ITEM 1. BUSINESS.
The statements which are not historical facts contained in this Annual Report for Intellicell Corp. (the "Company") are forward-looking statements that involve risks and uncertainties, including but not limited to, possible delays in the Company's expansion efforts, changes in wireless communication markets and technologies, the nature of possible supplier or customer arrangements which may become available to the Company in the future, risks associated with foreign markets and currencies, possible technological obsolescence, uncollectible accounts receivable, slow moving inventory, lack of adequate financing, increased competition and any future unfavorable general economic conditions. The Company's actual results may differ materially from the results discussed in any forward-looking statement.
GENERAL
The Company is engaged in the wholesale distribution of wireless communications products. The Company offers wireless telephones and accessories from leading manufacturers, featuring brand names such as AT&T, Audiovox, Ericsson, Mitsubishi, Motorola, Nokia, NEC, Panasonic, Qualcomm, Samsung and Sony. The Company also offers a proprietary line of accessory products under the Intellicell name. The Company has developed a customer base of more than 2,100 wholesalers, carriers, agents, dealers and retailers. The Company has historically acquired most of its inventory products from, and has sold a substantial portion of this inventory to, other distributors.
The Company's objective is to capitalize on wireless communications opportunities in markets in which the Company believes it can achieve significant growth. The Company intends to implement its business strategy by (i) strategically aligning with certain key manufacturers and network operators to provide value-added services, (ii) transitioning to a service-based company offering a broad selection of services related to distribution, including "just in time" delivery of wireless handsets and accessories, purchasing, selling, warehousing, picking, packing and shipping and value added services, including inventory management, marketing, kitting and customized packaging, private labeling, light assembly, accounts receivable management, end user support services and warranty servicing. As part of this strategy, the Company is targeting emerging foreign markets and may seek to expand through acquisitions of companies in businesses related to that of the Company.
RECENT DEVELOPMENTS
The Company experienced a significant decline in revenues and incurred substantial operating losses in 1998. The losses incurred by the Company are attributable to various factors, including the intense price competition in the wireless communications industry. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Prior to March 1998, the Company had failed to sustain significant supplier relationships with any of the leading manufacturers of analog and digital cellular products. The Company's supplier relationships have consisted of primarily other wholesale distributors. As a result, the Company's supply of product has been inconsistent and of higher cost. Furthermore, product obtained from other distributors does not typically include price protection and promotional allowances when compared to the product which are acquired directly from manufacturers. In March 1998, the Company signed a non-exclusive distribution agreement with Sony Electronic Inc Wireless Telecommunications Company ("Sony"), pursuant to which the Company was able to distribute analog and cellular digital telephones and accessories to its customer base. The relationship with Sony does include price protection and promotional allowances, however, the Company was not granted open credit terms. As a result, goods purchased from Sony are on a prepaid basis. The
wide acceptance of the digital technology in wireless handsets, which included personal communications services ("PCS"), TDMA and CDMA formats has had an adverse effect on the demand for the analog cellular products sold by the Company. Manufacturers in the PCS market have selected distribution channels, which do not currently include the Company and distribute directly to the end user. There can be no assurance that the Company will establish additional strategic relationships with manufacturers of digital wireless products or secure any strategic relationships allowing it to access digital products directly. The Company's financial results will continue to be adversely affected if it is unable to secure (i) additional supplier relationships with manufacturers of analog and digital wireless products and (ii) a consistent supply of digital products at commercially competitive rates. See "Competition."
In November 1998, the Company consummated a private placement (the "Offering") with an investor group (the "Investor Group") and agreed to certain related transactions as follows:
(a) The Company issued $1,500,000 of unsecured, subordinated convertible notes. The notes were convertible, at the option of the Company, upon ratification of the Offering by the Company's shareholders, into 1,500,000 units (the "Units"), and this conversion was effected by the Company in December 1998. Each Unit consists of one share of common stock plus one warrant to purchase two-thirds of a share of common stock at an exercise price of $1 per share, or a total of 1,500,000 shares and warrants to purchase 1,000,000 shares of common stock. The 1,000,000 warrants had a term of three years and were redeemable by the Company under certain conditions. The Investor Group exercised all of these warrants in March 1999.
(b) In conjunction with the Offering, the Company issued the options to purchase 100,000 shares of common stock to a director who had previously cancelled options to purchase 100,000 shares of common stock, but at the lower exercise price of $1 per share for the new options and repriced the exercise price to $1 for options to purchase 100,000 shares of common stock previously granted to another outside director. The Company paid a financial advisor, Sands Brothers, $50,000 upon the closing of the Offering and issued warrants to purchase 150,000 shares of common stock at an exercise price of $1, with the options to purchase 100,000 shares granted to Sands Brothers in March 1998 being rescinded and cancelled.
(c) Options to purchase 200,000 shares of common stock at $1 per share were each granted to John Swinehart, who became the Company's Chief Executive Officer and a director in November 1998, to another individual who became a director of the Company in November 1998 and to an individual who served as a finder in the Offering. Of the options issued, five-sixths vested upon issuance, with the remaining one-sixth vested upon exercise of the Unit warrants in March 1999.
(d) In December 1997, the Company declared a dividend in the form of a warrant to its existing shareholders (except the Company's President and Chairman). For every two shares held, a warrant to purchase one share was issued with an exercise price of $4 per share. These warrants were redeemable by the Company if the closing bid price of the Common Stock remains above $7 per share for a defined period. In conjunction with the Offering, the Board of Directors agreed to reprice these warrants to an exercise price of $1 per share. In addition, existing shareholders of record as of February 16, 1999 (other than the Company's President and Chairman and the Investor Group) will receive an additional warrant (which may only be exercisable after the Company registers the shares issuable upon exercise) to purchase one share of common stock at $1 per share, for every two shares held. This new warrant will be redeemable by the Company if its shares trade for a period, as defined, above $2 per share.
(e) The common stock issued upon conversion of the notes and upon exercise of the warrants issued upon conversion of the notes, together with the common stock issuable upon exercise of the options and warrants issued to officers and directors of the Company and Sands Brothers will be registered, together with the shares of common stock owned by the Chairman and President.
In January 1998, the Company entered into a revolving line of credit agreement (the "Credit Agreement") with BankAmerica Business Credit, Inc. ("BankAmerica") which provided for borrowings of up to a maximum of $12 million based on a maximum of 80% of eligible accounts receivable and the lesser of $6 million or 50% of eligible inventory as defined in the Credit Agreement. Subsequent to entering into the Credit Agreement, the Company was in violation of the tangible net worth covenant of the Credit Agreement (with BankAmerica providing a waiver of this default in exchange for reducing the amount available to be loaned to the Company). In November 1998, the Company paid off all amounts owing under and terminated the Credit Agreement. The Company is seeking and has received a preliminary letter of interest from another financial institution to provide a revolving line of credit for a maximum of $5,000,000, although there can be no assurance that the Company will be able to enter into a definitive agreement with this bank.
THE WIRELESS COMMUNICATIONS INDUSTRY
The wireless communications industry provides voice and data communications services through wireless telephone, PCS, satellite, enhanced specialized mobile radio ("ESMR") and paging services. Advances in system technology and equipment, combined with lower equipment prices and service charges, have increased consumer acceptance and driven dramatic increases in worldwide demand for wireless communications products and services.
UNITED STATES MARKET
Wireless communications technology encompasses wireless communications devices such as handheld, mobile and transportable handsets, pagers and two-way radios. However, the Company currently sells only handsets and accessories for handsets. Since its inception in 1983, the wireless handset market has grown rapidly. The Company believes that the wireless communications industry will continue its rapid growth for several reasons. Economic growth, increased service availability and lowering cost of wireless service will continue to create demand for wireless communications products. The Company further believes the shift for most major markets from analog based signals to digital signals will lower the cost for network operators and encourage consumers to purchase the next generation of products. In addition, certain markets have seen a significant increase in choices of wireless services. This increase in choices has, in turn, resulted in increased demand for wireless communications products. The proliferation of new manufacturers is expected to service the demand, expanding the sales channels while lowering prices and increasing product selection.
INTERNATIONAL MARKET
The markets for wireless products and services outside the United States also have grown significantly. The Company expects that rapid growth in international markets will continue as low market penetration, economic growth and high population density result in increased demand for wireless communications products and services. The Company also believes that wireless systems in certain of these countries offer lower-cost alternatives to the construction of conventional telephone facilities because they do not require substantial investment in infrastructure. Due to these factors and the limited availability and quality of land-line service, the Company believes that consumers in many countries outside of the United States will increasingly utilize wireless services. These markets present attractive expansion opportunities for the Company, which will seek to reduce collection loss problems it has encountered in its prior foreign sales through the use of insurance.
EMERGING WIRELESS TECHNOLOGIES
In addition to growth in the wireless market, the emergence of the new digital wireless communications technologies and services, such as the TDMA, CDMA, PCS, EMR and satellite communications systems, is expected to increase the capabilities associated with wireless communications including seamless roaming, increased service coverage, improved signal quality and greater data transmission capacity. These technologies include cellular type services, including advanced voice and data transmissions using small, light-weight wireless telephones or hand-held computers. Digital format also offers greater functionality, resulting in lower cost service options and lighter handsets with longer battery life. Digital based technology has been introduced in markets throughout the United States. Upon the widespread commercial introduction of these services, demand for wireless communications products and services is expected to increase.
