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: August 31, 2003
_________________
[ ] 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The registrant had 14,749,112 shares of Common Stock outstanding as of
September 30, 2003.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except par value amounts)
August 31, February 28,
2003 2003
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 23,080 $ 21,947
Accounts receivable, less allowance for doubtful
accounts of $251 and $273, respectively 12,884 16,053
Inventories 11,700 12,862
Deferred income tax assets 2,846 1,130
Prepaid expenses and other current assets 1,387 1,100
-------- --------
Total current assets 51,897 53,092
Property and equipment, at cost, net of
accumulated depreciation and amortization 7,550 9,322
Deferred income tax assets, less current portion 3,973 5,400
Goodwill 20,938 20,938
Other assets 980 845
-------- --------
$ 85,338 $ 89,597
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 3,438 $ 3,005
Accounts payable 11,105 11,553
Accrued payroll and employee benefits 823 1,649
Other accrued liabilities 1,238 2,198
-------- --------
Total current liabilities 16,604 18,405
-------- --------
Long-term debt, less current portion 10,835 12,569
-------- --------
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; 14,749 and 14,745 shares issued
and outstanding, respectively 147 147
Additional paid-in capital 43,453 43,441
Retained earnings 15,124 15,836
Accumulated other comprehensive loss (825) (801)
-------- --------
Total stockholders' equity 57,899 58,623
-------- --------
$ 85,338 $ 89,597
======== ========
See notes to unaudited consolidated financial statements.
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Three Months Ended Six Months Ended
August 31, August 31,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Sales $24,197 $27,526 $42,763 $50,008
Cost of goods sold 20,997 21,171 38,257 37,809
------- ------- ------- -------
Gross profit 3,200 6,355 4,506 12,199
------- ------- ------- -------
Operating expenses:
Research and development 1,236 1,723 2,598 3,424
Selling 549 744 1,043 1,474
General and administrative 869 1,052 1,713 2,102
------- ------- ------- -------
Total operating expenses 2,654 3,519 5,354 7,000
------- ------- ------- -------
Operating income (loss) 546 2,836 (848) 5,199
Non-operating expense, net (129) (79) (182) (80)
------- ------- ------- -------
Income (loss) before
income taxes 417 2,757 (1,030) 5,119
Income tax benefit (provision) (27) (939) 318 (1,835)
------- ------- ------- -------
Net income (loss) $ 390 $ 1,818 $ (712) $ 3,284
======= ======= ======= =======
Net income (loss) per share:
Basic $ 0.03 $ 0.12 $ (0.05) $ 0.23
Diluted $ 0.03 $ 0.12 $ (0.05) $ 0.22
Shares used in per share
calculations:
Basic 14,747 14,720 14,746 14,547
Diluted 14,916 14,914 14,746 14,835
See notes to unaudited consolidated financial statements.
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
August 31,
---------------------
2003 2002
------- -------
Cash flows from operating activities:
Net income (loss) $ (712) $ 3,284
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,613 1,824
Equipment impairment writedowns 575 -
Gain on sale of equipment (117) (148)
Increase in equity associated with tax
benefit from exercise of stock options - 2,972
Deferred tax assets, net (289) (1,290)
Changes in operating assets and liabilities:
Accounts receivable 3,169 (3,017)
Inventories 1,162 2,625
Prepaid expenses and other assets (278) (230)
Accounts payable (222) 268
Accrued payroll and other accrued liabilities (1,786) (566)
------- -------
Net cash provided by operating activities 3,115 5,722
------- -------
Cash flows from investing activities:
Capital expenditures (978) (702)
Proceeds from sale of property and equipment 285 299
Acquisition of Kaul-Tronics - (16,588)
------- -------
Net cash used in investing activities (693) (16,991)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt - 12,000
Repayments of long-term debt (1,301) (483)
Proceeds from exercise of stock options 12 103
------- -------
Net cash provided by (used in) financing activities (1,289) 11,620
------- -------
Net change in cash and cash equivalents 1,133 351
Cash and cash equivalents at beginning of period 21,947 23,156
------- -------
Cash and cash equivalents at end of period $23,080 $23,507
======= =======
Supplemental cash flow information:
Interest paid $ 281 $ 257
Income taxes paid (net refunds received) $ (93) $ 170
Non-cash investing and financing activities:
Issuance of common stock as partial consideration
for acquisition of Kaul-Tronics $ - $ 6,054
Increase in valuation allowance for
available-for-sale investment $ - $ 209
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
Six Months Ended August 31, 2003
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 television programming
transmitted from satellites and wireless terrestrial transmission sites, and
two-way transceivers used for wireless high-speed Internet (broadband)
service. The Company's Satellite business unit designs and markets
reception products principally for the Direct Broadcast Satellite ("DBS")
subscription television market in the United States. The Wireless Access
business unit designs and markets integrated reception and two-way
transmission fixed wireless equipment for terrestrial broadband data and
video applications, the latter sometimes referred to as "Wireless Cable".
