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: November 30, 2002
-----------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------- ------------
Commission File Number: 0-12182
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 14,722,812 shares of Common Stock outstanding as of
December 16, 2002.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except par value amounts)
November 30, February 28,
2002 2002
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 27,048 $ 23,156
Accounts receivable, less allowance for doubtful
accounts of $364 and $417, respectively 9,714 8,219
Inventories, net 11,090 9,472
Deferred income tax assets 5,053 3,580
Prepaid expenses and other current assets 922 1,312
-------- --------
Total current assets 53,827 45,739
Property and equipment, at cost, net of
accumulated depreciation and amortization 9,566 7,375
Goodwill 20,992 3,287
Deferred income tax assets, less current portion 1,677 -
Other assets 856 287
-------- --------
$ 86,918 $ 56,688
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,382 $ 917
Accounts payable 9,511 5,713
Accrued payroll and employee benefits 2,055 1,870
Other accrued liabilities 2,436 6,980
-------- --------
Total current liabilities 16,384 15,480
-------- --------
Long-term debt, less current portion 13,438 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; 14,722 and 13,630 shares issued
and outstanding, respectively 147 136
Additional paid-in capital 43,146 27,569
Retained earnings 14,865 10,676
Accumulated other comprehensive loss (1,062) (801)
-------- --------
Total stockholders' equity 57,096 37,580
-------- --------
$ 86,918 $ 56,688
======== ========
See notes to unaudited consolidated financial statements.
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands except per share amounts)
Three Months Ended Nine Months Ended
November 30, November 30,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Sales $23,965 $32,756 $73,973 $78,212
Cost of goods sold 19,587 25,210 57,396 59,735
------- ------- ------- -------
Gross profit 4,378 7,546 16,577 18,477
------- ------- ------- -------
Operating expenses:
Research and development 1,391 2,276 4,815 5,996
Selling 469 622 1,943 1,848
General and administrative 902 1,739 3,004 6,857
------- ------- ------- -------
Total operating expenses 2,762 4,637 9,762 14,701
------- ------- ------- -------
Operating income 1,616 2,909 6,815 3,776
Litigation settlement - (925) - (925)
Other income (expense), net (79) (4) (159) (3)
------- ------- ------- -------
Income from continuing operations
before income taxes 1,537 1,980 6,656 2,848
Income tax provision (632) (628) (2,467) (940)
------- ------- ------- -------
Income from continuing operations 905 1,352 4,189 1,908
Loss from discontinued
operations, net of tax - - - (25)
Gain on sale of discontinued
operations, net of tax - - - 1,615
------- ------- ------- -------
Net income $ 905 $ 1,352 $ 4,189 $ 3,498
======= ======= ======= =======
Basic earnings per share:
Continuing operations $ 0.06 $ 0.10 $ 0.29 $ 0.14
Discontinued operation - - - 0.12
------- ------- ------- -------
$ 0.06 $ 0.10 $ 0.29 $ 0.26
======= ======= ======= =======
Diluted earnings per share:
Continuing operations $ 0.06 $ 0.10 $ 0.28 $ 0.14
Discontinued operation - - - 0.11
------- ------- ------- -------
$ 0.06 $ 0.10 $ 0.28 $ 0.25
======= ======= ======= =======
Shares used in per share
calculations:
Basic 14,720 13,724 14,605 13,723
Diluted 14,850 13,906 14,840 13,955
See notes to unaudited consolidated financial statements.
