 did not have any impact on the Company's
financial position, cash flows or results of operations for the year ended
December 31, 2002
In April 2002, the FASB issued No. 145, "Recission of FASB Statements No. 4, 44
and 64, Amendment of FASB statement No.13, and Technical Corrections"("SFAS
145"). The recission of FASB No. 4 "Reporting Gains and Losses for
Extinguishment of Debt" applies to the Company. FASB No. 4 required that gains
and losses from extinguishments of debt were included in the determination of
net income be aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. SFAS 145 is effective for our fiscal year
beginning January 1, 2003. Effective January 1, 2003, pursuant to SFAS 145, the
treatment of the early extinguishments of debt will be included in "other
expenses" in the financial statements. Management does not anticipate that the
adoption of SFAS 145 will have a material impact on the Company's financial
position or results of operations.
In June 2002, the FASB issued Statement No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities"("SFAS 146"). The standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit on
Activity (Including Certain Costs Incurred in a Restructuring)" is replaced by
this statement. SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. Management does not anticipate
that the adoption of this statement will have a significant effect on the
Company's financial position or results of operations.
18
In December 2002, the FASB issued Statement No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure, an amendment of FASB Statement No. 123,
Accounting for Stock-Based Compensation" ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation.
Finally, this statement amends Accounting Principles Board ("APB") Opinion No.
28, "Interim Financial Reporting", to require disclosure about those effects in
interim financial information. SFAS 148 is effective for financial statements
for fiscal years ending after December 15, 2002. The Company will continue to
account for stock-based employee compensation using the intrinsic value method
of APB Opinion No. 25, "Accounting for Stock Issued to Employees," but has
adopted the enhanced disclosure requirements of SFAS 148.
CRITICAL ACCOUNTING POLICIES AN ESTIMATES
Financial Reporting Release No. 60, which was recently released by the
Securities And Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our significant accounting policies are described in Note
1 of the Notes to the Consolidated Financial Statements. The significant
accounting policies that we believe are most critical to aid in fully
understanding our reported financial results are the following:
Significant Estimates-- We have made a number of estimates and assumptions
related to the reporting of assets and liabilities in preparation of the
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. The most significant
estimates relate to the allowance for doubtful accounts, the reserve for
inventory obsolescence and the deferred tax valuation allowance.
In determining the adequacy of the allowance for doubtful accounts, we consider
a number of factors including the aging of the receivable portfolio, customer
payment trends, financial condition of the customer, industry conditions and
overall credibility of the customer. Actual amounts could differ significantly
from our estimates.
In determining the adequacy of the reserve for inventory obsolescence, we
consider a number of factors including the aging of the inventory, recent sales
trends, availability of the product in the market, industry market conditions
and overall economic conditions. Actual amounts could differ significantly from
our estimates.
In assessing the realizability of deferred income tax assets, we consider
whether it is more likely than not that the deferred income assets will be
realized through the future generation of taxable income.
Inventories -- Inventories, which consist solely of finished goods, are carried
at the lower of cost, determined on a first-in, first-out basis (FIFO), or
market value.
Revenue Recognition -- Revenue is recognized at the time of shipment. Revenue
related to the web site vendor agreements at AccessorySolutions.com, Inc. are
recognized ratably over the related contract period.
19
LIQUIDITY AND CAPITAL RESOURCES
Our requirement for capital is to fund (i) sales growth and (ii) financing for
possible acquisitions. Our primary sources of financing during 2002 and 2001
were cash flow from operations, reduction in net assets (particularly inventory
and accounts receivable), collection of notes receivable principal and interest
relating to the sale of substantially all of the assets of Tauber and Battery
Network in January 2000 and November-December 2000, respectively, and bank
borrowings.
