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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, 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 14,853,512 shares of Common Stock outstanding as of
December 29, 2003.
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,
2003 2003
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 25,286 $ 21,947
Accounts receivable, less allowance for doubtful
accounts of $203 and $273, respectively 17,399 16,053
Inventories 13,875 12,862
Deferred income tax assets 2,576 1,130
Prepaid expenses and other current assets 935 1,100
-------- --------
Total current assets 60,071 53,092
Property and equipment, at cost, net of
accumulated depreciation and amortization 7,887 9,322
Deferred income tax assets, less current portion 4,098 5,400
Goodwill 20,938 20,938
Other assets 668 845
-------- --------
$ 93,662 $ 89,597
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 3,375 $ 3,005
Accounts payable 15,671 11,553
Accrued payroll and employee benefits 1,311 1,649
Other accrued liabilities 1,488 2,198
-------- --------
Total current liabilities 21,845 18,405
-------- --------
Long-term debt, less current portion 9,874 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; 14,850 and 14,745 shares issued
and outstanding, respectively 148 147
Additional paid-in capital 44,024 43,441
Retained earnings 18,576 15,836
Accumulated other comprehensive loss (805) (801)
-------- --------
Total stockholders' equity 61,943 58,623
-------- --------
$ 93,662 $ 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 Nine Months Ended
November 30, November 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Sales $44,248 $23,965 $87,011 $73,973
Cost of goods sold 37,514 19,587 75,771 57,396
------- ------- ------- -------
Gross profit 6,734 4,378 11,240 16,577
------- ------- ------- -------
Operating expenses:
Research and development 1,338 1,391 3,936 4,815
Selling 627 469 1,670 1,943
General and administrative 925 902 2,638 3,004
------- ------- ------- -------
Total operating expenses 2,890 2,762 8,244 9,762
------- ------- ------- -------
Operating income 3,844 1,616 2,996 6,815
Non-operating expense, net (12) (79) (194) (159)
------- ------- ------- -------
Income before income taxes 3,832 1,537 2,802 6,656
Income tax provision (380) (632) (62) (2,467)
------- ------- ------- -------
Net income $ 3,452 $ 905 $ 2,740 $ 4,189
======= ======= ======= =======
Net income per share:
Basic $ 0.23 $ 0.06 $ 0.19 $ 0.29
Diluted $ 0.22 $ 0.06 $ 0.18 $ 0.28
Shares used in per share
calculations:
Basic 14,788 14,720 14,760 14,605
Diluted 15,555 14,850 15,128 14,840
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,
---------------------
2003 2002
------- -------
Cash flows from operating activities:
Net income $ 2,740 $ 4,189
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,381 2,728
Property and equipment impairment writedowns 575 -
Gains on sale of property and equipment (273) (150)
Increase in equity associated with tax
benefit from exercise of stock options 212 5,395
Deferred tax assets, net (144) (3,150)
Changes in operating assets and liabilities:
Accounts receivable (1,346) (1,495)
Inventories (1,013) (588)
Prepaid expenses and other assets 270 (122)
Accounts payable 4,385 3,798
Accrued payroll and other accrued liabilities (1,048) (823)
------- -------
Net cash provided by operating activities 6,739 9,782
------- -------
Cash flows from investing activities:
Capital expenditures (2,026) (987)
Proceeds from sale of property and equipment 579 301
Acquisition of Kaul-Tronics - (16,588)
------- -------
Net cash used in investing activities (1,447) (17,274)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 1,000 12,000
Repayments of long-term debt (3,325) (725)
Proceeds from exercise of stock options 372 109
------- -------
Net cash provided by (used in) financing activities (1,953) 11,384
------- -------
Net change in cash and cash equivalents 3,339 3,892
Cash and cash equivalents at beginning of period 21,947 23,156
------- -------
Cash and cash equivalents at end of period $25,286 $27,048
======= =======
Supplemental cash flow information:
Interest paid $ 405 $ 430
Income taxes paid (net refunds received) $ (93) $ 209
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 $ - $ 261
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, 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 November 30, 2003 and its
results of operations for the three and nine month periods ended November