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
November 30,
---------------------
2002 2001
------- -------
Cash flows from operating activities:
Net income $ 4,189 $ 3,498
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,728 2,800
Gain on sale of equipment (150) -
Increase in equity associated with tax
benefit from exercise of stock options 5,395 1,823
Deferred tax assets, net (3,150) (939)
Gain on sale of discontinued operations - (1,615)
Changes in operating assets and liabilities:
Accounts receivable (1,495) (4,199)
Inventories (588) (871)
Prepaid expenses and other assets (122) 142
Accounts payable 3,798 6,726
Accrued payroll and other accrued liabilities (823) 1,005
------- -------
Net cash provided by operating activities 9,782 8,370
------- -------
Cash flows from investing activities:
Capital expenditures (987) (1,173)
Proceeds from sale of property and equipment 301 14
Acquisition of Kaul-Tronics (16,588) -
Net proceeds from sale of discontinued operation - 3,231
------- -------
Net cash provided by (used in) investing activities (17,274) 2,072
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 12,000 -
Repayments of long-term debt (725) (347)
Proceeds from exercise of stock options 109 6
------- -------
Net cash provided by (used in) financing activities 11,384 (341)
------- -------
Effect of foreign exchange rate changes - (67)
------- -------
Net change in cash and cash equivalents 3,892 10,034
Cash and cash equivalents at beginning of period 23,156 9,778
------- -------
Cash and cash equivalents at end of period $27,048 $19,812
======= =======
Supplemental cash flow information:
Interest paid $ 430 $ 248
Income taxes paid $ 209 $ 282
Non-cash investing and financing activities:
Issuance of common stock as partial consideration
for acquisition of Kaul-Tronics $ 6,054 -
Issuance of common stock to reduce
accrued liability $ 4,030 -
See notes to unaudited consolidated financial statements.
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended November 30, 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 consolidated financial statements reflect all adjustments
necessary to present fairly the Company's financial position at November 30,
2002 and its results of operations for the three and nine months ended
November 30, 2002 and 2001. The results of operations 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 November 30, 2002 and December 1, 2001.
In the accompanying consolidated financial statements, the 2002 fiscal year
end is shown as February 28 and the interim period end for both years is
shown as November 30 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 ("LNBFs")
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 LNBFs 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 $17,705,000, 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 six trading day 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 3,998
Non-compete agreements 400
Accrued liabilities assumed (495)
-------
Total fair value of net assets acquired 4,937
-------
Goodwill $17,705
=======
Pursuant to the provisions of Statement of Financial Accounting
Standards No. 142, "Accounting for Goodwill and Intangible Assets" ("SFAS
142"), 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 taxes.
The following pro forma information is presented as if the acquisition
had occurred at the beginning of each of the respective periods (in
thousands):
Nine Months Ended Nine Months Ended
November 30, 2002 November 30, 2001
------------------- -------------------
As Pro As Pro
reported forma reported forma
-------- -------- -------- --------
Sales $73,973 $76,600 $78,212 $110,699
Income from continuing
operations $ 4,189 $ 4,336 $ 1,908 $ 4,460
Income from continuing
operations per share:
Basic $ .29 $ .29 $ .14 $ .31
Diluted $ .28 $ .29 $ .14 $ .30
The "as reported" amounts for the nine months ended November 30, 2002
include the operating results of Kaul-Tronics for the eight months since the
April 5, 2002 acquisition date. Pro forma adjustments for the nine month
period ended November 30, 2002 consist mainly of adding Kaul-Tronics'
results for the month of March 2002. Because Kaul-Tronics had a different
fiscal year-end than the Company, pro forma adjustments for the nine months
ended November 30, 2001 include Kaul-Tronics' results for the nine months
ended December 30, 2001.
Note 3 - INVENTORIES
Inventories include the cost of material, labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in,
first-out method) or market, and consist of the following (in thousands):
November 30, February 28,
2002 2002
------ ------
Raw materials and subassemblies $ 8,888 $6,163
Finished goods 2,202 3,309
------ ------
$11,090 $9,472
====== =====
Note 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine months ended
November 30, 2002 are as follows (in thousands):
Balance as of February 28, 2002 $ 3,287
Goodwill acquired in April 2002 17,705
-------
Balance as of November 30, 2002 $ 20,992
=======
All goodwill is associated with the Company's Satellite business segment.