Prior to 1995, the United States Federal Communications Commission (the "FCC") allowed two carriers to provide cellular service to each metropolitan service area. In connection with the auctioning of licenses in 1995 and 1996, the FCC added three Digital carriers to each metropolitan service area, increasing the total number of potential carriers to five per market. The Company believes that this increase in the number of wireless service providers will increase competition and generate additional demand for wireless communications products and services through lower prices, increased advertising and improved service quality.
During late 1994, the FCC awarded mobile satellite licenses to major corporations that are investing in satellites which will enable them to provide wireless phone, data, fax and paging services on a global basis. In addition, other corporations have announced their intention to enter the mobile satellite market and launch networks, which would permit computers to bypass local telephone exchanges and connect directly to the Internet.
REGULATORY TRENDS
The Company believes that the Telecommunications Act of 1996 will ultimately serve to reverse the trends associated with the breakup of AT&T and the Bell System that separated long distance and local telephone service. This statute permits long distance, cable and wireless companies to compete in local markets. The Company believes that such deregulation will significantly increase competition, which should translate into lower costs and increased numbers of subscribers.
STRATEGY
The Company's strategy is to achieve and thereafter maintain profitability by significantly expanding its revenues and by focusing on products and services that can generate higher profit margins. The Company's objective is to capitalize on wireless communication opportunities in markets in which the Company believes it can achieve significant growth. The key elements of the Company's strategy are as follows:
EXPAND THROUGH ACQUISITIONS. Assuming financing is available, of which no assurance can be given, the Company is seeking to expand through acquisitions of companies, which the Company believes will provide significant growth potential. Any decision to make an acquisition will be based upon the business prospects and competitive position of the acquisition candidate and the extent to which the acquired business would enhance the Company's prospects and maximize revenues. Potential acquisition candidates may include companies with alternative distribution channels for wireless products. Although the Company has recently identified several potential acquisition candidates, it has not entered into any agreements to acquire any companies.
VALUE ADDED DISTRIBUTOR. The Company believes that to be successful as a distributor, it must offer services such as inventory management, warehousing, repair and refurbishment services, credit risk management, transparent order processing, customized kitting, packaging, handset software programming, and the development of new alternative distribution channels. In addition to offering an expansive menu of services, the Company must have access to an information system capable of integrating, tracking and reporting all of the activities of its customers. The Company's strategy is provide these services, which the Company believes will provide higher profit margins than the Company's traditional product distribution activities, to network operators and wireless manufacturers.
TARGET EMERGING FOREIGN MARKETS. The Company is targeting emerging foreign markets in which wireless products are believed to have potential for significant market penetration. The Company believes that certain markets are likely to achieve greater penetration based on anticipated economic growth and the increasing numbers of carriers. Many of these markets, particularly in Mexico and other Latin American countries, are characterized by low penetration rates, high population densities and inadequate land-line service. The Company anticipates that it will initially seek to achieve penetration in regions with fast-growing economies and wireless markets. Additionally, the Company will seek to further establish a position in Latin America by developing relationships with established carriers and industry participants.
OFFER BROAD PRODUCT SELECTION. The Company distributes a broad selection of popular brand name products and accessories. The Company analyzes customer purchasing patterns and industry trends to anticipate demand for new products. The emergence of new wireless communications technologies, including digital wireless technology, PCS and satellite communications systems, is expected to dramatically increase demand for wireless products and services. The Company intends to evaluate cost, effectiveness and the potential of future wireless services as primary considerations in selecting products for particular markets. The Company is making an effort to develop relationships with equipment manufacturers and other potential providers of emerging new wireless products and services so as to position the Company to capitalize on evolving industry standards and trends. No relationships have been developed to date and no assurance can be given that such relationships with key players in the emerging wireless product and service industry will be developed.
The Company's strategy and current and future marketing plans are subject to change as a result of a number of factors, including inability to obtain products at commercially competitive rates, adequate financing, progress or delays in the Company's expansion efforts, changes in wireless communications markets and technologies, the nature of possible supplier or customer arrangements which may become available to it in the future, and competitive factors. There can be no assurance that the Company will be able to successfully expand its operations or achieve its other strategic objectives.
PRODUCTS
The Company offers a broad selection of wireless products from leading manufacturers. The Company's product offerings include a variety of hand-held and mobile cellular telephones featuring prominent brand names such as AT&T, Ericsson, Mitsubishi, Motorola, Nokia, NEC, Audiovox, Panasonic, Samsung and Sony. The Company continually reviews and evaluates wireless products in determining the mix of products purchased for resale to customers and seeks to acquire distribution rights for products which the Company believes have the potential for significant market penetration. For the years ended December 31, 1996, 1997, and 1998, approximately, 74.6%, 92.0%, and 92.3%, respectively, of the Company's revenues were derived from sales of wireless telephones. A significant portion of the Company's sales were of Motorola, Ericsson and Nokia products (approximately 63% in 1997 and 47% in 1998). Motorola, Ericsson and Nokia products are not available to the Company directly from these manufacturers. Since the Company purchases these
handsets from third parties, it does not obtain price protection, cooperative advertising and marketing allowances on such products.
CUSTOMERS
The Company has developed a customer base of more than 2,100 wholesalers, carriers, agents, dealers and retailers. The Company believes that these categories of customers will continue to be the primary purchasers of the Company's products.
For the years ended December 31, 1996, 1997 and 1998, sales of cellular products to the Company's five largest customers accounted for approximately 48.8%, 36.2% and 28.6%, respectively, of the Company's revenues. For the year ended December 31, 1996, sales to Brightpoint and Downtown accounted for approximately 17.1% and 15.9%, respectively, of the Company's revenues. For the year ended December 31, 1997, sales to Downtown and Brightpoint accounted for approximately 11.7% and 11.4%, respectively, of the Company's revenues. For the year ended December 31, 1998, sales to Brightpoint and Celluphone accounted for approximately 6.1% and 8.0%, respectively, of the Company's revenues. For the years ending December 31, 1996 and 1997, no other customer accounted for more than 10% of the Company's revenues, and no single customer accounted for more than 10% of the Company's revenues for the year ended December 31, 1998.
In February 1998, the Company learned that the business and associated assets of Downtown had been assumed by CellStar Corporation ("CellStar") a supplier/customer and competitor of the Company, which the Company believes maintained a first priority security interest in and to the assets of Downtown. As a result, in 1997, the Company charged $1,665,000 to bad debt expense to reserve the unpaid receivable from Downtown. In 1998, the Company determined that collecting any amounts from this account was not economically viable for the Company and therefore ceased collection efforts.
Brightpoint and CellStar are two of the Company's primary customer/supplier competitors. Failure or delay by these or other customer/suppliers in purchasing and/or supplying competitive products on favorable terms, or at all, would materially adversely affect the Company's sales, operating margins and ability to obtain and deliver products on a timely and competitive basis. See "Competition."
The Company generally sells its products pursuant to customer purchase orders and ships product orders received by 4:00 P.M. local time the same day. Unless otherwise requested, substantially all of the Company's products are delivered within two days of receipt of customer orders by common carrier. Because orders are filled shortly after receipt, backlog is not material to the Company's business.
The Company sells its products to customers in foreign markets, including Israel, Paraguay, Mexico, Peru, Brazil and Canada and to United States-based exporters of wireless products. For the years ended December 31, 1996, 1997 and 1998, sales of the Company's products to customers in foreign markets accounted for 5.2%, 17.6% and 8.0%, respectively, of the Company's revenues. Approximatley 77% of the Company's 1998 foreign sales of $2.2 million were made in Mexico, with no other country accounting for more than 10% of the Company's foreign market sales. The Company is seeking to continue to expand product sales in foreign markets. No assurance can be given that the Company will be able to do so or with terms that limit the Company's exposure to collection risks. In 1998, all sales to foreign countries were made in US dollars.
SUPPLIERS
The Company has established relationships with leading manufacturers and distributors of wireless products. The Company generally negotiates directly with suppliers in an effort to obtain
adequate inventories of popular brand name products on favorable pricing terms. Inventory purchases are based on quality, price, service, customer demand, product availability and brand name recognition. Product manufacturers typically provide warranties, which the Company extends to its customers.
For the years ended December 31, 1996, 1997 and 1998, the Company's four largest suppliers accounted for approximately 54.1%, 43.9% and 41.0%, respectively, of product purchases. For the year ended December 31, 1996, Brightpoint, Best Cellular, Sony and CellStar accounted for approximately 26.1%, 10.2%, 9.6% and 8.2%, respectively, of product purchases. For the year ended December 31, 1997, Brightpoint, Progressive Concepts, Inc. and Audiovox, accounted for approximately 11.9%, 11.8%, and 11.0% respectively, of product purchases. For the year ended December 31, 1998, Sony, Audiovox and Brightpoint, accounted for approximately 22.4%, 6.9%, and 6.5% respectively, of product purchases. For these periods, none of the Company's other suppliers accounted for more than 10% of product purchases. Brightpoint and CellStar are two of the Company's primary competitors. Failure or delay by these or other suppliers in supplying competitive products on favorable terms, or at all, could materially adversely affect the Company's operating margins and the Company's ability to obtain and deliver products on a timely and competitive basis. See "Competition."