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.
All 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 August 31, 2003 and its
results of operations for the three and six month periods ended August 31,
2003 and 2002. 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 2003 fell on March 1, 2003.
The actual interim periods ended on August 30, 2003 and August 31, 2002. In
the accompanying consolidated financial statements, the 2003 fiscal year end
is shown as February 28 and the interim period end for both years is shown
as August 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 2003 Annual Report on Form 10-K as filed with the Securities
and Exchange Commission on May 30, 2003.
Note 2 - 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):
August 31, February 28,
2003 2003
------ ------
Raw materials and subassemblies $ 9,089 $ 9,627
Finished goods 2,611 3,235
------ ------
$11,700 $12,862
====== ======
Note 3 - GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of adopting Statement of Financial Accounting Standards No.
142, "Accounting for Goodwill and Intangible Assets", at the beginning of
fiscal 2003, the Company no longer records amortization on goodwill. There
was no change in the carrying amount of goodwill during the six months ended
August 31, 2003.
All goodwill is associated with the Company's Satellite business
segment. The first annual goodwill impairment test was conducted as of
December 31, 2002. This test indicated that there was no impairment of
goodwill at that date. Because of the write-down of certain assets in the
Satellite segment in the first quarter ended May 31, 2003, the Company
conducted an interim impairment test as of that date. This test also
indicated that there was no impairment of goodwill. The Company used a
discounted cash flow approach to estimate the fair value of its Satellite
reporting unit in these impairment tests.
At August 31, 2003, the gross carrying amount and accumulated
amortization of covenants not to compete acquired in conjunction with the
Kaul-Tronics acquisition (Note 1) was $400,000 and $148,000, respectively.
The covenants not to compete, which are included in Other Assets in the
accompanying consolidated balance sheet, are being amortized on a straight-
line basis over a weighted average life of approximately 4.1 years.
Note 4 - FINANCING ARRANGEMENTS
At August 31, 2003, the Company had a $10 million working capital
revolving line of credit with a commercial bank. Borrowings under this
line of credit bear interest at the London Inter-Bank Offer Rate (LIBOR)
plus 2.0% or the bank's prime rate, and are secured by substantially all of
the Company's assets. At August 31, 2003, there were no borrowings
outstanding under the line of credit. At that date, there was $1,582,000
reserved under the line of credit for outstanding standby letters of
credit, and an additional $2,225,000 reserved for outstanding trade letters
of credit. The Company also has two bank term loans which had an aggregate
outstanding principal balance of $14,273,000 at August 31, 2003.
Note 5 - INCOME TAXES
Deferred income tax assets reflect 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 assets on a quarterly basis, and a valuation
allowance is provided, as necessary, in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". During this evaluation, the Company reviews its forecasts of future
operating performance 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, 2003, the deferred tax asset valuation allowance was
$3,335,000. Based on profitable operations in the three year period ended
February 28, 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 $6,819,000. As a result of this analysis, the deferred tax
asset valuation allowance was reduced to $3,164,000 at August 31, 2003.
The effective income tax rate was 30.9% and 35.8% in the six months
ended August 31, 2003 and 2002, respectively. The decrease in effective tax
rate is attributable primarily to the fact that, beginning in fiscal 2004,
adjustments to the deferred tax asset valuation allowance have a
corresponding impact on the income tax provision or benefit reported in the
consolidated statement of operations. Prior to fiscal 2004, reductions of
the deferred tax asset valuation allowance were offset by increases in
additional paid-in capital, and accordingly the effective income tax rate in
fiscal 2003 was not impacted by adjustments to the valuation allowance.
