EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
(a) Computation of the weighted average number of shares of common stock
outstanding for the fiscal years ended the years ended December 31, 2001, 2002
and 2003.
SHARES OF WEIGHTED SHARES
COMMON STOCK OUTSTANDING
2001
January 1, 2001 to December 31, 2001 10,391 10,391
Shares issued on exercise of stock options 105 43
Shares issued under Directors Stock Plan 1 1
Shares issued in connection with the July 6, 2001
Broadband Networks, Inc. Stock Exchange 23 11
------- -------
Total 10,520 10,446
======= =======
2002
January 1, 2002 to December 31, 2002 10,520 10,520
Shares issued on exercise of stock options 255 195
Shares issued under Directors Stock Plan 3 1
Shares issued to BellSouth Wireless for the conversion of 30,000 preferred
stock shares into 625,000 common shares, converted on December 2, 2002 625 50
------- -------
Total 11,403 10,766
======= =======
2003
January 1, 2003 to December 31, 2003 11,403 11,403
Shares issued on exercise of stock options -- --
Shares issued under Directors Stock Plan 12 7
Shares purchased as treasury stock from BellSouth Wireless on March 28, 2003 (625) (476)
------- -------
Total 10,790 10,934
======= =======
(b) Computation of Earnings per Share
Computation of earnings per share is net earnings (loss) divided by the weighted
average number of shares of common stock outstanding for the years ended
December 31, 2001, 2002 and 2003.
2001 2002 2003
Net earnings (loss) $(3,382) $(7,690) $(1,404)
Weighted average number of shares
of common stock outstanding 10,446 10,766 10,934
Basic earnings (loss) per share $ (0.32) $ (0.71) $ (0.13)
Diluted earnings (loss ) per share $ (0.32) $ (0.71) $ (0.13)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENT
This document contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include, among other things,
statements regarding trends, strategies, plans, beliefs, intentions,
expectations, goals and opportunities. Forward-looking statements are typically
identified by words or phrases such as "believe," "expect," "anticipate,"
"intend," "estimate," "assume," "strategy," "plan," "outlook," "outcome,"
"continue," "remain," "trend," and variations of such words and similar
expressions, or future or conditional verbs such as "will," "would," "should,"
"could," "may," or similar expressions. All statements and information herein
and incorporated by reference herein, other than statements of historical fact,
are forward-looking statements that are based upon a number of assumptions
concerning future conditions that ultimately may prove to be inaccurate. Many
phases of the Company's operations are subject to influences outside its
control. The Company cautions that these forward-looking statements are subject
to numerous assumptions, risks and uncertainties, which change over time. These
forward-looking statements speak only as of the date of this Annual Report, and
the Company assumes no duty to update forward-looking statements. Actual results
could differ materially from those anticipated in these forward-looking
statements and future results could differ materially from historical
performance.
Any one or any combination of factors could have a material adverse
effect on the Company's results of operations or could cause actual results to
differ materially from forward-looking statements or historical performance.
These factors include: the pace of technological change; variations in quarterly
operating results; delays in the development, introduction and marketing of new
wireless products and services; customer acceptance of products and services;
economic conditions; the inability to attain revenue and earnings growth;
changes in interest rates; inflation; the introduction, withdrawal, success and
timing of business initiatives and strategies; competitive conditions; the
extent and timing of technological changes; changes in customer spending; the
loss of intellectual property protection; general economic conditions and
conditions affecting the capital markets. Actual events, developments and
results could differ materially from those anticipated or projected in the
forward-looking statements as a result of certain uncertainties set forth below
and elsewhere in this document. Subsequent written or oral statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this report and
those in the Company's reports previously and subsequently filed with the
Securities and Exchange Commission.
OVERVIEW
Numerex Corp. (the "Company") is a technology company comprised of
operating subsidiaries that develop and market a wide range of communications
products and services. The Company's primary focus is wireless data
communications utilizing proprietary network technologies.
2003 marked a year of transition and re-positioning for the Company.
Revenues declined compared to the prior year because of reduced Digital
Multimedia and Wireless Data product sales. However, it is believed that their
decline will be reversed in 2004 primarily as a result of the new product
introductions of Mobile Guardian, VendView and IP Contact that were announced in
2003. In addition, many of the Company's businesses are built on the model of
recurring service revenues and the expectation is that this will continue to
grow in 2004 as it did in 2003.
2003 also marked a continuation of the focus on controlling expenses in
Selling, General and Administrative as well as Research and Development
categories. As a result, significant expense reductions were achieved in both
categories. These reductions will not continue, but equally it is expected that
any increases will be modest and relevant to supporting greater revenues.
Finally in 2003, was focused on strengthening the balance sheet and
improving the liquidity position of the Company. To accomplish these goals,
Data1Source LLC was sold which resulted in an early payment of $1,500,000 to
Cingular, the repayment of the entire amount outstanding under the revolving
line of credit as well as substantially reducing capital lease liabilities.
In addition, in January 2004 a private placement was arranged with the Laurus
Master Fund of a $4,500,000 Term Convertible Note. The net proceeds will be used
primarily for the repayment of the Company's remaining short term debt to
Cingular and to provide additional working capital. It is believed that
operations in 2004 will generate sufficient cash to not only support the ongoing
business of the Company but also service the Laurus Term Note.
The following is a discussion of the consolidated financial condition
and results of operations of the Company for the fiscal years ended December 31,
2003 and 2002 and 2001. This discussion should be read in conjunction with the
Company's consolidated financial statements, the related notes thereto, and
other financial information included elsewhere in this report.
CRITICAL ACCOUNTING POLICIES
Note A of the Notes to the Consolidated Financial Statements includes a
summary of the significant accounting policies and methods used in the
preparation of Numerex's Consolidated Financial Statements. The following is a
brief discussion of the more significant accounting policies and methods used.
GENERAL
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates and assumptions relate to
revenue recognition, accounts receivable and allowance for doubtful accounts,
inventories and the adequacy of reserves for excess and obsolete inventories,
accounting for income taxes and valuation of goodwill and other intangible
assets. Actual amounts could differ significantly from these estimates.
REVENUE RECOGNITION
The Company primarily sells products, recurring services (most billed
on a monthly basis) and on-demand services.
