SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: May 31, 2002
-----------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 012182
Exact Name of Registrant as
Specified in Its Charter: CALIFORNIA AMPLIFIER, INC.
--------------------------
DELAWARE 95-3647070
- ------------------------------ ------------------
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization: Identification No.
Address of Principal Executive Offices: 460 Calle San Pablo
Camarillo, CA 93012
Registrant's Telephone Number: (805) 987-9000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The registrant had 14,598,437 shares of Common Stock outstanding as of
July 12, 2002.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except par value amounts)
May 31, February 28,
2002 2002
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 19,604 $ 23,156
Accounts receivable, less allowance for doubtful
accounts of $430 and $417, respectively 10,255 8,219
Inventories, net 10,245 9,472
Deferred income tax asset, net 4,435 3,580
Prepaid expenses and other current assets 1,063 1,312
-------- --------
Total current assets 45,602 45,739
Property and equipment, at cost, net of
accumulated depreciation and amortization 10,593 7,375
Goodwill 20,912 3,287
Other assets 769 287
-------- --------
$ 77,876 $ 56,688
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,351 $ 917
Accounts payable 6,557 5,713
Accrued payroll and employee benefits 1,588 1,870
Other accrued liabilities 6,809 6,980
-------- --------
Total current liabilities 16,305 15,480
-------- --------
Long-term debt, less current portion 14,951 3,628
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 3,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 30,000 shares
authorized; 14,598 and 13,630 shares issued
and outstanding, respectively 146 136
Additional paid-in capital 35,307 27,569
Retained earnings 12,142 10,676
Accumulated other comprehensive loss (975) (801)
-------- --------
Total stockholders' equity 46,620 37,580
-------- --------
$ 77,876 $ 56,688
======== ========
See notes to unaudited condensed consolidated financial statements.
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share amounts)
Three Months Ended
May 31,
-------------------
2002 2001
------- -------
Sales $22,482 $20,802
Cost of goods sold 16,638 16,023
------- -------
Gross profit 5,844 4,779
------- -------
Operating expenses:
Research and development 1,701 1,661
Selling 730 634
General and administrative 1,050 2,343
------- -------
Total operating expenses 3,481 4,638
------- -------
Operating income 2,363 141
Non-operating expense, net (1) (10)
------- -------
Income from continuing operations
before income taxes 2,362 131
Income tax provision (896) (40)
------- -------
Income from continuing operations 1,466 91
Loss from discontinued operations,
net of tax - (20)
------- -------
Net income $ 1,466 $ 71
======= =======
Basic earnings per share:
Continuing operations $ 0.10 $ 0.01
Discontinued operation - -
------- -------
$ 0.10 $ 0.01
======= =======
Diluted earnings per share:
Continuing operations $ 0.10 $ 0.01
Discontinued operation - -
------- -------
$ 0.10 $ 0.01
======= =======
Shares used in per share
calculations:
Basic 14,373 13,723
Diluted 14,756 13,958
See notes to unaudited condensed consolidated financial statements.
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
May 31,
---------------------
2002 2001
------- -------
Cash flows from operating activities:
Net income $ 1,466 $ 71
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 862 1,026
Gain on sale of equipment (148) (5)
Increase in equity associated with tax
benefit from exercise of stock options 1,591 -
Deferred tax assets, net (855) 31
Changes in operating assets and liabilities:
Accounts receivable (2,036) (1,317)
Inventories 257 771
Prepaid expenses and other assets (4) (367)
Accounts payable 844 1,955
Accrued payroll and other accrued liabilities (947) 569
------- -------
Net cash provided by operating activities 1,030 2,734
------- -------
Cash flows from investing activities:
Capital expenditures (135) (386)
Proceeds from sale of property and equipment 281 12
Acquisition of Kaul-Tronics (16,588) -
------- -------
Net cash used in investing activities (16,442) (374)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 12,000 -
Repayments of long-term debt (243) (43)
Proceeds from exercise of stock options 103 -
------- -------
Net cash provided by (used in) financing activities 11,860 (43)
------- -------
Effect of foreign exchange rate changes - (84)
------- -------
Net change in cash and cash equivalents (3,552) 2,233
Cash and cash equivalents at beginning of period 23,156 10,009
------- -------
Cash and cash equivalents at end of period $19,604 $12,242
======= =======
Supplemental cash flow information:
Interest paid $ 88 $ 99
Income taxes paid $ 3 $ 69
Non-cash activities:
Issuance of common stock as partial consideration
for acquisition of Kaul-Tronics $ 6,054 -
Increase in valuation allowance for
available-for-sale investment $ 174 -
See notes to unaudited condensed consolidated financial statements.
