Annual Report
ITEM 6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our
financial condition and results of operations are based upon our financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. In consultation with our
Board of Directors, we have identified eight accounting principles that we
believe are key to an understanding of our financial statements. These
important accounting policies require management's most difficult, subjective
judgments.
(1) ACCOUNTS RECEIVABLE
Accounts receivable are reported at the
customer's outstanding balances less any allowance for doubtful accounts and
provision for returned merchandise. Our terms for repayment range from 30 days
to 60 days. We do not normally require collateral to support receivables and
interest is not accrued thereon.
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS AND PROVISION FOR RETURNED MERCHANDISE
The allowance for doubtful accounts on
accounts receivables is charged to income in amounts sufficient to maintain the
allowance for uncollectible accounts at a level management believes is adequate
to cover any probable losses. We determine the adequacy of the allowance based
on historical write-off percentages and information collected from individual
customers. Accounts receivable are charged off against the allowance when
collectibility is determined to be permanently impaired (bankruptcy, lack of
contact, age of account balance , etc.). We also provide a provision for
returned merchandise based on our history of returns as a percentage of sales.
(3) INVENTORIES
Inventories are stated at the lower of
cost (determined principally by average cost) or market.
(4) ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES
We have issued convertible debt
securities with non-detachable conversion features. The Company has recorded
the fair value of the beneficial conversion features as interest expense and an
increase to Additional Paid in Capital.
(5) REVENUE RECOGNITION
We recognize revenue when persuasive
evidence of an arrangement exists, title transfer has occurred, the price is
fixed or readily determinable, and collectibility is probable. Sales are
recorded net of sales discounts. We recognize revenue in accordance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," (SAB 101). Our revenues are recorded under two categories:
Product Sales Product sales represent
primarily sales of PDA accessories to retailers. Revenue is recorded when the
goods are shipped and title passes to the customer. We provide a reserve for
sales returns based on our history of returns as a percentage to sales. During
the year we will provide rebates on selected products for a limited sale
period, normally 7 days. We contract with a company to process and track the
rebates. We provide a reserve for outstanding rebates based on our history of
rebates submitted as a percentage of applicable sales.
Maintenance Agreements We continue to
sell service agreements to maintain and service computers and printers that
were a part of our product line several years ago. We no longer sell such
products but continue to offer renewals of maintenance agreements. Income from
maintenance agreements is being recognized on a straight-line basis over the
life of the service contracts, which range from 3 months to 1 year. The
unearned portion is recorded as deferred income.
(6) CONSULTING AGREEMENTS
We issued common stock for payment of
consulting services. The cost of the consulting services was determined by
multiplying the common shares issued by the market price, less an agreed upon
discount, for the shares at the inception date of the agreement.
SELECT FINANCIAL INFORMATION
Years Ended
10/31/03 10/31/02
-------- --------
Statement of Operations Data
Total revenue $ 485,382 $ 356,278
Operating income (loss) (2,818,163) (1,539,938)
Net earnings (loss) after tax (4,462,182) (6,490,465)
Net earnings (loss) per share (0.02) (0.25)
Balance Sheet Data
Total assets 330,619 439,120
Total liabilities 7,047,304 5,380,902
Stockholders' deficit (6,716,685) (4,941,782)
The year ended October 31, 2003 compared
to the year months ended October 31, 2002.
REVENUES
Revenues increased by approximately 36%
to $485,382 in the year ended October 31, 2003 from $356,278 in the year ended
October 31, 2002. The increase was in product sales resulting from the addition
of new customers, the increase in volume sales to an existing national retailer
and introduction of new products. The largest impact on our sales in 2003 was
from the introduction of the "Pocket Radio" accessory for PDAs. The
Pocket Radio consists of card with software that inserts into the PDA which
converts it to an FM stereo receiver.
Our maintenance revenues remained
relatively comparable at approximately $32,000 in 2003 and 2002. We are not
actively pursuing this area of business and do not expect this to be
significant in subsequent periods.
COST OF REVENUES
The cost of revenues of $519,003 (107%
of sales) in the year ended October 31, 2003 increased from $379,440 (106% of
revenues) for the year ended October 31, 2002.
Cost of Revenues-Product Sales in 2003
consists of approximately $299,000 (66% of sales) of direct material, packaging
and freight, provision
for obsolete inventories totaling
$53,000 (12% of sales) and $145,000 (32% of sales) of salaries and employee
related costs. Cost of Revenues-Product Sales in 2002 consists of $177,000 (55%
of sales) of direct material, packaging and freight, provision for obsolete
inventories totaling $90,000 (28% of sales) and $90,000 (28% of sales) of
salaries and employee related costs. The increase in the direct material,
packaging and freight costs as a percentage from 2002 to 2003 is due to the
change in product mix from higher margin chargers and travel kits to the lower
margin Pocket Radios. As noted, a significant portion of the components of our
cost of revenues is wages and benefits which, in our business, are generally
fixed in nature. Because of our cash flow problems we were unable to retain
employees to support our production and servicing and, accordingly, our Vice
president, Mark Perkins, devoted approximately 25% of his time to this area in
2003.