Our working capital as of December 31, 2002 was $2,511,635 Net cash provided by
operating activities for the years ended December 31, 2002, 2001 and 2000 was
$1,486,790, $2,226,006 and $2,724,948, respectively. In 2002, we showed a loss
of cash from operations of $257,310 from our net loss of $541,152 as adjusted
for non-cash items of depreciation and amortization of $569,079 and bad debt
provision of $229,383. Cash provided from changes in assets and liabilities
totaled $1,229,480 consisting of reductions in accounts receivable, inventory
and prepaid expenses of $873,667, $426,558 and $25,233 respectively, collection
of the federal income tax refund receivable of $582,751 less a net decrease in
accounts payable and accrued expenses of $678,729.
Our reduction in accounts receivable was mostly attributable to tighter credit
policies including the increased use of Cash on Delivery and immediate customer
credit payments on selected newer and less credit worthy accounts, coupled with
more stringent collection procedures.
The reductions in inventory are primarily the result of reduced purchases in
response to the deteriorated sales base, aggressive markdowns to move older
inventory, write off of obsolete inventory and improved inventory turns due in a
large part to tighter controls over quantities of new items purchased.
Net cash provided by investing activities in 2002 of $79,708 resulted from the
collection of $185,287 of principal payments related to the sale of discontinued
operations offset in part by capital expenditures of $105,579. Net cash used in
investing activities in 2001 of $70,804 was for capital expenditure of $141,212
net of principal payments related to the sale of Battery Network of $70,408. Net
cash provided by investing activities in 2000 of $62,745 was primarily for
capital expenditures of $1,187,075 net of cash proceeds from the sale of
substantially all of the assets of Tauber in January 2000 and Battery Network in
November and December 2000 totaling $1,005,000 and $240,000, respectively.
Capital expenditures in 2000 were primarily for automated labor saving packaging
machines, automated shipping system, warehouse and office furniture, equipment,
and improvements. We expanded warehouse capacity and relocated Advanced Fox
headquarters in 2000.
20
Cash used in financing activities for the twelve months ended December 31, 2002
totaling $1,228,555 was due to net debt repayments of $1,114,864, net payments
of capital lease obligations of $56,787 and the cost of reacquiring company
stock of $56,904. Cash used in financing activities for the twelve months ended
December 31, 2001 totaling $2,008,776 and was due to net debt repayments of
$1,962,951, net payments of capital lease debt of $14,202 and the cost of
reacquiring company stock of $31,623. Cash used in financing activities for the
twelve months ended December 31, 2000 totaling $2,652,451 was principally due to
$2,755,126 net payments in borrowings and net additions to capital lease debt of
$24,714, offset in part by proceeds from the exercise of common stock options of
$127,389.
We are party to a Revolving Credit, Term Loan and Security Agreement, dated
January 6, 1997, as subsequently amended (the "Loan Facility"), between IBJ
Whitehall-Financial Group (formerly known as IBJ Schroder Bank & Trust Company),
as Agent ("IBJ"), us and certain of our affiliates. The Loan Facility consists
of a $3,000,000 Term Loan (the "Term Loan") payable in 35 monthly installments
of $50,000 each, with the balance to be paid at maturity, and a Revolving Credit
Facility (the "Revolver Loan") of up to $10,000,000 to be advanced at the rate
of 80% of eligible accounts receivable and 50% of inventories. The Loan Facility
is secured by a pledge of the assets of the Company and a pledge of the
outstanding capital stock of our subsidiaries. On August 14, 2001, we entered
into an amended credit agreement and at management's request, to reduce the
revolving credit facility to $5,000,000 (less an undrawn availability of
$800,000 to be maintained at all times) At the same time, the interest rate we
pay to IBJ on our borrowings was increased to the sum of the alternate base rate
(as defined) plus .75% with respect to domestic rate loans or the sum of the
Eurodollar rate plus 2-1/2% with respect to Eurodollar rate loans. The Term Loan
was paid in full effective with a final payment of $39,218 in June 2001. There
was no debt outstanding under the credit facility as of December 31, 2002.