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended May 31, 2002
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
California Amplifier, Inc. (the "Company") designs, manufactures and
markets microwave equipment used in the reception of video and data
transmitted from satellites and wireless terrestrial transmission sites, and
two-way wireless transceivers used for fixed point wireless broadband data
(Internet) applications. The Company's Satellite business unit designs and
markets reception components for the worldwide direct broadcast satellite
(DBS) television market as well as a full line of consumer and commercial
products for video and data reception. The Wireless Access business unit
designs and markets integrated reception and two-way transmission fixed
wireless equipment for video, voice, data and networking applications.
All significant intercompany transactions and accounts have been
eliminated in consolidation. In the opinion of the Company's management,
the accompanying condensed consolidated financial statements reflect all
adjustments necessary to present fairly the Company's financial position at
May 31, 2002 and its results of operations and cash flows for the three
months ended May 31, 2002 and 2001. The results of operations and cash
flows for such periods are not necessarily indicative of results to be
expected for the full fiscal year.
The Company uses a 52-53 week fiscal year ending on the Saturday
closest to February 28, which for fiscal year 2002 fell on March 2, 2002.
The actual interim periods ended on June 1, 2002 and June 2, 2001. In the
accompanying condensed consolidated financial statements, the 2002 fiscal
year end is shown as February 28 and the interim period end for both years
is shown as May 31 for clarity of presentation.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form
10-Q. Therefore, these financial statements should be read in conjunction
with the Company's 2002 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on May 31, 2002.
Note 2 - ACQUISITION
On April 5, 2002, the Company acquired substantially all of the assets,
properties and business of Kaul-Tronics, Inc., a Wisconsin corporation, and
two affiliated companies (collectively, "Kaul-Tronics"). The results of
Kaul-Tronics' operations have been included in the Company's consolidated
financial statements since that date. The operations acquired by the
Company involve primarily the design and manufacture of satellite antenna
dishes used in the DBS industry. The satellite antenna dishes of the type
produced by Kaul-Tronics, and the downconverter/amplifier devices of the
type produced by the Company, together comprise the outdoor portion of
customer premise equipment for DBS television reception. In calendar year
2001, Kaul-Tronics had revenues of approximately $36 million and pretax
income of $4.8 million. Kaul-Tronics' 2001 revenues included approximately
$12 million of satellite downconverter/amplifier devices of the type
produced by the Company.
The total acquisition cost was $22,642,000, consisting of a cash payment
to the sellers of $16,063,000, issuance to the sellers of 929,086 shares of
the Company's common stock valued at $6,054,000, and $525,000 for direct costs
of the acquisition including legal, accounting and financial advisory fees.
The acquisition gave rise to goodwill of $17,625,000, which was assigned to
the Company's Satellite business segment. The value of the common shares
issued was determined based on the average closing price of the Company's
common stock during the period beginning two trading days before the
acquisition was agreed to and ending two trading days after the terms of the
acquisition were announced.
The source of funds for the cash payment was the Company's cash on hand
and the proceeds of a $12 million drawdown on the Company's existing bank
revolving line of credit which had been increased from $8 million to $13
million effective April 3, 2002. On May 2, 2002, the $12 million
outstanding principal balance on the revolver was repaid in full from the
proceeds of a new $12 million term loan. The new term loan bears interest
at LIBOR plus 2.0% or the bank's prime rate. The $12 million term loan
provides for interest only payments until April 1, 2003, and thereafter
provides for monthly principal reductions of $200,000 plus accrued interest.
Following is a computation of the goodwill arising from this
acquisition (in thousands):
Total acquisition costs $22,642
Fair value of net assets acquired:
Inventory $1,030
Prepaid expenses 4
Property and equipment 4,078
Non-compete agreements 400
Accrued liabilities assumed (495)
-------
Total fair value of net assets acquired 5,017
-------
Goodwill $17,625
=======
Pursuant to the provisions of Statement of Financial Accounting
Standards No. 142, "Accounting for Goodwill and Intangible Assets", which
the Company adopted effective at the beginning of fiscal 2003, goodwill
which arose from this transaction will not be amortized. Instead, goodwill
will be evaluated on an annual basis for impairment. None of the goodwill
arising from this acquisition is expected to be deductible for income tax
purposes.
