ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
The following table represents the Company's statement of income data expressed
as a percentage of net sales for the respective periods:
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
2007 2006 2007 2006
------ ------ ------ ------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 64.0 72.1 65.8 66.8
------ ------ ------ ------
Gross Profit 36.0 27.9 34.2 33.2
Selling, General and administrative
Expenses 34.9 27.2 29.8 27.7
(Loss) on investments (1.8) -- (0.9) --
Unrealized gains on Tradable securities 0.5 -- 0.8 --
Income from sale of Investments 0.4 1.0 0.3 0.4
Interest Income 0.0 0.1 0.0 0.1
------ ------ ------ ------
Income before Income Tax 0.2 1.8 4.6 6.0
Income Tax 0.0 (0.4) 1.9 0.3
------ ------ ------ ------
Net Income 0.2% 2.2% 2.7% 5.7%
====== ====== ====== ======
|
MANAGEMENT DISCUSSION
THREE MONTHS ENDED September 30, 2007 ("2007") COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2006 ("2006").
Net sales decreased by $ .6 million or 11.5% from $5.7 million in 2006 to $ 5.0
in 2007. A large portion of this decline is attributable to a drop in our lower
margin Bluetooth product sales. One customer who previously purchased a large
volume of a specific Bluetooth item at low margin from us chose to source his
product needs directly overseas.
Additionally, Company sales were impacted in the quarter by reduced volume from
three of its larger customers due to a reevaluation of a product line directly
imported for them, the sale of the customers business to a carrier, and
financial difficulties, respectively.
The Company has significantly improved its competitive position due to expanded
value added services offered to customers , a well-trained and motivated sales
staff, expanded product selection, expanded marketing and overall good
pricing/value relationship offered to customers to build the business.
9
Gross profit increased by approximately $226,217 from $1,809,111 in 2007 to $
1,582,894 in 2006 and as a percentage of sales increased from 27.9% in 2006 to
36.0% in 2007. The increase in gross margin percentage resulted in the most part
from the following factors:
(1) The total gross margin percentage was enhanced in 2007 for the quarter
by the decline of lower margin Bluetooth product sales in terms of
both dollar sales and as a percentage of total sales as compared to
2006.
(2) In 2006, the Company wrote off additional amounts of Bluetooth
defective product that could not be returned to vendors (in one case
the vendor went out of business) for credit.
(3) The Company has reduced its Freight expenses as a result of improved
logistics, timing of shipments and overall efficiencies.
Selling, general and administrative (SG&A) expenses increased by $ $213,013 or
13.9% comparing 2006 to 2007. As a result, total SG&A expenses as a percentage
of sales increased from 27.2% in 2006 to 34.9% in 2007.
Company expenditures were up in the nine months to bolster the sales support
effort along with accounting and I/T labor to support our Sarbanes Oxley
efforts. Additionally, warehouse labor was up as a result of sales mix changes.
The Company also upgraded our accounting and I/T staffs to enhance our controls
and to support our Sarbanes-Oxley compliance efforts.
The Company's effective income tax rate on the net income for the three months
of 2007 was 42.0 % or a total approximate expense of $ 7,000. The Company's
effective income tax rate on the net income for the three months of 2006 was
38.0 % or a total approximate expense of $ 38,000. However, for the three months
ended September 30, 2006, the Company reduced its valuation allowance of
deferred tax assets resulting in a tax credit of $ 25,000 or 25% of taxable
income.
NINE MONTHS ENDED SEPTEMBER 30, 2007 ("2007") COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2006 ("2006").
Net sales increased by $ .2 million or 1.0% from $ 17.0 million in 2006 to $
17.2 in 2007. The increase in sales on a year to date basis is mainly
attributable to the major expansion of our third party distributed products and
product lines such as Bluetooth (though our Bluetooth sales were off for the
third quarter).
These gains were offset, at least in part, by the drop in sales of 4 of its
larger customers and the relatively sluggish accessory market conditions in the
September quarter.
Overall, in spite of coming off a difficult quarter the Company feels it has
significantly improved its overall competitive position due to expanded value
added services offered to customers bolstered by a 30 person well-trained and
motivated Sales and Customer Service departments, expanded product selection,
expanded marketing and overall pricing/value relationship offered to customers.