The Company has entered into non-exclusive arrangements with Sony, Audiovox, NEC, and Panasonic Telecommunications and Systems Company pursuant to which the Company distributes wireless telephones and accessories to carriers, retailers and, with the exception of Sony products, wholesalers. Such arrangements are terminable on short notice. The Company purchases products from the above manufacturers and other distributors pursuant to purchase orders placed from time to time in the ordinary course of business. The Company believes that its relationships with its suppliers are satisfactory, although it is seeking to establish more supplier relationships with manufacturers.
The Company generally places orders to its suppliers by facsimile on a daily basis. Purchase orders are typically filled within one to seven days and wireless products are shipped to the Company's warehouses by common carrier.
The Company obtains all of its proprietary accessory products from manufacturers in Taiwan and is dependent on such manufacturers to provide sufficient quantities of products on favorable terms. The Company currently pays import duties of between 2.4% and 5.9% of the cost of its accessory products.
SALES, MARKETING AND DISTRIBUTION
The Company's executive officers and sales staff of twelve are responsible for all of the Company's marketing and sales efforts. The Company's sales personnel are paid a base salary plus commission (generally between 8% and 15% of gross profit represented by their sales). The Company maintains agreements with its sales personnel, which contain confidentiality provisions and prohibit such individuals from competing with the Company.
The Company's sales staff consists of eight account executives. The Company has assigned specific customers to each account executive, who is responsible for maintaining all customer relations with their assigned group of customers. Because of the service-oriented nature of the Company's business, the Company's executive officers devote a substantial amount of time to developing and maintaining continuing personal relationships with the Company's customers. The Company's ability to expand its customer base may be limited by the number of marketing personnel and will be largely dependent upon the efforts of such individuals.
In an effort to increase its sales in foreign markets, primarily Latin America, the Company in November 1997, began operation of a 12,800-square foot warehouse and office facility in Miami, Florida.
However, in May 1998, in an effort to cut costs, the Company closed this facility, and the Company now services all its sales out if its Chatsworth, California facility.
The Company believes that product recognition by customers and consumers is an important factor in the marketing of the products sold by the Company. Accordingly, the Company promotes its product lines through advertising in trade publications and attendance at national and regional trade shows. The Company also solicits customers through direct mail and telemarketing activities. The Company's manufacturers and dealers use a variety of methods to promote their products directly to consumers, including print and media advertising.
ASSET MANAGEMENT
ACCOUNTS. For the years ended December 31, 1996, 1997 and 1998, approximately 79.3%, 93.6% and 86.5%, respectively, of the Company's sales were made on open account. The Company generally offers 30-day open account terms to its customers. As of December 31, 1996, 1997 and 1998, trade accounts receivable averaged 35.6, 31.5 and 28.3 days for sales made on open account, respectively. The Company experienced bad debt expense in 1998 of $108,000 (0.4% of 1998 sales), as compared to $3,627,000 in 1997 (4.4% of 1997 sales) and as compared to $380,000 for 1996 (0.5% of 1996 sales). The Company engages credit rating associations that provide credit rating information in connection with individual customer accounts, attempts to monitor its customer's creditworthiness and seeks to obtain advance payment or letters of credit from its foreign customers. All foreign sales are made in United States dollars. As direct and indirect foreign sales increase, the Company will become subject to risks inherent in foreign trade, including credit risk, shipping delays, trade restrictions, international political, regulatory and economic developments. In September 1998, the Company obtained credit insurance on its accounts receivable. Although this insurance is subject to certain limitations and deductibles, the Company believes that the risk of bad debts from uncollectible accounts receivable will be substantially reduced through the use of this insurance.
INVENTORY. On average, the Company has historically turned inventory approximately 14.2 times per year. The Company takes physical inventory on a quarterly basis. On an annual basis, cumulative physical inventory adjustments have accounted for less than 1% of total purchases during the years ended December 31, 1996, 1997 and 1998.
MANAGEMENT INFORMATION SYSTEMS. The Company believes that inventory control and other information systems are important factors in providing customers with competitive prices and rapid delivery of variety of products. Accordingly, the Company currently maintains financial, accounting and management controls for its operations through the use of a centralized accounting system and a computerized management information system. The Company's management information system is designed to enable the Company to adapt to new product developments and to enhance corporate productivity through the integration of sales inventory controls, purchasing and financial and credit control. The Company believes that the system allows the Company to provide value to its customers through general efficiency, and timely and accurate product and pricing information. Internally, the system provides management and other key employees with detailed account information, including buying and credit histories and current account status, as well as pricing and product availability information. During 1997, the Company made significant investments in maintenance and in upgrading its computer system. In 1999, the Company anticipates continuing to make upgrading and maintenance investments in its computer system to support its new strategy. The Company believes that with the foregoing investment, the Company's management information system will be sufficient to support its anticipated level of operations.
COMPETITION
The markets for wireless communication products are characterized by intense price competition and significant price erosion over the life of a product. The Company competes principally on the basis of price and product availability. The Company competes with numerous well-established wholesale distributors and manufacturers of wireless equipment, including the Company's customers and suppliers, as well as with providers of cellular services, most of which possess substantially greater financial, marketing, personnel and other resources than the Company and have established reputations for success in the sale and service of cellular products. A number of these competitors have the financial resources necessary to enable them to withstand substantial price competition and implement extensive advertising and promotional campaigns, both generally and in response to efforts by additional competitors to enter into new markets or introduce new products.
The Company has experienced and expects to continue to experience significant price competition in the sale of analog and wireless digital products. The Company believes this price competition is reflective of the lack of direct supplier relationships of high demand digital cellular product and the advent and customer acceptance of digital products. The primary suppliers of product and the primary customers of the Company have been other wholesale distributors. The supply of product from other wholesale distributors as compared to supplies from manufacturers is inconsistent, of higher cost, on less favorable terms and typically is without price protection and promotional allowances. The Company will continue to seek to establish additional supplier relationships with leading manufacturers of analog and digital cellular products. No assurance can be given that the Company will be able to establish such relationships. The Company expects its competitors to offer new and existing products and services at prices necessary to gain and retain market share. Certain of the Company's competitors have substantial financial resources, which enable them to withstand sustained price competition or market downturn better than the Company. Furthermore, no assurance can be given that competitors of the Company (many of which are the Company's suppliers) will not develop enhanced services that the Company will not be able to match based on its industry and financial position.
Additionally, it is the Company's belief that the wide acceptance of the digital format has had a negative impact on the demand for analog and cellular digital product. The Company has not secured a strategic relationship allowing it to access digital PCS products directly. Manufacturers currently in the digital PCS market have selected distributors and distribution channels other than the Company. As other manufacturers present their products to the digital market they may compete directly with the Company, or enter into joint ventures or strategic relationships with the Company's competitors, in which case the Company's ability to access and sell such products could be reduced or eliminated. The Company's results of operations, net sales, profitability and financial condition have been and will continue to be adversely impacted until access to a consistent supply of digital products at commercially competitive rates is maintained at levels to sustain growth and profitability.
The wireless distribution industry is characterized by low barriers to entry and frequent introduction of new products. The industry is evolving, with value-added services becoming of increased importance to the market. This evolution is expected to increase entry barriers, as value added services require increased human resources, management information systems and equipment. The Company's ability to continue to compete successfully will be dependent on its ability to anticipate and respond both strategically and financially to various competitive factors affecting the industry, including new products and services, changes in consumer preferences, demographic trends, international, national, regional and local economic conditions particularly recessionary conditions adversely affecting consumer spending and discount pricing strategies and promotional activities by carriers.
The markets for wireless communications products are characterized by rapidly changing technology and evolving industry standards, often resulting in product obsolescence or short product life cycles. Accordingly, the Company's success is dependent upon its ability to anticipate technological
changes in the industry and to continually identify, obtain and successfully market new products that satisfy evolving industry and customer requirements. The use of alternative wireless technologies, including digital and satellite communications systems, will reduce demand for existing cellular products, increasing risk associated with the granting of credit and inventory obsolescence. Upon widespread commercial introduction, digital, satellite communications systems and other new wireless technologies could materially change the types of products sold by the Company and its suppliers and result in further significant price competition. There can be no assurance that the Company will be able to continue to compete successfully, or will have the financial capability to sustain its business particularly as domestic cellular markets mature and the Company seeks to enter into new markets and market new products and services.