The Loan Facility, as amended, contains certain covenants that include
maintenance of certain financial ratios, maintenance of certain amounts of
EBITDA (earnings before interest, taxes, depreciation and amortization), minimum
amounts of funds available for borrowing under its Loan Facility and limits on
capital expenditures as well as other affirmative and negative covenants. At
December 31, 2001, we were not in compliance with one of these covenants. On
March 21, 2002, we entered into an amended credit agreement whereby the
non-compliance at December 31, 2001 was waived and new financial covenants were
negotiated through December 31, 2003, which reflect our current projections. As
part of the agreement, the advance rate for borrowing on eligible inventory was
lowered from 50% to 40%. Additionally, the Loan Facility was extended for an
additional one-year period, expiring on January 7, 2004. At December 31, 2002,
we were not in compliance with two of the covenants.
21
We are in the process of negotiating with the lender a restructuring of the
existing credit facility to better reflect our current reduced borrowing
requirements. The planned restructuring of the existing credit facility may
include the receipt of a waiver of the non-compliance with the aforementioned
covenants.
Based upon its present plans, management believes that operating cash flow,
available cash and available credit resources will be adequate to make the
repayments of indebtedness described herein, to finance the stock repurchase
program, to meet the working capital cash needs of the Company and to meet
anticipated capital expenditure needs during the 12 months ending December 31,
2003. Although we would like to issue shares of Common Stock as our primary
method of financing acquisitions, we anticipate that additional funds may be
required to successfully implement any acquisition program, and will use various
methods to finance acquisitions, including raising new equity capital. There is
no guarantee that such equity or debt financing will be available to us in the
future.
COMMITMENT:
We lease various types of warehouse and other space and equipment, furniture and
fixtures under non-cancellable operating lease agreements, which expire at
various dates. Certain leases for warehouse and other space contain rental
escalation clauses based on the Consumer Price Index. Future minimum lease
payments under non-cancellable operating leases for the years ending December
31, 2002 are as follows:
2003 $ 429,013
2004 254,286
2005 32,370
thereafter 0
-------------
Total $ 715,669
=============
During 2000, we entered into certain capital leases for equipment and office
furniture. Total future lease payments under these lease obligations are $33,603
and $7,014 in 2003, and 2004, respectively.
SEASONALITY AND INFLATION
Our quarterly operating results have fluctuated only to a limited extent in the
past. However, with the discontinuation of the Battery Segment, it is likely
that they will fluctuate significantly in the future with lower product revenues
in the first and second quarters as compared with the third and fourth quarters.
This fluctuation is due primarily to the traditionally lower demand for Wireless
Accessories during the December holiday season. Though in the fiscal years ended
December 31, 2002 and 2001, combined sales for the third and fourth quarters
were less than the combined sales for the first and second quarters due to the
poor cellular accessory market and the timing of the loss of key customers. In
addition, our net sales could be affected in the future by business
acquisitions.
The impact of inflation on our operations has not been significant to date.
However, there can be no assurance that a high rate of inflation in the future
would not have an adverse effect on our operating results.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk - The Company did not have any interest rate risk at December
31, 2002, as there was no outstanding balance owed by the Company under its
revolving credit facility at this date.
These instruments were not entered into for trading purposes and carry interest
at a pre-agreed upon percentage point spread from one of several designated base
rates. Our objective in maintaining these variable rate borrowings is the
flexibility obtained regarding early repayment without penalties and lower
overall cost as compared with fixed-rate borrowings.
Foreign Currency Risk - We do not use foreign currency forward exchange
contracts or purchased currency options to hedge local currency cash flows or
for trading purposes. All sales arrangements with international customers and
suppliers are denominated in U.S. dollars. We purchase approximately 75% of our
products from manufacturers located overseas, principally in the Far East. The
depreciation of the U.S. dollar against the major Asian currencies could,
therefore, cause an increase in the cost of our products and adversely affect
our results of operations or financial condition.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
[THIS PAGE INTENTIONALLY LEFT BLANK]
24
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS F-5
CONSOLIDATED STATEMENTS OF OPERATIONS F-7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-11
CONSOLIDATED SUPPORTING SCHEDULE FILED:
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS S-1
All other schedules are omitted because they are not applicable, not required,
or the information required to be set forth therein is included in the
Consolidated Financial Statements or in the Notes thereto.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Wireless Xcessories Group, Inc.