30, 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 November 29, 2003 and November 30, 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 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 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):
November 30, February 28,
2003 2003
------ ------
Raw materials and subassemblies $ 9,233 $ 9,627
Finished goods 4,642 3,235
------ ------
$13,875 $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 nine months
ended November 30, 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 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 November 30, 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 $174,000, 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 November 30, 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 November 30, 2003, there were outstanding
borrowings of $1 million on the line of credit and $1,644,000 was reserved
under the line for issued letters of credit. The $1 million outstanding
balance on the line of credit is classified as long-term debt at November
30, 2003 because the revolver does not mature until August 2005. The
Company also has two bank term loans which had an aggregate outstanding
principal balance of $12,249,000 at November 30, 2003. The bank credit
agreement which encompasses the line of credit and the two term loans
contains a subjective acceleration clause which enables the bank to call
the loans in the event of a material adverse change (as defined) in the
Company's business. Based on the Company's history of profitable
operations and positive operating cash flow over the past several years,
and based on the Company's internal financial forecasts for the next
several quarters, the Company does not believe it is probable that the bank
will assert the material adverse change clause in the next 12 months.
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 $6,674,000. As a result of this analysis, the deferred tax
asset valuation allowance was reduced to $2,261,000 at November 30, 2003.
During fiscal years 2003 and 2002, the deferred tax asset 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 reported in the
consolidated statement of operations. During the nine months ended November
30, 2003, the deferred tax asset valuation allowance was reduced by
approximately $1 million, which had the effect of lowering the estimated
effective income tax rate for that period to 2.2%, compared to an effective
tax rate of 37.1% in the nine months ended November 30, 2002.
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 Nine months ended
November 30, November 30,
---------------- ----------------
2003 2002 2003 2002
------ ------ ------ ------
Basic weighted average number
of common shares outstanding 14,788 14,720 14,760 14,605
Effect of dilutive securities:
Stock options 767 130 368 235
------ ------ ------ ------
Diluted weighted average number
of common shares outstanding 15,555 14,850 15,128 14,840
====== ====== ====== ======
The computation of diluted earnings per share excludes 579,000 and
1,976,000 stock options that were anti-dilutive for the three months ended
November 30, 2003 and 2002, respectively, and excludes 1,426,000 and
1,329,000 stock options that were anti-dilutive for the nine months ended
November 30, 2003 and 2002, respectively.
Note 7 - COMPREHENSIVE INCOME
Comprehensive income is defined as the total of net income and all
changes that impact stockholders' equity other than transactions involving
stockholders' ownership interests. The following table details the
components of comprehensive income for the three and nine month periods
ended November 30, 2003 and 2002 (in thousands):
Three months ended Nine months ended
November 30, November 30,
---------------- ----------------
2003 2002 2003 2002
------ ------ ------ ------
Net income $3,452 $ 905 $2,740 $4,189
Decrease (increase) in
unrealized holding loss on
available-for-sale investments 20 (52) (4) (261)
------ ------ ------ ------
Comprehensive income $3,472 $ 853 $2,736 $3,928
====== ====== ====== ======
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 nine months
ended November 30, 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 Nine months ended
November 30, November 30,
-------------- ----------------
2003 2002 2003 2002
------ ------ ------ ------
Compensation cost for
outstanding stock options $850 $1,078 $2,818 $3,105
==== ====== ====== ======
The following table illustrates the effect on net income and earnings