As a result of adopting SFAS 142 at the beginning of fiscal 2003, the
Company no longer records amortization on goodwill. Goodwill acquired in
fiscal 2000 was, prior to fiscal 2003, being amortized at the rate of
approximately $270,000 per year. For the three and nine months ended
November 30, 2001, income from continuing operations and income from
continuing operations per share adjusted to exclude goodwill amortization
expense is as follows (in thousands except per share amounts):
Periods ended
November 30, 2001
-----------------------
Three Nine
months months
-------- -------
Income from continuing
operations as reported $1,352 $1,908
Add back goodwill amortization 57 203
----- -----
Income from continuing
operations as adjusted $1,409 $2,111
===== =====
Income from continuing
operations per share:
Basic -
As reported $.10 $.14
As adjusted $.10 $.15
Diluted -
As reported $.10 $.14
As adjusted $.10 $.15
At November 30, 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 $70,000, respectively. The
covenants not to compete, which are included in Other Assets in the
accompanying consolidated balance sheet at November 30, 2002, are being
amortized on a straight-line basis over a weighted average life of
approximately 4.1 years.
Note 5 - INCOME TAXES
The effective income tax rate was 41.1% and 31.7% in the three months
ended November 30, 2002 and 2001, respectively. The increase in effective
tax rate is attributable primarily to changes in the effective tax rate on
foreign operations. For the nine month period, the effective income tax
rate was 37.1% and 33.0% in 2002 and 2001, respectively.
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.
At February 28, 2002, the deferred tax asset valuation allowance was
$8,724,000. Of this amount, approximately $5.6 million represented reserved
tax benefits associated with the exercise of non-qualified stock options in
years prior to fiscal 2002 and, in general, these are the tax benefits which
are being recognized first.
Based on profitable operations in fiscal 2002 and in the first nine
months of fiscal 2003, and on management's internal forecast of future
operating results, management believes it is more likely than not that the
Company will generate sufficient taxable income in the future to utilize
deferred tax assets of $6,730,000, and accordingly the deferred tax asset
valuation allowance was reduced by $5,395,000 during the latest nine month
period with a corresponding increase in additional paid-in capital. At
November 30, 2002, the current and non-current portions of the deferred tax
assets were $5,053,000 and $1,677,000, respectively.
Note 6 - 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. In computing diluted earnings
per share, the treasury stock method assumes that outstanding options are
exercised and the proceeds are used to purchase common stock at the average
market price during the period. Options will have a dilutive effect under
the treasury stock method only when the average market price of the common
stock during the period exceeds the exercise price of the 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 Nine months ended
November 30, November 30,
---------------- ----------------
2002 2001 2002 2001
------ ------ ------ ------
Weighted average number of
common shares outstanding 14,720 13,602 14,541 13,601
Shares issuable for legal
settlement - 122 64 122
------ ------ ------ ------
Basic weighted average number
of common shares outstanding 14,720 13,724 14,605 13,723
Effect of dilutive securities:
Stock options 130 182 235 232
------ ------ ------ ------
Diluted weighted average number
of common shares outstanding 14,850 13,906 14,840 13,955
====== ====== ====== ======
Options to purchase approximately 1,976,000 shares of Common Stock at
prices ranging from $3.88 to $50.56 were outstanding at November 30, 2002
but were not included in the computation of diluted earnings per share for
the three and nine 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 November 30, 2001 to purchase approximately
1,320,000 shares of Common Stock at prices ranging from $4.52 to $50.56 were
excluded from the computation of diluted earnings per share for the three
and nine months then ended.
Note 7 - COMPREHENSIVE INCOME
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 for the three and nine months ended November 30, 2002
and 2001 (in thousands):
Three months ended Nine months ended
November 30, November 30,
---------------- ----------------
2002 2001 2002 2001
------ ------ ------ ------
Net income $ 905 $1,352 $4,189 $3,498
Change in valuation allowance for
available-for-sale investments (52) - (261) -
Foreign currency translation
adjustments - 62 - (67)
------ ------ ------ ------
Comprehensive income $ 853 $1,414 $3,928 $3,431
====== ====== ====== ======
Note 8 - CONCENTRATION OF RISK
A significant percentage of sales and accounts receivable relate to a
small number of customers, as summarized below. Customers A, B, D, E and F
are Satellite customers, while C is a Wireless Access customer.