We have audited the accompanying consolidated balance sheet of Wireless
Xcessories Group, Inc. and subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. We have also audited the schedule listed in the index on
page F-1 of this Form 10-K. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements and schedule are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements and schedule. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the
consolidated financial statements and schedule. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wireless Xcessories
Group, Inc. and subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the schedule presents fairly, in all material respects, the
information set forth therein.
BAGELL, JOSEPHS & COMPANY, L.L.C.
Gibbsboro, New Jersey
March 25, 2003
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Wireless Xcessories Group, Inc.
We have audited the accompanying consolidated balance sheet of Wireless
Xcessories Group, Inc. and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit includes assessing the
accounting principles used and significant estimates made by the management, as
well as evaluating the overall presentation of the financial statements and
schedule. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wireless Xcessories
Group, Inc. and subsidiaries as of December 31, 2001 and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
March 21, 2002
F-3
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN, LLP IN
CONNECTION WITH WIRELESS XCESSORIES GROUP, INC'S FILING ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2000. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN, LLP IN CONNECTION WITH THIS FILING ON FORM 10-K, AS ARTHUR ANDERSEN,
LLP CEASED PROVIDING AUDIT SERVICES AS OF AUGUST 31, 2002. THE CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 2000 REFERRED TO IN THIS REPORT HAS NOT BEEN
INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Wireless Xcessories Group, Inc.
We have audited the accompanying consolidated balance sheet of Wireless
Xcessories Group, Inc. (a Delaware Corporation) and subsidiaries as of December
31, 2000 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
2000. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by our management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wireless Xcessories
Group, Inc. and subsidiaries as of December 31, 2000 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to the financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and in our opinion, fairly states in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statement taken as a whole.
ARTHUR ANDERSEN, LLP
Philadelphia, Pennsylvania
March 31, 2001
F-4
WIRELESS XCESSORIES GROUP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 985,438 $ 647,495
Accounts receivable (net of allowance for doubtful
accounts of $536,345 and $431,577, respectively) 1,029,158 2,132,208
Inventories 1,380,901 1,807,459
Prepaid expenses and other assets 154,254 160,972
Income tax refund receivable -- 582,751
Current maturities of Notes Receivable 183,434 207,529
---------- ----------
Total current assets 3,733,185 5,538,414
PROPERTY AND EQUIPMENT - Net 771,916 1,219,990
NOTES RECEIVABLE-NET OF CURRENT PORTION 174,623 335,815
OTHER ASSETS 90,144 124,083
---------- ----------
Total assets $4,769,868 $7,218,302
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2002 AND 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001
---------- ----------
CURRENT LIABILITIES
Current portion of long-term debt $ 31,579 $ 56,796
Bank overdraft 206,772 185,965
Accounts payable 405,421 418,917
Net liabilities of discontinued operations 58,000 103,000
Accrued payroll and related benefits 92,275 139,213
Amounts due to officer 209,313 273,897
Rent and related obligations -- 163,885
Other accrued expenses 218,190 583,821
---------- ----------
Total current liabilities 1,221,550 1,925,494
---------- ----------
LONG-TERM DEBT 8,510 1,154,944
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001, 1,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock, par value $.001, 10,000,000 shares
authorized, 5,222,080 issued 5,222 5,222
Additional paid-in capital 11,331,106 11,331,106
Accumulated deficit (7,707,993) (7,166,841)
Treasury stock, at cost, 344,810 and 78,000
shares, respectively (88,527) (31,623)
---------- ----------
Total stockholders' equity 3,539,808 4,137,864
---------- ----------
Total liabilities and stockholders' equity $4,769,868 $7,218,302
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
Net sales $ 14,067,672 $ 20,890,284 $ 30,128,028