The following is supplemental pro forma information presented as if the
acquisition had occurred at the beginning of each of the respective periods
(in thousands):
Three Months Ended Three Months Ended
May 31, 2002 May 31, 2001
-------------------- --------------------
As Pro As Pro
reported forma reported forma
-------- -------- -------- --------
Sales $22,482 $25,109 $20,802 $26,314
Income from continuing
operations $ 1,466 $ 1,613 $ 91 $ 240
Income from continuing
operations per share:
Basic $ .10 $ .11 $ .01 $ .02
Diluted $ .10 $ .11 $ .01 $ .02
Note 3 - INVENTORIES
Inventories include the cost of material, labor and manufacturing
overhead, are stated at the lower of cost (first-in, first-out) or market,
and consist of the following (in thousands):
May 31, Feb. 28,
2002 2002
------ ------
Raw materials and subassemblies $ 6,813 $6,163
Finished goods 3,432 3,309
------ ------
$10,245 $9,472
====== =====
Note 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the three months ended
May 31, 2002 are as follows:
Balance as of February 28, 2002 $ 3,287
Goodwill acquired in April 2002 17,625
-------
Balance as of May 31, 2002 $ 20,912
=======
All goodwill is associated with the Company's Satellite business segment.
For the three months ended May 31, 2001, pro forma net income and
earnings per share excluding goodwill amortization expense is as follows:
Net income as reported $ 71,000
Add back goodwill amortization 73,000
-------
Pro forma net income as adjusted $144,000
=======
Basic earnings per share:
As reported $.01
Pro forma as adjusted $.01
Diluted earnings per share:
As reported $.01
Pro forma as adjusted $.01
At May 31, 2002, the gross carrying amount and accumulated amortization
of covenants not to compete acquired in conjunction with the Kaul-Tronics
purchase (Note 2) was $400,000 and $18,000, respectively. The covenants not
to compete, which are included in Other Assets in the accompanying condensed
consolidated balance sheet at May 31, 2002, are being amortized on a straight-
line basis over a weighted average life of approximately 4.1 years.
Note 5 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution, using the treasury stock method, that could occur if
securities or other contracts to issue Common Stock were exercised or
converted into Common Stock or resulted in the issuance of Common Stock that
then shared in the earnings of the Company.
Common stock equivalents used in the determination of diluted earnings
per share include the effect, when such effect is not antidilutive, of the
Company's outstanding employee stock options. The following is a summary of
the calculation of weighted average shares used in the computation of basic
and diluted earnings per share (in thousands):
Three months ended
May 31,
----------------
2002 2001
------ ------
Weighted average number of
common shares outstanding 14,251 13,601
Shares issuable for legal
settlement 122 122
------ ------
Basic weighted average number
of common shares outstanding 14,373 13,723
Effect of dilutive securities:
Stock options 383 235
------ ------
Diluted weighted average number
of common shares outstanding 14,756 13,958
====== ======
Options to purchase approximately 774,000 shares of Common Stock at
prices ranging from $6.53 to $50.56 were outstanding at May 31, 2002 but
were not included in the computation of diluted earnings per share for the
three months then ended because the exercise price of these options was
greater than the average market price of the Common Stock and accordingly
the effect of inclusion would be antidilutive. For the same reason, options
outstanding at May 31, 2001 to purchase approximately 918,000 shares of
Common Stock at prices ranging from $5.69 to $50.56 were excluded from the
computation of diluted earnings per share for the three months then ended.
Note 6 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income is defined as the total of net income and all non-
owner changes in equity. The following table details the components of
comprehensive income (loss) for the three months ended May 31, 2002 and 2001
(in thousands):
Three months ended
May 31,
----------------
2002 2001
------ ------
Net income $1,466 $ 71
Change in valuation allowance for
available-for-sale investments (174) -
Foreign currency translation
adjustments - (84)
------ ------
Comprehensive income (loss) $1,292 $ (13)
====== ======
Note 7 - CONCENTRATION OF RISK
A significant percentage of sales and accounts receivable relate to a
small number of customers, as summarized below.
Sales to significant customers as a percent of consolidated sales are
as follows:
Three months ended
May 31,
-----------------
Customer 2002 2001
-------- ------ ------
A 50.6% 10.1%
B 5.4% 35.2%
C - 21.7%
D .3% 16.9%
E 5.9% -
Accounts receivable from significant customers as a percent of
consolidated net accounts receivable are as follows:
May 31, Feb. 28,
2002 2002
------ -----
A 47.2% 39.6%
B 1.0% 30.0%
C - -
D - 8.5%
E 13.0% -
Customers A, B, D and E are Satellite customers, while C is a Wireless
Access customer.