Product revenues are recognized at the time title passes to the
customer, which in most cases is at the time of shipment. However, the Company
did have one significant product shipment during the year where the Company did
not recognize revenue at the passage of title. In May 2003, pursuant to an
agreement signed by the Company and a customer in Australia, the Company shipped
$583,000 of wireline security detection equipment, in exchange for a share of
the customer's future revenues. Under the agreement with the customer, title
passed to the customer at the time of acceptance that occurred in May 2003.
Since the actual revenue that will be generated by the sale of the equipment is
uncertain at this time, the Company did not recognize revenue on the equipment
sale as of December 31, 2003. Currently the Company plans to recognize revenue
and related costs as revenues are received. The Company expects to receive at
least the full value of the equipment from this revenue share, however, as more
information becomes available, the Company will reassess the accounting
treatment for the project. In May 2003, the value of the wire-line equipment was
transferred from inventory to other assets. (See Discussion of Results from
Operations for the fiscal years ended December 31, 2003 and December 31, 2002
below)
The Company bills most of its recurring service revenues on a monthly
basis. Most of these revenues are generated by providing customers access to the
Company's wireless machine-to-machine communications network (the Network). The
Company sells these services to retailers and wholesalers of the service. For
services sold to retailers, monthly service fees are generally a fixed monthly
amount billed one month in advance. The Company defers the advance billing for
the service and recognizes the revenue when the services are provided. For
services sold to wholesalers, the customers are billed a fixed base fee in
advance and usage fees in arrears at the end of each month. Again the Company
defers the advance billing of the base fee and recognizes the revenues when the
services are performed. On occasion some customers will have units that
malfunction and cause their Network usage and related fees to increase
dramatically over normal usage. While these customers are contractually
obligated to pay for any such excess usage, the Company has experienced problems
in collecting such fees. Therefore, for accounting purposes, the Company reduces
the revenue recognized for such occurrences based on prior collections
experience. These types of incidents have been relatively rare in the past and
the Company does not expect this to change in the foreseeable future.
The Company also provides services on a demand basis - such as
installation services. These types are services are generally completed in a
short period of time (usually less than one month) and are billed and the
revenue recognized when the services are completed.
The Company does occasionally have multiple element service agreements,
which involve both the supply of product and the provision of services over a
multi-year arrangement. Accounting principles for agreements involving multiple
elements require the Company to allocate earned revenue to each element based on
the relative fair value of the elements. The arrangement fee for
multiple-element arrangements is allocated to each element, such as design,
product supply, product integration, installation, maintenance, support and
warranty services, based on the relative fair values of the elements. The
Company determines the fair value of each element in multi-element arrangements
based on vendor-specific objective evidence ("VSOE"). VSOE for each element is
based on the price charged when the same element is sold separately or could be
purchased from an unrelated supplier. If evidence of fair value of all delivered
elements exists but evidence does not exist for one or more undelivered
elements, then revenue is recognized using the residual method. Under the
residual method, the fair value of the undelivered element is deferred and is
recognized ratably over the contract term on an earned basis. In the case of the
supply of product the Company maintains title to the product and transfers title
at the completion of the contract term.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company's estimate for its allowance for doubtful accounts related
to trade receivables is based on two methods. The amounts calculated from each
of these methods are combined to determine the total amount reserved. First, the
Company evaluates specific accounts where information exists that the customer
may have an inability to meet its financial obligations. In these cases, the
Company uses its judgment, based on the best available facts and circumstances,
and records a specific reserve for that customer to reduce the receivable to the
amount that is expected to be collected. These specific reserves are reevaluated
and adjusted as additional information is received that impacts the amount
reserved. Second, the Company establishes a general reserve for all customers
based on a range of percentages applied to aging categories. These percentages
are based on historical collection and write-off experience. If circumstances
change (i.e. higher than expected defaults or an unexpected material adverse
change in a major customer's ability to meet its financial obligation to the
Company), the Company's estimates of the recoverability of amounts due the
Company could be reduced by a material amount.
During 2002 there was a significant downturn in the general economic
conditions in the communications industry. While the Company has relatively few
substantial customers, the Company has a very large number of low volume small
business customers (mostly in the security industry). Many of these customers
were particularly vulnerable to the economic downturn and they experienced
significant liquidity problems as their customers slowed payments to them and
their access to financing and capital diminished. This forced many of these
customers to sell their companies and led to significant consolidation in the
industry. This created significant collections problems for the Company in 2002
as many of these customers sold their businesses as asset sales, with the
acquiring companies refusing to pay for prior products and services provided by
the Company. As a result, the Company had to significantly increase its bad debt
reserves to $1,275,000 and had $1,837,000 in bad debt expense for the year ended
December 31, 2002. The Company reviewed and tightened its credit polices and put
more resources into collections efforts. As a result of these changes, the
Company experienced a significant reduction in bad debt expense to $555,000 for
the year ended December 31, 2003. The Company's accounts receivable aging also
significantly improved due to these efforts, thus reducing the necessary bad
debt reserve to $609,000. While the Company still expects to see some
improvement in bad debt expense as the general economic conditions improve, it
does not expect the significant improvement that occurred between 2002 and 2003.
The Company recognizes that material differences may result in the
amount and timing of expenses for any period if the Company made different
judgments or utilized different estimates.
INVENTORIES AND RESERVES FOR EXCESS, SLOW-MOVING AND OBSOLETE INVENTORY
The Company values inventory at the lower of cost or market, which
equates to net realizable value. The Company continually evaluates the
composition of its inventory and identifies, with estimates, potential future
excess, obsolete and slow-moving inventories. The Company specifically
identifies obsolete products for reserve purposes and analyzes historical usage,
forecasted production based on demand forecasts, current economic trends, and
historical write-offs when evaluating the adequacy of the reserve for excess and
slow-moving inventory. If the Company is not able to achieve its expectations of
the net realizable value of the inventory at its current value, the Company
would adjust its reserves accordingly.
Material differences in estimates of excess, slow-moving and obsolete
inventory may affect the amount and timing of cost of sales for any period if
the Company made different judgments or utilized different estimates. The
Company's reserve for excess, slow-moving and obsolete inventory amounted to
$681,000, as of December 31, 2003.
VALUATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
The Company assesses the impairment of goodwill and identifiable
intangible assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors considered important which could
trigger an impairment review include the following:
- significant underperformance relative to expected historical
or projected future operating results;
- significant changes in the manner of use of the acquired
assets or the strategy for the overall business; and
- significant negative industry or economic trends.