10
Gross profit increased by .2 million in 2007 from $5.7 million in 2006 to $5.9
million in 2007, and as a percentage of sales increased from 33.2% in 2006 to
34.2% in 2007. The increase in gross profit percentage resulted from the
following:
(1) A net reduction in freight expense resulting from a reduction from
improved logistics and timing of shipments.
(2) In 2006, the Company wrote off additional amounts of blue tooth
defective product that could not be returned to vendors (in one case
vendor out of business) for credit.
(3) Increased fees for logistics and distribution services provided for a
foreign distributor.
(4) Offsetting the above factors is the growth of lower margin third party
product sales for the year to date as Bluetooth as compared to higher
margin direct import sales as a percentage of total sales as compared
to 2006.
(5) The Company absorbed additional charges for obsolescence expense in
2007, resulting from the decision to freshen, expand, and upgrade its
proprietary product lines, particularly cases, and the resultant
decision to discontinue and aggressively move out slower moving, lower
turn, and stale product.
Selling, general and administrative (SG&A) expenses increased by $ 403,137 or an
8.6% compared with 2006. As a result, total SG&A expenses as a percentage of
sales increased 27.7% of sales in 2006 to 29.8% in 2007. Company expenditures
were up in the nine months to bolster the sales support effort along with
accounting and I/T labor to support our Sarbanes Oxley efforts. Additionally,
warehouse labor was up as a result of sales mix changes. Other factors were an
increase to its bad debt provision to provide for an unexpected Customer
bankruptcy and to increased costs relating to credit card usage by our
customers. Partially offsetting the above increases were reductions in non-
sales orientated expense categories such as Investor related costs.
Additionally, the Company's effective income tax rate on the net income for the
nine months of 2007 was 41 % or a total approximate expense of $ 326,000.
The Company's effective income tax rate on the net income for the nine months of
2006 was 38.0 % or a total approximate expense of $ 385,000. However, for the
nine months ended September 30, 2006, the Company reduced its valuation
allowance of deferred tax assets resulting in an expense of $49,000 or 4.8% of
taxable income.
11
LIQUIDITY AND CAPITAL RESOURCES:
The Company's requirements for capital are to fund (I) sales growth, (ii)
financing for possible acquisitions, (iii) repurchase of stock, and (IV) Capital
Expenditures mainly related to business system and warehouse upgrades. The
Company's primary source of financing during the six months ended September 30,
2007 was cash flow from operations.
The Company's working capital as of September 30, 2007 and 2006 was $ 7,033,000
and $ 6,169,000, respectively. Net cash provided by operating activities for the
9 months ended September 30, 2007 and 2006 were $ 749,000 and $ 232,000,
respectively. In 2007, the Company provided $ 798,310 from operations from its
net income of $ 469,481 as adjusted for non-cash items of depreciation
amortization of $ 191,676 and issuance of stock to outside consultants of
$4,125, allowance for doubtful accounts of $111,485, loss on investment of
$159,308 less unrealized gains on marketable securities of $137,765.
Cash used in changes in assets and liabilities of $49,176 resulted from
decreases in accounts receivable, inventory and in prepaid expense and other
assets of $290,439, $268,999 and $128,328 respectively, less an increase in
marketable securities purchased of $643,405, and a decrease in accounts payable
and accrued expenses of $ 93,537.
Net cash used in investing activities for the nine months ended September 30,
2007 was $61,370 resulting from the purchase of property and equipment related
primarily to software costs and new computer equipment. Net cash used in
investing activities for the nine months ended September 30, 2006 was $ 201,000
for the purchase of property and equipment including approximately $165,000 for
the implementation and installation of an upgraded business system including
software and hardware cost during the September, 2006 quarter and assorted
computer equipment and peripherals.
The Company's total Accounts Receivable decreased from $1,873,000 at December
31, 2006 to $1,471,000 at September 30, 2007 or a net reduction of $402,000.
This reduction was mainly attributable to less Customer credit sales which
generated less Accounts Receivable for the 60 day period prior to September 30,
2007. The Company had seasonally higher credit sales prior to December 31, 2006.
The Company estimates that it will incur capital expenditures of approximately
$150,000 during the twelve months ended September 30, 2008 principally for an
upgraded business system, computer servers and related peripherals and warehouse
upgrades.