The Company's current primary competitors include Brightpoint, CellStar, Com-Quest Wireless Distributing Company, Arizona Wholesale Supply Company (a/k/a QDI), and Progressive Concepts, Inc. ("Progressive"). For the year ended 1998, the Company secured from the foregoing entities 21.0% of its product purchases, with such products comprising 27.1% of the Company's telephone sales for the 1998 year. The occurrence of either increased price competition and/or the lack of supply of such products would have an adverse effect on the Company.
TRADEMARK
The Company currently holds a federal trademark registration for the name "Intellicell" for use in connection with wireless accessory products.
EMPLOYEES
At March 15, 1999, the Company had 25 employees, of which six are in executive positions, eight are engaged in sales and marketing, four are engaged in warehouse operations and seven engaged in accounting and administrative activities. There are no employees covered by a collective bargaining agreement. The Company believes that its relations with its employees are satisfactory.
RISK FACTORS
In addition to the other information in this Annual Report, the following factors should be considered carefully in evaluating the Company's business and prospects:
ABSENCE OF PROFITABILITY; FUTURE OPERATING RESULTS. The Company has operated on a high-volume, low-margin basis. The Company has achieved only limited profitability for limited periods of time, has incurred operating losses for 1997 and 1998 and expects to incur further operating losses for at least the first half of 1999. The Company's operating expenses have increased and can be expected to increase significantly in connection with the Company's contemplated expansion of its operations, which will require the Company to make substantial up-front expenditures to finance increased levels of inventories and accounts receivable and increased marketing efforts. A recent trend by original equipment manufacturers to reduce prices of wireless products has had and could continue to have an adverse effect on the Company's profit margins. Future events, including unanticipated expenses, increased price competition, unfavorable economic conditions, product returns and recalls and uncollectible accounts, could have a material adverse effect on the Company's future operating results. There can be no assurance that the Company's future operations will be profitable.
NEED FOR ADDITIONAL WORKING CAPITAL. The Company believes that it will require additional working capital to significantly expand the level of its operations as part of its strategy to generate operating profits and implement its new strategies. The Company is seeking to obtain a line of credit that will be secured by its accounts receivable and inventory. Although the Company is in discussions with several financial institutions to provide such a line of credit and has received a preliminary letter of interest from one of these lenders, there can be no assurance that the Company will be successful in obtaining this financing, which may also contain various customary covenants that limit the Company's activities. If the Company is unable to secure a line of credit or if it additional working capital is required after obtaining a line of credit, it may seek additional debt or equity financing, although it does not have any commitment from any third party to provide this financing. There can be no assurance that additional financing will be available to the Company on acceptable terms, or at all.
RISKS ASSOCIATED WITH NEW STRATEGY TO PROVIDE DISTRIBUTION SERVICES. The Company believes that it will require significant capital expenditures and working capital to implement its strategy to become a value added distributor providing services to manufacturers and network operators. Expansion efforts may be required in the Company's warehousing facilities, computer systems and equipment for repair and refurbishing and working capital to support increased levels of inventory and accounts receivable. The Company plans on outsourcing the aforementioned service elements until such time that the Company has adequate capital. However, if the Company is unable to secure vendors to provide these services on a cost-effective basis, the Company may be required to expend its capital in their development, increasing general and overhead expenses, including depreciation. There can be no assurance that the Company will be successful in obtaining contracts to provide services to manufacturers and network operators to absorb these extra costs, which would adversely affect the Company's operating results. In addition, there can be no assurance that the Company's sources for working capital, which may include a revolving line of credit, would be available to support the Company's new strategy.
RISKS ASSOCIATED WITH REVENUE FLUCTUATIONS The Company has experienced significant increases and contractions from time to time in its revenues, which has placed and is expected to continue to place a strain on its management, administrative, operational, financial, management information systems and other resources. An expansion of the Company's operations as part of a plan to generate operating profits will be largely dependent upon its ability to maintain its operating and gross margins; secure an adequate supply of competitive products on a timely basis and on commercially reasonable terms; hire and retain skilled marketing and other personnel; and successfully manage growth (including monitoring operations, controlling costs and maintaining effective management, inventory and credit controls). The Company has limited experience in effectuating expansion and there can be no assurance that the Company will be able to successfully expand its operations or manage growth. The Company's growth prospects will be significantly affected by its ability to continue to successfully develop and maintain relationships with leading manufacturers, dealers, agents, carriers and sub-agents of wireless products. The Company's prospects could be adversely affected by a decline in the wireless industry generally or in particular geographic markets or related market segments, which could result in reduction or deferral of expenditures by prospective customers.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS. The Company intends to pursue opportunities by seeking to enter into marketing and distribution alliances and by making acquisitions of businesses which the Company believes will enhance its prospects. While the Company has from time to time evaluated possible acquisition opportunities, the Company has no plans, agreements, commitments, understandings or arrangements with respect to any such acquisition. There can be no assurance that the Company will ultimately effect any acquisition or that the Company will be able to successfully integrate into its operations any business which it may acquire. Any inability to do so, particularly in instances in which the Company has made significant capital investments, could have a material adverse effect on the Company.
DEPENDENCE ON PRINCIPAL SUPPLIERS. The Company is dependent on third-party equipment manufacturers and distributors for all of its supply of cellular telephones and accessories. The Company is dependent on the ability of its suppliers to provide adequate inventories of currently popular brand name products on a timely basis and on favorable pricing terms. The Company generally does not maintain supply agreements and purchases products pursuant to purchase orders placed from time to time in the ordinary course of business. There can be no assurance that suppliers will continue to offer competitive products to the Company on favorable terms or that the Company will not be subject to the risk of price fluctuations and periodic delays. Failure or delay by principal suppliers in supplying competitive products to the Company on favorable terms would materially adversely affect the Company's operating margins and the Company's ability to obtain and deliver products on a timely and competitive basis.
The Company has failed to sustain significant relationships with leading manufacturers of analog and digital cellular products. The Company's supplier relationships have been primarily other wholesale distributors. As a result, the Company's supply of product is inconsistent, of higher cost and does not typically include price protection and promotional allowances when compared to the products which are obtained directly from manufacturers. In addition, the wide acceptance of the digital technologies and their short supply, has had an adverse effect on the demand for the analog products sold by the Company and the supply for digital product. In addition, network operators of PCS products have selected distribution channels which do not currently include the Company. Although the Company's business strategy now targets establishing strategic supply relationships with a number of large manufacturers, there can be no assurance that the Company will establish additional strategic relationships with manufacturers of analog and digital cellular products or secure any strategic relationships allowing it to access digital or PCS products directly. The Company's financial results will continue to be adversely affected if it is unable to secure (i) additional supplier relationships with manufacturers of analog and digital cellular products and (ii) a consistent supply of digital products at commercially competitive rates.
INTENSE INDUSTRY COMPETITION. The markets for wireless communications products are characterized by intense price competition and significant price erosion over the life of a product. The Company competes with numerous well-established wholesale distributors and manufacturers of wireless equipment, including the Company's customers and suppliers, as well as with providers of wireless services, many of which possess greater financial, marketing, personnel and other resources than the Company. Brightpoint and CellStar, historically two of the Company's principal suppliers, are also two of the Company's primary competitors. Certain of the Company's competitors have the financial resources necessary to enable them to withstand substantial price competition and implement extensive advertising and promotional programs, both generally and in response to efforts by additional competitors to enter into new markets and introduce new products. The wireless distribution industry is also characterized by low barriers to entry and frequent introduction of new products. The Company's ability to compete successfully will be largely dependent on its ability to maintain its current vendor relationships and anticipate and respond to various competitive factors affecting the industry, including new products which may be introduced, changes in consumer preferences, demographic trends, international, national, regional and local economic conditions (particularly recessionary conditions adversely affecting consumer spending), discount pricing and promotional strategies by carriers and consolidating trends in the industry. There can be no assurance that the Company will be able to compete successfully, particularly as domestic wireless markets mature and the Company seeks to enter into new markets and market new products.
DEPENDENCE ON SALES OF CELLULAR TELEPHONES; INCREASING SALES CONCENTRATION AND ACCOUNTS RECEIVABLE; COLLECTION AND CREDIT RISKS. A substantial portion of the Company's revenues are derived from the sale of cellular telephones, a decline in the sale of which would have an adverse effect on the Company. An increasing portion of the Company's revenues has been derived from a limited customer
base. The loss of one or more of these customers or other principal customers could have a material adverse effect on the Company's financial condition and results of operations. The Company has been required to write off significant accounts receivable balances in the past. The Company's accounts receivable, less allowance for doubtful accounts, at December 31, 1998 were approximately $2,155,000, as compared to approximately $6,578,000, at December 31, 1997. At December 31, 1998, the Company's allowance for doubtful accounts was $251,000, which the Company believes is currently adequate for the size and nature of its receivables. Nevertheless, delays in collection or uncollectibility of accounts receivable could have a material adverse effect on the Company's liquidity and working capital position. Substantially all of the Company's sales are made on open account terms. In connection with the Company's proposed expansion of sales, the Company intends to offer open account terms to additional customers, which will subject the Company to increased credit risk, particularly in the event that any such receivables represent sales to a limited number of customers or are concentrated in foreign markets, and could require the Company to continually increase its allowance for doubtful accounts.