When determined that the carrying value of goodwill and other
intangible assets may not be recoverable based upon the existence of one or more
of the above indicators of impairment, the Company measures any impairment based
on a projected discounted cash flow method using a discount rate determined by
management to be commensurate with the risk inherent in the Company's current
business model. Net goodwill and intangible assets amounted to $22,993,000 as of
December 31, 2003.
In 2002, SFAS No. 142, Goodwill and Other Intangible Assets, became
effective and as a result, the Company ceased to amortize $10,983,000 of
goodwill. On March 28, 2003 the Company purchased the 40% share Cingular owned
in Cellemetry LLC. This gave the Company 100% ownership of Cellemetry LLC and
increased total goodwill to $15,014,000 at December 31, 2003. The Company had
recorded $733,000 of amortization during 2001 and would have recorded
approximately $768,000 of amortization during 2002 and approximately $918,000 in
2003. In lieu of amortization, the Company is required to perform an annual
impairment review of goodwill. Based on this initial review at January 1, 2002
and the annual review at December 31, 2002 and 2003, the Company did not record
an impairment charge.
The above listing is not intended to be a comprehensive list of all of
the Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. See the Company's
audited consolidated financial statements and notes thereto which begin on page
F-1 of this Annual Report on Form 10-K which contain accounting policies and
other disclosures required by generally accepted accounting principles.
SELECTED CONSOLIDATED STATEMENTS OF OPERATION
TWELVE MONTH PERIOD ENDED 2002 TO 2001 TO
DECEMBER 31, 2003 2002
% %
2003 2002 2001 CHANGE CHANGE
-------- -------- -------- ------ ------
Net sales:
Wireless Data Communications
Product $ 4,839 $ 7,461 $ 7,007 (35.1)% 6.5%
Service 7,848 6,748 4,493 16.3% 50.2%
-------- -------- -------- ------ ------
Sub-total 12,687 14,209 11,500 (10.7)% 23.6%
Digital Multimedia and Networking
Product 2,647 5,668 7,948 (53.3)% (28.7)%
Service 3,518 3,686 3,696 (4.6)% (0.3)%
-------- -------- -------- ------ ------
Sub-total 6,165 9,354 11,644 (34.1)% (19.7)%
Wireline Security
Product 449 230 392 95.2% (41.3)%
Service 856 708 722 20.9% (1.9)%
-------- -------- -------- ------ ------
Sub-total 1,305 938 1,114 39.1% (15.8)%
Total net sales
Product 7,935 13,359 15,347 (40.6)% (13.0)%
Service 12,222 11,142 8,911 9.7% 25.0%
-------- -------- -------- ------ ------
Total net sales 20,157 24,501 24,258 (17.7)% 1.0%
Cost of sales 10,486 13,952 14,737 (24.8)% (5.3)%
Depreciation and amortization 642 328 267 95.7% 22.8%
-------- -------- -------- ------ ------
Gross profit 9,029 10,221 9,254 (11.7)% 10.4%
% 44.8% 41.7% 38.1%
Selling, general, administrative and
other expenses 8,922 12,509 10,710 (28.7)% 16.8%
Research and development expenses 905 1,097 2,755 (17.5)% (60.2)%
Depreciation and amortization 1,928 2,184 2,701 (11.7)% (19.1)%
Costs related to non-recurring
acquisition activity -- 1,899 -- (100.0)% 100.0%
Business restructuring charges -- -- 418 0.0% 100.0%
-------- -------- -------- ------ ------
Operating loss (2,726) (7,468) (7,330) 63.5% (1.9)%
======== ======== ======== ====== ======
Net loss (1,404) (7,450) (3,142) 81.2% (137.1)%
======== ======== ======== ====== ======
Net loss applicable to common
shareholders (1,404) (7,690) (3,382) 81.7% (127.4)%
======== ======== ======== ====== ======
Basic earnings per share (0.13) (0.71) (0.32)
======== ======== ========
Weighted average shares outstanding 10,934 10,766 10,446
======== ======== ========
RESULT OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net sales represented by selected items in the Company's
Consolidated Statements of Operations.
TWELVE MONTH PERIOD ENDED
DECEMBER 31,
2003 2002 2001
------ ------ ------
Net sales:
Wireless Data Communications
Product 24.0% 30.5% 28.9%
Service 38.9% 27.5% 18.5%
------ ------ ------
Sub-total 62.9% 58.0% 47.4%
Digital Multimedia and Networking
Product 13.1% 23.1% 32.8%
Service 17.5% 15.0% 15.2%
------ ------ ------
Sub-total 30.6% 38.2% 48.0%
Wireline Security
Product 2.2% 0.9% 1.6%
Service 4.2% 2.9% 3.0%
------ ------ ------
Sub-total 6.5% 3.8% 4.6%
Total net sales
Product 39.4% 54.5% 63.3%
Service 60.6% 45.5% 36.7%
------ ------ ------
Total net sales 100.0% 100.0% 100.0%
Cost of sales 52.0% 56.9% 60.8%
Depreciation and amortization 3.2% 1.3% 1.1%
------ ------ ------
Gross profit 44.8% 41.7% 38.1%
Selling, general, administrative and
other expenses 44.3% 51.1% 44.2%
Research and development expenses 4.5% 4.5% 11.4%
Depreciation and amortization 9.6% 8.9% 11.1%
Costs related to non-recurring
acquisition activity 0.0% 7.8% 0.0%
Business restructuring charges 0.0% 0.0% 1.7%
------ ------ ------
Operating loss (13.5)% (30.5)% (30.2)%
====== ====== ======
Net loss (7.0)% (30.4)% (13.0)%
====== ====== ======
Net loss applicable to common
shareholders (7.0)% (31.4)% (13.9)%
====== ====== ======
See notes to consolidated financial statements
FISCAL YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
Net sales decreased 17.7% to $20,157,000 for the year ended December
31, 2003 as compared to $24,501,000 for the year ended December 31, 2002. This
decrease in sales was due to a decrease in Digital Multimedia, Networking sales
and in Wireless Data Communication. These decreases were partially offset by an
increase in Wireless Data Communication services revenues and an increase in
Wireline Security sales. As a percentage of total net sales, services revenues
of the Company increased to 60.6% for the year ended December 31, 2003 which
comprised of a 16.3% increase in Wireless Data Communication service revenues
partially offset by decrease in Digital Multimedia and Networking services of
4.6%.
