| Item 6. Management's Discussion and Analysis or Plan of Operation -
Liquidity and Capital Resources
December 31,
2002 2001
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Components of Working Capital
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Cash (including restricted cash) $ 265,000 $ 345,000
Accounts Receivable, trade 5,216,000 4,687,000
Accounts Receivable, vendors 939,000 1,214,000
Inventory 5,397,000 5,938,000
Other Current Assets 131,000 117,000
Bank Line of Credit - current (3,718,000) (925,000)
Accounts Payable (4,166,000) (5,273,000)
Notes Payable and Capital Lease Obligations (14,000) (11,000)
Notes Payable - Officers - -
Other Current Liabilities (548,000) (503,000)
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Total Working Capital $ 3,502,000 $ 5,589,000
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In 2000 the Company was successful in raising approximately $11 million in
equity financing from which $6 million was used in the acquisition of Winncom,
$1 million was used in the acquisition of Starworks, approximately $300,000 was
used in March 2001 to pay off the bank debt of Starworks and the remainder of
the equity financing was used to fund the net loss from operations in 2001
and for working capital.
In 2001 the Company was successful in raising approximately $1 million in
equity financing for which the funds were used for working capital.
The $2.1 million decrease in working capital from December 31, 2001 to
December 31, 2002 is primarily due to the classification of $2.6 million of bank
line of credit to current in 2002 that was non-current in 2001 because the bank
line of credit is due April 30, 2003 and has not yet been renewed but the intent
is to renew this line. As a result of profitable operations in 2002 we were able
to reduce accounts payable by approximately $1.1 million through payments and by
reducing inventory by approximately $500,000 substantially all of which came
from the Wireless Communications Products Division. The bank line of credit
increased by only $200,000 from 2001 to 2002 and the increase was used primarily
to finance working capital at Winncom. The receivables from vendors at December
31, 2002 and 2001 are for our subsidiary, Winncom. In 2002 and 2001 there has
been a substantial increase in vendor sales incentive programs to stimulate
sales in the flat market in 2002 and 2001.
We had total assets of $23.5 million as of December 31, 2002 as compared with
$24 million as of December 31, 2001. The decrease is due to a reduction in
inventory of approximately $600,000 million, amortization of property, plant and
equipment of approximately $200,000, offset by an increase in receivables, both
trade and vendor, in 2002 of approximately $300,000.
Liabilities decreased from $9.4 million at December 31, 2001 to $8.4 million
at December 31, 2002, or $1 million primarily due to a decrease in accounts
payable of approximately $1.1 million offset by an increase in the bank line of
credit of approximately $200,000. Profitable operations for 2002 and reductions
in inventory in 2002 have allowed us to substantially reduce accounts payable
from 2001.
The Company had net cash used in operating activities of $149,000 for the
year ended December 31, 2002 and approximately $2.4 million for the year ended
December 31, 2001. The improvement in the net cash used in operations is
partially the result of income from operations in 2002 of $261,000 as compared
to a loss from operations in 2001 of $2.6 million. In 2001 there was an increase
of $2.7 million in accounts receivable and inventory. In 2002 there was a net
decrease in inventory and accounts receivable of approximately $300,000. The
negative cash flow for 2002 was financed through a private placement and
borrowings under the line of credit. The negative cash flow in 2001 was financed
through an increase in line of credit borrowings of approximately $1.7 million
and proceeds from the sale of common stock of approximately $1 million. The
acquisition of certain commercial assets of the wireless communications products
line from BATC in August 2001 has resulted in new sales of base station antennas
in 2001 of approximately $1.5 million with profit margins of approximately 40%.
Additionally in 2001 the Company incurred nearly $500,000 on legal and other
litigation costs associated with the McConnell litigation, which was settled in
November 2001.
Management believes that current working capital, continued profitable
operations, new or renewed bank lines of credit together with additional equity
infusions that management believes will be available, will be sufficient to
allow the Company to maintain its operations through December 31, 2003 and into
the foreseeable future.