EVOLVING INDUSTRY STANDARDS AND TRENDS AND RAPID TECHNOLOGICAL CHANGE. The markets for wireless communications products are characterized by rapidly changing technology and evolving industry standards, often resulting in product obsolescence or short product life cycles. Accordingly, the Company's marketing strategy and ultimate success is dependent upon its ability to anticipate technological changes in the industry and to continually identify, obtain and successfully market new products that satisfy evolving industry and customer requirements. In connection with the Company's proposed expansion, the Company intends to make increased commitments of capital to purchase product inventories. Increased concentrations of capital in inventory increase the risk of loss from possible inventory obsolescence. There can be no assurance that competitors or manufacturers of wireless products will not market products which have perceived advantages over the Company's products or which render the products currently sold by the Company obsolete or less marketable.
The use of alternative wireless communications technologies, including digital, PCS and satellite communications systems, which are expected to continue to successfully compete with analog wireless systems, may reduce demand for existing wireless products. The Company expects that companies which have developed or are developing new technologies or products in related market segments will commercialize technologies which would compete with or replace existing analog wireless technology. Certain of such technologies, upon widespread commercial introduction, could materially change the types of products sold by the Company and its suppliers and result in significant price competition. There can be no assurance that the Company's existing customers or consumers will be willing, for financial or other reasons, to purchase new equipment necessary to utilize these new technologies or that product obsolescence will not result in significant unsold inventories. Moreover, complex hardware and software contained in new wireless and digital equipment could contain defects which become apparent subsequent to widespread commercial use resulting in product recalls and returns.
FOREIGN TRADE RISKS. Sales of wireless products to customers in foreign markets, primarily in Latin America, have accounted for a portion of the Company's revenues. For the year ended December 31, 1998, sales to customers outside of the United States accounted for 8% of the Company's total revenues. The Company is seeking to increase product sales in foreign markets and believes that such markets present significant growth opportunities. Although the Company maintains credit insurance with respect to a portion of its current foreign sales, there can be no assurance that the Company will be able to continue to do so or that any such markets will ultimately prove to be viable. To the extent that the Company is able to successfully increase its foreign sales, it will become increasingly subject to certain risks inherent in foreign trade, including increased credit risks, customs duties and import quotas and other trade restrictions, currency rates, shipping delays, failure or material interruption of wireless
systems and services and international political, regulatory and economic developments, all of which, particularly in light of the historical and political instability of many countries in Latin America, Asia and the Middle East, could have a material adverse effect on the Company. Although all foreign sales are currently made in United States dollars, an increase in the value of the dollar in relation to foreign currencies may nevertheless have an adverse effect on potential demand for wireless products. For competitive reasons, the Company may make certain future foreign sales in local currencies, exposing the Company to additional currency fluctuation risks. The Company currently does not intend to engage in foreign currency hedging transactions.
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY. The Company's operating results may vary from period to period as a result of purchasing patterns of potential customers, the timing of introduction of new products by the Company's suppliers and competitors, variations in sales by distribution channels, product availability and pricing and the seasonal nature of the Company's business. Sales of the Company's products are seasonal, with peak product shipments occurring in the third and fourth quarters. Unanticipated events, including delays in securing adequate inventories of competitive products at the time of peak sales, or significant decreases in sales during such periods, could result in losses which would not be easily reversed before the following year. There can be no assurance that the foregoing factors will not result in significant fluctuations in operating results in the future.
DEPENDENCE ON FOREIGN MANUFACTURERS. The Company currently obtains product from several manufacturers who are based or affiliated with companies in Asia that have been affected by the recent and well publicized Asian financial crises, including Japan and Korea. The Company is dependent on such manufacturers to provide sufficient quantities of products on favorable terms. Failure or delay by such manufacturers in supplying products to the Company would have an adverse effect on the Company. In addition, countries in Asia may from time to time impose duties, tariffs, quotas or other restrictions on exports or the United States may impose increased import duties or tariffs on the import of products, which could adversely affect the Company's operations.
POSSIBLE ADVERSE EFFECT OF TRADE SANCTIONS. The United States has from time to time been involved in trade disputes relating to, among other things, the opening of certain international markets to products (including wireless telephones) manufactured in the United States. Although the Company believes that the United States has resolved such disputes, there can be no assurance that trade disputes will not arise in the future or that the United States will not impose tariffs on wireless products and components manufactured abroad. Any imposition of significant tariffs on such products and components manufactured abroad, resulting in increased product costs, would reduce the Company's operating margins and possibly render the marketing of such products uneconomical.
POSSIBLE MEDICAL RISKS ASSOCIATED WITH WIRELESS TELEPHONES. Lawsuits have been filed against manufacturers of wireless telephones alleging possible medical risks, including brain cancer, associated with electromagnetic fields emitted by portable hand-held cellular telephones. To date, there has been only limited research in this area, and such research has not been conclusive as to what effects, if any, exposure to electromagnetic fields emitted by portable cellular telephones has on human cells. The Company recognizes, however, that the perception that health risks may exist could adversely affect the Company's ability to market portable wireless telephone products. Inasmuch as a substantial portion of the Company's revenues is derived from sales of portable wireless telephones, future studies confirming possible health risks associated with the use of such products could have a material adverse effect on the wireless communications industry and the Company. As a distributor of wireless telephones, the Company may be subject to lawsuits filed by plaintiffs alleging health risks. A successful claim against the Company could have a material adverse effect on the Company, which does not carry product liability insurance.
DEPENDENCE ON KEY PERSONNEL. The success of the Company has been largely dependent on the personal efforts of John Swinehart, its Chief Executive Officer; Ben Neman, its Chairman and President; Stephen Jarrett, its Executive Vice President of Sales; David Kane, its Chief Financial Officer; Meir Abramov, a vice president; and other key personnel. The Company also has recently hired Michael Hedge as its Executive Vice President and General Manager and Michael King as its Vice President of Marketing and Business Development. The loss or interruption of the services of such individuals or other key employees could have a material adverse effect on the Company's business and prospects. Mr. Swinehart has no prior experience as a senior executive in a publicly-held company and has limited experience in the cellular phone industry. In March 1998, the Company reduced its workforce by approximately 35% as a cost-cutting measure. Any expansion of the Company's operations may require the hiring of additional personnel, which could be made more difficult by the Company's prior workforce reduction.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM. The Company's Common Stock is currently traded on the Nasdaq SmallCap Market. In order to continue to be listed on Nasdaq, however, the Company must maintain certain requirements. In January 1999, the Company received a notice from Nasdaq that it planned to delist the Company's Common Stock based on Nasdaq's determination that the Company would be unable to continue to maintain compliance with Nasdaq's minimum net worth requirement. The Company has appealed this determination to a Nasdaq panel hearing that will be held in April 1999. Although the Company is currently in compliance with Nasdaq's net worth requirement and believes that it has presented to Nasdaq a viable business plan for maintaining compliance with this requirement, there can be no assurance that the Company will succeed in its appeal. If Nasdaq were to delist the Company's Common Stock, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the market value of the Common Stock and the lack of a Nasdaq listing of its securities could make it more difficult for the Company to do any equity financings in the future.
CONTROL BY CURRENT STOCKHOLDER. As of December 31, 1998, Mr. Neman owned approximately 30% of the Company's outstanding Common Stock. Accordingly, Mr. Neman will be able to exert significant control over the election of the Company's directors, decisions to increase the authorized capital, dissolve, merge, or sell the assets of the Company and any other actions affecting the affairs of the Company.
INDEMNIFICATION AND EXCULPATION PROVISIONS. The Company's amended Certificate of Incorporation provides for indemnification of officers and directors to the fullest extent permitted by Delaware law. In addition, under the Company's amended Certificate of Incorporation, no director shall be liable personally to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that the Certificate of Incorporation does not eliminate the liability of a director for (i) any breach of the director's duty of loyalty to the Company or its stockholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) acts or omissions in respect of certain unlawful dividend payments or stock redemptions or repurchases; or (iv) any transaction from which such director derives improper personal benefit. As a result of such provisions in the Certificate of Incorporation and the By-Laws of the Company, stockholders may be unable to recover damages against the directors and officers of the Company for actions taken by them which constitute negligence, gross negligence or a violation of their fiduciary duties, which may reduce the likelihood of stockholders instituting derivative litigation against directors and officers and may discourage or deter stockholders from suing directors, officers, employees and agents of the Company for breaches of their duty of care, even though such an action, if successful, might otherwise benefit the Company and its stockholders.
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK. The Company's Certificate of Incorporation authorizes the issuance of up to 1,000,000 shares of "blank check" preferred stock with
such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Company's Common Stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company.
YEAR 2000 COMPLIANCE. As is true for most companies, the Year 2000 computer problem creates a risk for the Company. If systems do not correctly recognize the date information when the year changes to 2000, there could be an adverse impact on the Company's operations. The Company, however, may not be able to identify or remedy all Year 2000 compliance issues with respect to its internal systems. As a result, the Year 2000 problem could have a materially adverse effect on the Company's financial condition or results of operations. Although the Company currently expects its information systems to be Year 2000 compliant by the end of 1999, no assurance can be given that the products the Company distributes, including products manufactured and or developed by the Company's suppliers and vendors, will contain all necessary date code changes necessary to prevent processing errors potentially arising from calculations using the Year 2000 date. The Company also believes that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues in a variety of ways. If any of the above systems or products are not Year 2000 compliant, the Company's business, financial condition and results of operations could be materially adversely affected.