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 Company reports income and 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 Six months ended
August 31, August 31,
---------------- ----------------
2003 2002 2003 2002
------ ------ ------ ------
Basic weighted average number
of common shares outstanding 14,747 14,720 14,746 14,547
Effect of dilutive securities:
Stock options 169 194 - 288
------ ------ ------ ------
Diluted weighted average number
of common shares outstanding 14,916 14,914 14,746 14,835
====== ====== ====== ======
Options outstanding at August 31, 2002 to purchase approximately
1,236,000 shares of Common Stock at prices ranging from $4.72 to $50.56 were
excluded from the computation of diluted earnings per share for the three
and six months then ended.
Because the Company had a net loss for the six ended August 31, 2003,
outstanding stock options to purchase approximately 2,590,000 shares of
common stock at exercise prices ranging from $2.76 to $50.56 would be anti-
dilutive and were therefore not included in the computation of diluted
earnings per share.
Note 7 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the total of net income
(loss) and all changes that impact stockholders' equity other than
transactions involving stockholders' ownership interests. The following
table details the components of comprehensive income (loss) for the three
and six month periods ended August 31, 2003 and 2002 (in thousands):
Three months ended Six months ended
August 31, August 31,
---------------- ----------------
2003 2002 2003 2002
------ ------ ------ ------
Net income (loss) $ 390 $1,818 $ (712) $3,284
Unrealized holding loss on
available-for-sale investments (25) (35) (24) (209)
------ ------ ------ ------
Comprehensive income (loss) $ 365 $1,783 $ (736) $3,075
====== ====== ====== ======
Note 8 - STOCK OPTIONS
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock Based Compensation - Transition
and Disclosure" ("FAS No. 148"). FAS No. 148 amends Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("FAS No. 123"), to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock
based employee compensation. In addition, FAS No. 148 amends the
disclosure requirements of FAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results.
As allowed by Statement of FAS No. 123, the Company has elected to
continue to measure compensation cost under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Under APB No. 25, compensation expense is measured on the first date at
which both the number of shares and the exercise price are known. Under
the Company's stock option plans, this would typically be the grant date.
To the extent that the exercise price equals or exceeds the market value of
the stock on the grant date, no compensation expense is recognized.
Because all of the options granted by the Company are at exercise prices
not less than the market value on the date of grant, no compensation
expense is recognized under this accounting treatment in the accompanying
unaudited consolidated statements of operations.
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following assumptions:
Options granted
during the six months
ended August 31, Options granted
------------------- before
2003 2002 March 1, 2002
------ ------ -----------
Expected life (years) 5 5 5 to 10
Dividend yield 0% 0% 0%
The range for interest rates is 2.58% to 6.82%, and the range for
volatility is 49% to 147%.
The estimated compensation cost for outstanding stock options
calculated using these assumptions is as follows (in thousands):
Three months ended Six months ended
August 31, August 31,
-------------- ----------------
2003 2002 2003 2002
------ ------ ------ ------
Compensation cost for
outstanding stock options $890 $1,054 $1,968 $2,027
==== ====== ====== ======
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of FAS 123 to stock-based employee compensation (in
thousands except per share amounts):
Three months ended Six months ended
August 31, August 31,
---------------- ----------------
2003 2002 2003 2002
------ ------ ------ ------
Net income (loss) as reported $ 390 $1,818 $ (712) $ 3,284
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (539) (639) (1,193) (1,228)
----- ----- ----- ------
Pro forma net income (loss) $ (149) $1,179 $(1,905) $ 2,056
===== ===== ===== ======
Earnings (loss) per share:
Basic -
As reported $ 0.03 $0.12 $(0.05) $0.23
Pro forma $(0.01) $0.08 $(0.13) $0.14
Diluted -
As reported $ 0.03 $0.12 $(0.05) $0.22
Pro forma $(0.01) $0.08 $(0.13) $0.14
Note 9 - CONCENTRATION OF RISK
Because the Company sells into markets dominated by a few large service
providers, a significant percentage of consolidated sales and consolidated
accounts receivable relate to a small number of customers. Sales to
customers which accounted for 10% or more of consolidated sales for the
three and six month periods ended August 31, 2003 or 2002, as a percent of
consolidated sales, are as follows:
Three months ended Six months ended
August 31, August 31,
---------------- ----------------
Customer 2003 2002 2003 2002
-------- ------ ------ ------ ------
A 35.5% 47.2% 34.0% 48.7%
B 21.5% 8.2% 19.6% 5.4%
C 13.5% 0.4% 8.8% 0.4%
Accounts receivable from these customers as a percent of consolidated
net accounts receivable are as follows:
August 31, Feb. 28,
2003 2003
------ ------
A 38.3% 58.0%
B 23.3% 5.5%
C 4.8% 0.5%
Customers A, B and C are customers of the Satellite segment. No customer of
the Wireless Access segment accounted for 10% or more of consolidated sales
during the periods shown above.