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 Nine months ended
November 30, November 30,
---------------- ----------------
2003 2002 2003 2002
------ ------ ------ ------
Net income as reported $3,452 $ 905 $2,740 $4,189
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (514) (652) (1,704) (1,878)
----- ---- ----- -----
Pro forma net income $2,938 $ 253 $1,036 $2,311
===== ==== ===== =====
Earnings per share:
Basic -
As reported $0.23 $0.06 $0.19 $0.29
Pro forma $0.20 $0.02 $0.07 $0.16
Diluted -
As reported $0.22 $0.06 $0.18 $0.28
Pro forma $0.19 $0.02 $0.07 $0.16
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/ or nine month periods ended November 30, 2003 and 2002, as a
percent of consolidated sales, are as follows:
Three months ended Nine months ended
November 30, November 30,
---------------- ----------------
Customer 2003 2002 2003 2002
-------- ------ ------ ------ ------
A 40.6% 25.1% 37.4% 41.1%
B 23.1% 21.2% 21.4% 10.5%
C 10.2% 0.7% 9.5% 0.7%
D 8.1% 10.9% 8.6% 8.3%
E 0.3% 12.2% 2.4% 8.9%
Accounts receivable from these customers as a percent of consolidated
net accounts receivable are as follows:
Nov. 30, Feb. 28,
2003 2003
------ ------
A 38.7% 58.0%
B 23.9% 5.5%
C 2.3% 0.5%
D 19.3% 15.1%
E 0.4% 4.1%
Customers A, B, C, D and E are customers of the Satellite segment. No
customer of the Wireless Access segment accounted for 10% or more of
consolidated sales or accounts receivable 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 November 30, 2003. Increases in and reductions of the
warranty liability for the nine months ended November 30, 2003 and 2002 is
as follows (in thousands):
Nine months
ended November 30,
-----------------
2003 2002
------ ------
Balance at beginning of period $491 $376
Charged (credited) to costs
and expenses 133 -
Deductions (89) (120)
---- ----
Balance at end of period $535 $256
==== ====
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 November 30, 2003 and 2002 is as
follows (in thousands):
Three months ended November 30, 2003:
Wireless
Satellite Access Corporate Total
------- ------ ------- -----
Sales $42,607 $ 1,641 $44,248
Gross profit $ 6,306 $ 428 $ 6,734
Gross margin 14.8% 26.1% 15.2%
Income (loss) before
income taxes $ 5,458 $ (690) $ (936) $ 3,832
Three months ended November 30, 2002:
Wireless
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) before
income taxes $ 2,536 $ (18) $ (981) $ 1,537
Nine months ended November 30, 2003:
Wireless
Satellite Access Corporate Total
------- ------ ------- -----
Sales $81,250 $ 5,761 $87,011
Gross profit $ 9,776 $ 1,464 $11,240
Gross margin 12.0% 25.4% 12.9%
Income (loss) before
income taxes $ 7,342 $(1,709) $(2,831) $ 2,802
Nine months ended November 30, 2002:
Wireless
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) before
income taxes $10,566 $ (747) $(3,163) $ 6,656
Included in cost of sales for Satellite products during the nine months
ended November 30, 2003 were impairment writedowns of $575,000 on property
and equipment which has become underutilized due to increased outsourcing to
contract manufacturers. These impairment writedowns had an adverse impact
of 0.7% on Satellite gross margin in the latest nine 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 nine months ended
November 30, 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.
Note 14 - SUBSEQUENT EVENT
On December 23, 2003, the Company announced that it had entered into a
definitive agreement to acquire Vytek Corporation ("Vytek"), a privately-
held company headquartered in San Diego, California engaged in providing
hardware and software products and services that enable both wireless and
wireline access to information. Vytek has approximately 280 employees with
10 offices nationwide. During its eleven month period ended November 30,
2003, Vytek recorded unaudited revenues of approximately $38.4 million.
During this period, Vytek generated approximately 40% of its revenues from
wireless and embedded technology products and 60% of its revenues from
software development and professional services.
The terms of the definitive agreement provide that California Amplifier
will acquire Vytek for fixed number of 8,200,000 shares of California
Amplifier's common stock. California Amplifier and Vytek expect to complete
the transaction during the first calendar quarter of 2004. The transaction
is subject to customary closing conditions, including approvals by
regulatory agencies and by the stockholders of Vytek and California
Amplifier.