The Company cannot be sure that it will not suffer business interruptions, either because of its own Year 2000 problems or those of its customers or suppliers whose Year 2000 problems may make it difficult or impossible for them to fulfill their commitments to the Company. The Company is continuing to evaluate Year 2000 related risks and will take such further corrective actions as may be required.
ITEM 2.
ITEM 2. PROPERTIES
In February 1998, the Company moved its executive offices and warehouse to a 36,000 square foot leased facility in Chatsworth, California. This facility provides 23,000 square feet of warehouse and 13,000 square feet of operations and office space. The lease is for a three-year term beginning February 1, 1998, and provides for an initial monthly rent of $18,495, with annual escalation based on the Consumer Price Index. At the end of the initial lease term, the Company has an option to extend the lease for a period of three years. In May 1998, the Company subleased approximately one-third of the Chatsworth, California facility for the same remaining lease term as the underlying lease.
In January 1999, the Company assumed the lease of a 2000-square foot office and warehouse in Mexico City, Mexico. This facility handles sales into Mexico. The lease is month-to-month with rent of $980 per month.
In November 1997, the Company commenced operation of a 12,800 square foot leased warehouse and office facility in Miami, Florida. The facility handled sales into the southeastern region of the United States and Latin America. In July 1998, the Company terminated its Miami-Based operations and assigned the lease for it Miami operations to a third party. The Company is contingently liable for the obligations of this lease if the assignee defaults.
The Company believes that its existing facilities are adequate for its current and future requirements and that additional space will be available as needed to accommodate future expansion of its operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 30, 1998, the Company held its Annual Meeting of
Stockholders. At the meeting, the stockholders elected as directors Ben Neman (with 4,182,020 affirmative votes and 55,400 withheld), Vinay Sharma (with 4,182,020 affirmative votes and 55,400 withheld), Stephen Jarrett (with 4,182,020 affirmative votes and 55,400 withheld), J. Sherman Henderson (with 4,182,020 affirmative votes and 55,400 withheld), John Swinehart (with 4,182,020 affirmative votes and 55,400 withheld), and Mark M. Laisure (with 4,182,020 affirmative votes and 55,400 withheld).
The stockholders also ratified the adoption of the Company's 1998 Stock Option Plan (with 2,237,678 shares voting for, 62,100 against, and 44,600 abstaining).
The stockholders also ratified the Company's private placement of $1,500,000 of three-year unsecured and subordinated convertible notes and approved certain transactions related thereto (with 2,308,678 shares voting for, 28,800 against, and 6,900 abstaining).
The stockholders also ratified the appointment of Hollander, Lumer & Co. LLP as the independent auditors for the Company for the fiscal year ending December 31, 1998 (with 4,167,780 shares voting for, 20,640 against, and 5,700 abstaining).
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the Nasdaq SmallCap Market ("Nasdaq") under the symbol "FONE" since the Company's initial public offering on December 18, 1996. The following table sets forth, for the period indicated, the high and low sales prices of the Company's Common Stock as reported by Nasdaq.
Such quotations reflect inter-dealer bids, without retail mark-up, mark-down or commissions, and may not reflect actual transactions.
On March 26, 1999, the closing price of the Common Stock on Nasdaq was $2.50. As of March 26, 1999, there were approximately 24 holders of record of the Company's Common Stock. The Company believes that there are in excess of 400 beneficial owners of its Common Stock whose shares are held in "street name."
DIVIDEND POLICY
During the two most recent fiscal years, the Company has not paid any cash dividends on its Common Stock. The payment of cash dividends, if any, in the future is within the discretion of the Company's Board of Directors and will depend upon the Company's earnings, its capital requirements and financial condition and other relevant factors. The Board of Directors does not intend to declare any cash dividends in the foreseeable future, but instead intends to retain all earnings, if any, for use in the Company's business operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
RECENT SALES OF UNREGISTERED SECURITIES
In November 1998 the Company consummated a private placement of $1,500,000 of convertible notes pursuant to Section 4(2) of the Securities Act of 1933 to six individuals who are accredited investors. The notes were converted on December 31, 1998 to units consisting of a total of 1,500,000 shares and three-year warrants to purchase 1,000,000 shares of common stock at an exercise price of $1 per share. Sands Bros served as the Company's financial advisor in connection with this private placement.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the Financial Statements of the Company which have been audited by BDO Seidman, LLP, independent certified accountants for the years ended December 31, 1997 and 1996 and Hollander, Lumer & Co. LLP, for the year ended December 31, 1998. Such selected financial data should be read in conjunction with the Company's financial statements and related notes set forth herein commencing on page.
STATEMENT OF OPERATIONS DATA:
(in thousands, except share and per share data) Year ended December 31,
BALANCE SHEET DATA:
(in thousands) As of December 31,
(1) Includes pro forma adjustments for income taxes. See Note 9 to Notes to Financial Statements.
(2) Based on pro forma net income and the weighted average number of shares of Common Stock outstanding.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
In February 1998, the Company became aware that the business and associated assets of one of its major customers had been assumed by another creditor of this customer. As a result, in 1997, the Company expensed $1,665,000 to bad debt expense to reserve the unpaid receivable from this customer. The Company has abandoned collection efforts as being economically non viable.
The following table sets forth for the periods indicated, the percentage of net sales represented by certain items reflected in the Company's statement of operations. The statement of operations contained in the Company's financial statements and the following table include pro forma adjustment for income taxes.
PERCENTAGES OF NET SALES YEAR ENDED DECEMBER 31,
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales decreased from $81,401,000 in 1997 to $27,787,000 in 1998, a decrease of $53,614,000 or 65.9%. The primary reason for the decrease in sales was the Company's lack of product from suppliers of the newest generation digital products. The sales in 1997 were based on analog product which was more readily available compared to 1998's paradigm where digital product replaced analog's dominance and market share. In 1998, digital product was not readily available on a consistent basis to the Company. Even though the Company was able to obtain product from selected manufacturers and other distributors of digital product on a non-exclusive basis, it was only available in limited quantities.
Gross profit decreased by $1,904,000, or 53.8%, from 1997 to 1998 and as a percentage of net sales increased from approximately 4.5% to approximately 5.9% respectively, during these periods. The decrease in gross profit from 1997 to 1998 is in line with the decrease in sales. The increase in gross profits as percentage of sales is due to a somewhat more favorable mix of products offered by the Company in 1998 versus 1997.
Selling, general and administrative expenses decreased by approximately $3,463,000 or 45.4%, from 1997 to 1998, but increased from 9.4% to 15.0%, as a percentage of net sales. The most significant items accounting for this decrease are decrease in personnel of $473,000 and decrease in bad debt expense for doubtful accounts receivable and doubtful notes receivable of $3,519,000. The decrease in payroll and payroll related costs for 1998 as compared to 1997 was primarily the result of having cost cutting measures initiated in 1998 by reducing the size of the Company's workforce to compensate for waning sales and lack of product.
In 1997, the Company incurred non-recurring expenses totaling $1,300,000. Of this amount $1,024,000 was incurred in connection with the audit of the Company's financial statements for the year ended December 31, 1996, consisting primarily of professional fees, including the fees of its prior auditor, fees of special counsel and a special auditor retained by the Company's Audit Committee. In December 1997, the Company terminated acquisition negotiations with Pacific Unplugged Communications, Inc.. Such negotiations had been ongoing since a non-binding letter of intent was signed by the parties in August 1997. In connection with the proposed acquisition the Company incurred and expensed, as non-recurring, $276,000 of professional and legal fees.
Loss from operations was $5,391,000 for 1997, as compared to an operating loss of $2,532,000 in 1998, a decrease in loss of $2,859,000 or 53%. The 1997 operating loss is primarily due to increased selling, general and administrative expenses and non-recurring expenses for 1997, as described above. The 1998 loss was primarily due to decreased sales.
Interest expense for 1997 and 1998 was $444,000 and $204,000, respectively. Interest expense is primarily attributable to borrowings under the Company's prior line of credit with BankAmerica, which during 1997, averaged $3,016,000 at an average interest rate of 10.25% per annum. At December 31, 1997, there was $3,402,000 of borrowing under this credit line. During 1998, the borrowings averaged $2,376,000 at an average interest rate of 7.1% per annum. For most of 1998, the Company was not in compliance with covenants of the BankAmerica line of credit, and several amendments to the line of credit agreement reduced the Company's ability to borrow funds for most of 1998.