Based upon its present plans, management believes that operating cash flow,
available cash and available credit resources will be adequate to meet the
working capital cash and capital expenditure needs of the Company during the
twelve months ending September 30, 2008.
12
CRITICAL ACCOUNTING POLICY AND ESTIMATES
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America as promulgated by the Public Company
Accounting Oversight Board. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgments, including those
related to revenue recognition, accrued expenses, financing operations, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions and conditions. The most significant
accounting estimates inherent in the preparation of our financial statements
include estimates as to the appropriate carrying value of certain assets and
liabilities which are not readily apparent from other sources. These accounting
policies are described at relevant sections in this discussion and analysis and
in the condensed consolidated financial statements included in this quarterly
report.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
SEASONALITY AND INFLATION
In fiscal years 2006 and 2005 the Company did approximately 49% and 51%,
respectively, of its sales in the second half of the year. This reflected the
more traditional pick up of additional business in the months preceding the
December Holiday season.
The impact of inflation on our operations has not been significant to date.
However, there can be no assurance that a high rate of inflation in the future
would not have an adverse effect on our operating results.
13
ITEM 3 FINANCIAL GRAPHS
Total Revenue - Quarterly
Dollars in Millions
5,976 5,485 5,857 5,670 5,857 6,073 6,080 5,021
---------------------------------------------------------------
QTR 4 1 2 3 4 1 2 3
FY 05 06 06 06 06 07 07 07
|
Gross Profit - Quarterly
Dollars in Millions
2,151 2,096 1,972 1,582 1,740 2,118 1,947 1,809
---------------------------------------------------------------
QTR 4 1 2 3 4 1 2 3
FY 05 06 06 06 06 07 07 07
|
Operating cash flow - Quarterly
Dollars in Thousands
502 -25 77 180 126 344 (33) 438
------------------------------------------------------
QTR 4 1 2 3 4 1 2 3
FY 05 06 06 06 06 07 07 07
|
Earnings per share - Quarterly
Dollars
.09 .10 .09 .03 .05 .06 .04 .00
------------------------------------------------------
QTR 4 1 2 3 4 1 2 3
FY 05 06 06 06 06 07 07 07
|
ITEM 4. - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The term " disclosure controls and procedures " is defined in Rules 13(a)-15e
and 15(d) - 15(e) of the Securities Exchange Act of 1934, as amended (the
Exchange Act). Our principal executive officer and principal financial officer
have evaluated the effectiveness of our disclosure controls and procedures as of
September 30, 2007. They have concluded that, as of September 30, 2007 our
disclosures were effective to ensure that:
(1) That information required to be disclosed by the Company in reports
that it files or submits under the act is recorded, processed,
summarized and reported, within the time periods specified in the
Commissions' rules and forms, and
14
(2) Controls and procedures are designed by the Company to ensure that
information required to be disclosed by Wireless Xcessories Group,
Inc. in the reports it files or submits under the Act is accumulated
and communicated to the issuer's management including the principal
executive and principal financial officers or persons performing
similar functions, as appropriate to allow timely decisions regarding
financial disclosure.
This term refers to the controls and procedures of a Company that are designed
to ensure that information required to be disclosed by a Company in the reports
that it files under the Exchange Act is recorded, processed, summarized and
reported within the required time periods. Our principal executive officer and
principal financial officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this quarterly
report. They have concluded that, as of September 30, 2007 our disclosure and
procedures were effective in ensuring that required information will be
disclosed on a timely basis in our reports filed under the exchange act.
CHANGES IN INTERNAL CONTROLS
There have not been any significant changes in the Company's internal controls
data provided in our form 10-QSB for September 30, 2007. There were no changes
in our internal control over financial reporting that occurred during the
quarter ended September 30, 2007 that has materially affected or is reasonably
likely to materially affect our internal control as required by item 308(c) of
Regulation S-B.
Bagell, Josephs, Levine & Company, L.L.C. our independent registered public
accounting firm, has provided us with an unqualified report on our consolidated
financial statements for the year ended December 31, 2006. However, in the
course of conducting its assessment of our internal controls for its audit of
our financial statements, Bagell, Josephs, Levine & Company, L.L.C. has advised
the audit committee and management that the following material weaknesses exist
as of December 31, 2006 and September 30, 2007:
(1) A material weakness exists in that no written Information Technology
(I/T) policies and procedures exist, nor do I/T internal control
functions exist to monitor the I/T control environment and assess
security.