California Amplifier will file a registration statement on Form S-4
with the Securities and Exchange Commission to register the offer and sale
of shares of its common stock in connection with the proposed merger.
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, the valuation of inventories, the deferred
tax asset valuation allowance, the valuation of long-lived assets and
goodwill, and product warranties. 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 four customers accounting
for 84% of accounts receivable at November 30, 2003 and 77% 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 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 November 30, 2003, the
Company's net deferred income tax asset was $6,674,000, which amount is net of
a valuation allowance of $2,261,000. 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 nine months ended November
30, 2003, the deferred tax asset valuation allowance was reduced by
approximately $1 million, which had the effect of lowering the estimated
effective income tax rate for fiscal 2004 to approximately 2%.
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 nine months ended November 30, 2003, the Company
recorded an impairment writedown of $794,000 on property and equipment which
has 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 nine months ended November 30, 2003 and 2002 are as follows:
SALES BY SEGMENT
Three months ended November 30, Nine months ended November 30,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- ------------- --------------
% of % of % of % of
Segment $000s Total $000s Total $000s Total $000s Total
- --------- ------- ----- ------- ----- ------- ----- ------- -----
Satellite $42,607 96.3% $20,443 85.3% $81,250 93.4% $64,557 87.3%
Wireless 1,641 3.7% 3,522 14.7% 5,761 6.6% 9,416 12.7%
------- ----- ------- ----- ------- ----- ------- -----
Total $44,248 100.0% $23,965 100.0% $87,011 100.0% $73,973 100.0%
======= ===== ======= ===== ======= ===== ======= =====
GROSS PROFIT BY SEGMENT
Three months ended November 30, Nine months ended November 30,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- ------------- --------------
% of % of % of % of
Segment $000s Total $000s Total $000s Total $000s Total
- --------- ------- ----- ------- ----- ------- ----- ------- -----
Satellite $ 6,306 93.6% $ 3,518 80.4% $ 9,776 87.0% $13,809 83.3%
Wireless 428 6.4% 860 19.6% 1,464 13.0% 2,768 16.7%
------- ----- ------- ----- ------- ----- ------- -----
Total $ 6,734 100.0% $ 4,378 100.0% $11,240 100.0% $16,577 100.0%
======= ===== ======= ===== ======= ===== ======= =====
Sales
Substantially all of the Company's Satellite sales consist of outdoor
reception equipment for the U.S. Direct Broadcast Satellite (DBS) industry.
Sales of Satellite products increased $22,164,000, or 108% in the three
months ended November 30, 2003 from the same period in the previous fiscal
year. For the nine months ended November 30, 2003, sales of Satellite
products increased by $16,693,000 from $64,557,000 to $81,250,000. These
increases resulted primarily from substantially higher customer orders for
the latest generation low-noise block feed (LNBF) downconverter amplifier
products in the latest three- and nine-month periods which have higher
average selling prices. Also, Satellite revenues in the comparable periods
of last year were depressed because of lower unit sales of LNBF products
caused by a delay in obtaining customer acceptance of new product designs
that were approved in the latter part of last year's third quarter.
Sales of Wireless Access products in the three months ended November
30, 2003 declined by $1,881,000, or 53%, from the same period in the prior
year. This decline resulted mainly because last year's revenue included
sales of $1.3 million of signal scrambling products to a terrestrial
wireless video customer in Africa which did not recur in the latest quarter.
For the nine months ended November 30, 2003, sales of Wireless products
decreased by $3,655,000. This decline occurred primarily because last
year's amount included sales totaling approximately $3.7 million to the
African customer referred to above and two other customers, substantially
all of which did not recur in the latest nine-month period.