Historical net loss decreased from $6,116,000 for 1997 to a historical net loss of $2,769,000 for 1998, a decrease of $3,347,000 or 55%. The decrease in net loss resulted from decrease in selling, general and administrative expenses and non-recurring legal and auditing and professional fees and expenses. At
December 31, 1998, the Company has recorded a net deferred tax asset of $3,395,000, representing the future benefit of net operating losses and timing differences and has established a valuation reserve in an equal amount reflecting current assessment of the uncertain realizability of this asset.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales were essentially flat from year to year, increasing by approximately $176,000, or 0.22%, from 1996 to 1997. For 1997, domestic sales were $67,048,000 (82.4%) and foreign sales were $14,353,000 (17.6%) as compared to domestic sales of $77,034,000 (94.8%) and foreign sales of $4,191,000 (5.2%) for 1996. For the year ended December 31, 1997, accessory sales decreased by $14,186,000 or 68.6%, with such decrease offset by increased phone sales of $14,362,000, a 23.7% increase from such sales for the prior year.
Gross profit decreased by $131,000, or 3.6%, from 1996 to 1997 and as a percentage of net sales decreased from approximately 4.5% to approximately 4.4% respectively, during these periods. The decrease in gross profit from 1996 to 1997 was primarily the result of an increase in the inventory obsolescence provision for 1997 of $197,000 (0.2% of 1997 sales) over such provision for 1996.
Selling, general and administrative expenses increased by approximately $4,883,000 or 177.8%, from 1996 to 1997, and increased from 3.4% to 9.4%, as a percentage of net sales. The most significant items accounting for this increase was an increase in bad debt expense for doubtful accounts receivable of $2,508,000 and doubtful notes receivable of $739,000, payroll and related costs of $625,000, (with such increase comprised of $110,000 for executive officers, $150,000 for accounting and administration and $365,000 for sales and marketing compensation). The increase in payroll and payroll related costs for 1997 as compared to 1996 was primarily the result of having three accounting and one executive position filled for only part of 1996 while the increase in compensation expense related to sales and marketing reflects both increased compensation levels and the number of personnel involved in this effort. Additional increases for 1997 over 1996 were associated with expense for non-capitalizable equipment repair and maintenance of $258,000 primarily associated with the Company's computer system, legal, auditing and professional fees of $141,000, and increased loan fee expense associated with the replaced line of credit of $172,000.
In 1997, the Company incurred non-recurring expenses totaling $1,300,000. Of this amount $1,024,000 was incurred in connection with the audit of the Company's financial statements for the year ended December 31, 1996, consisting primarily of professional fees, including the fees of its prior auditor, fees of special counsel and a special auditor retained by the Company's Audit Committee. In December 1997, the Company terminated acquisition negotiations with Pacific Unplugged Communications, Inc.. Such negotiations had been ongoing since a non-binding letter of intent was signed by the parties in August 1997. In connection with the proposed acquisition the Company incurred and expensed, as non-recurring, $276,000 of professional and legal fees.
Income from operations was $923,000 for 1996, as compared to an operating loss of $5,391,000 for 1997, a decrease of $6,314,000 or 684%. The 1997 operating loss was primarily due to increased selling, general and administrative expenses and non-recurring expenses for 1997, as described above.
Interest expense for 1996 and 1997 was $431,000 and $444,000, respectively. Interest expense is primarily attributable to borrowings under the Company's line of credit with CIT which during 1997, averaged $3,016,000 (1996-$3,700,000) at an average interest rate of 10.25% (1996- 10%) per annum. At December 31, 1997, there was $3,402,000 (1996 - nil) of borrowing under this credit line.
Historical net income decreased from $839,000 for 1996 to a historical net loss of $6,116,000 for 1997, a decrease of $6,955,000 or 829%. The decrease in net income resulted from an increase in selling, general and administrative expenses and non-recurring legal and auditing and professional fees and expenses and the reversal of a deferred tax benefit recorded in December 1996 in accordance with FASB 109, "Accounting for Income Taxes". A net deferred tax benefit of $330,000 was recognized upon termination of the Company's S corporation election in December 1996. At December 31, 1997, the Company had recorded a net deferred tax asset of $2,626,000 representing the future benefit of net operating losses and timing differences and has established a valuation reserve in an equal amount reflecting current assessment of the uncertain realizability of this asset.
LIQUIDITY AND CAPITAL RESOURCES
Typically, the Company's primary cash requirements have been to fund increased levels of inventories, accounts receivable and operations. The Company has historically satisfied its working capital requirements principally through cash flow from operations and borrowings. At December 31, 1998, the Company had working capital of $2,490,000 compared to working capital of $3,596,000 at December 31, 1997. The decrease in working capital is primarily attributable to decreased accounts receivables from lower sales and lower inventory caused by a short supply of product offset by lower borrowings under the Company's former credit line. The losses sustained from operations have significantly reduced the Company's liquidity. Additionally, as a result of the Company's operating losses, certain vendors have restricted credit to the Company.
Net cash provided by (used in) operating activities was $2,930,000 in 1998, and ($5,374,000) in 1997. The increase in cash provided by operations for 1998 was primarily attributable to the reduced net loss, and decrease in accounts receivable and inventory. Net cash used in investing activities was $278,000 in 1998, versus cash provided by investing activities of $1,505,000 in 1997. The decrease in cash provided by investing activities was primarily attributable to proceeds from the collection of notes receivable in 1997. Net cash provided by(used in) financing activities was ($2,290,000) in 1998 and $3,869,000 in 1997. The decrease was primarily attributable to the advances of the Company's line of credit in 1997 whilst in 1998, the Company repaid and terminated this line of credit with a portion of the proceeds from its private placement of convertible notes. In January 1997, the managing underwriter exercised an over-allotment option (the "Over-allotment Option") to purchase an additional 300,000 shares of common stock, resulting in net proceeds of $1,341,000. In November 1998, the Company consummated a private placement of convertible notes for resulting in net proceeds of $1,288,000 ($1,500,000 net of $212,000 offering costs).
In January 1998, the Company entered into a new loan agreement with BankAmerica Business Credit, Inc. ("BankAmerica") which provided for borrowings under a line of credit of up to $12,000,000. Advances under the line of credit were based on a borrowing formula equal to the sum of (i) 80% of eligible accounts receivable and (ii) the lower of $6,000,000 or 50% of eligible inventory. Interest accrued on such advances at the prime lending rate plus one half of one percent (.5%) per annum and was payable monthly. In November 1998, the Company paid off the remaining balance owing to BankAmerica and terminated this agreement.
The Company has increasingly emphasized the sale of products on open account to maintain competitive other distributors who routinely grant credit. For the years ended December 31, 1996, 1997 and 1998, 79.3%, 93.6% and 86.5% of the Company's sales were made on open account. Inventory turns decreased from 14.2 times during 1997 to 10.1 times during 1998.
The Company's trade accounts receivable, less allowances for doubtful accounts at December 31, 1998, was $2,155,000, as compared to $6,578,000 at December 31, 1997 and as compared to $6,287,000 at December 31, 1996. As of December 31, 1998, accounts 90 days past due were approximately 21.9% of aggregate trade accounts receivable as compared to 9.9% of aggregate trade accounts receivable at December 31, 1997.
The allowance for doubtful accounts receivable was $251,000 at December 31, 1998, and $2,697,000 at December 31, 1997. The decrease in the allowance for doubtful accounts receivable results primarily from the Company's largest customer in 1997 (11.7% of total 1997 sales) sustaining severe financial difficulties. The Company currently believes that this customer is out of business and that its assets have been taken over by another supplier/customer and competitor. The Company has abandoned its pursuit in connection with the foregoing and wrote off the account in 1998. Other significant decreases in the allowance for doubtful account receivables relate to 44 domestic accounts aggregating $577,000 and 7 foreign accounts aggregating $456,000 included in the 1997 balance, written off in 1998.
At December 31, 1998, notes receivable, less the allowance for doubtful notes receivable was nil as compared to $195,000 at December 31, 1997. The allowance for doubtful notes receivable at December 31, 1998, was $1,521,000 as compared to $739,000 at December 31, 1997. Notes receivable are the result of converting aged accounts receivable into interest bearing promissory notes with a fixed maturity. Of the notes receivable for which an allowance is provided, one note due from a foreign customer accounts for 71% of the total.
Bad debt expense for trade accounts receivable and notes receivable equaled $108,000 or 0.4% of the Company's revenues for 1998 and $3,627,000 or 4.5% of the Company's revenues for 1997.
The Company believes the allowances for doubtful accounts receivable and doubtful notes receivable are adequate for the size and nature of its receivables. Nevertheless, further delays in the collection or the uncollectibility of accounts receivable will continue to have an adverse effect on the Company's liquidity and working capital position. Because of market considerations the Company will offer open account terms to additional customers, which will subject the Company to increased credit risks, particularly in foreign markets, and could require the Company to increase its allowance for doubtful accounts. The Company attempts to minimize losses on credit sales by monitoring its customers' creditworthiness. The Company seeks to obtain letters of credit or similar security in connection with open account sales to customers located in foreign markets.
At December 31, 1998, the Company's inventory reserve was $592,000, which the Company believes is currently adequate for obsolescence and net realizable value, given the size and nature of its
inventories. The amounts the Company will ultimately realize could, however differ materially from the amounts estimated in arriving at the inventory reserve.