(2) A material weakness exists in that access to the LAN is not
appropriately restricted by firewalls and routers, file access on the
server is not adequately configured to restrict access to sensitive
information and no evidence exists that user access management is
being properly maintained and administered.
(3) A material weakness exists in that the server room does not contain
adequate physical or environmental control, the network is not
adequately secured against virus or malicious software, no evidence
exists that system event logs, change logs, and access logs are being
monitored and reviewed and a problem management system for I/T issues
does not exist. Additionally, back-up procedures are not adequate to
reasonably ensure that all backups of critical data are consistently
successful and financial data would be recoverable in the event of a
disaster at our main office location.
15
While these material weaknesses did not have an effect on our reported results,
they nevertheless constituted deficiencies in our controls. In light of these
material weaknesses and the requirements enacted by the Sarbanes - Oxley Act of
2002, and the related rules and regulations adopted by the SEC, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31,
2006 and September 30, 2007, our controls and procedures needed improvement and
were not effective at a reasonable assurance level. Despite those deficiencies
in our disclosure controls, management believes that there were no material
inaccuracies or omissions of material fact in this report.
Since the discovery of the material weaknesses in I/T internal controls
described above, management is strengthening the Company's oversight over the
I/T functions and its attendant controls, procedures, documentation and security
beyond what has existed in prior years. Specifically, we have taken, and plan to
take, whatever additional steps necessary to improve our I/T controls and
procedures and to remediate any deficiencies including, but not limited to, the
following:
(1) We have hired a new higher level I/T Manager in early April, 2007
whose assigned responsibility is not only run the function at a high
level but to put in place the necessary staff, procedures and controls
to properly remediate the deficiencies as sighted above. Additionally,
the Company has hired a full time professional programmer in June,
2007 which will serve to further upgrade the capabilities of the
function.
(2) The Company's steering committee has taken on a more active oversight
role to review in detail all deficiencies and to develop with the
assistance of I/T personnel a line by line remedial written action
plan sighting and defining the deficiency, corrective action to be
taken, person(s) responsible and appropriate completion dates. The
Company is in the process of documenting and implementing corrective
action on a line by line basis. A progress report was presented to and
discussed with the audit committee for their review and approval on
November 9, 2007.
(3) The preparation of the plan will be the overall responsibility of the
steering committee and senior managers in coordination with the I/T
Director, who will be closely assisted and monitored by the two
steering committee members and will include, but not limited to, the
following:
(a) Establishing a formal policy and procedure plan, to address the
overall security framework, including password usage, intrusion
detection and system security monitoring.
(b) Improving our security measures to safeguard our data, including
enhancing our recovery plan and better securing access to and
environmental improvements to our computer operations facility.
(c) Improve our policies, procedures and attendant documentation for
system maintenance and handling back up and recovery tapes.
(d) Improve documentation, testing and access controls relating to
new programs and provide high level control over any possible
back end entry into the system.
(e) Establishment of a plan for uniform upgrade of workstations and
software, including virus protection and software fixes.
(f) The preparation of an IT policy and procedure manual to document
all of our updated procedures/standards on a company-wide basis
16
(4) The Company, as of November 9, 2007, has made significant progress on
implementing changes and correcting some of the individual
deficiencies covered under three summarized categories of material
weaknesses pointed out above. Progress has been made particularly, in
the preparation and development of policies and procedures, computer
room environment, documentation and security with most cited
deficiencies corrected. The Company expects to be fully completed with
correcting all deficiencies by December 31,2007. As outlined in points
5 and 6 below the Company is actively working with our current
business system software provider and servicer and considering various
sources of outside technical support.
(5) Additionally, the steering committee including senior management has
met with top managers of our Business system "Vision " provider and
servicer during the week ending April 5, 2007 to discuss their
responsibility and role in the process along with any access, system
and programming controls we will require from them. Since that time
our new I/T director has had on an on sight training session at the
Vision office in New Jersey and outlined further compliance steps with
them and timetables necessary to assure the Company can meet its
remedial objectives. The Company has hired a Controller, Kathleen
Duffy in early May, 2007 to be fully involved in the enhancement of
controls and in the monitoring of Sarbanes Oxley compliance.