Cost of sales 7,834,019 12,446,317 15,440,512
------------ ------------ ------------
Gross profit 6,233,653 8,443,967 14,687,516
Selling, general and administrative expenses 6,757,434 11,179,715 13,009,812
Interest expense, net 17,371 116,172 273,452
------------ ------------ ------------
(Loss) income from continuing operations
before income taxes (541,152) (2,851,920) 1,404,252
Income tax expense -- 70,766 579,036
------------ ------------ ------------
(Loss) income from continuing operations (541,152) (2,922,686) 825,216
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from operations (net of tax benefit of $0,
$0, and $187,548, respectively) -- -- (293,344)
Estimated loss on sale of subsidiaries (net of tax
benefit of $0, $0, and $186,900, respectively) -- -- (285,296)
------------ ------------ ------------
(Loss) from discontinued operations -- -- (578,640)
------------ ------------ ------------
Net (loss) income $ (541,152) $ (2,922,686) $ 246,576
============ ============ ============
(Loss) earnings per common share- Basic and Diluted:
(Loss) income from continuing operations $ (0.11) $ (0.56) $ 0.16
(Loss) from discontinued operations -- -- (0.11)
------------ ------------ ------------
Net (loss) income $ (0.11) $ (0.56) $ 0.05
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-7
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Common Stock Additional Treasury Stock
------------------------- Paid-In Accumulated -------------------------
Shares Amount Capital Deficit Shares Amount Total
------------------------- ----------- ----------- ------------------------- -----------
BALANCE, JANUARY 1, 2000 5,132,732 $ 5,133 $11,203,806 $(4,490,731) -- $ -- $ 6,718,208
Option exercises 89,348 89 127,300 -- -- -- 127,389
Net income -- -- -- 246,576 -- -- 246,576
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 5,222,080 5,222 11,331,106 (4,244,155) -- -- 7,092,173
Stock repurchased -- -- -- -- 78,000 (31,623) (31,623)
Net (loss) -- -- -- (2,922,686) -- -- (2,922,686)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2001 5,222,080 5,222 11,331,106 (7,166,841) 78,000 (31,623) 4,137,864
Stock repurchased -- -- -- -- 266,810 (56,904) (56,904)
Net (loss) -- -- -- (541,152) -- -- (541,152)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2002 5,222,080 $ 5,222 $11,331,106 $(7,707,993) 344,810 $ (88,527) $ 3,539,808
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-8
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
OPERATING ACTIVITIES:
Net (loss) income $ (541,152) $ (2,922,686) $ 246,576
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 569,079 589,874 765,545
Provision for doubtful accounts 229,383 401,196 669,565
Deferred income taxes (benefit) -- 701,974 (26,782)
Estimated loss on sale of subsidiaries -- -- 472,196
Impairment of excess cost over net assets acquired -- 876,008 --
Loss on disposition of equipment -- 93,126 --
Changes in assets and liabilities,
net of effects from dispositions:
Accounts receivable 873,667 1,525,470 1,311,486
Inventories 426,558 3,088,666 1,116,857
Income tax refund receivable 582,751 (582,751) 566,633
Prepaid expenses and other assets 25,233 280,938 (126,885)
Accounts payable and accrued expenses (678,729) (1,825,809) (2,270,243)
------------ ------------ ------------
Net cash provided by operating activities 1,486,790 2,226,006 2,724,948
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (105,579) (141,212) (1,187,075)
Proceeds from sale of subsidiaries -- -- 1,245,000
Principal payment received on note receivables 185,287 70,408 4,820
------------ ------------ ------------
Net cash provided by (used in)
investing activities 79,708 (70,804) 62,745
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements.
F-9
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
FINANCING ACTIVITIES:
Payments on capital lease obligation $ (56,787) $ (14,202) $ (24,714)
Repurchase of common stock (56,904) (31,623) --
Issuance of common stock -- -- 127,389
Net payments of borrowings (1,114,864) (1,962,951) (2,755,126)
------------ ------------ ------------
Net cash used in financing activities (1,228,555) (2,008,776) (2,652,451)
------------ ------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 337,943 146,426 135,242
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 647,495 501,069 365,827
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 985,438 $ 647,495 $ 501,069
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during year for:
Interest $ 44,000 $ 179,680 $ 353,924
Income taxes 25,000 142,854 590,758
The accompanying notes are an integral part of these consolidated financial statements.