Based on currently proposed plans and assumptions relating to its operations, the Company believes that with the funds raised in both the Offering and the subsequent exercise of $1,000,000 warrants, projected cash flow from operations and available cash resources, should be sufficient to satisfy its near-term cash requirements. However, the Company is seeking to obtain a new line of credit to finance future growth. There can be no assurance that additional financing will be available to the Company on commercially reasonable terms, or at all. The Company is also seeking to address its liquidity concerns by attempting to secure more favorable contracts for supply of products with manufacturers of digital wireless equipment. In addition, the Company intends on establishing more stringent criteria to evaluate creditworthiness prior to extending credit to customers and limit the risk of additional bad debt with credit insurance. No assurance can be given that these measures will help to alleviate the liquidity concerns faced by the Company.
The Company's Common Stock is currently traded on the Nasdaq SmallCap Market. In order to continue to be listed on Nasdaq, however, the Company must maintain certain requirements. In January 1999, the Company received a notice from Nasdaq that it planned to delist the Company's Common Stock based on Nasdaq's determination that the Company will be unable to continue to maintain compliance with Nasdaq's minimum net worth requirement. The Company has appealed this determination to a Nasdaq panel hearing that will be held in April 1999. Although the Company is currently in compliance with Nasdaq's net worth requirement and believes that it has presented to Nasdaq a viable business plan for maintaining compliance with this requirement, there can be no assurance that the Company will succeed in its appeal. If Nasdaq were to delist the Company's Common Stock, the lack of a Nasdaq listing of its securities could make it more difficult for the Company to do any equity financings in the future.
SEASONALITY
Sales of the Company's products are seasonal and are a function of consumer sales, with peak product shipments typically occurring in the third and fourth quarters.
INFLATION
Inflation has historically not had a material effect on the Company's operations.
YEAR 2000 COMPLIANCE
OVERVIEW AND BACKGROUND The Company is implementing a project (the Project) to address the Year 2000 readiness of its information technology as well as its non-information technology systems (e.g. telephones, alarm systems, office machines, etc.) which have embedded technology (collectively referred to as Systems). Additionally, the Project includes assessment of the Year 2000 readiness of the Company's significant suppliers and customers.
STATUS OF THE PROJECT The Project is divided into four separate phases - Planning and Awareness, Inventory, Assessment and Renovate.
The Planning and Awareness phase began in November 1998 and is scheduled for completion in early May 1999. This phase included: (I) development and approval of the Project charter, (ii) formation of a
Project management team to carry out the Project charter, (iii) identification and assessment of overall Project risks and (iv) development of a Project budget. Because the Company does not believe that its customers' Year 2000 compliance issues will have a significant impact on the Company, the Company plans on conducting informal conversations about Year 2000 issues with its customers.
In April 1999, the Company will implement the Inventory phase of the Project, which involves: (i) identification of significant Systems to be assessed and (ii) identification of all significant suppliers and customers.
The Assessment phase is scheduled to begin in May 1999, with an anticipated completion date of August 1999. This phase involves (i) contacting vendors of significant Systems to assess the Year 2000 readiness of those Systems, (ii) testing of the assertions made by significant Systems vendors, (iii) contacting significant suppliers, customers and wireless network operators in order to ascertain their state of Year 2000 readiness, (iv) assessment of assertions made by significant suppliers and customers, (v) determination of the extent to which renovation will be required to insure Year 2000 readiness and (vi) development of contingency plans to the extent considered necessary.
Once the Assessment phase is completed for each System, the Renovation phase will commence for those Systems identified as not Year 2000 compliant. The Renovation phase is projected to be completed by mid 1999. The activities that will be performed during Renovation include (i) repairing, replacing or reprogramming all significant Systems that do not comply with Year 2000 readiness, (ii) testing and validation of renovated Systems and (iii) establishment and completion of action plans to address any Year 2000 issues with significant customers and suppliers.
COSTS The Company will rely primarily on internal resources to implement and fund the Project. Costs incurred to insure the Company's systems are Year 2000 compliant are not expected to exceed $25,000 or to be material to the Company's results of operations, financial position or cash flows since the Company has already been in the process of upgrading certain Systems to keep pace with new computer and software technologies. Project costs are and will be expensed as incurred.
RISKS AND CONTINGENCIES The Company believes that the Project will meets its Year 2000 objectives in a timely manner. However, the Company has not completed significant portions of the Project. The ability of suppliers and customers with which the Company transacts to timely convert their systems to be Year 2000 compliant is uncertain. Lastly, disruptions in the economy generally resulting from Year 2000 issues could also have an adverse affect on the Company's operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial position.
The Company is dependent on wireless equipment manufacturers for supply of wireless handsets and accessories. Additionally, demand for the Company's products (wireless handsets and accessories) by the Company's customers is dependent on the ability of network operators to provide wireless network services to the end-users of those products. Failure in the products and/or systems of the wireless equipment manufacturers or network operators, including those resulting from a lack of Year 2000 compliance, could have a material adverse effect on the Company.
The estimated completion dates for the various phases and estimated costs are dependent upon management's assumptions of certain future events, such as compliance efforts, the availability of personnel and ability to locate and renovate all Systems. There can be no assurance that third parties which the Company significantly relies upon will succeed in their Year 2000 compliance efforts or that failure by third parties would not have a material adverse effect on the Company's results of operations or financial condition.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements appear in a separate section of this report as pages through following Part IV. The unaudited Quarterly Results of Operations are as follows (in thousands except per share data):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On April 9, 1997, Richard A. Eisner & Company, LLP ("Eisner"), the accounting firm that audited the Company's financial statements at December 31, 1994 and 1995 and for the years ended December 31, 1993, 1994 and 1995, resigned as the Company's independent auditor. The report of Eisner for the fiscal years ended December 31, 1993, 1994 and 1995 did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. During the audit period for the fiscal years ended December 31, 1993, 1994 and 1995, and during the interim period prior to Eisner's resignation, there were no disagreements with Eisner on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. However, in its letter of resignation addressed to the Company's Board of Directors, Eisner concluded that it was "unable to rely on the integrity of management." In a subsequent letter filed as an Exhibit to the Company's Report on Form 8-K, Eisner stated that its resignation followed an expanded scope investigation in response to allegations with respect to the 1996 financial statements made to Eisner by the Company's controller, and that during Eisner's investigation evidence came to its attention that contradicted statements made to Eisner by management.
Effective April 19, 1997, the Company engaged BDO Seidman, LLP as independent auditors to audit the Company's annual financial statements. During the Company's two most recent fiscal years, the
Company nor any person acting on behalf of the Company consulted BDO Seidman, LLP regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements or (ii) any matters that were either the subject of a disagreement or a reportable event.
On May 10, 1998, BDO Seidman, LLP the accounting firm that audited the Company's financial statements at December 31, 1996 and 1997 and for the years ended December 31, 1996 and 1997, resigned as the Company's independent auditor. The report of BDO Seidman, LLP for the fiscal years ended December 31, 1996 and 1997 did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. During the audit period for the fiscal years ended December 31, 1996 and 1997, and during the interim period prior to BDO Seidman LLP's resignation, there were no disagreements on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO Seidman, LLP would have caused it to make a reference to the subject matter of the disagreements in connection with its reports.
The Company did not consult with BDO Seidman, LLP in relation to any financial statements or filings subsequent to May 10, 1998, including the Company's quarterly reports on Form 10-Q filed during 1998 and the Offering. BDO Seidman, LLP has disclaimed any association with such filings and Offering.
Effective May 10, 1998, the Company engaged Hollander, Lumer & Co. LLP as its independent auditors to audit the Company's annual financial statements for the year ended December 31, 1998. During the Company's two most recent fiscal years, and the subsequent interim period prior to the engagement of Hollander, Lumer & Co. LLP, neither the Company nor any person acting on behalf of the Company consulted Hollander, Lumer & Co. LLP regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements or (ii) any matters that were either the subject of a disagreement or a reportable event.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item to be contained in an amendment, and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item to be contained in an amendment, and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item to be contained in an amendment, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Cellular Specialists, a company controlled by Mr. Neman's brother, is a customer of the Company. For the year ended December 31, 1998, the Company sold $307,696 of wireless products to this company. As of March 15, 1999, $119,000 remains unpaid and is over 300 days past due.
Digicell International Inc. ("Digicell"), a company controlled by two of Mr. Neman's cousins, is a customer and a supplier to the Company. For the year ended December 31, 1998, the Company sold to Digicell $1,577,000 and purchased from Digicell $817,000 of cellular products on terms no less favorable to the Company than could be obtained from an unaffiliated third party. As of the date of this report, no amounts were past due from this company.
Vinay Sharma, a director of the Company, is a partner with the law firm Sharma & Herron, which provides certain legal services to the company.
PART IV
ITEM. 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The Financial Statements are filed as a part of this report as pages through following the signature page.
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying accounts page
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(a)(3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of Regulation of S-K and paragraph (C) of this Item 14.