Note 8 - SEGMENT INFORMATION
The Company currently manages its business under two identifiable
business segments: Satellite products and Wireless Access products. Segment
information for the three months ended May 31, 2002 and 2001 is as follows
(in thousands):
Three months ended May 31, 2002:
Wireless General
Satellite Access Corporate Total
-------- -------- -------- -------
Sales $19,474 $ 3,008 $22,482
Gross profit $ 4,828 $ 1,016 $ 5,844
Gross margin 24.8% 33.8% 26.0%
Income (loss) from continuing
operations before income taxes $ 3,731 $ (318) $(1,051) $ 2,362
Three months ended May 31, 2001:
Wireless General
Satellite Access Corporate Total
-------- -------- -------- -------
Sales $14,285 $ 6,517 $20,802
Gross profit $ 2,340 $ 2,439 $ 4,779
Gross margin 16.4% 37.4% 23.0%
Income (loss) from continuing
operations before income taxes $ 1,474 $ 1,011 $(2,354) $ 131
Note 9 - LEGAL MATTERS
Yourish class action and RLI Insurance Company litigation:
On March 29, 2000 the Company and the individual defendants (certain
present and former officers and directors of the Company) reached a
settlement in the matter entitled Yourish v. California Amplifier, Inc., et
al., Case No. CIV 173569 shortly after trial commenced in the Superior Court
for the State of California, County of Ventura. The terms of the settlement
called for the issuance by the Company of 187,500 shares of stock along with
a cash payment of $3.5 million, funded in part by insurance proceeds, for a
total settlement valued at approximately $11.0 million. Of the total
settlement, $9.5 million was accrued in the consolidated financial
statements for the year ended February 28, 2000, and the remaining $1.5
million was expected to be funded by the Company's director and officer
liability insurance carriers. The common stock portion of the settlement
was originally accrued at $7.5 million, or $40 per share, which share price
was based on the trading range of the Company's common stock at the time the
settlement agreement was reached. By Order dated September 14, 2000, the
Court approved the terms of the settlement and dismissed the action with
prejudice.
Upon approval of the settlement agreement by the Court, in September
2000 the Company issued 65,625 of the 187,500 shares of common stock and
paid $2.5 million of the $3.5 million cash portion of the settlement.
T.I.G. Insurance Company ("T.I.G."), one of the Company's liability
insurance carriers, paid the remaining $1 million.
The fair value of the Company's common stock on September 14, 2000, the
date the settlement agreement was approved by the court, was $33.063 per
share. Accordingly, at that time the Company reduced its litigation accrual
by $1.3 million to revalue the common stock portion of the settlement at
$33.063 per share instead of $40 per share. Also in September 2000, the
Company accrued $500,000 for additional legal expenses associated with this
litigation which had not been previously accrued, and accrued $800,000 for a
refund contingently payable to T.I.G., which had contributed $1 million to
the settlement under a reservation of rights.
In March 2002, T.I.G. notified the Company that it intends to seek a
refund of its $1 million settlement contribution made under a reservation of
rights. As discussed above, the Company had previously accrued a reserve of
$800,000 for the refund contingently payable to T.I.G. Consequently, at
February 28, 2002 the Company accrued an additional $200,000 for the
contingent refund payable to T.I.G.
The Company's condensed consolidated balance sheet at May 31, 2002
includes an accrued liability of $5.0 million related to the Yourish
settlement, which amount represents the remaining 121,875 shares still to be
issued, valued at $33.063 per share, and the $1 million reserved for the
contingent refund payable to T.I.G. Pursuant to the terms of the court-
approved settlement, the Company cannot issue the remaining shares of
common stock under the settlement until instructions are received from
plaintiffs' counsel.
2001 securities litigation and shareholder derivative lawsuit:
Following the announcement by the Company on March 29, 2001 of the
resignation of its controller and the possible overstatement of net income
for the fiscal year ended February 28, 2000 and the subsequent restatement
of the Company's financial statements for fiscal year 2000 and the interim
periods of fiscal years 2000 and 2001, the Company and certain officers were
named as defendants in twenty putative actions in Federal Court. Caption
information for each of the lawsuits is set forth in Item 3 of the Company's
Form 10-K for the fiscal year ended February 28, 2001. On June 18, 2001,
the twenty actions were consolidated into a single action pursuant to
stipulation of the parties, and lead plaintiffs' counsel was appointed.
In July 2001, all of the current directors of the Company were named as
defendants in the above-entitled shareholder derivative lawsuit filed in Los
Angeles Superior Court. The Company was named as a nominal defendant. The
complaint alleged claims against the directors for breach of fiduciary duty,
abuse of control and gross mismanagement, arising out of the Company's
restatement of earnings for fiscal year 2000 and portions of fiscal year
2001.