Cost of Revenues-Maintenance Agreements
in 2004 consists of $2,000 of parts and accessories (7% of revenues) and
$20,000 of wages and benefits (59% of revenues). Cost of Revenues-Maintenance
Agreements in 2003 consists of $4,000 of parts and accessories (12% of
revenues) and $19,000 of wages and benefits (59% of revenues). Based on the
nature of the equipment being serviced and the applicable age thereof, parts
and accessories can fluctuate significantly each period.
The Company's products experience a
high degree of technological obsolescence based on the rapidly changing market
for PDA-related products and the introduction of new PDAs. The Company
evaluates its inventories based on sales over a rolling six-month period and
industry publications of PDA-related product changes in order to determine the
write-off of slow-moving and obsolete inventories.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative
expenses increased approximately 1% to $1,526,660 in the year ended October 31,
2003 from $1,516,776 in the year ended October 31, 2002. The main components in
these expenses are salaries and wages for its key employees and officers
(2003-$683,000; 2002-$700,000), professional fees (2003-$255,000;
2002-$219,000) and consulting fees (2003-$206,000; 2002-$199,000).
OFFICER BONUSES
During 2003 we paid our officers and
certain key employees $1,132,882 in stock and cash in order to retain their
services despite reduced revenues over the last two years and delays in payment
of wages due to cash flow problems. The following table indicates the retention
bonuses by officer in 2003:
Name Stock Cash Total
------------------------------ -------------- ------------- -------------
Ken Schilling $523,652 $4,798 $528,449
Mark Perkins 521,635 4,798 526,432
Other employees as a group 78,000 78,000
------------------------------ -------------- ------------- -------------
Total $1,123,287 $9,595 $1,132,882
------------------------------ -------------- ------------- -------------
WRITE-OFF OF INTANGIBLE ASSETS
During 2003 we wrote off 50% of the
value of Intellectual Property Rights acquired in 2002 in order to value it at
its estimated fair value.
INTEREST EXPENSE
Interest expense increased 41% to
$353,516 in the year ended October 31, 2003 from $250,057 in the year ended
October 31, 2002. The increase is a result of additional convertible debentures
issued in 2002 and 2003.
BENEFICIAL INTEREST EXPENSE
We record the excess of the fair value
of the stock price at the date of issuance of convertible debentures over the
conversion price on the same date as interest expense-beneficial conversion
feature. The amount decreased to $1,379,077 in 2003 from $4,283,930 in 2002 due
to the amount of debentures issued, the conversion formula and the relative
stock prices during the dates of grant.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2003, we had an
accumulated deficit of $24,798,332 and a working capital deficit of $6,093,514
as compared to a working capital deficit of $4,247,020 at October 31, 2002. The
increase in the deficit is primarily due approximately $690,000 in convertible
debentures issued in 2003, a $735,000 increase in additional unpaid wages and
bonuses and $312,000 in additional interest due on the convertible debentures.
We have $3,265,837 and $750,000 of debt payments related to convertible
debentures due within the next year and next two to five years, respectively.
Subsequent to October 31, 2003, $2,023,150 of these debt payments were
converted in full to common stock and the remaining balance of convertible
debentures was approximately $1,992,687. The investors have verbally agreed to
convert to equity the remaing balance as per the terms of the agreements.
Accordingly, the market price of our common stock may decline because there are
a large number of shares underlying our convertible debentures that may be
available for future sale and the sale of these shares may depress the market
price and dilute your voting rights
Accrued wages and bonuses totaling
$833,000 were also satisfied subsequent to year end through the issuance of 398
million shares ($578,000) and cash amounting to $285,000. We are negotiating
with several past employees to issue stock and/or cash for approximately
$385,000 of accrued wages.
CASH FLOWS FROM OPERATIONS
Our cash flow from operations used
$793,646 in 2003 compared to $671,211 in 2002. The increase in cash used is
primarily due to increased receivables in the fourth quarter of 2003 versus
2002 (revenues were $200,000 in the fourth quarter of 2003 versus $50,000 in
2002), partially offset by the increase in accounts payable and accrued
expenses resulting from our tight cash flows during the year. Our primary
suppliers are based in Asia and require advance payment on all orders. Based on
the initial reception of our new product, the "Virtual Keyboard" (set
to be delivered to retailers in April 2004) and the continued success of our
Pocket Radio product, we are confident that our cash flows will be positive in
2004. We currently have a backlog of orders totaling $650,000. As with other
technology-related products, our success depends on acceptance of our products
in the market and introduction of new products. If our products do not continue
to receive acceptance in the market our cash flows can quickly turn negative.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used for investing activities was
$-0- in 2003 versus $201,000 in 2002 (primarily the purchase of Intellectual
Property Rights and tooling related to a new product line in 2002). As
discussed above, we wrote-off 50% of the value of this product line value in
2003. If we are successful in raising additional equity capital in 2004, we
expect to incur significant investing activity related to the acquisition of
additional product lines and complimentary businesses. We do not have the
resources available to make any acquisitions that would require a significant
amount of cash, although we may elect to use our common stock to acquire
additional product lines and complimentary businesses if such acquisitions are
immediately cash flow positive. Such an acquisition involving our common stock
could have a material impact on the dilution of our stock. We currently do not
have any plans, proposals or arrangements involving any specific acquisition.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided by financing activities
consisted of a $90,000 loan from a foreign company (Enterprise Capital AG) and
the issuance of convertible debentures totaling $686,813. We may need to raise
additional capital through the issuance of common stock and/or debt, which will
be used to expand our infrastructure and acquire additional product lines and
complimentary businesses.