The continued implementation of the initiatives described above is among our
highest priorities. We have discussed our corrective actions and future plans
with our audit committee and Bagell, Josephs, Levine & Company, L.L.C. as of the
date of this report, believe the actions outlined above should serve to correct
the above listed material weaknesses to our internal controls. However, in
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assistance of achieving the desires
control objectives and are subject to certain limitations, including the
exercise of judgment by individuals, the inability to identify unlikely future
events, and the inability to eliminate misconduct completely. As a result, there
can be no assurance that our disclosure controls and procedures will prevent all
errors or fraud or ensure that all material information will be made known to
management in a timely manner. In addition, we cannot assure you that neither
we, nor our independent auditors, will in the future identify further material
weaknesses or significant deficiencies in our internal control over financial
reporting that we have not discovered to date.
17
PART II. COMPANY HISTORY
ITEM 1 - NARRATIVE
OVERVIEW & HISTORY
Wireless Xcessories Group is a leading provider of accessories to dealers,
distributors, retailers, agents and airtime carriers throughout the United
States and Canada. We have created a variety of product lines, totaling over
3,000 items designed to appeal to the widest possible spectrum of wholesale
buyers.
In addition to our products, we support our customers with a wide assortment of
Value Added services, including customized retail packaging, displays, posters,
marketing, and sales training materials, and free e-commerce websites.
Our corporation was formed in 1988, as Advanced Fox Antenna, and our product
line increased steadily as handheld cell phones grew in popularity. As part of
an IPO in April 1996, Advanced Fox Antenna, along with two battery-related
companies were acquired by the parent company Batteries Batteries, Inc. Between
1997 and 2001 we sold off or otherwise divested ourselves of the battery
companies' businesses, merged a similar cell phone accessory company into our
main operation and changed our name to Wireless Xcessories Group. We have, since
then, focused on our core strengths. We consider ourselves to be the largest
distributor of accessories to independent wireless dealers in the Unites States.
Our website address is Wirexgroup.com
PRODUCTS & SERVICES
We source, design, create, market and sell a series of accessory product lines
that appeal to all categories of wireless resellers. The bulk of our lines are
aftermarket accessories that our customers offer in lieu of OEM accessories sold
by the cell phone manufacturers.
Our current product lines are called "Standard," "Platinum," Industrial
Strength(R). And our newest line which is our "Limited Collection".
We created a product design and development division and produced a series of
cases, vehicle power adapters, hands free headsets, and a line of accessories
for popular PDA'S such as Treo and Blackberry. Our current projects involve a
series of Bluetooth hands free accessories. The mission of our product
development department is to design and create accessories with exclusive
styling and functionality. We offer these items to phone manufacturers and major
distributors under our name or as a private labeled product.
18
We added new product lines such as Apple-IPod accessories, entertainment
accessories such as headsets and chargers for players. The majority of our
products are manufactured in China. In addition, we also act as a master
distributor for well-known brand name products such as Plantronics, and Blue
Ant.
Our product lines are sold along with comprehensive sales and marketing
programs, and a series of value added products designed to separate and
distinguish us in the minds of wireless resellers.
THESE SERVICES ARE OFFERED FREE OF CHARGE:
|X| Airtime carrier phone and accessories compatible charts
|X| E-Mail blast management programs
|X| Customized retail packaging
|X| Sales training materials
|X| In store displays and posters
|X| Private Label E-commerce websites that allow customers to offer our full
product line to their end users
We introduced an on-line ordering option to our customers which permits them to
view our current inventory along with our next receive date if an item is out of
stock.
CUSTOMERS
Our customer base consists of more than 2,500 independent dealers from a
one-location mall kiosk to multi-store retail franchisers covering 250 locations
and more. In addition, we sell to some of the largest distributors of cell
phones, computers, and infrastructure products. These distributors in turn
resell to airtime carriers, mass retailers, and prepaid phone distributors. We
had one customer who accounted for 5.6% of our 2007 year to date sales. No other
customer accounted for 5% or more of our sales in the period.
About 25% of our customers either repackage our products for resale through
their resale channels or ask us to provide custom packaging as part of our value
added services.
19
BUSINESS MODEL
With our recent introduction of Blackberry and smart phone accessories plus a
new line of phones, we have the widest product line in America and are truly a
"One stop shopping source" for all types of wireless resellers.