Net sales from Wireless Data Communications decreased 10.7% to
$12,687,000 for the year ended December 31, 2003 as compared to $14,209,000 for
the year ended December 31, 2002. Wireless Data Communications product sale
decreased by 35.1%, which was partially offset by an increase of service
revenues of 16.3%. The decrease in product sales was primarily the result of
changes made to the Company's distribution strategy for wireless mobile
telemetry product lines, which resulted in a decline in unit sales while new
markets were developed during 2003. This included exiting the radio distribution
market because of intense competition and slim margins as well as a revised
focus with regard to mobile tracking. With regard to mobile tracking the Company
launched its MobileGuardian product line, which provides vehicle security and
tracking services, early in 2003. The Company continues to develop its
automotive dealer distribution network for this product line and anticipates
that the decline in product sales of mobile tracking units is temporary. The
16.3% increase in service revenues was primarily due to increased connections on
the Company's Cellemetry(R) network, mainly related to security monitoring. The
second quarter of 2002 net service revenues included a sale of a license of the
Company's Cellemetry(R) gateway software to a customer in Colombia, South
America for $500,000. Excluding this sale, service revenue derived from
connections to Cellemetry(R) network increased 25.6% in 2003 versus the same
period in 2002. In addition there was an increase in digital subscribers
utilizing the Company's Data1Source(TM) mobile messaging service prior to being
sold on September 15, 2003 (see comments on "Gain on sale of business" below).
Net sales from Digital Multimedia and Networking decreased 34.1% to
$6,165,000 for the year ended December 31, 2003 as compared to $9,354,000 for
the year ended December 31, 2002. The decrease was primarily in product sales in
both Digital Multimedia and Networking. The decrease in Digital Multimedia
product sales was largely due to a decrease in PowerPlay(TM) purchases by
distance learning customers. The decline in Network monitoring equipment sales
was due a reduction in capital spending by telecommunications customers for the
year ended December 31, 2003 versus the same period in 2002. The reduction in
Network monitoring equipment also translated into a decline in installation
service revenues of 4.6%. While a reversal in the decline in capital spending
for distance learning and telecommunications customers remains uncertain, the
Company introduced IPContact(TM) in December of 2003. This high performance
desktop videoconferencing software package is expected to supplement
PowerPlay(TM) sales in 2004.
Net sales from Wireline Security increased 39.1% to $1,305,000 for the
year ended December 31, 2003 as compared to $938,000 for the year ended December
31, 2002. This increase was primarily due to an increase in product sales, which
is due to additional sales of maintenance parts to a customer in Australia with
which we have an equipment supply agreement (the "Agreement"). Pursuant to the
Agreement, in May 2003, the Company shipped $583,000 of wireline security
detection equipment to the customer, in exchange for a share of the customer's
future revenues. Although the customer retains title to this equipment from
acceptance, it must meet certain obligations under the Agreement, or pay amounts
specified in the Agreement. Since the actual revenue that will be generated by
the sale of the equipment is uncertain at this time, the Company did not
recognize revenue on the equipment sale as of December 31, 2003. The sales of
maintenance parts to the customer, however, was not pursuant to the Agreement
and therefore we recognized revenues from those sales in the period ended
December 31, 2003 since the sales price was a fixed amount and payable upon our
normal terms. Installation of the equipment was completed by December 31, 2003.
Our customer in Australia plans to promote the new service (made available by
the equipment we provided) in the first quarter of 2004. This is when we expect
to receive our first share of revenues from the service. Currently the Company
expects to receive at least the full value of the equipment from this revenue
share, however, as more information becomes available, the Company will reassess
the accounting treatment for the project. (In May 2003, the value of the
wire-line equipment was transferred from inventory to other assets.) The Company
expects to continue to sell maintenance parts and perform services for this
customer for the term of the Agreement.
Cost of sales decreased 24.8% to $10,486,000 for the year ended
December 31, 2003 as compared to $13,952,000 for the year ended December 31,
2002. This decrease was primarily due to the lower volume of product sales in
Wireless Data Communications and Digital Multimedia and Networking.
Cost of sales depreciation and amortization expense increased 95.7% to
$642,000 for the year ended December 31, 2003 as compared to $328,000 for the
year ended December 31, 2002. This increase was primarily due to the purchase of
software and hardware for the Data1Source(TM) service line (that was sold on
September 5, 2003), the capitalization of software developed internally in both
2002 and 2003 and the purchase of a license agreement in 2003 for our wireline
business in Australia.
Gross profit, as a percentage of net sales, was 44.8% for the year
ended December 31, 2003 as compared to 41.7% for the year ended December 31,
2002. The reason for the increase in the gross profit for the year was primarily
attributable to service revenues being a higher portion of total revenues in
2003 versus 2002. Service revenues were 60.6% of total revenues in 2003 versus
45.5% for 2002 and we generally achieve higher margin than product sales.
Service revenues were also up 9.7% in total, which allowed the Company to make
up some of the gross profit dollars lost from the decline in product sales. The
sale of a gateway software license recorded in the second quarter of 2002 had a
significant positive impact on margin percentage for the year ended in December
31, 2002, since this software was originally developed for Cellemetry's internal
use, there was little additional costs associated with this sale to an external
customer. This added approximately 1.2% to the margin percentage for 2002. The
twelve-month period ended December 31, 2003 did not include such a gateway
software license sale, thus the margin did not receive such a benefit.
Selling, general, administrative and other expenses decreased 28.7% to
$8,922,000 for the year ended December 31, 2003 as compared to $12,509,000 for
the year ended December 31, 2002. As a percentage of sales, selling, general,
administrative and other expenses decreased to 44.3% for the year ended December
31, 2003 as compared to 51.1% for the year ended December 31, 2002. Selling,
general, administrative and other expenses decreased primarily due to reductions
in personnel and a decrease in bad debt expense to $515,000 as compared to
$1,837,000 in 2002. Bad debt expense was unusually high in 2002 due to an
increase in customers not being able to pay as a result of a decline in the
general economic conditions in the telecommunications industry and severely
curtailed access to additional sources of capital and credit facilities. This
led the Company to tighten its credit policy beginning in the latter part of
2002. The $1,837,000 bad debt expense in 2002 included $361,000 written off for
a specific customer. The Company accepted product in lieu of payment for the
goods and services billed to the customer. The sales value of the goods and
services sold to this customer totaled $1,735,000; $1,102,000 was invoiced in
the forth quarter ended December 31, 2001 and the balance of $633,000 was
invoiced in the first quarter of 2002. The $361,000 written off to bad debt
expense represents the margin earned on the sale. The balance, $1,374,000,
represented the expected net realizable value (in this case at cost) of the
product repossessed and placed in inventory.