Gross Profit and Gross Margins
Satellite gross profit increased by $2,788,000, or 79%, in the three
months ended November 30, 2003 compared to the prior year, even though gross
margin for Satellite products declined from 17.2% in the three months ended
November 30, 2002 to 14.8% in the latest quarter. The decline in gross
margin was caused primarily by significantly higher freight costs incurred
for the procurement of raw materials and subassemblies in the latest quarter
as a result of the quick ramp up in production activity to meet customer
demand, which adversely affected third quarter gross margin by approximately
2.3%. Also contributing to the lower gross margin on substantially higher
sales volume in the latest quarter were manufacturing inefficiencies
resulting from the rapid expansion of production capability.
In the latest nine month period, Satellite gross profit declined by
$4,033,000, or 29%, from the comparable period of the prior year, and gross
margin declined to 12.0% this year from 21.4% last year. Despite the fact
that Satellite sales in the latest nine month period are about 26% higher
than last year, the quarter-to-quarter volatility of sales and production
activity in the current year has been extreme, ranging from a low of $16.6
million of sales in the first quarter and a high of $42.6 million in the
third quarter. This volatility, which was caused by rapid shifts in demand
on the part of the two U.S. DBS service providers, required the Company to
make a rapid contraction in production capability in the first quarter, and
a rapid expansion of production capability in the third quarter, all of
which adversely affected manufacturing efficiencies and gross margins.
Also contributing to the decline in Satellite gross margins in the
latest three- and nine-month periods, and to the decline in gross profit in
the latest nine months, was the effect of persistent competitive pricing
pressures on certain Satellite products. In addition, included in Satellite
cost of sales for the nine months ended November 30, 2003 were asset
impairment writedowns of $575,000 on property and equipment which had become
underutilized due to increased outsourcing to contract manufacturers, and a
lower of cost or market inventory writedown of $242,000 that collectively
had an adverse impact of 1.0% on Satellite gross margin in the latest nine
month period.
Wireless Access gross profit decreased $432,000, or 50%, while gross
margin for Wireless Access products increased to 26.1% in the third quarter
of fiscal 2004 from 24.4% in the third quarter of fiscal 2003. The
improvement in Wireless Access gross margin in the latest quarter is
primarily due to a change in product mix compared to the prior year.
For the nine months ended November 30, 2003, Wireless Access gross
profit declined by $1,304,000, or 47%, from the comparable period of the
prior year, and gross margin declined to 25.4% this year from 29.4% last
year. The decline in gross margin in the latest nine month period is
primarily attributable to the decrease in Wireless sales 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 $53,000, or 4%, from
$1,391,000 in the third quarter of last year to $1,338,000 in the latest
quarter. For the nine month year-to-date periods, research and development
expense decreased $879,000, or 18%, from $4,815,000 last year to $3,936,000
this year. The decline in R&D expense during the latest nine month period
is due in part to the cancellation, in the third 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. This cancellation resulted in a reduction of $375,000 in
outside service expense in the latest nine month period. Also contributing
to the decline in R&D expense in the latest nine month period was lower
salaries expense due to staffing reductions ($350,000) and lower incentive
compensation expense ($128,000).
Selling expense increased by 34% from $469,000 in the three months ended
November 30, 2002 to $627,000 in the three months ended November 30, 2003.
This increase is primarily due to higher incentive compensation expense
($116,000) in the latest quarter. Also contributing to the quarter-over-
quarter increase in selling expense is the fact that last year's third quarter
included a $63,000 reduction to bad debts expense as a result of lowering the
allowance for uncollectible accounts receivable based on management's analysis
of historical bad debts experience. For the nine month periods, selling
expense decreased 14% from $1,943,000 last year to $1,671,000 this year. This
decrease is primarily attributable to lower incentive compensation expense
($173,000) and lower advertising and promotion expense ($65,000) in the latest
nine month period compared to the prior year.
General and administrative expense of $925,000 in the latest quarter was
up slightly from $902,000 in the third quarter of last year. For the nine
month periods, general and administrative expense decreased by $366,000, or
12%, to $2,638,000 in 2003 from $3,004,000 in 2002. This decline is due
mainly to reduced incentive compensation expense and legal expense, which
were lower by $223,000 and $51,000, respectively in the latest nine month
period compared to the prior year. Also, gains on sales of property and
equipment, which are included in general and administrative expense for
financial reporting purposes, amounted to $273,000 in 2003 and $150,000 in
2002, which contributed to the year-over-year decline in general and
administrative expense.