Note 10 - PRODUCT WARRANTIES
The Company generally warrants its products against defects over
periods ranging from 3 to 24 months. An accrual for estimated future costs
relating to products returned under warranty is recorded as an expense when
products are shipped. At the end of each quarter, the Company adjusts its
liability for warranty claims based on its actual warranty claims
experience as a percentage of sales for the preceding three years. In
addition, during the fourth quarter of fiscal 2003, the Company accrued
warranty cost of $250,000 in connection with a product replacement program,
as further described in Note 12. Such amount is included in the warranty
liability at August 31, 2003. Increases in and reductions of the warranty
liability for the six months ended August 31, 2003 and 2002 is as follows
(in thousands):
Six months
ended August 31,
-----------------
2003 2002
------ ------
Balance at beginning of period $491 $376
Charged (credited) to costs
and expenses (26) 87
Deductions (73) (112)
---- ----
Balance at end of period $392 $351
==== ====
Note 11 - 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 August 31, 2003 and 2002 is as
follows (in thousands):
Three months ended August 31, 2003:
Wireless
Satellite Access Corporate Total
------- ------ ------- -----
Sales $22,022 $ 2,175 $24,197
Gross profit $ 2,610 $ 590 $ 3,200
Gross margin 11.9% 27.1% 13.2%
Income (loss) before
income taxes $ 1,892 $ (477) $ (998) $ 417
Three months ended August 31, 2002:
Wireless
Satellite Access Corporate Total
------- ------ ------- -----
Sales $24,640 $ 2,886 $27,526
Gross profit $ 5,463 $ 892 $ 6,355
Gross margin 22.2% 30.9% 23.1%
Income (loss) before
income taxes $ 4,300 $ (412) $(1,131) $ 2,757
Six months ended August 31, 2003:
Wireless
Satellite Access Corporate Total
------- ------ ------- -----
Sales $38,643 $ 4,120 $42,763
Gross profit $ 3,470 $ 1,036 $ 4,506
Gross margin 9.0% 25.1% 10.5%
Income (loss) before
income taxes $ 1,884 $(1,019) $(1,895) $(1,030)
Six months ended August 31, 2002:
Wireless
Satellite Access Corporate Total
------- ------ ------- -----
Sales $44,114 $ 5,894 $50,008
Gross profit $10,291 $ 1,908 $12,199
Gross margin 23.3% 32.4% 24.4%
Income (loss) before
income taxes $ 8,030 $ (729) $(2,182) $ 5,119
Included in cost of sales for Satellite products during the six months
ended August 31, 2003 were asset impairment writedowns of $575,000 on
surface mount equipment which had become underutilized due to increased
outsourcing of printed circuit board subassemblies to contract manufacturers
and certain other manufacturing equipment which was taken out of service.
The underutilized surface mount equipment was sold in August 2003. Also
included in Satellite product cost of sales for the six months ended August
31, 2003 was a lower of cost or market inventory writedown of $242,000. The
foregoing items had an aggregate adverse impact of 2.1% on Satellite gross
margin in the latest six month period.