In October 2001, the insurance company that provides the Company's
primary director and officer liability coverage applicable to the above
matters filed a lawsuit seeking to rescind the policy on the grounds that
there was a misstatement in the policy application that incorporated by
reference the Company's financial statements prior to their restatement.
In December 2001, the parties reached an agreement to settle both the
class action litigation and the shareholder derivative lawsuit for the
aggregate sum of $1.5 million, subject to final Court approval. Of this
amount, the Company's primary directors and officers liability insurance
carrier agreed to contribute $575,000 toward the settlement, which amount
was paid in December 2001, and agreed to withdraw its policy rescission
lawsuit. The Company accrued its $925,000 share of the settlement in the
fiscal year ended February 28, 2002. Of this amount, $425,000 was paid by
the Company in December 2001, and the remaining $500,000 is to be paid once
the Court approves the settlement. At the Company's option, this final
settlement installment of $500,000 may be paid in the form of cash or Common
Stock. The Stipulation of Settlement seeking preliminary Court approval of
the settlement was filed with the Court in May 2002. The Court granted its
preliminary approval on June 6, 2002, ordered that notice be given to the
class and scheduled a hearing date on October 7, 2002 for final approval of
the settlement agreement.
Investigation by the Securities and Exchange Commission:
In May 2001, the Company announced that it had received notice from the
Securities and Exchange Commission (SEC) that the SEC was conducting an
informal inquiry into the circumstances that caused the Company to announce
that it would be restating earnings for fiscal year 2000 and certain interim
quarters of fiscal year 2001. Subsequently, the Company learned that the
SEC adopted an order directing a private investigation and designating
officers to take testimony. The Company has provided the SEC with documents
and testimony and expects to continue cooperating with the SEC in connection
with its investigation.
Note 10 - NEW AUTHORITATIVE PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Accounting for
Business Combinations" ("SFAS 141"). SFAS 141 establishes accounting and
reporting standards for business combinations initiated after June 30, 2001.
It requires that all business combinations use the Purchase Method of
Accounting. Goodwill will continue to be initially recognized as an asset
in the financial statements and goodwill will be measured as the excess of
the cost of an acquired entity over the fair value amounts assigned to
assets acquired and liabilities assumed. An intangible asset acquired in a
business combination is recognized as an asset apart from goodwill if that
asset arises from contractual or other legal rights. The provisions of SFAS
141 are required to be applied starting with fiscal years beginning after
December 15, 2001. The Company adopted SFAS 141 on March 3, 2002 (i.e., the
first day of fiscal 2003). The adoption of SFAS 141 will not have a material
effect on the Company's results of operations, financial position or
liquidity.
In July 2001, the FASB also issued Statement of Financial Accounting
Standards No. 142, "Accounting for Goodwill and Intangible Assets" ("SFAS
142"). Under SFAS 142, goodwill is no longer amortized but rather is tested
for impairment at least annually at the reporting unit level. A recognized
intangible asset is amortized over its useful life and reviewed for
impairment in accordance with SFAS 144 (see below). A recognized intangible
asset with an indefinite useful life is not amortized until its life is
determined to be finite. The provisions of SFAS 142 are required to be
applied starting with fiscal years beginning after December 15, 2001. The
Company adopted SFAS 142 on March 3, 2002. As a result of adopting SFAS
142, beginning in fiscal 2003 the Company no longer records amortization on
goodwill of approximately $270,000 per year.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS
143"). SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs and applies to all entities. It
applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/or
the normal operation of a long-lived asset, except for certain obligations
of lessees. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company plans on adopting
SFAS 143 in March 2003. The Company believes that the adoption of SFAS 143
will not have a material effect on the Company's results of operations,
financial position or liquidity.
In August 2001, the FASB also issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. SFAS 144 establishes a
single accounting model, based on the framework established in Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"),
for long-lived assets to be disposed of by sale. SFAS 121 did not address
the accounting for a segment of a business accounted for as a discontinued
operation under APB Opinion No. 30, "Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
("APB 30") so two accounting models existed for the disposal of long-lived
assets. SFAS 144 replaces both SFAS 121 and APB 30, so that only one
accounting model exists for the disposal of long-lived assets. SFAS 144
also resolves implementation issues related to SFAS 121. The provisions of
SFAS 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The provisions of SFAS 144 are to be
applied prospectively. The Company adopted SFAS 144 on March 3, 2002. The
adoption of SFAS 144 did not have a material effect on the Company's results
of operations, financial position or liquidity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's condensed consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of sales and expenses
during the reporting periods. Areas where significant judgments are made
include, but are not limited to: allowance for doubtful accounts, inventory
valuation, product warranties and the deferred tax asset valuation
allowance. Actual results could differ materially from these estimates.