We believe we are virtually the only organization that offers resellers three
full product lines to provide a "good, better, best" choice for end users to
purchase.
The wireless phone industry is characterized by the continuous introduction of
new model handsets with design changes, new operating features, and enhancements
that limit the ability of all but a few of our competitors to compete with
aftermarket accessories, especially by having them available for purchase soon
after the phone manufacturers introduces their new models.
In addition to being quick to market on new accessories, it is necessary to have
inventory for some handsets for 1-2 years because of their continuing popularity
in certain parts of the country that do not follow the latest fashion trends.
Our customers have come to expect same day shipping on orders placed before 3pm,
and we meet this commitment on more than 99% of our orders.
Because of the rapid pace of new handset introductions, retail sales people find
it hard to keep current on which accessories are compatible among various brands
and models. We help solve this problem by publishing a monthly chart of phone
and accessory compatibilities for our customers who are agents of Verizon, AT&T,
Sprint/Nextel, T-Mobile, Alltel, U.S Cellular, metro PCS, cricket, SunCom.
MANAGEMENT DISCUSSION OF FACTORS THAT HAVE AFFECTED OUR SALES GROWTH:
A) We introduced a line of PDA and SmartPhone accessories for Blackberry,
Motorola, and Samsung.
B) We created a carrier direct marketing program, which promotes
accessories that are specific to each United States carrier and its
carrier agents.
EMPLOYEES
Wireless Xcessories Group employs approximately 81 full time workers divided
into accounting, sales, customer services, marketing, purchasing/product
development, MIS, quality control, and warehouse picking and packing. Our
7-person management team has been with the company from 2-15 years, with most
managers having 5-10 years experience.
Most members of our management team receive stock grants tied to an agreement
not to compete.
No employee is covered by collective bargaining and we consider our employee
relations to be excellent.
20
COMPETITION
The aftermarket wireless accessory industry is both competitive and fragmented.
There are a number of local and regional distributors who import their products
from the Far East, and there are 15 or more national distributors.
Barriers to entry are low assuming one wants to market a limited product line.
We believe that it would require a large investment in inventory, quality
assurance, packaging capabilities, sales training, purchasing, and marketing to
duplicate the total program we have developed.
The continual introduction of new phone models combined with popularity changes
that can be measured in weeks and months have caused some of the larger
distributors to seek out accessory specialists like Wireless Xcessories Group,
Inc. to manage the selection, packaging and sourcing of their accessory
programs.
INTELLECTUAL PROPERTY
We seek to protect our intellectual property through a combination of
trademarks, service marks, and confidentiality agreements, non-compete
agreements, and patent protection when appropriate.
We maintain a number of registered trade names and registered trademarks,
including Industrial Strength(R), IndustrialStrength.com(R),
Platinumaccessories.com and WirexGroup.com.
As our product development initiatives bear fruit we intend to seek protection
for the patentable technology we create.
ITEM 2. INDUSTRY RISK FACTORS THAT COULD AFFECT OUR PERFORMANCE
A) General economic conditions deteriorate, thereby reducing the demand for
phones and accessories.
B) Manufacturers reduce the number of new phone introductions, thereby reducing
our competitive advantage of speed to market new accessories.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") provide companies with a "safe harbor" when making forward-looking
statements. This "safe harbor" encourages companies to provide prospective
information.
21
We wish to take advantage of the "safe harbor" provisions of the Act and are
including this section in our Annual Report on Form 10-KSB in order to do so.
Forward-looking statements also appear in other sections of this report.
Statements that are not historical facts, including statements about
management's expectations for fiscal year 2007 and beyond are forward-looking
statements and involve various risks and uncertainties. Factors that could cause
the actual results to differ materially from management's projections,
forecasts, estimates and expectations include, but are not limited to, the
following:
WE MAY NOT SUCCESSFULLY OFFER ATTRACTIVE MERCHANDISE TO OUR CUSTOMERS.
In order to meet our strategic goals, we must successfully locate and offer our
customers new, innovative and high quality products. Our product offerings must
be affordable, useful to the customer, well made, distinctive in design, and not
widely available from other sources. We cannot predict with certainty that we
will successfully offer products that meet these requirements in the future.
WE DEPEND ON OUR VENDORS.