The Company considers income (loss) before income taxes to be the
primary measure of profit or loss of its business segments. The amount
shown for each period in the "Corporate" column above for income (loss)
before income taxes consists of general and administrative expenses not
allocated to the business segments, and non-operating income (expense).
General and administrative expense includes salaries and wages for the CEO,
the CFO, all finance and accounting personnel, human resource personnel,
information services personnel, and corporate expenses such as audit fees,
director and officer liability insurance, and director fees and expenses.
Non-operating income (expense) includes interest income, interest expense
and foreign currency gains and losses.
Note 12 - COMMITMENTS AND CONTINGENCIES
In March 2003, one of the Company's customers made a $1.6 million
claim against the Company for what the customer described as its expected
costs for a replacement program involving a product that had been supplied
by the Company. The Company accrued $250,000 at February 28, 2003 as its
best estimate of the costs to resolve this matter, and there have been no
changes in this accrued liability balance during the six months ended
August 31, 2003. The Company can give no assurance that the actual costs
to resolve this claim will not exceed the $250,000 reserve amount. See
further discussion of this matter in Note 12 to the unaudited consolidated
financial statements contained in the Company's Form 10-Q for the quarter
ended May 31, 2003.
Note 13 - LEGAL MATTER
In 2001, the Company was notified that the Securities and Exchange
Commission (SEC) was conducting an investigation into the circumstances that
caused the Company to restate earnings for fiscal year 2000 and the first
three quarters of fiscal year 2001. The Company has provided the SEC with
documents and testimony, and management believes that it has fully
cooperated, and will continue to fully cooperate, with the SEC in connection
with its investigation.
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 9 to the accompanying unaudited consolidated financial statements, the
Company's customer base is quite concentrated, with three customers
accounting for 66% of accounts receivable at August 31, 2003 and 62% of the
Company's sales in the six 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 treats 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.
Deferred Income Tax Asset Valuation Allowance
Deferred income tax assets reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and 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, and the valuation allowance is adjusted
accordingly. 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 August 31, 2003, the Company's net deferred income tax asset was
$6,819,000, which amount is net of a valuation allowance of $3,164,000.
During fiscal years 2003 and 2002, the valuation allowance was reduced by an
aggregate amount of $9,173,000, substantially all of which related to tax
benefits associated with exercises of non-qualified stock options in prior
years and was therefore recognized by increasing additional paid-in capital.
That portion of the valuation allowance that related to these tax benefits
on stock option deductions was fully eliminated as of the end of fiscal
2003. Therefore, beginning in fiscal 2004, reductions of the deferred tax
asset valuation allowance have a corresponding impact on the income tax
provision or benefit reported in the consolidated statement of operations.
During the six months ended August 31, 2003, the deferred tax asset
valuation allowance was reduced by $145,000, which had the effect of
lowering the estimated effective income tax rate for fiscal 2004.
Valuation of Long-lived Assets and Goodwill
The Company accounts for long-lived assets other than goodwill in
accordance with the provisions of Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment and Disposal of Long Lived
Assets" ("FAS 144"), which supersedes Statement of Financial Accounting
Standards No. 121 and certain sections of Accounting Principles Board
Opinion No. 30 specific to discontinued operations. FAS 144 classifies
long-lived assets as either: (1) to be held and used; (2) to be disposed of
by other than sale; or (3) to be disposed of by sale. This standard
introduces a probability-weighted cash flow estimation approach to deal with
situations in which alternative courses of action to recover the carrying
amount of a long-lived asset are under consideration or a range is estimated
for the amount of possible future cash flows. This statement, which the
Company adopted in fiscal 2003, did not have a material impact on the
Company's financial position or results of operations prior to fiscal 2004.
FAS 144 requires, among other things, that an entity review its long-lived
assets and certain related intangibles for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. During the six months ended August 31, 2003, the Company
recorded an impairment writedown of $575,000 on certain surface mount
manufacturing equipment, tooling and other equipment used in the Satellite
business unit which had become underutilized due to increased outsourcing to
contract manufacturers.