Sales to significant customers as a percent of consolidated sales are
as follows:
Three months ended Nine months ended
November 30, November 30,
---------------- ----------------
Customer 2002 2001 2002 2001
-------- ------ ------ ------ ------
A 25.1% 12.4% 41.1% 21.2%
B 10.9% 10.4% 8.3% 30.5%
C - 6.6% - 16.6%
D .1% 4.3% .1% 13.2%
E 21.2% .3% 10.5% -
F 12.2% - 8.9% -
Accounts receivable from significant customers as a percent of
consolidated net accounts receivable are as follows:
Nov. 30, 2002 Feb. 28, 2002
-------- -------
A 24.6% 39.6%
B 19.0% 30.0%
C - -
D - 8.5%
E 18.3% 1.0%
F 25.7% -
Note 9 - SEGMENT INFORMATION
The Company currently manages its business under two identifiable
business segments: Satellite products and Wireless Access products. Segment
information for the three and nine months ended November 30, 2002 and 2001
is as follows (in thousands):
Three months ended November 30, 2002:
Wireless General
Satellite Access Corporate Total
------- ------ ------- -----
Sales $20,443 $ 3,522 $23,965
Gross profit $ 3,518 $ 860 $ 4,378
Gross margin 17.2% 24.4% 18.3%
Income (loss) from continuing
operations before income taxes $ 2,536 $ (18) $ (902) $ 1,616
Three months ended November 30, 2001:
Wireless General
Satellite Access Corporate Total
------- ------ ------- -----
Sales $26,120 $ 6,636 $32,756
Gross profit $ 5,846 $ 1,700 $ 7,546
Gross margin 22.4% 25.6% 23.0%
Income (loss) from continuing
operations before income taxes $ 4,608 $ 39 $(2,667) $ 1,980
Nine months ended November 30, 2002:
Wireless General
Satellite Access Corporate Total
------- ------ ------- -----
Sales $64,557 $ 9,416 $73,973
Gross profit $13,809 $ 2,768 $16,577
Gross margin 21.4% 29.4% 22.4%
Income (loss) from continuing
operations before income taxes $10,566 $ (747) $(3,163) $ 6,656
Nine months ended November 30, 2001:
Wireless General
Satellite Access Corporate Total
------- ------ ------- -----
Sales $59,135 $19,077 $78,212
Gross profit $12,088 $ 6,389 $18,477
Gross margin 20.4% 33.5% 23.6%
Income (loss) from continuing
operations before income taxes $ 9,044 $ 426 $(6,622) $ 2,848
Note 10 - LEGAL MATTERS
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 was paid in October
2002 upon the Court's 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
certain 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 11 - DISCONTINUED OPERATIONS
On July 31, 2001, the Company sold its 51% ownership interest in Micro
Pulse. The sale generated net cash proceeds of $3,231,000 and an after-tax
gain of $1,615,000.
Micro Pulse was the sole operating unit comprising the Company's Antenna
segment. Accordingly, operating results for Micro Pulse have been presented
in the accompanying consolidated statements of income as a discontinued
operation, and are summarized as follows (in thousands):
Period ended
November 30, 2001
-----------------
Three Nine
months months
------ ------
Sales $ - $2,556
====== ======
Operating loss $ - $ (105)
====== ======
Loss from discontinued
operations, net of tax $ - $ (25)
====== ======
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 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 8 to the accompanying consolidated financial statements, the Company's
customer base is quite concentrated, with four customers accounting for
approximately 88% of accounts receivable at November 30, 2002 and
approximately 69% of the Company's sales in the nine months then ended.
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 November 30, 2002,
the Company's net deferred income tax asset was $6,730,000, which amount is
net of a valuation allowance of $3,329,000. Approximately $180,000 of the
valuation allowance at November 30, 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 as the valuation allowance
is reduced. 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, further reductions of the valuation allowance would
be recognized as an income tax benefit.
RESULTS OF OPERATIONS
Sales
Total sales for the three months ended November 30, 2002 were
$23,965,000, compared to $32,756,000 for the same period in the previous
fiscal year. Sales of Satellite products decreased $5,677,000, or 22%, from
$26,120,000 to $20,443,000. Sales of Wireless Access products decreased
$3,114,000, or 47%, from $6,636,000 to $3,522,000. Third quarter sales of
the Satellite segment declined because of lower unit sales of low-noise
block feed (LNBF) downconverter/amplifier products caused by a delay in
obtaining customer approval of a new product and lower market demand for
mature LNBF products.