Research and development expenses decreased 17.5% to $905,000 for the
year ended December 31, 2003 as compared to $1,097,000 for the year ended
December 31, 2002. This was primarily the result of reductions in research and
development personnel that was partially offset by lower capitalization than in
the prior year. Most of the research and development was more general in 2003,
as opposed to the major projects in 2002. The Company expenses research and
development costs and expects it to continue at current levels.
Operating expense depreciation and amortization expense decreased 11.7%
to $1,928,000 for the year ended December 31, 2003 as compared to $2,184,000 for
the year ended December 31, 2002. This was due to some older assets becoming
fully depreciated while the Company has had a limited requirement for the
purchase of new equipment.
Costs related to non-recurring acquisition activity were $1,899,000 for
the year ended December 31, 2002. This write-off was the result of the Company
reaching an impasse in the second quarter of 2002 in its negotiations with BT
Group plc to acquire their RedCARE division, its security products and service
business. These costs were primarily related to legal and accounting expenses
incurred during diligence and negotiations.
Interest expense and other expense increased to $298,000 in 2003
compared to an expense of $212,000 for the prior year. This increase in net
interest expense and other expense was primarily the result of increased
interest expense on the $5,000,000 note payable incurred on March 28, 2003 to
Cingular for the purchase of their interest in Cellemetry (see explanation under
"Liquidity and Capital Resources"). There was also additional interest expense
in the year ended December 31, 2003 versus the same period in 2002 on the
Company's revolving line of credit. This interest expense was partially offset
by foreign currency gains in 2003. There was a small foreign currency loss in
2002.
Gain on sale of business of $1,712,000 for the year ended December 31,
2003 was due to the sale of the Company's Data1Source mobile messaging service
through an entity Data1Source LLC. The selling price was approximately
$3,400,000 with $3,200,000 paid in cash at closing and $200,000 due in six
months on March 15, 2004, if certain criteria are met. Currently it has not been
determined if these criteria have been met. Costs associated with the
transaction included the net book value of the assets sold, including software
and computer hardware, and transaction costs including finders' fees and legal
costs. While the sale of Data1Source LLC did not meet the requirements to be
considered a significant disposition, its sale will have a negative impact on
future revenues, gross margins and cash flow because of the profitable nature of
the business.
Minority interest for the year ended December 31, 2003 was $0 compared
to $326,000 for the year ended December 31, 2002. The principle reason for the
decrease in Minority interest was the depletion of Minority Interest on the
Company's balance sheet related to a joint venture. The Company purchased the
minority parties interest on March 28, 2003.
Due to its net loss from operations, the Company did not record a tax
provision in the years ended December 31, 2003 and 2002, respectively. The
$92,000 in income tax expense recorded for 2003 relates the Company's operations
in Australia and certain state income taxes. The Company is entitled to the
benefits of certain net operating loss carry forwards, however, net operating
loss carry forwards of approximately $2,900,000 and $8,500,000 for the years
ended December 31, 2001 and 2002 respectively may not be available in future
years. The Company has not classified its net operating loss carry forwards as
an asset in its financial statements and thus a loss of net operating loss carry
forwards does not impact current operating results. In March 2004, the Company
filed a ruling request with the Internal Revenue Service (IRS) for an extension
of time to file an election to carry forward the net operating losses in
question. The Company believes it has a reasonable chance of receiving a
favorable ruling on this matter.
The Company recorded a net loss of $1,404,000 for the year ended
December 31, 2003 compared to a net loss of $7,450,000 for the year ended
December 31, 2002.
Preferred stock dividend for the year ended December 31, 2003 was $0 as
compared to $240,000 for the year ended December 31, 2002. This decrease was due
to the conversion of the preferred stock to the Company's common stock in
December 2002.
The Company recorded a net loss applicable to common shareholders of
$1,404,000 for the year ended December 31, 2003 as compared to net loss
applicable to common shareholders of $7,690,000 for the year ended December 31,
2002.
Basic and diluted loss per common share decreased to $(0.13) for year
ended December 31, 2003 as compared to $(0.71) for the year ended December 31,
2002.
The weighted average and diluted shares outstanding increased to
10,934,000 for the year ended December 31, 2003 as compared to 10,766,000 for
the year ended December 31, 2002. The increase in weighted average basic and
diluted shares outstanding was primarily due to the conversion of preferred
stock to 625,000 shares of the Company's common stock in December 2002, the
exercise of stock options, and share issued under the employee stock purchase
plan. The 625,000 shares of common stock were repurchased on March 28, 2003 (see
explanation under "Liquidity and Capital Resources").
FISCAL YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
Net sales increased 1.0% to $24,501,000 for the year ended December 31,
2002 as compared to $24,258,000 for the year ended December 31, 2001. This
increase in total net sales was the result of increased net sales from Wireless
Data Communication products and services, partially offset by a decrease in net
sales from Digital Multimedia and Networking and Wireline Security products and
services. As a percentage of total net sales, services revenues of the Company
increased to 45.5% for the year ended December 31, 2002 compared to 36.7% in the
comparable period in 2001.
Net sales from Wireless Data Communications increased 23.6% to
$14,209,000 for the year ended December 31, 2002 as compared to $11,500,000 for
the year ended December 31, 2001 and as a percentage of the Company's total net
sales, Wireless Data Communications increased to 58.0% for the year ended
December 31, 2002 compared to 47.4% in the comparable period in 2001. This
increase in net sales was primarily due to higher services revenues from
increased connections on the Company's Cellemetry(R) network, primarily related
to security monitoring, and from an increase in digital subscribers utilizing
the Company's Data1Source(TM) mobile messaging service. Also contributing to the
increase in net sales was higher product sales, primarily in the Company's
wireless security devices and from the introduction of mobile wireless devices
in the beginning of 2002.
Net sales from Digital Multimedia and Networking decreased 19.7% to
$9,354,000 for the year ended December 31, 2002 as compared to $11,644,000 for
the year ended December 31, 2001. This decrease in net sales was primarily due
to lower product sales as the result of decreases in capital spending by distant
learning customers.