The Company also adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets", in fiscal 2003. As a
result goodwill, all of which relates to the Company's Satellite business
unit, is no longer amortized. Instead, goodwill is subject to annual
impairment testing, or more frequently as impairment indicators arise. The
test for impairment involves the use of estimates related to the fair
values of the business operations with which goodwill is associated and is
usually based on projected cash flows or a market value approach. The
first annual goodwill impairment test was conducted as of December 31,
2002, which indicated that there was no impairment of goodwill at that
date. Because of the writedown of certain assets in the Satellite segment
under FAS No. 144 during the quarter ended May 31, 2003, the Company
conducted an interim impairment test as of that date. This test also
indicated that there was no impairment of goodwill. The Company used a
discounted cash flow approach to estimate the fair value of its Satellite
business unit in these impairment tests.
The Company believes the estimate of its valuation of long-lived assets
and goodwill is a "critical accounting estimate" because if circumstances
arose that led to a decrease in the valuation it could have a material
impact on the Company's results of operations.
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.
RESULTS OF OPERATIONS
The Company's sales and gross profit by business segment for the three
and six months ended August 31, 2003 and 2002 are as follows:
SALES BY SEGMENT
Three months ended August 31, Six months ended August 31,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- ------------- --------------
% of % of % of % of
Segment $000s Total $000s Total $000s Total $000s Total
- --------- ------- ----- ------- ----- ------- ----- ------- -----
Satellite $22,022 91.0% $24,640 89.5% $38,643 90.4% $44,114 88.2%
Wireless 2,175 9.0% 2,886 10.5% 4,120 9.6% 5,894 11.8%
------- ----- ------- ----- ------- ----- ------- -----
Total $24,197 100.0% $27,526 100.0% $42,763 100.0% $50,008 100.0%
======= ===== ======= ===== ======= ===== ======= =====
GROSS PROFIT BY SEGMENT
Three months ended August 31, Six months ended August 31,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- ------------- --------------
% of % of % of % of
Segment $000s Total $000s Total $000s Total $000s Total
- --------- ------- ----- ------- ----- ------- ----- ------- -----
Satellite $ 2,610 81.6% $ 5,463 86.0% $ 3,470 77.0% $10,291 84.4%
Wireless 590 18.4% 892 14.0% 1,036 23.0% 1,908 15.6%
------- ----- ------- ----- ------- ----- ------- -----
Total $ 3,200 100.0% $ 6,355 100.0% $ 4,506 100.0% $12,199 100.0%
======= ===== ======= ===== ======= ===== ======= =====
Sales
Sales of Satellite products decreased $2,618,000, or 10.6% in the three
months ended August 31, 2003 from the same period in the previous fiscal
year. For the six months ended August 31, 2003, sales of Satellite products
decreased by $5,471,000 from $44,114,000 to $38,643,000. These declines
resulted primarily from reduced customer orders in the latest three- and
six-month periods due to customers' overstocked inventories of certain
satellite television reception products. The Satellite products impacted by
this order slowdown are predominantly the more technologically advanced
products that have higher selling prices.
The Company believes that this decline in orders from key Satellite
customers was a temporary condition, and that sales of Satellite products
have begun to return to more normal levels as a result of these customers
working down their existing inventory quantities.
Sales of Wireless Access products in the three months ended August 31,
2003 declined by $711,000, or 25%, from the same period in the prior year.
For the six months ended August 31, 2003, sales of Wireless products
decreased by $1,774,000 from $5,894,000 to $4,120,000. The decline in the
six-month results occurred primarily because last year's amount included
sales to three customers totaling approximately $2.4 million, substantially
all of which did not recur in the latest six-month period.
Gross Profit and Gross Margins
Satellite gross profit decreased $2,853,000, or 52%, and gross margin
for Satellite products declined from 22.2% in the three months ended August
31, 2003 to 11.9% in the latest quarter. In the latest six-month period,
Satellite gross profit declined by $6,821,000, or 66%, from the comparable
period of the prior year, and gross margin declined to 9.0% this year from
23.3% last year.