Allowance for Doubtful Accounts
The Company establishes an allowance for estimated bad debts based upon
a review and evaluation of specific customer accounts identified as known
and expected collection problems, based on historical experience, due to
insolvency, disputes or other collection issues. As further described in
Note 7 to the accompanying condensed consolidated financial statements, the
Company's customer base is quite concentrated, with three customers
accounting for approximately 62% of the Company's sales in the three months
ending May 31, 2002. Changes in either a key customer's financial position,
or the economy as a whole, could cause actual write-offs to be materially
different from the recorded allowance amount.
Inventories
The Company evaluates the carrying value of inventory on a quarterly
basis to determine if the carrying value is recoverable at estimated selling
prices. To the extent that estimated selling prices do not exceed the
associated carrying values, inventory carrying amounts are written down. In
addition, the Company generally considers that inventory on hand or
committed with suppliers, which is not expected to be sold within the next
12 months, as excess and thus appropriate write-downs of the inventory
carrying amounts are established through a charge to cost of sales.
Estimated usage in the next 12 months is based on firm demand represented by
orders in backlog at the end of the quarter and management's estimate of
sales beyond existing backlog, giving consideration to customers' forecasted
demand, ordering patterns and product life cycles. Significant reductions
in product pricing, or changes in technology and/or demand may necessitate
additional write-downs of inventory carrying value in the future.
Product Warranties
The Company provides for the estimated cost of product warranties at
the time revenue is recognized. While it engages in extensive product
quality programs and processes, including actively monitoring and evaluating
the quality of its component suppliers, the Company's warranty obligation is
affected by product failure rates and material usage and service delivery
costs incurred in correcting a product failure. Should actual product
failure rates, material usage or service delivery costs differ from
management's estimates, revisions to the estimated warranty liability would
be required.
Deferred Income Tax Asset Valuation Allowance
The deferred income tax asset reflects the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
A deferred income tax asset is recognized if realization of such asset is
more likely than not, based upon the weight of available evidence which
includes historical operating performance and the Company's forecast of
future operating performance. The Company evaluates the realizability of
its deferred income tax asset on a quarterly basis, and a valuation
allowance is provided, as necessary. During this evaluation, the Company
reviews its forecasts of income in conjunction with the positive and
negative evidence surrounding the realizability of its deferred income tax
asset to determine if a valuation allowance is needed. If in the future a
portion or all of the valuation allowance is no longer deemed to be
necessary, reductions of the valuation allowance will either increase
additional paid-in capital or decrease the income tax provision, depending
on the nature of the underlying deferred tax asset. Alternatively, if in
the future the Company were unable to support the recovery of its net
deferred income tax asset, it would be required to provide an additional
valuation allowance for all or a portion of the net deferred income tax
asset, which would increase the income tax provision. At May 31, 2002, the
Company's net deferred income tax asset was $4,435,000, which amount is net
of a valuation allowance of $7,133,000. Approximately $4.0 million of the
valuation allowance at May 31, 2002 is related to a tax asset generated upon
the exercise of non-qualified stock options and, in general, these are the
tax benefits which are being recognized first. Any future reduction of this
portion of the valuation allowance will result in the tax benefit being
recorded as an increase in additional paid-in capital. If and when this
portion of the valuation allowance is completely eliminated, any further
reductions of the valuation allowance will be recognized as an income tax
benefit.
RESULTS OF OPERATIONS
Sales
Total sales for the three months ended May 31, 2002 were $22,482,000,
compared to $20,802,000 for the same period in the previous fiscal year.
Sales of Satellite products increased $5,189,000, or 36%, from $14,285,000
to $19,474,000. Sales of Wireless Access products decreased $3,509,000, or
54%, from $6,517,000 to $3,008,000.
Sales of the Satellite segment increased primarily as a result of the
acquisition of the Kaul-Tronics satellite antenna business on April 5, 2002,
as further described in Note 2 to the accompanying financial statements.
The Kaul-Tronics business generated approximately $3 million of revenues for
the Satellite business segment during April and May 2002.