F-10
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business description- Wireless Xcessories Group, Inc. and subsidiaries
(collectively, the "Company") are engaged in the distribution of
cellular accessories and components principally in the United States.
During the fourth quarter of 1999, the Company began selling products
via a newly created e-commerce subsidiary, AccessorySolutions.com,
Inc. On March 13, 2001, former subsidiaries of Wireless Xcessories
Group, Inc, Advanced Fox Antenna, Inc., Cliffco of Tampa Bay, Inc. and
AccessorySolutions.com, Inc. entered into an agreement to combine and
merge with Wireless Xcessories Group, Inc., the surviving Company.
Principles of Consolidation- The consolidated financial statements
include the accounts of the Wireless Xcessories Group, Inc.and its
wholly owned subsidiaries. All material intercompany transactions have
been eliminated.
Cash equivalents- The Company considers all highly liquid investments
with a maturity date of three months or less from the date of purchase
to be cash equivalents.
Concentration of Risk- The Company utilizes its excess cash to reduce
its bank borrowings. The Company has not experienced any losses on its
cash accounts or short-term investments. The Company sells its
products to commercial businesses and retail consumers. Through its
continuing relationships with these customers, the Company performs
credit evaluations and generally does not require collateral. The
Company maintains a reserve for potential credit losses. Except for a
provision of approximately $190,000 resulting from a large customer
filing Chapter 7 bankruptcy in 2003, such credit losses have been
minimal. No single customers accounted for greater than 10% of
consolidated net sales during any of the years presented.
In 2002, the Company purchased approximately 52% of its products from
three Far East suppliers with two vendors accounting for 19% each and
one vendor at 14% of the total purchases.
In 2001, the Company purchased approximately 44% of its products from
our Far East supplier and one domestic supplier with each vendor
accounting for 22%.
Inventories- Inventories, which consist solely of finished goods, are
carried at the lower of cost, determined on a first-in, first-out
basis (FIFO), or market value.
F-11
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment- Property and equipment are stated at cost.
Additions and improvements are capitalized. Maintenance and repairs
are expensed as incurred. Depreciation and amortization of property
and equipment is calculated under the straight-line method over the
estimated useful lives of the respective assets. Estimated useful
lives are five to seven years for furniture and fixtures and three to
ten years for machinery and equipment. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the
terms of their leases. Depreciation and amortization expense was
$553,653, $549,059, and $561,953 in 2002, 2001 and 2000, respectively,
and is included in selling, general and administrative expense in the
consolidated statements of operations.
Other assets- Other assets consist of the Long-Term portion of Notes
Receivable received in connection with the disposition of the Battery
Segment Companies (See Note 2), as well as refundable deposits.
Excess of Costs Over Net Assets Acquired- The excess of cost over net
assets acquired prior to September 30, 2001, was amortized on a
straight-line basis over twenty-five years. The carrying value of the
excess cost over net assets acquired is periodically reviewed to
determine whether an impairment existed. This review was based on
comparing the carrying amounts to the undiscounted estimated cash
flows before interest charges from operations over the remaining
amortization period. During the quarter ended September 30, 2001, the
Company recognized an impairment loss of the remaining balance of its
excess of cost over net assets acquired of $876,008. This impairment
related to the significant deterioration of Cliffco of Tampa Bay,
Inc's business. What remained of Cliffco's operations were merged into
the Wireless Xcessories Group.
Revenue Recognition- Revenue is recognized at the time of shipment.
Revenue related to web site vendor agreements at
AccessorySolutions.com, Inc. is recognized ratably over the related
contract period.
F-12
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Shipping and Handling Fees- The Company records revenues derived from
shipping and handling in net sales and the costs associated with
shipping and handling in cost of sales.
Income Taxes- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under the liability method specified by
SFAS No. 109, a deferred tax asset or liability is determined based on
the difference between the financial reporting basis and tax basis of
assets and liabilities, measured using enacted tax rates. The impact
of changes in tax rates is reflected in income in the period in which
the change is enacted.