Net sales from Wireline Security decreased 15.8% to $938,000 for the
year ended December 31, 2002 as compared to $1,114,000 for the year ended
December 31, 2001. This decrease was the result of continued decline in derived
channel sales activity resulting from the divestment of Company's derived
channel technology in November 1999 and the resulting de-emphasis on the sale
and marketing of derived channel technology.
Cost of sales decreased 5.3% to $13,952,000 for the year ended December
31, 2002 as compared to $14,737,000 for the year ended December 31, 2001. This
decrease was primarily due to the lower product sales volume in Digital
Multimedia and Networking and lower product costs due to the redesign of the
certain wireless devices that were introduced in the first quarter of 2002.
Cost of sales depreciation and amortization expense increased 23.2% to
$328,000 for the year ended December 31, 2002 as compared to $267,000 for the
year ended December 31, 2001.
Gross profit, as a percentage of net sales, was 41.7% for the year
ended December 31, 2002 as compared to 38.1% for the year ended December 31,
2001. The reason for the increase in the gross profit rate for the year was
primarily attributable to the higher service activities of Wireless Data
Communications, along with the lower product costs due to the redesign of
certain wireless devices. The sale of a gateway software license recorded in the
second quarter of 2002 had a significant positive impact on margin percentage
for the year ended in December 31, 2002, since this software was originally
developed for Cellemetry's internal use, there was little additional costs
associated with this sale to an external customer. This added approximately 1.2%
to the margin percentage for 2002.
Selling, general, administrative and other expenses increased 16.8% to
$12,509,000 for the year ended December 31, 2002 as compared to $10,701,000 for
the year ended December 31, 2001. As a percentage of sales, selling, general,
administrative and other expenses increased to 51.1% for the year ended December
31, 2002 as compared to 44.2% for the year ended December 31, 2001. The primary
reason for the increase in expenses for 2002 was due to the recording of
$1,837,000 in bad debt expense related to write-offs and increases in allowances
for doubtful accounts due to an increase in customers not being able to pay as a
result of significant weakening of economic conditions in the communications
industry. This led to a tightening of the Company's credit policy. This compared
to $589,000 in 2001.
Research and development expenses decreased 60.2% to $1,097,000 for the
year ended December 31, 2002 as compared to $2,755,000 for the year ended
December 31, 2001. The principal reasons for the decrease in research and
development expenses was the reduced requirement for development efforts in 2002
for the Company's product and services and the capitalization of development
costs of $872,000 during the year for new products and services that reached
technical feasibility and for internal use software developed during these
periods.
Operating expense depreciation and amortization expense decreased 19.1%
to $2,184,000 for the year ended December 31, 2002 as compared to $2,701,000 for
the year ended December 31, 2001. The principal reason for the decrease is due
to the reduction in goodwill amortization expense resulting from the
implementation of SFAS 142 on January 1, 2002.
Costs related to non-recurring acquisition activity were $1,899,000 for
the year ended December 31, 2002. This write-off was the result of the Company
reaching an impasse in the second quarter of 2002 in its negotiations with BT
Group plc to acquire their RedCARE division, its security products and service
business. These costs were primarily related to legal and accounting expenses
incurred during diligence and negotiations.
Non-recurring employee separation costs amounted to $418,000 for the
year ended December 31, 2001.
Interest and other income for the year ended December 31, 2002 was an
expense of $212,000 compared to income of $934,000 for the year ended December
31, 2001. This decrease in net interest and other income were primarily the
result of a decrease in income earned on cash balances and an increase in
interest expense from capital leases established in the first quarter of 2002.
Minority interest for the year ended December 31, 2002 was $326,000
compared to $3,139,000 for the year ended December 31, 2001. The principle
reason for the decrease in Minority interest was the depletion of Minority
Interest on the Company's balance sheet related to a joint venture.
Due to its net loss from operations, the Company did not record a tax
provision in the years ended December 31, 2002 and 2001, respectively. The
$96,000 in income tax expense recorded for 2002 relates principally to an income
tax withholding on an international product and service sale and the $(115,000)
provision for the recovery of income tax recorded in the 2001 followed the
completion and submission of the Company's federal income tax returns in
connection with an assessed over payment of federal income tax installments in
connection with the sale of the Company's derived channel technology.
The Company recorded a net loss of $7,450,000 for the year ended
December 31, 2002 compared to a net loss of $3,142,000 for the year ended
December 31, 2001.
The Company recorded a net loss applicable to common shareholders of
$7,690,000 for the year ended December 31, 2002 as compared to net loss
applicable to common shareholders of $3,382,000 for the year ended December 31,
2001.
Basic and diluted earnings (loss) per common share decreased to $(0.71)
for year ended December 31, 2003 as compared to $(0.32) for the year ended
December 31, 2001.
The weighted average and diluted shares outstanding increased to
10,766,000 for the year ended December 31, 2002 as compared to 10,466,000 for
the year ended December 31, 2001. The increase in shares outstanding was
primarily due to the exercise of stock options.
SELECTED QUARTERLY FINANCIAL DATA
The following tables detail certain unaudited financial data of the
Company for each quarter of the last two fiscal years ended December 31, 2003,
and 2002, respectively.
The Company's financial results may fluctuate from quarter to quarter
as a result of factors, including the timing of product shipments, new product
introductions and equipment, product and system sales that historically have
been of a non-recurring nature.