Included in cost of sales for Satellite products during the six months
ended August 31, 2003 were impairment writedowns totaling $575,000 on
surface mount machines and other manufacturing equipment which had become
underutilized due to increased outsourcing of printed circuit board
subassemblies to contract manufacturers. Also included in Satellite product
cost of sales for the six months ended August 31, 2003 was a lower of cost
or market inventory writedown of $242,000. The foregoing items had an
aggregate adverse impact of 2.1% on Satellite gross margin in the latest six
month period. The remainder of the decline in Satellite gross margin is
attributable primarily to the lower production and sales volume in the
latest quarter and six month period relative to the prior year and the
resultant lower absorption of fixed overhead costs, and the effect of
competitive pricing pressures on certain Satellite products.
Wireless Access gross profit decreased $302,000, or 34%, while gross
margin for Wireless Access products declined to 27.1% in the second quarter
of fiscal 2004 from 30.9% in the second quarter of fiscal 2003. For the six
months ended August 31, 2003, Wireless Access gross profit declined by
$872,000, or 46%, from the comparable period of the prior year, and gross
margin declined to 25.1% this year from 32.4% last year. These declines are
primarily attributable to the decrease in Wireless sales in the latest
three- and six month periods and the resultant lower absorption of fixed
overhead costs.
See also Note 11 to the accompanying unaudited consolidated financial
statements for additional operating data by business segment.
Operating Expenses
Research and development expense decreased by $487,000, or 28%, from
$1,723,000 in the second quarter of last year to $1,236,000 in the latest
quarter. For the six month year-to-date periods, research and development
expense decreased $826,000 from $3,424,000 last year to $2,598,000 this
year. These reductions are due in part to the cancellation, in the second
quarter of last fiscal year, of a product development contract for broadband
wireless application specific integrated circuits (ASICs) because the market
timing for large scale deployment of this technology was considered to be
uncertain in the near-term future. Expense associated with this product
development contract was $130,000 and $330,000, respectively, in the three
and six months ended August 31, 2002. Also contributing to the decline in
research and development expense in the latest six month period was lower
salaries expense due to staffing reductions ($240,000) and lower incentive
compensation expense ($218,000).
Selling expense decreased by 26% from $744,000 in the three months ended
August 31, 2002 to $549,000 in the three months ended August 31, 2003. For
the six month periods, selling expense decreased 29% from $1,474,000 last year
to $1,043,000 this year. These decreases are primarily attributable to lower
incentive compensation expense, which declined by $177,000 and $291,000 in the
latest three and six month periods, respectively, compared to the prior year.
Also contributing to the declines was bad debts expense, which was lower by
$51,000 and $79,000 in the latest three and six month periods, respectively,
compared to the prior year.
General and administrative expense in the latest quarter decreased 17%
to $869,000 from $1,052,000 in the second quarter of last year. For the six
month periods, general and administrative expenses decreased by $389,000, or
19%, to $1,713,000 in 2003 from $2,102,000 in 2002. These declines are due
mainly to reduced incentive compensation expense, which was lower by $174,000
and $363,000 in the latest three and six month periods, respectively,
compared to the prior year.
Non-operating Expense, Net
Net non-operating expense increased from $79,000 in the second quarter of
last year to $129,000 in the latest quarter. This increase in net non-
operating expense is attributable to the change in foreign currency gains and
losses. There was a foreign currency gain of $13,000 in last year's second
quarter, and a foreign currency loss of $37,000 in the latest quarter. Net
non-operating expense for the six month periods increased from $80,000 in 2002
to $182,000 in 2003 due to the change in foreign currency gains and losses
($70,000) and greater net interest expense ($32,000).
Income (loss) before income taxes
Income before income taxes in the latest quarter was $417,000 compared
to $2,757,000 in the second quarter of last year. For the six month
periods, income (loss) before income taxes was ($1,030,000) in 2003 compared
to $5,119,000 in 2002. These declines in the latest three and six month
periods compared to the prior year are due to decreases in gross profit,
partially offset by lower operating expenses, all as discussed above.