Total sales for the nine months ended November 30, 2002 decreased by
$4,239,000 from $78,212,000 to $73,973,000. Sales of Satellite products
increased $5,422,000, or 9%, from $59,135,000 to $64,557,000. Sales of
Wireless Access products decreased $9,661,000, or 51%, from $19,077,000 to
$9,416,000. For the nine-month periods, 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 acquired Kaul-Tronics
business accounted for approximately $6.5 million and $14 million of
Satellite segment sales during the three and nine months ended November 30,
2002, respectively.
The decline in sales of Wireless Access products in the latest three-
and nine month periods 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. 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 November 30, 2002 was
$4,378,000, down 42% from the $7,546,000 gross profit in the comparable
period of the prior year. The decline in gross profit in the latest quarter
is the result of production inefficiencies caused by delays in receiving
materials during and after the West Coast dockworkers lockout, lower unit
sales and lower average selling prices for mature LNBF products, and costs
associated with production ramp-up of new Satellite products. For the nine
month periods, gross profit decreased by $1,900,000, or 10%, to $16,577,000
in fiscal 2003 from $18,477,000 in fiscal 2002, primarily due to the factors
cited in the preceding sentence.
Gross margins for Satellite products declined to 17.2% and 21.4%,
respectively, in the three and nine months ended November 30, 2002, from
22.4% and 20.4%, respectively, in the third quarter and first nine months of
last fiscal year. Satellite gross margin declined primarily because of raw
steel price increases, production inefficiencies caused of the dockworkers
lockout, lower average selling prices of mature LNBF products, and costs
associated with production ramp-up of new Satellite products.
Gross margins for Wireless Access products declined to 24.4% and 29.4%,
respectively, in the three and nine months ended November 30, 2002, from
25.6% and 33.5%, respectively, in the third quarter and first nine months of
last fiscal year. Wireless Access gross margins declined principally due to
the decline in sales and a change in product mix.
See also Note 9 to the accompanying unaudited consolidated financial
statements for additional operating data by business segment.
Operating Expenses
Research and development expense decreased by $885,000, or 39%, from
$2,276,000 in the third quarter of last year to $1,391,000 in the latest
quarter. For the nine month year-to-date periods, research and development
expense decreased $1,181,000 from $5,996,000 last year to $4,815,000 this
year. These declines are primarily due to headcount reductions and a
reduced level of subcontracted product development costs of the Wireless
Access business segment in the current three- and nine-month periods
compared to the prior year. During the quarter ended August 31, 2002, the
Company cancelled a product development contract for broadband wireless
application specific integrated circuits (ASICs) because the market timing
of large scale deployment for this technology is uncertain in the near-term
future.
Selling expense decreased by 25% from $622,000 in the three months
ended November 30, 2001 to $469,000 in the three months ended November 30,
2002 due primarily to reductions in consulting expense and telecommunications
expense. For the nine month periods, selling expense increased 5% from
$1,848,000 last year to $1,943,000 this year. This increase was
attributable primarily to the acquisition of the Kaul-Tronics business in
early April 2002.
General and administrative expense in the latest quarter decreased 48%
to $902,000 from $1,739,000 in the third quarter of last year. This
decrease was due primarily to reductions in legal expense, consulting
expense, employee recruiting expense, and accrued incentive compensation
expense. For the nine month periods, general and administrative expenses
decreased by $3,853,000, or 56%, to $3,004,000 in 2002 from $6,857,000 in
2001. This decrease was primarily due to the aforementioned expense
reductions in the latest quarter, a bad debts provision of $1,162,000 in the
second quarter of last year, and expenses of $950,000 incurred in the first
quarter of last fiscal year in connection with the restatement of the
Company's fiscal year 2000 and fiscal year 2001 interim financial
statements.
Non-operating Expense, Net
Net non-operating expense declined from $929,000 in the third quarter
of last year to $79,000 in the latest quarter. Last year's amount included
a litigation settlement charge of $925,000. For the same reason, net non-
operating expense for the nine month periods declined from $928,000 in 2001
to $159,000 in 2002.