Discontinued Operations- During the first quarter of 2000, the Company
sold most of the assets and transferred certain liabilities of Tauber
Electronics, Inc. During the fourth quarter of 2000, the Company sold
the remaining assets of Battery Network, Inc. (see Note 2). As these
two companies represented all of the Company's remaining businesses
within its Battery Segment, the Company accounted for this segment as
discontinued operations.
The results of operations for the Battery Segment have been classified
as discontinued operations for all periods presented in the
consolidated statements of operations. Discontinued operations have
not been segregated in the accompanying consolidated statements of
cash flows, and, therefore, amounts of certain captions will not agree
with the respective consolidated statements of operations. Net sales
for the Battery segment were $0, $0 and $3,397,208 for the years ended
December 31 2002, 2001, 2000, respectively.
The Company allocated interest not specifically associated with any
segment based upon a ratio of net tangible assets. Interest expense
allocated to discontinued operations was $0, $0 and $50,000 in 2002,
2001, and 2000 respectively.
F-13
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per share- Basic earning per share (EPS) is computed using
the weighted average number of common shares outstanding for the
period while diluted EPS is computed assuming conversion of all
dilutive securities such as options. Included below is a
reconciliation of shares for the basic and diluted EPS computations.
2002 2001 2000
--------- --------- ---------
Basic EPS Shares 5,040,657 5,185,089 5,193,731
Dilutive effect of stock options
and warrants -- -- 60,598
--------- --------- ---------
Diluted EPS shares 5,040,657 5,185,089 5,254,329
========= ========= =========
Options to purchase 302,152, 315,612, and 112,960 shares with exercise
prices ranging from $.28 to $5.00 and warrants to purchase 0, 100,000,
and 100,000 shares with an exercise price of $4.13 were outstanding at
December 31, 2002, 2001, and 2000, respectively, but were not included
in the computation of diluted EPS because the option's exercise price
was greater than the average market price of the common shares.
Disclosures About Fair Value of Financial Instruments- The carrying
values of cash, cash equivalents, and long-term debt approximate their
respective fair values.
Employee Stock Options- The Company applies Accounting Principles
Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees," which recognizes compensation costs based on the intrinsic
value of an equity instrument.The Company has applied APB No. 25 to
its stock compensation awards to employees and has disclosed the
required pro forma effect on net (loss) income per share in accordance
with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and has adopted the enhanced disclosure provisions of
SFAS No. 148 "Accounting for Stock-Based Compensation- Transition and
Disclosure, an amendment of SFAS No. 123" (See Note 5).
Reclassifications- Certain prior year amounts have been reclassified
to conform to current year presentation.
F-14
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates in the Preparation of Financial Statements- The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
RECENT ACCOUNTING PRONOUNCEMENTS-
In October 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS
144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes SFAS
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions." This new pronouncement also amends Accounting
Research Bulletin (ARB) No. 51 "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. SFAS 144 requires that one
accounting model be used for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired and also
broadens the presentation of discontinued operations to include more
disposal transactions. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those
fiscal years. Adoption of SFAS 144 on January 1, 2002, did not have
any impact on the Company's financial position, cash flows or results
of operations for the year ended December 31, 2002.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB
Statements No. 4, 44 and 64, Amendment of FASB statement No. 13, and
Technical Corrections" ("SFAS 145"). The recission of FASB No. 4,
"Reporting Gains and Losses for Extinguishment of Debt" applies to the
Company. FASB No. 4 required that gains and losses from
extinguishments of debt were included in the determination of net
income be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. SFAS 145 is effective for the
Company's our fiscal year beginning January 1, 2003. Effective January
1, 2003, pursuant to SFAS 145, the treatment of the early
extinguishments of debt will be included in "other expenses" in the
financial statements. Management does not anticipate that the adoption
of SFAS 145 will not expected to have a material impact on the
Company's financial position and results of operations.
F-15
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 2002, the FASB issued Statement No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). The
standard requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of
commitment to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee
severance costs that are associated with restructuring, discontinued
operation, plant closing, or other exit or disposal activities.