Income Taxes
The effective income tax rate was 30.9% and 35.8% in the six months
ended August 31, 2003 and 2002, respectively. The decline in effective tax
rate is attributable primarily to the fact that, beginning in the current
year, adjustments to the deferred tax asset valuation allowance have a
corresponding impact on the income tax provision or benefit reported in the
consolidated statement of operations. Prior to fiscal 2004, reductions of
the deferred tax asset valuation allowance were offset by increases in
additional paid-in capital, and accordingly the effective income tax rate
last year was not impacted by adjustments to the valuation allowance. See
further discussion of the deferred tax asset valuation allowance in Note 5
to the accompanying unaudited financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $23,080,000 at August 31, 2003, and its
working capital line of credit with a bank. During the six months ended
August 31, 2003, cash and cash equivalents increased by $1,133,000. This
increase consisted of cash provided by operations of $3,115,000, proceeds
from sale of fixed assets of $285,000, and proceeds from stock option
exercises of $12,000, partially offset by cash used for capital expenditures
of $978,000 and debt repayments of $1,301,000.
Components of operating working capital decreased by $2,045,000 during
the six months ended August 31, 2003, comprised of a decrease of $3,169,000
in accounts receivable, a decrease of $1,162,000 in inventory, an increase
of $278,000 in prepaid expenses and other assets, a decrease of $222,000 in
accounts payable, and a decrease of $1,786,000 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 2004 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.
At August 31, 2003, the Company had a $10 million working capital
revolving line of credit with a commercial bank. Borrowings under this
line of credit bear interest at LIBOR plus 2.0% or the bank's prime rate,
and are secured by substantially all of the Company's assets. At August
31, 2003, there were no borrowings outstanding under the line of credit.
At that date, there was $1,582,000 reserved under the line of credit for
outstanding standby letters of credit, and an additional $2,225,000
reserved for outstanding trade letters of credit. The Company also has two
bank term loans which had an aggregate outstanding principal balance of
$14,273,000 at August 31, 2003.
Following is a summary of the Company's contractual cash obligations as
of August 31, 2003 (in thousands):
Future Cash Payments Due by Fiscal Year
---------------------------------------
Contractual 2004 There-
Obligations (Remainder) 2005 2006 2007 2008 after Total
- ------------- ------ ------ ------ ------ ------ ------ ------
Debt principal $1,713 $3,426 $4,423 $2,911 $1,800 $ - $14,273
Operating leases 379 433 681 699 699 2,328 5,219
------ ------ ------ ------ ------ ------ ------
Total contractual
cash obligations $2,092 $3,859 $5,104 $3,610 $2,499 $2,328 $19,492
====== ====== ====== ====== ====== ====== ======
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 Annual Report on
Form 10-K as filed with the SEC on May 30, 2003, 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 August 31,
2003, 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
August 31, 2003, a change in interest rates of one percent would result in
an annual impact of approximately $110,000, net of tax, on the Company's
consolidated statement of income.
A portion of the Company's operations consists of its investment in a
foreign subsidiary. 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 its foreign subsidiary
accounts for less than 10% of consolidated revenues, and a significant
portion of the foreign subsidiary's sales, even though made in international
markets, are denominated in U.S. dollars. Furthermore, the Company's
purchases of raw materials and components from foreign suppliers are
typically denominated in U.S. dollars.
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 August 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by 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
Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934
(the "Exchange Act"). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that as of the end of the
period covered by this report, the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiary) required to
be included in the Company's periodic SEC filings.
During the period covered by this report there have been no
significant changes in the Company's internal controls over financial
reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 13 to the accompanying consolidated financial statements for a
description of pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2003 Annual Meeting of Stockholders held on July 17, 2003, the
six incumbent directors stood for reelection to a one year term expiring at
the fiscal 2004 Annual Meeting. All six of the director nominees were
reelected. Following is a summary of the results of the director voting:
Votes
Against or
Votes For Withheld Unvoted
-------- ------- -------
Ira Coron 10,659,614 2,819,838 1,266,360
Richard Gold 12,474,490 1,004,962 1,266,360
Arthur Hausman 12,479,584 999,868 1,266,360
Frank Perna 12,591,364 888,088 1,266,360
Thomas Ringer 12,595,304 884,148 1,266,360
Fred Sturm 12,592,219 887,233 1,266,360
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 31.1 - Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K:
On June 19, 2003, the Company filed a report on Form 8-K that
furnished a copy of its press release announcing the financial
results for the Company's first quarter ended May 31, 2003.
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.
October 2, 2003 /s/ Richard K. Vitelle
- --------------------------------- -----------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)