Non-operating Expense, Net
Net non-operating expense decreased from $79,000 in the third quarter of
last year to $12,000 in the latest quarter. This decrease in net non-
operating expense is primarily attributable to an increase in foreign currency
gains in 2003 of $43,000 compared to the prior year. Net non-operating
expense for the nine month periods increased from $159,000 in 2002 to $194,000
in 2003 due primarily to lower foreign currency gains in 2003 ($15,000) and
greater net interest expense ($25,000).
Income before income taxes
Income before income taxes in the latest quarter was $3,832,000
compared to $1,537,000 in the third quarter of last year. This improvement
is primarily due to higher gross profit of $2.4 million in the latest
quarter as a result of the 85% increase in sales volume quarter-over-
quarter.
For the nine month periods, income before income taxes was $2,802,000
in 2003 compared to $6,656,000 in 2002. This decline is due to lower gross
profit of $5.3 million in 2003, partially offset by lower operating expenses
of $1.5 million 2003, all as discussed above.
Income Taxes
The effective income tax rate was 2.2% and 37.1% in the nine months
ended November 30, 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 $25,286,000 at November 30, 2003, and its
working capital line of credit with a bank. During the nine months ended
November 30, 2003, cash and cash equivalents increased by $3,339,000. This
increase consisted of cash provided by operations of $6,739,000, proceeds
from sale of fixed assets of $579,000, and proceeds from stock option
exercises of $372,000, partially offset by cash used for capital
expenditures of $2,026,000 and net debt repayments of $2,325,000.
Components of operating working capital decreased by $1,248,000 during
the nine months ended November 30, 2003, comprised of an increase of
$1,346,000 in accounts receivable, an increase of $1,013,000 in inventory, a
decrease of $273,000 in prepaid expenses and other assets, an increase of
$4,385,000 in accounts payable, and a decrease of $1,048,000 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 has not been, and 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 November 30, 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 November 30, 2003, there were outstanding
borrowings of $1 million on the line of credit and $1,644,000 was reserved
under the line for issued letters of credit. The $1 million outstanding
balance on the line of credit is classified as long-term debt at November
30, 2003 because the revolver does not mature until August 2005. The
Company also has two bank term loans which had an aggregate outstanding
principal balance of $12,249,000 at November 30, 2003. The bank credit
agreement which encompasses the line of credit and the two term loans
contains a subjective acceleration clause which enables the bank to call
the loans in the event of a material adverse change (as defined) in the
Company's business. Based on the Company's history of profitable
operations and positive operating cash flow over the past several years,
and based on the Company's internal financial forecasts for the next
several quarters, the Company does not believe it is probable that the bank
will assert the material adverse change clause in the next 12 months.
Following is a summary of the Company's contractual cash obligations as
of November 30, 2003 (in thousands):
Future Cash Payments Due by Fiscal Year
---------------------------------------
Contractual 2004 There-
Obligations (Remainder) 2005 2006 2007 2008 after Total
- ------------- ------ ------ ------ ------ ------ ------ -----
Debt principal $ 858 $ 3,426 $4,423 $2,911 $1,800 $ - $13,418
Operating leases 184 433 681 699 699 2,328 5,024
Purchase
obligations 23,508 10,832 - - - - 34,340
------ ------ ------ ------ ------ ------ ------
Total contractual
cash obligations $24,550 $14,691 $5,104 $3,610 $2,499 $2,328 $52,782
====== ====== ====== ====== ====== ====== ======
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 November 30,
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
November 30, 2003, 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 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 November 30, 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 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 October 2, 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 second quarter ended August 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.
December 31, 2003 /s/ Richard K. Vitelle
- --------------------------------- -----------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)