The decline in sales of Wireless Access products compared to the prior
year is attributable to a combination of the general slowdown in capital
spending in the telecommunications industry and the anticipation of second
generation non-line of sight products. Although Wireless Access sales in
the latest quarter increased 10% on a sequential quarter basis, the Company
does not anticipate that its Wireless Access sales will increase appreciably
until the development of second generation non-line of sight two-way
transceiver products is completed, and until wireless access service
providers resume the expansion of their subscriber bases.
Gross Profit and Gross Margins
Gross profit for the three months ended May 31, 2002 was $5,844,000, up
22% from $4,779,000 for the comparable period of the prior year.
Consolidated gross margin increased from 23.0% to 26.7%. The increase in
consolidated gross margin is attributable primarily to higher gross margins
for Satellite products.
Gross margin for Satellite products improved to 24.8% in the three
months ended May 31, 2002 from 16.4% in the first three months of last
fiscal year. Satellite gross margin improved primarily because of a more
favorable mix of Satellite products and higher sales volume, which resulted
in improved manufacturing efficiencies compared to the first quarter of last
year.
Gross margin for Wireless Access products declined to 33.8% in the
three months ended May 31, 2002, from 37.4% in the first three months of
last fiscal year. The Wireless Access gross margin declined principally due
to the decline in sales as discussed above.
See also Note 8 to the accompanying unaudited condensed consolidated
financial statements for additional operating data by business segment.
Operating Expenses
Research and development expense increased slightly to $1,701,000 in
the latest quarter from $1,661,000 last year. Selling expense increased by
15% from $634,000 in the three months ended May 31, 2001 to $730,000 in the
three months ended May 31, 2002 due primarily to the acquisition of the
Kaul-Tronics business in early April 2002.
General and administrative expense of $1,050,000 in the latest quarter
decreased 55% from $2,343,000 in the first quarter of last year. This
decrease was due primarily to expenses of $950,000 incurred in last year's
first quarter in connection with the restatement of the Company's fiscal
2000 and fiscal 2001 interim financial statements. Also contributing to the
decrease is the fact that general and administrative expense in the latest
quarter includes a gain of $148,000 on sale of equipment.
Non-operating Expense, Net
Non-operating expense, net declined from $10,000 in the first quarter
of last year to $1,000 in the latest quarter.
Income from Continuing Operations Before Income Taxes
Income from continuing operations before income taxes in the latest
quarter was $2,362,000 compared to $131,000 in the first quarter of last
year. This increase is primarily attributable to the $1,065,000 increase in
gross profit and the $1,145,000 decrease in general and administrative
expenses, as discussed above.
Income Tax Provision
The effective income tax rate was 37.9% and 30.5% in the three months
ended May 31, 2002 and 2001, respectively.
During the three months ended May 31, 2002, the Company recognized
income tax benefits of $1,591,000 associated with tax deductions on non-
qualified employee stock options which were exercised in prior years. These
tax benefits were recognized by reducing the deferred tax asset valuation
allowance by $1,591,000, with a corresponding increase in additional paid-in
capital. The deferred tax asset valuation allowance was established in
fiscal years 2000 and 2001, years during which a significant number of non-
qualified stock options were exercised, because management believed at the
time that it did not have the basis to conclude that it was more likely than
not that the deferred tax benefits arising from the stock option tax
deductions would be realized in the future. Based on profitable operations
in fiscal 2002 and in the first quarter of fiscal 2003, and on management's
internal forecast of expected operating results over the next several
quarters, management believes it is more likely than not that the Company
will generate sufficient taxable income in the future to utilize deferred
tax benefits of $4,435,000, and accordingly the deferred tax asset valuation
allowance was reduced during the latest quarter as discussed above.
Net Income
Net income, for reasons outlined above, increased from $71,000 in the
first quarter of last year to $1,466,000 in the latest quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $19,604,000 at May 31, 2002, and its working
capital line of credit with a bank. During the three months ended May 31,
2002, cash and cash equivalents declined by $3,552,000. This decrease
consisted of cash used for the acquisition of Kaul-Tronics of $16,588,000,
partially offset by the $12 million proceeds from a new bank term loan, cash
provided by operating activities of $1,030,000, and all other activity
during the quarter which had a net cash inflow effect of $6,000.
Components of operating working capital increased by $1,886,000 during
the three months ended May 31, 2002 comprised of a $2,036,000 increase in
accounts receivable, partially offset by a net decrease of $150,000 in all
other components of operating working capital.
The Company believes that inflation and foreign currency exchange rates
have not had a material effect on its operations. The Company believes that
fiscal year 2003 will not be impacted significantly by foreign exchange
since a significant portion of the Company's sales are to U.S. markets, or
to international markets where its sales are denominated in U.S. dollars.