In January 2004 we entered into an
agreement to purchase the assets of Synosphere LLC for 30 million shares of
common stock valued at $1.2 million .We currently have no other material
commitments for capital expenditures.
ACQUISITION
On January 20, 2004, the Company
acquired 5,000,000 Interests, representing all of the Interests, of Synosphere,
LLC, ("Synosphere"), in exchange for 30,000,000 shares of common
stock. Synosphere is a Plano, Texas based corporation specializing in the
development of innovative handheld computer technologies.
On January 20, 2004, the Company
entered into employment agreements with Bryan Scott and Ramon Pereles,
President and Chief Marketing Officer of Synosphere. The term of these employee
agreements shall be two years following the closing and transferable in the
event of a sale of Synosphere to another entity or if Synosphere is spun-off.
The employees shall receive annual base salaries of $112,000 and $102,000,
respectively, per year with healthcare benefits. In addition, each employee
shall receive a sign on bonus of 2,500,000 shares of common stock. Furthermore,
the employees shall each receive an Earn Out bonus of common stock in eight
payments, each made quarterly, in the amount of $62,500. A "golden
parachute" clause shall be put in place such that if either of the
employee agreements are terminated by the Company or any successor they are
payable in full at the date of their termination. Finally, we expect to appoint
Byran Scott to the Company's Board of Directors in the near future.
INCREASE IN CASH SUBSEQUENT TO OCTOBER 31, 2003
November 2003- Options valued at
$260,000 to purchase 200 million shares of common stock (at a 40% discount from
market, as defined) were issued to D. Scott Elliott for general business and
financial consulting services to assist the Company with its expansion plans
and entry into other markets. All of these options have been exercised for an
aggregate of $93,600.
December 2003- Options valued at
$60,000 to purchase 50 million shares of common stock (at a 15% discount from
market, as defined) were issued to Jeffrey Firestone for providing legal
counsel on international issues in mergers and acquisitions. All of these
options have been exercised for an aggregate of $1,125,604.52.
January 2004- Options valued at
$4,450,000 to purchase 100 million shares of common stock (at a 50% discount
from market, as defined) were issued to Pangea Investments GmbH for consulting
and acquisition services in Europe and Israel. Sam Elimalech, an officer of
Enterprise Capital AG, is also a member of Pangea Investments Gmbh. All of
these options have been exercised for an aggregate of $1,200,000.
As of February 4, 2004, the Company has
received approximately $1,098,000 cash as a result of the Company's Option
holders exercising their options to purchase shares of common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued the following
statements:
In April 2003, the FASB issued 145
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This Statement rescinds SFAS
4, Reporting Gains and Losses from Extinguishment of Debt and an amendment of
that statement, SFAS 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. The rescission of these Statements alters the financial reporting
requirements from gains and losses resulting from the extinguishments of debt.
These gains or losses should now be reported before extraordinary items, unless
the two requirements for extraordinary items are met. This statement also
rescinds SFAS 44, Accounting for Intangible Assets of Motor Carriers and amends
SFAS 13, Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of this
statement related to the rescission of Statement 4 shall be applied in fiscal
years beginning after May 15, 2002. Any gain or loss on extinguishments of debt
that was classified as an extraordinary item in prior periods presented that
does not meet the criteria in Opinion 30 for classification as an extraordinary
shall be reclassified. The provision of this Statement related to Statement 13
shall be effective for transactions occurring after May 15, 2002.
In June of 2002, the FASB issued SFAS
146, "Accounting for Costs Associated with Exit or Disposal
Activities," which nullifies EITF Issue 94-3. SFAS 146 is effective for
exit and disposal activities that are initiated after December 31, 2002 and
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, in contrast to the date
of an entity's commitment to an exit plan, as required by EITF Issue 94-3. The
Company adopted the provisions of SFAS 146 effective January 1, 2003.
In December 2002, the FASB issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure". This Statement amends SFAS No. 123, "Stock-Based
Compensation", to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The alternative methods of transition of SFAS 148 are effective for fiscal year
ending after December 15, 2002. The Company follows APB 25 in accounting for
its employee stock options. The disclosure provision of SFAS 148 is effective
for years ending after December 15, 2002 and has been incorporated into these
consolidated financial statements and accompanying footnotes.
In May 2003, the FASB issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity". This Statement establishes standards for how
an issuer of debt classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify certain financial instruments as a liability (or an asset in some
circumstances) instead of equity. The Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company adopted this Statement on July 1, 2003.
The Company does not believe that any
of these recent accounting pronouncements will have a material impact on their
financial position or results of operations.