The information has been prepared from the books and records of the
Company in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all (including only normal,
recurring adjustments) considered necessary for fair presentation have been
included. Interim results for any quarter are not necessarily indicative of the
results that may be expected for any future period.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
2003 2003 2003 2003
--------- -------- ------------- -------------
(in thousands, except per share data)
Net sales:
Wireless Data Communications
Product $ 1,027 $ 1,073 $ 1,229 $ 1,509
Service 1,859 2,081 1,964 1,945
-------- -------- -------- --------
Sub-total 2,886 3,154 3,193 3,454
Digital Multimedia and Networking
Product 504 395 944 803
Service 1,042 809 898 770
-------- -------- -------- --------
Sub-total 1,546 1,204 1,842 1,573
Wireline Security
Product 39 172 173 65
Service 216 190 248 202
-------- -------- -------- --------
Sub-total 255 362 421 267
Total net sales
Product 1,570 1,640 2,346 2,377
Service 3,117 3,080 3,110 2,917
-------- -------- -------- --------
Total net sales 4,687 4,720 5,456 5,294
Cost of sales 2,454 2,269 2,889 2,874
Depreciation and amortization 180 174 181 107
-------- -------- -------- --------
Gross profit 2,053 2,277 2,386 2,313
Selling, general, administrative and other expenses 2,387 2,234 2,210 2,094
Research and development expenses 298 284 261 59
Depreciation and amortization 489 505 480 454
-------- -------- -------- --------
Operating loss (1,121) (746) (565) (294)
Net earnings (loss) (1,117) (854) 992 (425)
-------- -------- -------- --------
Basic earnings (loss) per share (0.10) (0.08) 0.09 (0.04)
Basic weighted average shares outstanding 11,384 10,785 10,787 10,790
-------- -------- -------- --------
Diluted earnings (loss) per share (0.10) (0.08) 0.09 (0.04)
Diluted weighted average shares outstanding 11,384 10,785 10,878 10,790
-------- -------- -------- --------
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
---------------------------------------------------------------
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
-------- -------- ------------- ------------
(in thousands, except per share data)
Net sales:
Wireless Data Communications
Product $ 2,658 $ 2,211 $ 2,215 $ 374
Service 1,591 2,303 1,539 1,315
-------- -------- -------- --------
Sub-total 4,249 4,514 3,754 1,689
Digital Multimedia and Networking
Product 2,199 1,748 952 749
Service 437 987 1,086 1,196
-------- -------- -------- --------
Sub-total 2,636 2,735 2,038 1,945
Wireline Security
Product 81 173 58 125
Service 128 86 188 102
-------- -------- -------- --------
Sub-total 209 259 246 227
Total net sales
Product 4,938 4,132 3,225 1,248
Service 2,156 3,376 2,813 2,613
-------- -------- -------- --------
Total net sales 7,094 7,508 6,038 3,861
Cost of sales 3,535 3,569 3,761 3,087
Depreciation and amortization 49 54 105 120
Inventory write-downs -- -- -- --
-------- -------- -------- --------
Gross profit 3,510 3,885 2,172 654
Research and development expenses 602 188 (63) 370
Selling, general, administrative and other
Expenses 2,456 2,952 3,805 3,296
Depreciation and amortization 518 549 552 565
Costs related to non-recurring acquisition
Activity -- 1,714 185 --
Non-recurring employee separation costs -- -- -- --
-------- -------- -------- --------
Operating loss (66) (1,518) (2,307) (3,577)
Net loss 199 (1,642) (2,338) (3,669)
-------- -------- -------- --------
Basic earnings (loss) per share 0.02 (0.16) (0.22) (0.33)
Basic weighted average shares outstanding 10,582 10,729 10,773 10,973
-------- -------- -------- --------
Diluted earnings (loss) per share 0.02 (0.16) (0.22) (0.33)
Diluted weighted average shares outstanding 11,512 10,729 10,773 10,973
-------- -------- -------- --------
LIQUIDITY AND CAPITAL RESOURCES
The Company has been able to fund its operations and working capital
requirements from cash flow generated by operations, the proceeds from a public
offering completed in April 1995, the proceeds from the sale of its derived
channel technology in November 1999, the proceeds from capital leases, the
proceeds from the exercise of stock options, the establishment of a revolving
line of credit in March of 2003, the sale of Data1Source on September 5th, 2003
(see below) and on January 13, 2004, a private placement to Laurus of a
Convertible Term Note in the principal amount of $4,500,000 (see below).
Net cash used in operating activities decreased to $269,000 for the
year ended December 31, 2003 as compared to $2,890,000 for the year ended
December 31, 2002. The reduction in cash used in operating activities was
primarily due to reductions in operating losses and a more aggressive management
of working capital in 2003 compared to the same period in 2002. The aging of
accounts receivable also significantly improved at December 31, 2003 versus
December 31, 2002.
Net cash provided by investing activities was $518,000 for the year
ended December 31, 2003 as compared to cash used by investing activities of
$1,149,000 for the year ended December 31, 2002. The cash provided by investing
activities in 2003 was primarily due to the sale of Data1Source LLC.
Net cash used by financing activities was $1,726,000 for the year ended
December 31, 2003 as compared to cash provided by financing activities of
$757,000 for the year ended December 31, 2002. Cash used in 2003 was primarily
due to the payoff of the lease payable of $605,000 for the software sold with
Data1Souce LLC, payoff of the balance due on the line of credit borrowed earlier
in the year (see explanation of the line of credit below) and the regular
payments on capital lease obligations. Cash usage also included the payments of
preferred stock dividends. The sources of cash during the comparable period in
2002 were from the exercise of stock options, which resulted in the issuance of
an additional 255,000 shares of the Company's Class A Common Stock, which was
partially offset by the regular payments on capital lease obligations.
The Company had a working capital deficit of $455,000 as of December
31, 2003 compared to a working capital balance of $4,951,000 at December 31,
2002. Included in working capital were notes receivable with certain customers
of $99,000 at December 31, 2003 and $823,000 at December 31, 2002. The Company
had cash balances of $734,000 and $2,137,000, respectively, as of December 31,
2003 and 2002. The majority of the reduction in working capital is due to a note
payable, $3,500,000 of which is classified as current, in connection with the
Company's acquisition of Cingular's interest in Cellemetry and Cingular's common
stock of the Company (see explanation of the transaction below). In order to
provide additional short-term liquidity to the Company, on March 28, 2003,
Alethea Limited Partnership, an entity affiliated with the family of the
Company's chairman and CEO, agreed to provide to Digilog a one-year revolving
line of credit for $1,000,000. Under its terms, the line is secured a lien on
all the assets of the Company subsequent to the rights of Laurus Group (see
below). Interest on the line of credit is at a rate of ten percent (10%) per
annum. There are no restrictions on the use of the line. The minimum amount of
any draw under the line is $100,000. The Company guarantees the line of credit.
As of December 31, 2003 the Company had full availability to the entire
$1,000,000 revolving line of credit. The Company is considering extending the
line of credit for an additional year. On January 13, 2004, the Company
completed a private placement to Laurus of a Convertible Term Note in the
principal amount of $4,500,000, and a Common Stock Purchase Warrant to purchase
up to 300,000 shares of the Company's Class A common stock, no par value per
share. The Company used the net proceeds of $4,270,000 to retire the $3,500,000
debt owed to Cingular and to provide additional working capital (see the
description of the financing below). This transaction eliminated the working
capital deficit.
The Company's business has traditionally not been capital intensive
and, accordingly, capital expenditures have not been material. To date, the
Company has funded all capital expenditures from operations, capital leases and
other long-term obligations, proceeds from the public offering and the proceeds
from the sale of its derived channel technology in November 1999 and the
proceeds from sale of Data1Source LLC.
On March 28, 2003, the Company acquired Cingular's interest in
Cellemetry and the 625,000 shares of the Company's stock owned by Cingular for
$5,000,000 (the "Cellemetry Transaction"). Under the terms of the agreement, the
Company agreed to pay Cingular $1,500,000 by December 15, 2003, $2,000,000
million by March 31, 2004 and $1,500,000 million by December 15, 2004. The
Company's obligation is secured by a pledge of the stock of all the Company's
subsidiaries (except Digilog) and a lien on the assets of all the Company's
subsidiaries (except Digilog) and bears interest at a rate of eight percent (8%)
per annum. On September 15, 2003 the Company paid the first installment of
$1,500,000 and on January 13, 2004, the Company paid off the remaining
$3,500,000 (see below).
On January 13, 2004, the Company completed a private placement to
Laurus ("Laurus Transaction")of (i) a Convertible Term Note in the principal
amount of $4,500,000 (the "Laurus Note"), and (ii) a Common Stock Purchase
Warrant (the "Warrant" and together with the Laurus Note, the "Securities") to
purchase up to 300,000 shares of the Company's Class A common stock, no par
value per share ("Common Stock"). The Company used the net proceeds of
$4,270,000 to retire the $3,500,000 debt owed to Cingular (see above) and to
provide additional working capital. The Laurus Note has a term of three years
maturing on January 12, 2007 and is secured by substantially all of the assets
of the Company and its U.S. subsidiaries except DCX Systems Australia Pty
Limited. Each of the Company's U.S. subsidiaries also has provided a guaranty to
Laurus. Interest accrues on the Laurus Note at an annual rate of 8%, and
interest and principal may be paid by the Company in either cash or in Common
Stock. The Company may only use Common Stock to make such payment if the price
per share of its Common Stock is greater than $5.02. However, the entire
principal amount of the Laurus Note, and any accrued interest, may be converted
by Laurus into the Company's Common Stock at a price equal to $4.56 per share
(the "Fixed Conversion Price"), subject to the certain limitations. If the
amount due and payable is paid by the Company using Common Stock, the number of
shares to be issued to Laurus by the Company will be determined based upon the
Fixed Conversion Price. Otherwise, cash payments of interest and principal due
on the Laurus Note must be paid at 102% of the amount then payable. During the
six-month period following the effectiveness of a registration statement (as
discussed below) and if no Event of Default (as defined in the terms of the
Laurus Note) has occurred, Laurus may not voluntarily convert, on a monthly
basis, a portion of the Company Note that exceeds 10% of that number of shares
of the Company traded in the one-month period preceding a voluntary conversion
by Laurus. The Warrant is exercisable by Laurus until January 13, 2011, and has
three separate tranches. The first tranche is exercisable for up to 150,000
shares of Common Stock at a price of $4.75 per share. The second tranche is
exercisable for up to 100,000 shares of Common Stock at a price of $5.17 per
share. The third tranche is exercisable for up to 50,000 shares of Common Stock
at a price of $5.99 per share. The Company has also agreed to register all of
the Common Stock that can be issued to Laurus. The Company is required to
register these Securities within six months from January 13, 2004. Failure to do
so would lead to monthly penalties for the next six months and if the Company
fails to register the Securities after one year, Laurus has the right to require
full payment of the unpaid principal and interest and can invoke its rights
under the security agreement.
The Company intends to fund the Laurus Transaction through a
combination of operating cash flow, cash on hand, and additional funding
sources. Such additional funding sources could include the public or private
sale of securities or proceeds from the sale of assets. If the Company is
successful in raising additional funds through the issuance of equity
securities, stockholders may experience dilution, or the equity securities may
have rights, preferences or privileges senior to those of the holders of our
common stock. If the Company raises funds through the issuance of additional
debt securities, those securities would have rights, preferences and privileges
senior to those of the common stock. There can be no assurance, however, that
additional funding will be available on terms favorable to the Company or at all
or that the Company will raise significant proceeds from the sale of assets. If
the Company is unable to pay the Laurus Note, Laurus could take action to
realize on its security interests described above.
The Company's operations used cash in 2003. The Company continues to
add products and distribution channels for its products, but the Company's
longer-term success will depend upon increased cash flow. The Company believes
that the combination of additional funding provided by the Laurus transaction
along with cash generated from future operations, will be sufficient to meet the
Company's operating requirements through at least December 31, 2004 and beyond
2004, the Company expects to fund its operations from operating cash flows,
assuming no material adverse change in the operation of the Company's business.
The Company is also considering other sources of funding, including the sale of
certain non-core assets.
Additionally, cash requirements for future expansion of the Company's
operations will be evaluated on an as-needed basis and may involve additional
external financing. The Company does not expect that such additional financing,
should it occur, will have a materially negative impact on the Company's ability
to fund its existing operations.
CONTRACTUAL OBLIGATIONS
Payments due by period
--------------------------------------------------------------
(in thousands) Less More
than 1 1 - 3 3 - 5 than 5
Total year years years years
------ ------ ------ ------ -------
Long-term Debt* $4,500 $ 468 $4,032 $ -- $ --
Capital lease obligations 378 343 35 -- --
Operating lease obligations 2,996 608 1,610 548 230
------ ------ ------ ------ ------
Total $7,874 $1,419 $5,677 $ 548 $ 230
====== ====== ====== ====== ======
* This debt is convertible into the Company's common stock at both the Company's
and Lender's option depending on the Company's stock price (see the description
of this financing in the Liquidity and Capital Resources section above)
EFFECT OF INFLATION
Inflation has not been a material factor affecting the Company's
business. In recent years the cost of electronic components has remained
relatively stable, due to competitive pressures within the industry, which has
enabled the Company to contain its manufacturing and operations costs. The
Company's general operating expenses, such as salaries, employee benefits, and
facilities costs are subject to normal inflationary pressures.
FOREIGN CURRENCY
The Company's functional and reporting currency is the U.S. Dollar.
Fluctuations in foreign currency exchange rates are not expected to have a
material impact on the Company's results of operations or liquidity.