Income from Continuing Operations before Income Taxes
Income from continuing operations before income taxes in the latest
quarter was $1,537,000 compared to $1,980,000 in the third quarter of last
year. For the nine month periods, income from continuing operations before
income taxes was $6,656,000 in 2002 compared to $2,848,000 in 2001. This
increase is primarily attributable to the $3,853,000 decrease in general and
administrative expenses, the $1,181,000 reduction in research and
development expense and the $769,000 decrease in net non-operating expenses,
partially offset by a decline in gross profit of $1,900,000, all as
discussed above.
Income Taxes
The effective income tax rate was 41.1% and 31.7% in the three months
ended November 30, 2002 and 2001, respectively. The increase in effective
tax rate is attributable primarily to changes in the effective tax rate on
foreign operations. For the nine month period, the effective income tax
rate was 37.1% and 33.0% in 2002 and 2001, respectively.
During the three and nine months ended November 30, 2002, the Company
recognized income tax benefits of $2,423,000 and $5,395,000, respectively,
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 in the aggregate amount
of $5,395,000, with a corresponding increase in additional paid-in capital.
The major portion of the deferred tax asset valuation allowance was
established in fiscal 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 nine months of fiscal 2003, and
on management's internal forecast of future operating results, management
believes it is more likely than not that the Company will generate sufficient
taxable income in the future to utilize deferred tax assets of $6,730,000,
and accordingly the deferred tax asset valuation allowance was reduced by
$5,395,000 during the latest nine month period as described above.
Income from Continuing Operations
Income from continuing operations, for the reasons discussed above,
decreased from $1,352,000 in the third quarter of last year to $905,000 in
the latest quarter. For the nine month periods, income from continuing
operations increased from $1,908,000 last year to $4,189,000 this year.
Discontinued Operations
As described further in Note 11 to the accompanying unaudited
consolidated financial statements, the Company sold its 51% ownership
interest in Micro Pulse during the third quarter of last year. A gain of
$1,615,000 net of tax was recognized on this transaction.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $27,048,000 at November 30, 2002, and its
working capital line of credit with a bank. During the nine months ended
November 30, 2002, cash and cash equivalents increased by $3,892,000. This
increase consisted of the $12 million proceeds from a new bank term loan and
cash provided by operating activities of $9,782,000, offset by cash used for
the acquisition of Kaul-Tronics of $16,588,000, capital expenditures of
$987,000, and all other activity during the period which had a net cash
outflow effect of $315,000.
Components of operating working capital decreased by $770,000 during
the nine months ended November 30, 2002 comprised of an increase of
$3,798,000 in accounts payable, an increase of $1,495,000 in accounts
receivable, an increase of $588,000 in inventory, an increase of $122,000 in
prepaid expenses and other assets, and a decrease of $823,000 in accrued
payroll and other accrued liabilities.
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 $4.7 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 November 30, 2002 and at the present time, there
are no outstanding borrowings under the $13 million working capital line of
credit. Of this amount, $11.4 million is available for borrowing and the
remaining $1.6 million of the working capital line is reserved for two
outstanding standby letters 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 November 30, 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
$420,000 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 $16.9 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.
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 Registration
Statement on Form S-3 as filed with the SEC on August 30, 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 November 30,
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
November 30, 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 November 30,
2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required
to be included in the Company's periodic SEC filings.
(b) Changes in internal controls.
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10 to the accompanying consolidated financial statements for a
description of pending legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 99-1 - Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
b. Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three
months ended November 30, 2002.
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.
December 20, 2002 /s/ Richard K. Vitelle
- --------------------------------- -----------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Fred M. Sturm, Chief Executive Officer of California Amplifier, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of California
Amplifier, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within these entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
December 20, 2002 /s/ Fred M. Sturm
------------------------ -----------------------------
Date Fred M. Sturm
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Richard K. Vitelle, Chief Financial Officer of California Amplifier,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of California
Amplifier, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within these entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
December 20, 2002 /s/ Richard K. Vitelle
------------------------ -----------------------------
Date Richard K. Vitelle
Chief Financial Officer