Results of Operations -
Fiscal Year Ended December 31, 2002 Compared To Fiscal Year Ended December
31,
Sales were $32.6 million and $30.9 million for the years ended December 31,
2002 and 2001, respectively. The primary reason for the increase in revenues
comparing 2002 to 2001 is attributable to an increase in revenues from the
Wireless Communications Products Division from $3.9 million in 2001 to $7.3
million in 2002. Sales for the Wireless Communications Products Division
increased by 87% primarily due to the addition of the base station antennas as a
result of the purchase of the wireless communications product line from Ball in
August 2001 and the increase in sales of the Company's redesigned panel antenna
systems. Sales of base station antennas were $1.5 million in 2001 and $3.9
million in 2002. Both Winncom and Starworks experienced reductions in revenue
comparing 2001 to 2002. Winncom's revenues declined from $25.9 million in 2001
to $25.1 million in 2002, primarily due to the weaker economy and Starworks
revenues declined from $1.2 million in 2001 to $400,000 in 2002 primarily as a
result of the closure of the facility in Atlanta, GA in July 2002.
Gross profit margins were 18.7% in 2002 and 19.6 % in 2001. The slight
decrease in gross margin for 2002 vs. 2001 is primarily the result of the
decrease in Winncom's profit margin from 17% in 2001 to 12.7% in 2002. This
decrease in Winncom's profit margin was, which we believe to be temporary due
the economy, offset by increased sales in the Wireless Communications Products
Division, which had margins in 2002 of approximately 36%. Winncom represented
approximately 77% of consolidated sales in 2002 and 84% of consolidated sales in
2001. Starworks sales represent only 1% and 4%, respectively of consolidated
sales so their impact on the overall margin was minimal in 2002 and 2001. The
decrease in Starworks sales in 2002 was primarily due to the closing of the
Atlanta facility in July 2002.
Selling, general and administrative (SG&A) expenses decreased by
approximately $900,000 from 2001 to 2002. SG&A as a % of revenues decreased
from 20.7% in 2001 to 17.9% in 2002. Included in SG&A in 2001 are $497,000
in legal and other professional fees associated with the McConnell litigation
that was not settled until November 2001. Also during the quarter ended March
31, 2001, termination agreements were entered into with the former CEO and CFO
of the Company. The former CEO received $63,000 of severance payments plus
options to purchase 250,000 shares of the Company's common stock at an exercise
price of $0.325 per share. The former CFO received $47,000 of severance payments
plus options to purchase 350,000 shares of the Company's common stock at $0.26
per share. The Company recognized $136,000 of expense related to these
termination agreements during the quarter ended March 2001, including $122,000
of non-cash compensation related to the issuance of the options.
In December 2001, the Company recorded a goodwill write-down of $1,257,000,
which eliminated the remaining goodwill associated with the acquisition of
Starworks in 2000. Goodwill was determined to be impaired because of the
uncertainty of the current financial and operating condition of Starworks and
the possibility that Starworks may be unable to generate future operating income
in its legacy business without the transformation of Starworks into a
conventional cable business. The goodwill write-down is included as a component
of operating expenses for 2001. There were no impairment write-downs in 2002.
Amortization of purchased intangibles represents the amortization of goodwill
and other specifically identifiable intangible assets recorded as part of the
acquisition of Winncom and Starworks in 2000. The 2001 amount represents a full
year of amortization of these intangibles. In accordance with SFAS 142, goodwill
is no longer amortized effective January 1, 2002.
The Company had income from operations in 2002 of approximately $260,000
compared to a loss from operations of $2.6 million in 2001. The loss from
operations in 2001 includes a $1.3 million impairment write-down of goodwill and
$1 million in amortization of purchased intangibles, neither of which occurred
in 2002. The income from operations in 2002 as compared to a net loss from
operations in 2001 is the result of a 5% increase in sales with no corresponding
increase in operating expenses and a substantial reduction of SG&A operating
expenses from 2001 to 2002.
Net interest expense was $207,000 in 2002 and $241,000 in 2001. The decrease
in interest expense from 2001 to 2002 is due to the fact that the average
interest rate on bank borrowings was 7.8% in 2001 and 5% in 2002. Winncom's
average line of credit balance outstanding was $3,739,000 in 2002 and $2,694,000
in 2001.
The Company had net income of $307,000 for 2002 compared to a net loss of
$2.8 million for 2001. The net income for 2002 is the result of increased
revenues, reduced operating expenses and gains from debt settlements. Gains from
debt settlements represents negotiated reductions of certain accounts payable.
The primary reasons for the net loss for 2001 were the goodwill impairment
write-down of approximately $1.3 million, the amortization of purchased
intangibles of $1 million, and the cost of the McConnell litigation, none of
which occurred in 2002.
Critical Accounting Policies
The Company's significant accounting policies are summarized in Note 1 of its
consolidated financial statements on Form 10-KSB. The preparation of financial
statements requires management to make estimates and assumptions that affect
amounts reported therein, including estimates about the effects of matters or
future events that are inherently uncertain. Policies determined to be critical
are those that have the most significant impact on the Company's financial
statements and require management to use a greater degree of judgment and/or
estimates. Actual results may differ from these estimates under different
assumptions or conditions.
On an on-going basis, management evaluates its estimates and judgments,
including those related to allowance for doubtful accounts, inventory valuations
and recoverability of intangible assets, including goodwill. Management bases
its estimates and judgments on historical experience and on various other
factors that are also 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.
However, future events are subject to change and the best estimates and
assumptions routinely require adjustment. Our major operating assets are trade
and vendor accounts receivable, inventory, property and equipment and intangible
assets. Our reserve for doubtful accounts of $986,000 should be adequate for any
exposure to loss in our accounts receivable as of December 31, 2002. We have
also established reserves for slow moving and obsolete inventories and believe
the current reserve of $381,000 is adequate. We depreciate our property and
equipment over their estimated useful lives and we have not identified any items
that are impaired.
Recent Accounting Pronouncement
In June 2001, the FASB approved for issuance SFAS 143 "Asset Retirement
Obligations." SFAS 143 establishes accounting requirements for retirement
obligations associated with tangible long-lived assets, including (1) the timing
of the liability recognition, (2) initial measurement of the liability, (3)
allocation of asset retirement cost to expense, (4) subsequent measurement of
the liability and (5) financial statement disclosures. SFAS 143 requires that an
asset retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method. The Company will adopt the statement effective no later than
January 1, 2003, as required. The transition adjustment resulting from the
adoption of SFAS 143 will be reported as a cumulative effect of a change in
accounting principle. The Company does not believe that the adoption of this
statement will have a material effect on its financial position, results of
operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. Adoption of SFAS 146 is required with the
beginning of fiscal year 2003. The Company does not anticipate a significant
impact on its results of operations from adopting this Statement.
In December 2002, the FASB issued Statements of Financial Accounting
Standards No.148, "Accounting for Stock-Based compensation - Transition and
Disclosure - an amendment of FASB Statement 123" (SFAS 123). For entities
that change their accounting for stock-based compensation from the intrinsic
method to the fair value method under SFAS 123, the fair value method is to be
applied prospectively to those awards granted after the beginning of the period
of adoption (the prospective method). The amendment permits two additional
transition methods for adoption of the fair value method. In addition to the
prospective method, the entity can choose to either (i) restate all periods
presented (retroactive restatement method) or (ii) recognize compensation cost
from the beginning of the fiscal year of adoption as if the fair value method
had been used to account for awards (modified prospective method). For fiscal
years beginning December 15, 2003, the prospective method will no longer be
allowed. The Company currently accounts for its stock-based compensation using
the intrinsic value method as proscribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and plans on
continuing using this method to account for stock options , therefore, it does
not intend to adopt the transition requirements as specified in SFAS 148. The
Company will adopt the new SFAS 148 disclosure requirements in the first quarter
of fiscal 2003.
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