Our performance depends on our ability to purchase our products in sufficient
quantities at competitive prices and on our vendors' ability to make and deliver
high quality products in a cost effective, timely manner. Some of our smaller
vendors have limited resources, production capacities and limited operating
histories. We have no long-term purchase contracts or other contracts that
provide continued supply, pricing or access to new products and any vendor or
distributor could discontinue selling to us at any time. There can be no
assurance that we will be able to acquire the products that we desire in
sufficient quantities or on terms that are acceptable to us in the future. In
addition, there can be no assurance that our vendors will make and deliver high
quality products in a cost effective, timely manner. We may also be unable to
develop relationships with new vendors. Also, all products we purchase from
vendors in the Far East must be shipped to our warehouse via freight carriers,
and there can be no assurance that we will be able to obtain sufficient capacity
at favorable rates. Our inability to acquire suitable products in a cost
effective, timely manner or the loss of one or more key vendors or freight
carriers could have a negative impact on our business.
WE FACE CERTAIN RISKS RELATING TO CUSTOMER SERVICE.
Any material disruption or slowdown in our order processing systems resulting
from labor disputes, telephone down times, electrical outages, mechanical
problems, human error or accidents, fire, natural disasters, or comparable
events could cause delays in our ability to receive and distribute orders and
may cause orders to be lost or to be shipped or delivered late. As a result,
Customers may cancel orders or refuse to receive goods on account of late
shipments, which would result in a reduction of net sales and could, mean
increased administrative and shipping costs.
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WE EXPERIENCE INTENSE COMPETITION IN OUR MARKETS.
We operate in a highly competitive environment. We principally compete with a
variety of small distributors of cellular phone accessories that focus on a
particular segment of the market, as well as a few single large distributors
that offers a broad range of such products.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL.
Our success depends to a significant extent upon the abilities of our senior
management. The loss of the services of any of the members of our senior
management or of certain other key employees could have a significant adverse
effect on our business. In addition, our performance will depend upon our
ability to attract and retain qualified management, merchandising and sales
personnel. There can be no assurance that the members of our existing management
team will be able to manage the Company or our growth or that we will be able to
attract and hire additional qualified personnel as needed in the future.
WE FACE CERTAIN RISKS RELATED TO CASH ACCOUNTS, SHORT-TERM INVESTMENTS AND
CREDIT LOSSES.
The Company has not experienced any losses on its cash accounts or short-term
investments. The Company sells its products to commercial businesses. Through
its continuing relationships with these customers, the Company performs credit
evaluations and generally does not require collateral. The Company maintains a
reserve for potential credit losses.
PROPERTIES
All of our real properties are held under leases. The following table provides
certain information concerning our leased properties:
APPROXIMATE LEASE
AREA EXPIRATION
OPERATION NATURE LOCATION (SQ.FT.) DATE
--------- ------ -------- ------ ----
Main Facility Warehouse and Huntingdon Valley, PA 52,000 3/31/09
Office 13,100 3/31/09
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In March 2004, the above lease for both office and warehouse was extended to
March 31, 2009. As part of the lease extension the Company has the right to
relinquish approximately 15,000 feet of warehouse space without further
obligation to the Company upon giving the landlord six months prior notice of
its intention to vacate.
LEGAL PROCEEDINGS
Lawsuits and claims are filed against us from time to time in the ordinary
course of business. We do not believe that any lawsuits or claims currently
pending against our company is material or will have a material adverse affect
on our financial condition.
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INDUSTRY RISK FACTORS THAT COULD AFFECT OUR PERFORMANCE
A) General economic conditions deteriorate, thereby reducing the demand for
handsets and accessories.
B) Manufacturers reduce the number of new handset introductions, thereby
reducing our competitive advantage of speed to market new accessories.
COMPANY SPECIFIC RISKS
A) Our sales and marketing plans are ineffective or poorly executed.
B) One or more major customers decide to buy elsewhere or suffer financial
difficulties resulting in reduced purchasing of our products.
C) One or more competitors successfully take customers from us.
D) Lawsuits resulting from alleged infringement of another of another
company's designs or products.
E) Key employee resignation or sickness.
F) Failure of our products to be accepted in the market place based on poor
quality, design, or features.
G) Disruption in our Far East supply chain due to accidents, shipping delays
or intensive customs inspections.
H) Problems experienced by our factories in China. These could be based on
component scarcity, labor problems, production delays, all of which are
beyond our control.