Previous accounting guidance provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit on Activity (Including Certain Costs Incurred in a
Restructuring)" is replaced by this statement. SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. Management does not anticipate that the adoption of
this statement will have a significant effect on the Company's
financial position or results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of
FASB Statement No. 123"("SFAS 148"). SFAS 148 amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. Finally, this Statement
amends Accounting Principles Board ("APB") Opinion No. 28, "Interim
Financial Reporting", to require disclosure about those effects in
interim financial information. SFAS 148 is effective for financial
statements for fiscal years ending after December 15, 2002. The
Company will continue to account for stock-based employee compensation
using the intrinsic value method of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," but has adopted the enhanced
disclosure requirements of SFAS 148.
F-16
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - ACQUISITONS AND DIVESTITURES
Effective January 1, 1997, the Company acquired the business and
related assets of Battery Network, Inc. and affiliated companies
("Battery Network"), which operated principally in California. The
purchase price was approximately $11.2 million including transaction
cost. The Battery Network acquisition agreement also provided the
sellers with contingent consideration through a certain subsequent
period. Such additional consideration was not earned.
In accordance with the decision to exit the Battery Segment (see Note
1- Discontinued Operations), the Company evaluated the net realizable
value of net assets of the Battery Network business. In connection
with this evaluation, the Company determined that the unamortized
excess of cost over net assets acquired at December 31, 1999 was not
realizable and, therefore, recognized a related impairment loss of
$3,939,470 in 1999.
On January 27, 2000, the Company sold substantially all of the assets
and certain liabilities of Tauber Electronics, Inc. for $1,489,427,
consisting of cash of $1,005,854 and a note receivable of $519,708
bearing interest of 1% above prime, as defined and payable over five
years. Any outstanding principal or accrued interest is due in full on
January 26, 2005. The principal amount of this note was subsequently
reduced to $483,573, effective on March 15, 2000, to reflect the final
valuation of transferred assets.
On November 6, 2000, the Company sold selective inventory and
substantially all of its machinery and equipment, trade names and
customer lists of Battery Network, Inc. to Ohlin Sales Corp. for
$200,000 in cash and a $125,000 note. The note provided for
twenty-four consecutive equal monthly payments of $5,655 including
interest at 8% and principal starting on December 1, 2000 and ending
on November 1, 2002. The note has a total of $22,620 that is past due,
which is being withheld by the debtor subject to the resolution of
certain obligations which the debtor claims are due him from the
Company. On December 16, 2000, the Company sold selected remaining
inventory, and trade names related to Absolute Battery (a division and
trade name of Battery Network principally involved in the laptop
battery and accessories business) to Battery Universe for cash of
$40,000 and a $10,000 note.
F-17
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2- ACQUISITONS AND DIVESTITURES (CONTINUED)
The note, which was paid in full effective July 2001, provided for
interest at 8% payable monthly along with equal monthly principal
payments commencing on January 1, 2001 and ending on June 1, 2001. The
Company retained accounts receivable, inventory and all outstanding
liabilities as of October 31, 2000. The Company physically shut down
the remaining Battery Network operation in January 2001, and achieved
an early termination of its existing lease obligation in June 2001.
The related loss on the sale and disposition of Battery Network of
($285,296, net of $186,900 tax benefit) has been reflected in the
estimated loss on sale of subsidiaries within the net loss from
discontinued operations in the 2000 consolidated statement of
operations.
NOTE 3 - PROPERTY AND EQUIPMENT - NET
Property and equipment consists of the following:
DECEMBER 31,
2002 2001
----------- -----------
Machinery and equipment $ 2,440,634 $ 2,335,055
Furniture and fixtures 416,153 416,153
Vehicles 38,463 38,463
Leasehold improvements 246,926 246,926
----------- -----------
3,142,176 3,036,597
Less accumulated depreciation
and amortization (2,370,260) (1,816,607)
----------- -----------
Property and equipment, net $ 771,916 $ 1,219,990
=========== ===========
F-18
WIRELESS XCESSORIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
2002 2001