In April 2002, the Company's working capital line of credit with its
bank was increased from $8 million to $13 million. In that same month, the
Company borrowed $12 million on the working capital line to partially fund
the acquisition of Kaul-Tronics. In addition, the Company used
approximately $4.6 million of its existing cash and issued 929,086 shares of
its common stock to pay for the Kaul-Tronics acquisition. In May 2002, the
$12 million outstanding balance on the working capital line of credit was
repaid in full from the proceeds of a new $12 million bank term loan. Also,
the maturity date of the working capital line was extended from August 2,
2002 to August 2, 2005. At May 31, 2002 and at the present time, there are
no outstanding borrowings under the $13 million working capital line of
credit. Of this amount, $12 million is available for borrowing and the
remaining $1 million of the working capital line is reserved for an
outstanding standby letter of credit.
The $12 million bank term loan bears interest at LIBOR plus 2.0% or the
bank's prime rate. Future maturities of this new term loan are $200,000 per
month, or $2.4 million annually, beginning in April 2003 and continuing
through March 2008.
At May 31, 2002, the Company had contractual cash obligations,
consisting of future maturities of debt (including the $12 million term loan
referred to above) and operating lease commitments, of approximately
$1,250,000 during the remainder of fiscal 2003, amounts in fiscal years 2004
through fiscal 2008 ranging from $2.4 million to $3.9 million annually, and
$200,000 in fiscal 2009, for a grand total of $17.7 million.
The Company believes that cash flow from operations, together with
amounts available under its working capital line of credit, are sufficient
to support operations, fund capital equipment requirements and discharge
contractual cash obligations over the next twelve months.
NEW AUTHORITATIVE PRONOUNCEMENTS
Reference is made to Note 10 of the accompanying unaudited condensed
consolidated financial statements for a description of new authoritative
accounting pronouncements.
SAFE HARBOR STATEMENT
Forward looking statements in this 10-Q which include, without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, projections and other information
regarding future performance, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
words "believes," "anticipates," "expects," and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements reflect the Company's current views with respect to future events
and financial performance and are subject to certain risks and
uncertainties, including, without limitation, lack of product
diversification, dependence upon a small number of customers, highly
competitive markets, rapid technology changes affecting the Company's
wireless access business, and other risks and uncertainties that are
described under the heading "Risk Factors" in the Company's Annual Report on
Form 10-K as filed with the Securities and Exchange Commission ("SEC") on
May 31, 2002, copies of which may be obtained from the Company upon request,
or directly from the SEC's website at http://www.sec.gov/. Such risks and
uncertainties could cause future results to differ materially from
historical results or from results presently anticipated. Although the
Company believes the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, it can give no assurance
that its expectations will be attained. The Company undertakes no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash equivalents, accounts
receivable, accounts payable and bank term loans payable. At May 31, 2002,
the carrying values of cash equivalents, accounts receivable and accounts
payable approximate fair values given the short maturity of these
instruments.
The carrying value of bank term loans payable approximates fair value
since the interest rates on these loans approximate the interest rates which
are currently available to the Company for the issuance of debt with similar
provisions and maturities. Based on the amount of bank debt outstanding at
May 31, 2002, a change in interest rates of one percent would result in an
annual impact of approximately $100,000, net of tax, on the Company's
consolidated statement of income.
A portion of the Company's operations consists of investments in
foreign subsidiaries. As a result, the consolidated financial results have
been and could continue to be affected by changes in foreign currency
exchange rates. However, the Company believes that it does not have
material foreign currency exchange rate risk since a significant portion of
the Company's sales are to U.S. markets, or to international markets where
its sales are denominated in U.S. dollars, and material purchases from
foreign suppliers are typically also denominated in U.S. dollars.
Additionally, the functional currency of the Company's foreign subsidiaries
is the U.S. dollar.
It is the Company's policy not to enter into derivative financial
instruments for speculative purposes. Furthermore, the Company generally
does not enter into foreign currency forward exchange contracts. There are
no foreign currency forward exchange contracts outstanding at May 31, 2002.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 8 to the accompanying condensed consolidated financial
statements for a description of pending legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
On April 19, 2002, a Form 8-K was filed which disclosed a change in the
Company's certifying public accountant.
On April 22, 2002, a Form 8-K was filed which disclosed the acquisition
of substantially all of the assets, properties and business of Kaul-
Tronics, Inc. and two affiliated companies.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
July 16, 2002 /s/ Richard K. Vitelle
- --------------------------------- -----------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer)