SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2004
COMMISSION FILE NUMBER: 0-12182
___________
CALIFORNIA AMPLIFIER, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 95-3647070
______________________________ __________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 N. RICE AVENUE, OXNARD, CALIFORNIA 93030
_________________________________________ __________________
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-9000
________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH
EXCHANGE
___________________ __________________
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
$.01 PAR VALUE COMMON STOCK
___________________________
(Title of Class)
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the common stock of the Registrant held
by non-affiliates computed by reference to the price at which the common
stock was last sold as of the last business day of the Registrant's most
recently completed second fiscal quarter was approximately $54,455,000.
There were 23,070,097 shares of the Registrant's Common Stock
outstanding as of May 24, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on July 30, 2004 are incorporated by
reference into Part III, Items 11, 12, 13 and 14 of this Form 10-K. This
Proxy Statement will be filed within 120 days after the end of the fiscal
year covered by this report.
PART I
ITEM 1. BUSINESS
THE COMPANY
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, as well as a line of
consumer and commercial products for video and data reception. The Wireless
Access business unit designs and markets integrated reception and two-way
transmission equipment for broadband data and video applications.
California Amplifier is an ISO 9001 certified company.
The consolidated financial statements include the accounts of the
Company (a Delaware corporation) and its wholly-owned French subsidiary,
California Amplifier SARL. The French subsidiary essentially functions as
an international sales office for the Wireless Access business unit.
As further described in Note 2 to the accompanying consolidated
financial statements, in April 2002 the Company acquired the DBS dish
antenna business of Kaul-Tronics, Inc. and two affiliated companies
(collectively, "Kaul-Tronics"). The results of operations of this DBS dish
antenna business are included since that date in the Company's consolidated
financial statements in the Satellite business segment.
As further described in Note 14 to the accompanying consolidated
financial statements, in July 2001 the Company sold its 51% interest in
Micro Pulse, a company engaged in the design, manufacture and marketing of
antennas and amplifiers used principally in global positioning satellite
(GPS) applications. Accordingly, the results of operations of Micro Pulse,
which represented a separate business segment of the Company, have been
presented as a discontinued operation in the accompanying consolidated
statement of operations for fiscal year 2002.
The Company was incorporated in California in 1981 and was
reincorporated in Delaware in 1987.
RECENT DEVELOPMENT
On April 12, 2004, the Company completed the acquisition of 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 video, voice and data.
Vytek has approximately 280 employees with 10 offices nationwide. During
its 11 months 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.
In connection with this acquisition, the Company: (i) issued
approximately 7,268,700 shares of its common stock to Vytek's selling
stockholders; (ii) issued and deposited 854,700 shares of its common stock
into an escrow fund; (iii) paid approximately $5,000 in lieu of fractional
shares; (iv) converted all Vytek employee stock options outstanding at the
time of the merger into a total of 148,821 fully vested Company stock
options that had an aggregate fair value under the Black-Scholes formula of
approximately $1,850,000; and (v) incurred total transaction costs estimated
to be $2,550,000. See Note 16 to the accompanying consolidated financial
statements for a description of the escrow fund.
The common shares issued to Vytek's selling stockholders and
issued/deposited to the escrow fund were valued at $11.26 per share, which
was the average closing price of the Company's common stock on the Nasdaq
National Market for the period beginning two trading days before and ending
two trading days after December 23, 2003, the day the acquisition terms were
agreed to and announced. The aggregate purchase price, including the shares
deposited into the escrow fund, is approximately $96 million.
See "Vytek Corporation" caption below for an additional description of
Vytek's business.
SATELLITE PRODUCTS
The Satellite business unit generates its revenue almost entirely from
the sale of outdoor satellite television reception equipment, with such
products accounting for substantially all (98% to 99%) of Satellite segment
revenues in fiscal years 2004, 2003 and 2002. Sales of the Company's
Satellite business segment amounted to $121 million, $88.4 million and $78.9
million in fiscal years 2004, 2003 and 2002, respectively. Such amounts
represented 94.1%, 88.4% and 78.3%, respectively, of consolidated sales in
these fiscal years.
The Company's principal satellite products are installed at
subscribers' premises to receive subscription television programming signals
that are transmitted from orbiting satellites. The Company's satellite
television reception products consist principally of a reflector dish
antenna, feedhorn, and electronics which receive, process and amplify
satellite television signals for distribution over coaxial cable into the
building. The dish antenna reflects the satellite microwave signal back to
a focal point where a feedhorn collects the microwaves and transfers the
signals into an integrated amplifier/downconverter that is referred to in
the satellite industry as a Low Noise Block Feed ("LNBF"). The microwave
amplifier boosts the signal millions of times for further processing. The
downconverter changes the signal from a microwave frequency into a lower
intermediate frequency that a satellite television receiver can acquire,
recognize and process to create a picture.
Beginning in the early 1980s the Company was a leading supplier of
amplifiers and downconverters to the "large backyard dish" markets worldwide,
primarily the United States in the 1980s and 1990s, and Brazil and the
Middle East in the early and mid-1990s. In April 1999, the Company
purchased substantially all of the satellite television products business of
Gardiner Communications Corp. This acquisition provided the Company
immediate entry into the DBS subscription television market in North America.
For the past several years, substantially all of the Company's
satellite product sales consisted of DBS products, because sales of large
backyard satellite dish products and other legacy satellite products had
declined to a negligible level. The Company believes that outdoor reception
equipment for the DBS television industry will continue to be its principal
satellite product line for the foreseeable future.
WIRELESS ACCESS PRODUCTS
The Company's Wireless Access business unit accounted for 5.9%, 11.6%
and 21.7% of consolidated net sales in fiscal years 2004, 2003 and 2002,
respectively.
Revenue of the Wireless Access business segment revenue by product line
for the last three years is as follows (in $000s):
Fiscal year ended February 28,
-----------------------------
2004 2003 2002
---- ---- ----
Wireless television products $ 5,722 $10,004 $ 4,867
Broadband wireless access
antenna transceivers 1,894 1,603 16,949
------- ------- -------
Total Wireless Access revenue $ 7,616 $11,607 $21,816
======= ======= =======
Wireless television products are sold to operators of terrestrial
wireless television systems (also known as "Wireless Cable"), and include
signal scrambling equipment to encode premium video programming prior to
transmission and reception equipment which is installed at the subscribers'
premises in direct line-of-sight of terrestrial transmission towers. The
reception equipment consists of an antenna to receive the signal, integrated
electronics which "downconvert" (i.e., change) the signal from a microwave
frequency to a television frequency, a low noise amplifier and, if
applicable, electronics to decode scrambled signals.
Broadband wireless access antenna transceivers are devices sold to
internet service providers or systems integrators which are mounted outside
a subscriber's premises in direct line-of-sight of a terrestrial
transmission tower, enabling the subscriber to receive two-way high-speed
Internet access. These transceivers enable wireless broadband Internet
service via a microwave frequency band (Multichannel Multipoint Distribution
System, or "MMDS"). The transceiver is connected by coaxial cable to a
modem inside the subscriber's premises. The modem either transmits or
receives signals to or from the transceiver. The Company's revenues from
this product line declined substantially after fiscal 2002 because the
largest owners of this wireless spectrum in the U.S., including Sprint,
ceased the rollout of this wireless broadband service in 2001 principally
because of high subscriber acquisition costs.
In 2003, the Company announced that it had developed an adaptive
digital beam-forming smart antenna technology for use in enhanced access
points for high-speed Internet access over wireless networks which use the
802.11 standard, commonly referred to as "Wi-Fi". The Company believes that
this access point technology, named RASTER[TM], effectively addresses issues
such as range, data throughput and tolerance to interference that have
hindered the widespread deployment of 802.11 networks. The Company is
continuing the development of this technology, and plans to begin beta
testing during calendar year 2004.
For additional information regarding the Company's sales by business
segment and geographical area, see Note 13 to the accompanying consolidated
financial statements.
MANUFACTURING
Electronic devices, components and made-to-order assemblies used in the
Company's products are generally obtained from a number of suppliers,
although certain components are obtained from sole source suppliers. Some
devices or components are standard items while others are manufactured to
the Company's specifications by its suppliers. The Company believes that
most raw materials are available from alternative suppliers. However, any
significant interruption in the delivery of such items could have an adverse
effect on the Company's operations.
Over the past several years, printed circuit board assembly has been
outsourced to contract manufacturers in the Pacific Rim. The Company
performs final assembly and test of most its Satellite LNBF and Wireless
Access products at its facilities in Ventura County, California. Printed
circuit assemblies are mounted in various aluminum and plastic housings,
electronically tested, and subjected to additional environmental tests on a
sampled basis prior to packaging and shipping.
Satellite dish antennas are manufactured on a subcontract basis by a
non-affiliated metal fabrication company in the U.S. In addition, one of
the Company's Satellite LNBF products is manufactured on a subcontract basis
by a company located in Taiwan.
A substantial portion of the Company's components, and substantially
all printed circuit board assemblies and housings, are procured from foreign
suppliers and contract manufacturers located primarily in Hong Kong,
mainland China, Taiwan, and other Pacific Rim countries. Any significant
shift in U.S. trade policy toward these countries, or a significant downturn
in the economic or financial condition of, or any political instability in,
these countries, could cause disruption of the Company's supply chain or
otherwise disrupt the Company's operations, which could adversely impact the
Company's business.
Since the fourth quarter of fiscal 2004, the price of raw steel, which
is a key material for the Company's satellite dish antenna products, has
increased substantially, which could adversely affect profit margins in
fiscal 2005. The Company is taking steps to minimize the impact of these
cost increases by, among other things, passing through these cost increases
to customers to the extent possible given competitive market conditions.
ISO 9001 INTERNATIONAL CERTIFICATION
In 1995, the Company became registered to ISO 9001, the widely
recognized international standard for quality management in product design,
manufacturing, quality assurance and marketing. The Company believes that
ISO certification is important to its business because most of the Company's
key customers expect their suppliers to have and maintain ISO certification.
The registration assessment was performed by Underwriter's Laboratory, Inc.
according to the ISO 9001:1994 International Standard. Continuous
assessments to maintain certification are performed semi-annually, and the
Company has maintained its certification through each audit evaluation, most
recently in February 2004. In addition, the Company conducts internal
audits of processes and procedures on a quarterly basis. The Company
believes that the loss of its ISO certification could have a material
adverse effect on its operations, and the Company can provide no assurance
that it will be successful in continuing to maintain such certification.
RESEARCH AND DEVELOPMENT
Each of the markets the Company competes in is characterized by
technological change, evolving industry standards, and new product features
to meet market requirements. During the last three years, the Company has
focused its research and development resources primarily on Satellite DBS
products, two-way wireless non-line-of-sight integrated transceiver/modems,
smart antenna technology for use in 802.11 "WiFi" broadband wireless
networks, and signal enhancing products for mobile telephones that operate
in the Personal Communications Services ("PCS") spectrum near 1900 megahertz.
In addition, development resources were allocated to broaden existing
product lines, reduce product costs and improve performance by product
redesign efforts.
Research and development expenses in fiscal years 2004, 2003 and 2002
were $5,363,000, $5,982,000 and $7,337,000, respectively. During this three
year period the Company's research and development expenses have ranged
between 4.2% and 7.3% of annual sales.
SALES AND MARKETING
The Company's sales are predominantly made to customers in the United
States. The following table summarizes the Company's sales by geographic
region for the last three years, as percentages of consolidated sales:
Year ended February 28,
--------------------------------
2004 2003 2002
------ ------ ------
United States 95.6% 90.5% 82.4%
Africa 1.3% 4.1% 1.3%
Latin America 1.5% 2.4% 1.7%
Europe 1.0% 2.3% 2.2%
Canada 0.2% 0.3% 11.7%
All other 0.4% 0.4% .7%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
The Company sells its Satellite products primarily to U.S. DBS system
operators, systems integrators and distributors for incorporation into
complete subscription satellite television systems. The Company sells its
Wireless Access products directly to system operators as well as through
distributors and system integrators. See Note 13 to the accompanying
consolidated financial statements for sales by business segment.
The Company's sales and marketing functions for both business units are
centralized at its corporate headquarters in Ventura County, California. In
addition, the Company has sales offices and personnel in Paris, France and
Sao Paulo, Brazil.
Sales to customers that accounted for 10% or more of consolidated annual
sales in any one of the last three years, as a percent of consolidated
sales, are as follows:
Year ended February 28,
------------------------------
Customer Segment 2004 2003 2002
-------- --------- ------ ------ ------
A Satellite 39.4% 43.8% 25.8%
B Satellite 22.9% 9.8% .2%
C Satellite 5.9% 9.5% 30.6%
D Wireless 0.1% - 13.5%
E Satellite - 0.1% 11.7%
Echostar Communications Corporation (identified as Customer A in the
table above), owns and operates the DISH satellite television service in the
U.S. DirecTV Group Inc. (identified as Customer B in the table above) is
the largest satellite television service provider in the U.S. The Company
believes that the loss of Echostar or DirecTV as a customer would have a
material adverse effect on the Company's financial position and results of
operations.
Sprint (identified as Customer D in the table above), ceased its
rollout of first generation line-of-sight fixed wireless broadband Internet
service in 2001. As a result, the Company's sales to this customer were
negligible in fiscal years 2004 and 2003.
COMPETITION
The Company's markets are highly competitive. In addition, if the
markets for the Company's products grow, the Company anticipates increased
competition from new companies entering such markets, some of whom may have
financial and technical resources substantially greater than those of the
Company. The Company believes that competition in its markets is based
primarily on performance, reputation, product reliability, technical
support and price. The Company's continued success in these markets will
depend in part upon its ability to continue to design and manufacture
quality products at competitive prices.
Satellite Products:
The Company believes that its principal competitors for its Satellite
Products business include Sharp Corporation, Wistron NeWeb Corporation,
Winegard Company, Andrew Corporation, Microelectronics Technology, Inc. and
ProBrand. Based on information announced quarterly by the U.S. DBS system
operators as to the total number of subscribers and the subscriber turnover
rate, the Company believes that it is a leading supplier to the market for
outdoor subscriber premise equipment for the U.S. satellite television
industry. In the Satellite television market, the Company believes its
reputation for performance and quality allows the Company a competitive
advantage if pricing of its products is comparable to its competitors.
Because the Company's Satellite products are not proprietary, it is possible
that they may be duplicated by low-cost producers, resulting in price and
margin pressures.
Wireless Access Products:
The Company believes that its principal competitors for its Wireless
Cable television products include TranSystem, Inc. and Telelynx, Inc., both
Taiwanese companies, and that its principal competitors for broadband
wireless access products include, or could include, IPWireless Inc., NextNet
Wireless, Inc. and Flarion Technologies, Inc. The wireless equipment market
sectors in which the Company competes are highly fragmented, and although
the Company was a leading supplier of first generation line-of-sight MMDS
transceivers for broadband wireless service in calendar years 2000 and 2001,
the Company believes that its share of the wireless market sectors in which
it competes is very small at the present time, in part because the MMDS
broadband wireless access market is largely dormant.
The Company believes that its product performance, reliability, low
field failure rate, technical support and pricing have been its principal
competitive advantages in the past. However, the Wireless Cable television
sector has been shrinking for a number of years, and the MMDS broadband
wireless access sector is, as noted above, largely dormant and will remain
so unless the spectrum owners commence system deployments utilizing next
generation non-line-of-sight technology. The Company's ability to
capitalize on its past competitive advantages in its Wireless business will
depend in part on whether and when market demand substantially improves for
MMDS broadband wireless access products. In addition, the Company has not
yet commercialized its technology targeted at broadband wireless access
networks which utilize the 802.11 standard.
BACKLOG
The Company's products are sold to customers that do not usually enter
into long-term purchase agreements, and as a result, the Company's backlog
at any date is not significant in relation to its annual sales. In addition,
because of customer order modifications, cancellations, or orders requiring
wire transfers or letters of credit from international customers, the
Company's backlog as of any particular date may not be indicative of sales
for any future period.
INTELLECTUAL PROPERTY
The Company's timely application of its technology and its design,
development and marketing capabilities have been of substantially greater
importance to its business than patents or licenses.
The Company currently has 22 patents ranging from design features for
downconverter and antenna products to its MultiCipher broadband scrambling
system. Those that relate to its downconverter products do not give the
Company any significant advantage since other manufacturers using different
design approaches can offer similar microwave products in the marketplace.
In addition to its awarded patents, the Company currently has 11 patent
applications pending, including 5 patent applications related to smart
antenna technology for use in 802.11 broadband wireless networks.
The Company believes that at the present time none of its patents are
material to its existing operations. The Company is currently pursuing
several patents in its Wireless Access business unit that, if obtained,
could be material to its future operations.
California Amplifier(R) and MultiCipher(R) are federally registered
trademarks of the Company.
EMPLOYEES
At February 28, 2004, the Company had approximately 260 employees and
approximately 255 contracted production workers. None of the Company's
employees are represented by a labor union. The contracted production
workers are engaged through independent temporary labor agencies in
California.
VYTEK CORPORATION
As stated under "Recent Development" above, the Company completed its
acquisition of Vytek on April 12, 2004. Vytek is a provider of technology
integration solutions catering to the needs of enterprises and original
equipment manufacturers (OEMs), in the emerging wireless and mobile
computing sector. Vytek provides integrated solutions leveraging a mix of
professional services and proprietary software and hardware platforms. In
addition to its experience with emerging wireless technologies, Vytek
provides both the embedded computing platform and the complex software
systems to enable mobile computing.
Since being founded in April 2000, Vytek has completed seven principal
acquisitions, including the acquisition of Sonik Technologies, Inc.
(subsequently renamed Vytek Products, Inc.), a provider of wireless
communication infrastructure equipment; Telamon, Inc. (subsequently renamed
Vytek Messaging Services, Inc.), which is the developer of TelAlert, a
leading urgent messaging solution; Planet Technology Solutions, Inc.
(subsequently renamed Vytek Solutions, Inc.), an integrator of wireless
solutions catering to retail and supply chain; Rubicon Technologies, Inc.
(subsequently renamed Vytek Public Safety Solutions, Inc.), a provider of
software solutions for municipal and other public safety organizations;
MicroKnowledge, Inc., a provider of training services; and Stellcom, Inc., a
provider of mobile computing software and hardware solutions.
Vytek provides mobile and wireless technology solutions to its
customers that incorporate an array of technologies. Vytek's solutions
include state-of-the-art software and hardware, plus the customization
services needed to make them suitable for each customer. Vytek provides
development and consulting services under either "time and materials" or
fixed price contracts. Vytek's customers range from enterprises seeking to
utilize mobile computing to technology innovators developing the next
generation of technology devices. Vytek serves customers in industries such
as health care, entertainment, transportation and public safety, among
others.
Vytek's experience includes mobile computing, embedded computing,
urgent messaging, enterprise content delivery, and integrated networks.
Vytek's mobile computing expertise extends enterprise business processes to
mobile workers by establishing connectivity between enterprise applications
and a wide range of mobile and telephony devices. Embedded computing
offerings include the development of end-to-end solutions that build and
connect a wide range of devices to back-end systems.
Vytek's messaging and paging offerings include an urgent messaging
software platform known as TelAlert as well as a series of paging hardware
products. Vytek also provides industry specific solutions such as its suite
of public safety applications that address the needs of federal, state and
local law enforcement agencies.
ITEM 2. PROPERTIES
The Company's corporate headquarters and its primary manufacturing
operations are housed in a building of approximately 100,000 square feet in
Ventura County, California under a lease that runs through June 2011. The
Company also leases small facilities for a sales office in France and a
product design center in Chanhassen, Minnesota.
In April 2002, as part of the acquisition of the satellite dish
manufacturing operation of Kaul-Tronics, Inc. (as further described in Note
2 to the accompanying consolidated financial statements), the Company
acquired three buildings in Wisconsin, consisting of two manufacturing
plants and one warehouse. During fiscal 2004, the Company outsourced this
satellite dish manufacturing operation to a non-affiliated metal fabrication
company in the U.S. As a result of this outsourcing, two of the three
buildings in Wisconsin were sold during fiscal 2004. The third building is
classified as property held for sale at the end of fiscal 2004.
ITEM 3. LEGAL PROCEEDINGS
Investigation by the Securities and Exchange Commission:
In May 2001, the Securities and Exchange Commission ("SEC") opened an
investigation into the circumstances surrounding the misstatements in the
Company's consolidated financial statements for its 2000 and 2001 fiscal
years caused by its former controller. In April 2004, the SEC concluded its
investigation and issued a cease and desist order directing the Company to
not violate federal securities laws in the future.
Wage-related class action lawsuit:
On April 21, 2004, the Company was served with a complaint alleging
certain violations of the California labor code. Among other charges, the
class action complaint alleges that from October 2000 to the present time
certain hourly employees did not take their lunch break within the time
period prescribed by state law. Notwithstanding that the delayed break was
at the request of, and for the convenience of, the affected employees, the
Company believes that it could have a liability to pay a wage premium for
these delayed lunch breaks. The Company intends to defend itself vigorously
against all allegations in the complaint and has established what management
believes to be an appropriate reserve in the quarter ended February 28, 2004.
Property lease lawsuit and cross-complaint
On May 21, 2004, the Company was served with a lawsuit filed by the
owner of a building in Camarillo, California that was formerly used as the
Company's corporate offices and principal manufacturing plant under a 15-
year lease agreement that expired on February 28, 2004. The lawsuit seeks
damages for facility repairs that are allegedly required in the range of
$520,000 to $700,000. The Company believes the lawsuit is without merit and
intends to defend itself vigorously against all allegations. On May 27,
2004, the Company filed a cross-complaint, seeking payment by the building
owner of approximately $180,000 in deposits and other amounts which the
Company believes it is owed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended February 28, 2004, no matters were
submitted to a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market under the
ticker symbol CAMP. The following table sets forth for the last two years
the quarterly high and low sale prices for the Company's Common Stock, as
reported by Nasdaq:
LOW HIGH
Fiscal Year Ended February 28, 2004:
1st Quarter $ 3.07 $ 4.23
2nd Quarter 3.07 4.42
3rd Quarter 4.05 11.60
4th Quarter 7.40 16.87
Fiscal Year Ended February 28, 2003:
1st Quarter $ 4.96 $ 7.24
2nd Quarter 3.46 6.40
3rd Quarter 3.11 5.90
4th Quarter 3.76 6.49
At May 24, 2004 the Company had approximately 1,600 stockholders of
record. The number of stockholders of record does not include the number of
persons having beneficial ownership held in "street name" which are
estimated to approximate 10,000. The Company has never paid a cash dividend
and has no current plans to pay cash dividends on its Common Stock.
At February 28, 2004, the Company had two option plans, the "1989 Plan"
and the "1999 Plan". Options to purchase the Company's common stock are
granted to both employees and directors under the 1999 Plan. Options can no
longer be granted under the 1989 Plan. Both of these plans were approved by
the Company's stockholders. Further information about these plans is set
forth in Note 8 to the consolidated financial statements. Certain
information about the plans is as follows:
Number of Number of securities
securities to be Weighted-average remaining available for
issued upon exercise price future issuance under
exercise of of outstanding equity compensation
outstanding options, plans (excluding
options, warrants warrants and securities reflected in
and rights rights the first column)
----------- ---------- -------------
2,578,138 $10.05 62,250
The 1999 Plan contains an "evergreen" provision under which the pool of
options available to grant is replenished to 500,000 options on the first
day of each fiscal year. Pursuant to this evergreen provision, the pool of
options available to grant under the 1999 Plan was increased from 62,250 to
500,000 effective March 1, 2004.
ITEM 6. SELECTED FINANCIAL DATA
Year ended February 28,
----------------------------------------------
(In thousands except per share amounts)
OPERATING DATA 2004 2003 2002 2001 2000
------- -------- -------- -------- -------
Sales $128,616 $100,044 $100,715 $117,129 $79,429
Cost of goods sold 110,950 79,511 78,342 94,128 64,426
------- -------- ------- ------- -------
Gross profit 17,666 20,533 22,373 23,001 15,003
------- -------- ------- ------- -------
Operating expenses:
Research and development 5,363 5,982 7,337 6,066 4,526
Selling 2,336 2,560 3,456 3,460 4,127
General and administrative 3,984 3,781 6,321 5,366 5,006
------- -------- ------- ------- -------
Total operating expenses 11,683 12,323 17,114 14,892 13,659
------- -------- ------- ------- -------
Operating income 5,983 8,210 5,259 8,109 1,344
------- -------- ------- ------- -------
Non-operating income (exp.):
Settlement of litigation - - (1,125) - (9,500)
Other income (expense), net (243) (215) 47 (359) (60)
------- -------- ------- ------- -------
Total non-operating expense (243) (215) (1,078) (359) (9,560)
------- -------- ------- ------- -------
Income (loss) from continuing
operations before income tax 5,740 7,995 4,181 7,750 (8,216)
Income tax (provision) benefit (26) (2,835) (1,307) (2,810) 2,950
------- -------- ------- ------- -------
Income (loss) from
continuing operations 5,714 5,160 2,874 4,940 (5,266)
Income (loss) from discontinued
operations, net of tax - - (25) 269 202
Gain on sale of discontinued
operations, net of tax - - 1,615 - -
------- -------- ------- ------- -------
Net income (loss) $ 5,714 $ 5,160 $ 4,464 $ 5,209 $(5,064)
======= ======== ======= ======= =======
Earnings (loss) per share:
Basic: Income (loss) from
continuing operations $ 0.39 $ 0.35 $ 0.21 $ 0.37 $ (0.44)
Income from discontinued
operations - - - 0.02 0.02
Gain on sale of
discontinued operations - - 0.12 - -
------- ------- ------- ------- -------
$ 0.39 $ 0.35 $ 0.33 $ 0.39 $ (0.42)
======= ======= ======= ======= =======
Diluted:
Income (loss) from
continuing operations $ 0.37 $ 0.35 $ 0.21 $ 0.35 $ (0.44)
Income from discontinued
operations - - - 0.02 0.02
Gain on sale of
discontinued operations - - 0.11 - -
------- ------- ------- ------- -------
$ 0.37 $ 0.35 $ 0.32 $ 0.37 $ (0.42)
======= ======= ======= ======= =======
February 28,
-----------------------------------------------
(In thousands)
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
BALANCE SHEET DATA
Current assets $67,365 $53,092 $45,739 $35,523 $37,201
Current liabilities $24,589 $18,405 $15,480 $15,032 $32,729
Working capital $42,776 $34,687 $30,259 $20,491 $ 4,472
Current ratio 2.7 2.9 3.0 2.4 1.1
Total assets $97,642 $89,597 $56,688 $49,812 $51,497
Long-term debt $ 7,690 $12,569 $ 3,628 $ 4,500 $ 145
Stockholders' equity $65,363 $58,623 $37,580 $29,624 $18,281
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
California Amplifier 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, as well as a line of consumer and commercial products for
video and data reception. The Wireless Access business unit designs and
markets integrated reception and two-way transmission fixed wireless
equipment for broadband data and video applications.
The Company's Satellite products are sold primarily to the two U.S. DBS
system operators, Echostar Communications Corporation and DirecTV Group Inc.,
as well as to system integrators and distributors for incorporation into
complete subscription satellite television systems. The Company sells its
Wireless Access products directly to system operators as well as through
distributors and system integrators.
Revenue consists principally of sales of outdoor reception equipment for the
U.S. satellite television industry, which accounted for over 90% of revenue
in the fiscal year ended February 28, 2004. The DBS system operators have
approximately 20% share of the total subscription television market in the
U.S. In calendar 2003, the size of the U.S. DBS market grew by 11.8% from
19.35 million subscribers to 21.64 million subscribers.
Demand for the Company's satellite television reception products are driven
not only by the growth in the overall DBS subscriber base, but also by
product upgrade cycles and subscriber "churn". Churn, which is defined as
subscribers whose service is disconnected for any reason, is an important
factor driving demand for the Company's satellite products because the
outdoor reception equipment typically is not redeployed by the service
provider when churn occurs. Average monthly churn in the U.S. DBS market
was approximately 1.53% and 1.60% in calendar years 2003 and 2002,
respectively. Given the size of the U.S. satellite television market of
about 20 million subscribers, this means that in calendar 2003 the aggregate
churn amounted to approximately 4 million subscribers.
In April 2002 the Company acquired the satellite dish antenna manufacturing
business of Kaul-Tronics. This acquisition was driven by the strategic goal
of becoming a vertically integrated supplier of outdoor customer premise
equipment to the DBS industry. Based on information currently available,
the Company believes that its market share of the outdoor reception
equipment for the U.S. DBS industry is now approximately 50%. The Company
believes that the acquisition of Kaul-Tronics has helped increase its share
of the overall market, but it has also contributed to downward pressure on
gross profit margins in the satellite business segment because the antenna
dishes are more of a commodity product and therefore have lower margins than
the LNBF portion of the outdoor reception system. Recent increases in the
cost of raw steel, which is the primary material for the antenna dishes, is
expected to put additional pressure on satellite product gross margins for
at least the near-term future.
Revenue from sale of Wireless Access products accounted for over 20% of the
Company's total revenue in fiscal 2004, but this business unit's sales have
declined over the past two years such that Wireless Access products
accounted for only about 6% of fiscal 2004 revenues.
The demand for our products has been affected in the past, and may continue
to be affected in the future, by various factors, including, but not limited
to, the following:
* the timing, rescheduling or cancellation of orders from one of our
key customers in our Satellite products business and our ability,
as well as the ability of our customers, to manage inventory;
* the rate of subscriber churn in the U.S. DBS market, and the ability
of the system operators to manage and reduce their churn rates
* the rate of growth in the overall subscriber base in the U.S. DBS
market
* the economic and market conditions in the wireless communications
markets;
* our ability to specify, develop or acquire, complete, introduce,
market and transition to volume production new products and
technologies in a timely manner;
* the rate at which our present and future customers and end-users
adopt our products and technologies in our target markets.
* the qualification, availability and pricing of competing products and
technologies and the resulting effects on sales and pricing of our
products; and
For these and other reasons, the Company's net revenue in fiscal 2004 may
not necessarily be indicative of future years' revenue amounts. From time to
time, the Company's key customers significantly reduce their product orders,
or may place significantly larger orders, either of which can cause the
Company's quarterly revenues to fluctuate significantly. The Company
expects these fluctuations to continue in the future.
As further discussed under the caption "Recent Developments" in Item I, on
April 12, 2004 the Company acquired Vytek Corporation, 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 video, voice and data. This acquisition was motivated primarily
by the strategic goals of increasing the Company's presence in markets which
offer higher growth and profit margin potential, and diversifying the
Company's business and customer base beyond its current dependence on the
two U.S. DBS system operators.
Material opportunities for the Company include increasing our market share
for outdoor reception equipment in the U.S. DBS market, expanding our
presence in wireless industry market segments for both fixed and mobile
wireless applications, and leveraging California Amplifier's high volume
manufacturing capabilities to gain production contracts with customers of
Vytek's product design and consulting engineering services. The Company's
challenges include managing recent raw steel cost increases, improving
product margins, and integrating the recent acquisition of Vytek.
Basis of Presentation
The Company uses a 52-53 week fiscal year ending on the Saturday
closest to February 28, which for fiscal years 2004, 2003 and 2002 fell on
February 28, 2004, March 1, 2003 and March 2, 2002, respectively. In these
consolidated financial statements, the fiscal year end for all years is
shown as February 28 for clarity of presentation. Fiscal years 2004, 2003
and 2002 all consisted of 52 weeks.
As described further in Note 14 to the accompanying consolidated
financial statements, in July 2001 the Company sold its 51% interest in
Micro Pulse, a company engaged in the design, manufacture and marketing of
antennas and amplifiers used principally in GPS applications. Accordingly,
the results of operations of Micro Pulse, which represented a separate
business segment of the Company, have been presented as a discontinued
operation in the accompanying consolidated statement of operations for
fiscal year 2002.
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, the deferred tax asset valuation allowance,
and the valuation of long-lived assets and goodwill. 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 1 to the accompanying consolidated financial statements, the Company's
customer base is quite concentrated, with four customers accounting for
approximately 77% of the Company's fiscal 2004 sales. 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.
Product Warranties
The Company provides for the estimated cost of product warranties at
the time revenue is recognized. While it engages in extensive product
quality programs and processes, including actively monitoring and evaluating
the quality of its component suppliers, the Company's warranty obligation is
affected by product failure rates and material usage and service delivery
costs incurred in correcting a product failure. Should actual product
failure rates, material usage or service delivery costs differ from
management's estimates, revisions to the estimated warranty liability would
be required.
Deferred Income Tax Asset Valuation Allowance
The deferred income tax asset reflects the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and 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 that 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.
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. These reductions of the valuation allowance in fiscal years 2003
and 2002 exhausted that portion of the valuation allowance that was related
to tax benefits from option exercises. During fiscal 2004, the deferred tax
asset valuation allowance was further reduced by $1,405,000, which had the
effect of reducing income tax expense by a corresponding amount. At
February 28, 2004 the Company's net deferred income tax asset was $6,763,000,
which amount is net of a valuation allowance of $630,000.
If in the future a portion or all of the $630,000 valuation allowance
at February 28, 2004 is no longer deemed to be necessary, reductions of the
valuation allowance will decrease the income tax provision. Conversely, if
in the future the Company were to change its realization probability
assessment to less than 50%, the Company would provide an additional
valuation allowance for all or a portion of the net deferred income tax
asset, which would increase the income tax provision.
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" ("SFAS 144"), which supersedes Statement of Financial Accounting
Standards No. 121 and certain sections of Accounting Principles Board
Opinion No. 30 specific to discontinued operations. SFAS 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 address
situations where 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. The Company has adopted this
statement, which has not had a material impact on our financial position or
results of operations. SFAS 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 fiscal 2004, the
Company recorded an impairment writedown of $739,000 on property and
equipment 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", on March 3, 2002 (the first day
of fiscal 2003). As a result, goodwill is no longer amortized, but is
subject to a transitional impairment analysis and is tested for impairment
on an annual basis, 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 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.
Results of Operations, Fiscal Years 2002 Through 2004
The following table sets forth, for the periods indicated, the
percentage of sales represented by items included in the Company's
Consolidated Statements of Operations:
Year Ended February 28,
----------------------------
2004 2003 2002
------ ------ ------
Sales 100.0% 100.0% 100.0%
Cost of goods sold 86.3 79.5 77.8
----- ----- -----
Gross profit 13.7 20.5 22.2
----- ----- -----
Operating expenses:
Research and development 4.2 6.0 7.3
Selling 1.8 2.6 3.4
General and administrative 3.1 3.8 6.3
----- ----- -----
Operating income 4.6 8.1 5.2
Settlement of litigation - - (1.1)
Other expense, net (0.2) (0.2) -
----- ----- -----
Income from continuing operations
before income taxes 4.4 7.9 4.1
Income tax provision - (2.8) (1.3)
----- ----- -----
Income from continuing operations 4.4 5.1 2.8
Gain on sale of discontinued
Operations - - 1.6
----- ----- -----
Net income 4.4% 5.1% 4.4%
===== ===== =====
The Company's sales and gross profit by business segment for the last
three years are as follows:
SALES BY SEGMENT
Year Ended February 28,
--------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
% of % of % of
Segment $000s Total $000s Total $000s Total
----------- ------- ----- ------- ----- ------- -----
Satellite $121,000 94.1% $ 88,437 88.4% $ 78,899 78.3%
Wireless Access 7,616 5.9% 11,607 11.6% 21,816 21.7%
------- ----- ------- ----- ------- -----
Total $128,616 100.0% $100,044 100.0% $100,715 100.0%
======= ===== ======= ===== ======= =====
GROSS PROFIT BY SEGMENT
Year Ended February 28,
--------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
% of % of % of
Segment $000s Total $000s Total $000s Total
----------- ------- ----- ------- ----- ------- -----
Satellite $ 15,965 90.4% $ 17,251 84.0% $15,469 69.1%
Wireless Access 1,701 9.6% 3,282 16.0% 6,904 30.9%
------- ----- ------- ----- ------ -----
Total $ 17,666 100.0% $ 20,533 100.0% $22,373 100.0%
======= ===== ======= ===== ====== =====
The Satellite business unit generates its revenue almost entirely from
the sale of outdoor reception equipment for use with subscription satellite
television programming services. Such products accounted for 98% to 99% of
Satellite segment revenues in fiscal years 2004, 2003 and 2002. The
remaining revenue of the Satellite segment in these fiscal years was
generated from the sale of commercial satellite products for video and data
reception.
Revenue of the Wireless Access business segment revenue by product type
for the last three years is as follows (in $000s):
Fiscal year ended February 28,
-----------------------------
2004 2003 2002
---- ---- ----
Wireless television products $ 5,722 $10,004 $ 4,867
Broadband wireless access antenna
transceivers 1,894 1,603 16,949
------- ------- -------
Total Wireless Access segment revenue $ 7,616 $11,607 $21,816
======= ======= =======
Fiscal Year 2004 compared to Fiscal Year 2003
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 $32,563,000, or 37%, in fiscal 2004
from fiscal 2003. This increase resulted primarily from substantially
higher customer orders in fiscal 2004 for the latest generation integrated
amplifier/downconverter products (referred to in the industry as Low Noise
Block Feeds or "LNBFs"), which have higher average selling prices compared
to earlier generation LNBF products. Also, Satellite revenues in the second
half of fiscal 2003 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 fiscal 2003's third quarter.
A new LNBF product was introduced during fiscal 2004 which generated sales
of $8.8 million. Also, the number of units sold in fiscal 2004 for all
other LNBF products was approximately 13% higher than in fiscal 2003, and
the average selling price of these other LNBF products increased by
approximately 16% in fiscal 2004 compared to fiscal 2003.
Sales of Wireless Access products in fiscal 2004 declined by $3,991,000,
or 34%, from fiscal 2003. This decline resulted mainly because fiscal
2003's revenue included several large sales that were nonrecurring.
Gross Profit and Gross Margins
In fiscal 2004, Satellite gross profit declined by $1,286,000, or 7%,
from fiscal 2003, and gross margin declined to 13.2% this year from 19.5% in
fiscal 2003. Despite the fact that Satellite sales in fiscal 2004 are 37%
higher than in fiscal 2003, the quarter-to-quarter volatility of sales in
the fiscal 2004 was extreme, ranging from a low of $16.6 million in the
first quarter and a high of $42.6 million in the third quarter. This
volatility in sales, which caused similar volatility in manufacturing
activity, was caused by rapid shifts in demand on the part of the two U.S.
DBS service providers. This 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 declines in Satellite gross profit and gross
margin in fiscal 2004 was the effect of persistent competitive pricing
pressures on certain Satellite products and significantly higher freight
costs incurred for the procurement of raw materials and subassemblies in the
third quarter of fiscal 2004. In addition, included in Satellite cost of
sales for fiscal 2004 were asset impairment writedowns of $739,000 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.
Wireless Access gross profit decreased $1,581,000, or 48%, and gross
margin for Wireless Access products decreased to 22.3% in fiscal 2004 from
28.3% in fiscal 2003. The decline in Wireless Access gross profit was
primarily due to the 34% year-over-year decrease in sales. The decline in
Wireless gross margin in the latest year is also attributable to the
decrease in Wireless sales, which resulted in higher unabsorbed fixed
overhead costs that are included in cost of sales.
See also Note 13 to the accompanying consolidated financial statements
for additional operating data by business segment.
Operating Expenses
Research and development expense decreased by $619,000, or 10%, from
$5,982,000 in fiscal 2003 to $5,363,000 in fiscal 2004. The decline in R&D
expense in fiscal 2004 is due in part to the cancellation, in the third
quarter of fiscal 2003, 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 approximately $345,000 in outside service expense in fiscal
2004. Also contributing to the decline in R&D expense in fiscal 2004 was
lower salaries expense due to staffing reductions ($420,000).
Selling expense decreased by $224,000, or 9%, in fiscal 2004 to
$2,336,000 from $2,560,000 in fiscal 2003. This decrease is primarily due
to the fact that bad debts expense for fiscal 2003 included a charge of
$258,000 to write down the carrying amount of an available-for-sale
investment in common stock that had been received in fiscal 2002 in
satisfaction of an accounts receivable balance from a customer that went
through a legal reorganization.
General and administrative expense increased by $203,000 in fiscal 2004
compared to fiscal 2003. This increase was primarily due to the Company's
relocation of its facilities in Ventura County, California during the fourth
quarter of fiscal 2004. Expense incurred in connection with this relocation
amounted to approximately $255,000.
Non-operating Expense, Net
Net non-operating expense increased by $28,000 from $215,000 in fiscal
2003 to $243,000 in fiscal 2004. This increase in net non-operating expense
is primarily attributable to a decline in foreign currency gains from
$97,000 in fiscal 2003 to $75,000 in fiscal 2004.
Income Taxes
The effective income tax rate was 0.5% and 35.5% in fiscal years 2004
and 2003, respectively. The decline in effective tax rate is attributable
primarily to the fact that, in fiscal 2004, reductions in the deferred tax
asset valuation allowance had a corresponding impact on the income tax
provision. 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. See further discussion
of the deferred tax asset valuation allowance in Note 7 to the accompanying
consolidated financial statements. In fiscal 2005, the effective income tax
rate is expected to revert to a more normal level because the deferred tax
asset valuation allowance was substantially eliminated by the end of fiscal
2004.
Fiscal Year 2003 compared to Fiscal Year 2002
Sales
Sales of Satellite products increased $9,538,000, or 12.1% in fiscal
2003 from fiscal 2002. This increase resulted from the acquisition of the
Kaul-Tronics satellite antenna dish business on April 5, 2002, as further
described in Note 2 to the accompanying consolidated financial statements.
The acquired Kaul-Tronics business accounted for approximately $16 million
of Satellite segment sales during fiscal 2003, substantially all of which
consisted of antenna dishes and associated mounting hardware. Partially
offsetting the fiscal 2003 revenue contribution of the Kaul-Tronics business
was a decline in revenue from the sale of LNBFs due to a decline of
approximately 8% in units sold. The average selling price of LNBFs in
fiscal 2003 was relatively unchanged from fiscal 2002.
Sales of Wireless Access products in fiscal 2003 decreased $10,209,000,
or 47%, from fiscal 2002. This is the net result of a $15,346,000 decline
in sales of broadband wireless access antenna transceivers and a $5,137,000
increase in sales of Wireless Cable television products. The decline in
broadband wireless transceivers is attributable to a combination of the
general slowdown in capital spending in the telecommunications industry and
the anticipation of next generation non-line of sight broadband wireless
products. The Company does not anticipate that its Wireless Access sales
will increase appreciably until the broadband wireless service providers
resume the expansion of their subscriber bases. In response to the
substantial decline in its broadband wireless product line, the Company's
Wireless Access unit concentrated its sales efforts on foreign Wireless
Cable television system operators, and was able to grow this portion of its
Wireless business in fiscal 2003 despite the fact that the overall Wireless
Cable television market is declining.
Gross Profit and Gross Margins
Satellite gross profit increased $1,782,000, or 11.5%, while gross
margin for Satellite products was stable year over year (19.5% and 19.6% in
fiscal 2003 and fiscal 2002, respectively). Benefiting fiscal 2003 gross
profit and gross margin were cost reductions on existing Satellite products
arising from product design changes and negotiated price reductions on raw
material components. However, the positive impact of these cost reductions
were largely offset by several negative factors, specifically: production
inefficiencies caused by delays in receiving materials during and after the
West Coast dockworkers lockout; lower average selling prices for mature LNBF
products; costs associated with production ramp-up of new Satellite
products; raw steel price increases during fiscal 2003; and costs in the
aggregate amount of approximately $450,000 associated with a Satellite
product replacement program in the fourth quarter of fiscal 2003.
Since the fourth quarter of fiscal 2004, the price of raw steel, which
is a key material for the Company's satellite dish antenna products, has
increased substantially, which could adversely affect profit margins in
fiscal 2005. The Company is taking steps to minimize the impact of these
cost increases by, among other things, passing through these cost increases
to customers to the extent possible given competitive market conditions.
Wireless Access gross profit decreased $3,622,000, or 52%, while gross
margin for Wireless Access products declined to 28.3% in fiscal 2003 from
31.6% in fiscal 2002. These declines are primarily attributable to the 47%
decrease in Wireless sales and the resultant higher unabsorbed fixed
overhead costs that are included in cost of sales.
Operating Expenses
Research and development expenses decreased by $1,355,000, or 18%, from
$7,337,000 in fiscal year 2002 to $5,982,000 in fiscal year 2003. This
decline is primarily due to headcount reductions and a reduced level of
subcontracted product development expenses of the Wireless Access business
segment in fiscal 2003. In the second quarter of fiscal 2003, the Company
cancelled a product development contract for broadband wireless application
specific integrated circuits (ASICs) because the market timing for large
scale deployment of this technology was uncertain in the near-term future.
As a result of this cancellation, expense associated with this product
development contract was $384,000 less in fiscal 2003 compared to fiscal
2002.
Selling expenses decreased by $896,000 from $3,456,000 in fiscal year
2002 to $2,560,000 in fiscal year 2003. The decrease occurred primarily
because fiscal 2002 selling expense included the write-off of a receivable
from a customer of the Company's Wireless Access business unit in the amount
of $817,000.
General and administrative expense decreased by $2,540,000 to
$3,781,000 in fiscal 2003 from $6,321,000 in fiscal 2002. This decrease was
due primarily to lower accounting and legal expenses of $1,365,000, lower
consulting expense of $182,000, lower employee recruiting and relocation
expenses of $239,000, lower goodwill amortization expense of $270,000
(because beginning in fiscal 2003 goodwill is no longer amortized, as
discussed further in Note 5 to the accompanying consolidated financial
statements), and lower incentive compensation expense of $104,000. Another
factor contributing $215,000 to this year-to-year change is that G&A expense
for fiscal 2002 includes a loss on sale of equipment of $58,000, while G&A
expense for fiscal 2003 includes a gain on sale of equipment of $157,000.
Contributing to the year-to-year declines for accounting, legal and
consulting expenses discussed above were the fact that these professional
service expenses for fiscal 2002 included approximately $950,000 associated
with the restatement of the Company's fiscal 2000 and interim fiscal 2001
financial statements. Remaining reductions in professional service fees in
fiscal 2003 compared to fiscal 2002 are primarily because fiscal 2002
amounts included legal fees in connection with several litigation matters,
and because fiscal 2002 accounting expense includes audit fees for redundant
services due to the Company's decision to terminate Arthur Andersen and to
engage KPMG to audit the fiscal 2002 financial statements after Arthur
Andersen had already begun its work on that audit.
Operating income increased by $2,951,000 from $5,259,000 in fiscal year
2002 to $8,210,000 in fiscal year 2003. The principal reasons for the
improvement are as described above -- a $1.8 million decrease in gross
profit, offset by a $4.8 million decrease in operating expenses.
Litigation Settlement
The "settlement of litigation" expense in the amount of $1,125,000 for
fiscal 2002 represents an accrued settlement of $925,000 for litigation
brought against the Company as a result of the fiscal 2000 and 2001
financial misstatements caused by the Company's former controller, and an
accrual of $200,000 for a refund payable to an insurance company involving a
legal settlement reached in March 2000.
Income Tax Provision and Deferred Income Tax Asset
The effective tax rates for fiscal 2003 and 2002 were 35.5% and 31.3%,
respectively. The increase in the effective tax rate in fiscal 2003
compared to fiscal 2002 was attributable primarily to state income tax rate
changes.
The deferred income tax asset valuation allowance was established in
years prior to fiscal 2002 because management believed at the time that it
did not have the basis to conclude that it was more likely than not that the
deferred income tax asset would be fully realized in the future. Based on
profitable operations in the most recent three year period, and on
management's internal forecast of future operating results, management
believed that it was more likely than not that the Company would generate
sufficient taxable income subsequent to fiscal 2003 to utilize deferred tax
assets of $6,530,000, and accordingly the deferred tax asset valuation
allowance was reduced by $5,389,000 during fiscal 2003. Because that
portion of the valuation allowance that was reduced during fiscal 2003 was
associated with tax deductions on non-qualified employee stock options which
were exercised in earlier years, the valuation allowance was reduced with a
corresponding increase in additional paid-in capital.
Liquidity and Capital Resources
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $22,885,000 at February 28, 2004, and its $10
million working capital line of credit with a bank. During fiscal year 2004,
cash and cash equivalents increased by $938,000. This net increase
consisted of cash provided by operating activities of $5,094,000, proceeds
from sale of property and equipment of $2,201,000, and proceeds from stock
option exercises of $617,000, less cash used for capital expenditures of
$2,693,000 and net repayments of debt of $4,281,000.
Cash was used by an increase in operating working capital during fiscal
2004 in the aggregate amount of $4,729,000, comprised of a $2,351,000
increase in accounts receivable, a $7,391,000 increase in inventories, a
$573,000 increase in prepaid expenses and other assets, and a decrease of
$256,000 in accrued liabilities, partially offset by an increase of
$5,842,000 in accounts payable.
The Company believes that inflation and foreign currency exchange rates
did not have a material effect on its operations in fiscal 2004. The
Company believes that fiscal year 2005 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 February 28, 2004 the Company had a $10 million working capital line
of credit with a commercial bank that matures on August 3, 2005. 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 February 28, 2004, $1 million was outstanding on this line of credit
which is classified as long-term at that date. At February 28, 2003, there
were no outstanding borrowings under the line of credit. At February 28,
2004 and 2003, amounts reserved under the line of credit for outstanding
irrevocable stand-by letters of credit were $2,479,000 and $1,582,000,
respectively. The Company also has two term loans with this bank that had
an aggregate outstanding principal balance of $10,293,000 at February 28,
2004, as further described in Note 6 to the consolidated financial
statements.
The bank credit agreement that encompasses the working capital line of
credit and the two bank term loans contains certain financial covenants and
ratios that the Company is required to maintain, including a fixed charge
coverage ratio of not less than 1.25, a current ratio of not less than 2.0,
a leverage ratio of not more than 2.25, tangible net worth of at least
$19,050,000 (such minimum amount increasing by $1 million annually beginning
on March 1, 2003), cash and cash equivalents not less than $8 million, and
net income of at least $1.00 in each fiscal year. At February 28, 2004 and
2003, the Company was in compliance with all such covenants. The bank
credit agreement contains a subjective acceleration clause that 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 four
years, and based on the Company's internal financial forecasts for the next
year, the Company does not believe it is probable that the bank will assert
the material adverse change clause in the next 12 months.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Contractual Obligations
Following is a summary of the Company's contractual cash obligations as
of February 28, 2004 (in thousands):
Future Cash Payments Due by Fiscal Year
----------------------------------------------
Contractual There-
Obligations 2005 2006 2007 2008 2009 after Total
- --------------- ------ ------ ------ ------ ------ ------ ------
Debt $ 3,603 $3,823 $2,139 $1,728 $ - $ - $11,293
Operating leases 697 732 732 741 763 1,874 5,539
Purchase
Obligations 27,148 - - - - - 27,148
------- ------ ------ ------ ------ ------ ------
Total contractual
cash obligations $31,448 $4,555 $2,871 $2,469 $ 763 $1,874 $43,980
====== ====== ====== ====== ====== ====== ======
Purchase obligations consists of obligations under non-cancelable
purchase orders, primarily for inventory purchases of raw materials,
components and subassemblies.
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.
New Authoritative Pronouncements
See Note 1 of the accompanying consolidated financial statements for a
description of new authoritative accounting pronouncements either recently
adopted or which had not yet been adopted by the Company as of the end of
fiscal 2004.
Forward Looking Statements
Forward looking statements in this Form 10-K 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 "may" "could", "plans", "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, product
demand, market growth, new competition, competitive pricing and continued
pricing declines in the DBS market, supplier constraints, manufacturing
yields, the ability to manage cost increases in inventory materials
including raw steel, timing and market acceptance of new product
introductions, new technologies, the ability to successfully integrate the
acquisition of Vytek Corporation that was completed on April 12, 2004, and
other risks and uncertainties that are set forth under the heading "Risk
Factors" in the Company's registration statement on Form S-4 (number 333-
112851) as filed with the Securities and Exchange Commission on February 13,
2004. Such risks and uncertainties could cause actual results to differ
materially from historical results or those 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. At
February 28, 2004, the Company's term debt and credit facility with its bank
are subject to variable interest rates. The Company monitors its debt and
interest bearing cash equivalents levels to mitigate the risk of interest
rate fluctuations. A fluctuation of one percent in interest rates would have
an annual impact of approximately $100,000 net of tax on the Company's
consolidated statement of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
California Amplifier, Inc.:
We have audited the accompanying consolidated balance sheets of California
Amplifier, Inc. and subsidiaries as of February 28, 2004 and 2003 and the
related consolidated statements of operations, stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended February 28, 2004. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
California Amplifier, Inc. and subsidiaries as of February 28, 2004 and 2003,
and the results of its operations and its cash flows for each of the years
in the three-year period ended February 28, 2004 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
implemented Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, on March 3, 2002.
/s/KPMG LLP
Los Angeles, California
April 6, 2004, except as to Note 16,
which is as of April 12, 2004
CALIFORNIA AMPLIFIER, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
February 28,
---------------------
2004 2003
-------- --------
Assets
Current assets:
Cash $ 22,885 $ 21,947
Accounts receivable, less allowance for
doubtful accounts of $211 and $273 at
February 28, 2004 and 2003, respectively 18,579 16,053
Inventories, net 20,253 12,862
Deferred income tax assets 2,404 1,130
Prepaid expenses and other current assets 3,244 1,100
-------- --------
Total current assets 67,365 53,092
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 4,381 9,322
Deferred income tax assets, less current portion 4,359 5,400
Goodwill 20,938 20,938
Other assets 599 845
-------- --------
$ 97,642 $ 89,597
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 3,603 $ 3,005
Accounts payable 17,395 11,553
Accrued payroll and employee benefits 1,513 1,649
Other accrued liabilities 2,078 2,198
-------- --------
Total current liabilities 24,589 18,405
-------- --------
Long-term debt, less current portion 7,690 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; 14,910 and 14,745 shares issued
and outstanding at February 28, 2004 and
2003, respectively 149 147
Additional paid-in capital 44,486 43,441
Retained earnings 21,550 15,836
Accumulated other comprehensive loss (822) (801)
-------- --------
Total stockholders' equity 65,363 58,623
-------- --------
$ 97,642 $ 89,597
======== ========
See accompanying notes to consolidated financial statements.
CALIFORNIA AMPLIFIER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended February 28,
-----------------------------
2004 2003 2002
-------- -------- -------
Sales $128,616 $100,044 $100,715
Cost of goods sold 110,950 79,511 78,342
-------- -------- -------
Gross profit 17,666 20,533 22,373
-------- -------- -------
Operating expenses:
Research and development 5,363 5,982 7,337
Selling 2,336 2,560 3,456
General and administrative 3,984 3,781 6,321
-------- -------- -------
Total operating expenses 11,683 12,323 17,114
-------- -------- -------
Operating income 5,983 8,210 5,259
-------- -------- -------
Non-operating income (expense):
Settlement of litigation - - (1,125)
Other income (expense), net (243) (215) 47
-------- -------- -------
Total non-operating expense (243) (215) (1,078)
-------- -------- -------
Income from continuing operations
before income taxes 5,740 7,995 4,181
Income tax provision (26) (2,835) (1,307)
-------- -------- -------
Income from continuing operations 5,714 5,160 2,874
Loss from discontinued operations,
net of tax - - (25)
Gain on sale of discontinued operations,
net of tax - - 1,615
-------- -------- -------
Net income $ 5,714 $ 5,160 $ 4,464
======== ======== =======
Basic earnings per share:
Income from continuing operations $ 0.39 $ 0.35 $ 0.21
Gain on sale of discontinued operations - - 0.12
-------- -------- -------
Net income $ 0.39 $ 0.35 $ 0.33
======== ======== =======
Diluted earnings per share:
Income from continuing operations $ 0.37 $ 0.35 $ 0.21
Gain on sale of discontinued operations - - 0.11
-------- -------- -------
Net income $ 0.37 $ 0.35 $ 0.32
======== ======== =======
Shares used in computing basic and
diluted earnings per share:
Basic 14,791 14,639 13,727
======== ======== =======
Diluted 15,390 14,870 13,979
======== ======== =======
See accompanying notes to consolidated financial statements.
CALIFORNIA AMPLIFIER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS)
Accum-
ulated
Other
Common Stock Additional Compre-
-------------- Paid-in Retained hensive
Shares Amount Capital Earnings Loss Total
------ ------ ------ ------ ------ ------
Balances at
February 28, 2001 13,601 $ 136 $23,975 $ 6,212 $(699) $29,624
Net income - - - 4,464 - 4,464
Foreign currency
translation
adjustment - - - - (102)
(102)
------
Comprehensive income 4,362
Exercise of stock
options 29 - 69 - - 69
Tax benefits from
exercise of non-
qualified stock
options - - 3,525 - - 3,525
------ ------ ------- ------- ------ ------
Balances at
February 28, 2002 13,630 136 27,569 10,676 (801) 37,580
Net income and compre-
hensive income - - - 5,160 - 5,160
Exercise of stock
options 64 1 159 - - 160
Issuances of
common stock 1,051 10 10,074 - - 10,084
Tax benefits from
exercise of non-
qualified stock
options - - 5,639 - - 5,639
------ ------ ------- ------- ------ ------
Balances at
February 28, 2003 14,745 147 43,441 15,836 (801) 58,623
Net income - - - 5,714 - 5,714
Unrealized loss on
available-for-sale
investments - - - - (21)
(21)
------
Comprehensive income 5,693
Exercise of stock
options 165 2 615 - - 617
Tax benefits from
exercise of non-
qualified stock
options - - 430 - - 430
------ ------ ------- ------- ------ ------
Balances at
February 28, 2004 14,910 $ 149 $44,486 $21,550 $(822) $65,363
====== ====== ======= ======= ===== ======
See accompanying notes to consolidated financial statements.
CALIFORNIA AMPLIFIER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year ended February 28,
------------------------------
2004 2003 2002
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,714 $ 5,160 $ 4,464
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,400 3,669 4,317
Property and equipment impairment writedowns 739 - -
Non-cash litigation charge - - 700
(Gain) loss on sale and disposal of equipment (227) (157) 58
Increase in equity associated with tax
benefit from exercise of stock options 430 5,639 3,525
Deferred tax assets, net (233) (2,950) (2,233)
Minority interest in loss of
discontinued operation, net of tax - - (24)
Gain on sale of discontinued operation - - (1,615)
Changes in operating assets and liabilities:
Accounts receivable (2,351) (7,834) 3,260
Inventories (7,391) (2,360) 283
Prepaid expenses and other assets (573) (61) (880)
Accounts payable 5,842 5,840 424
Accrued liabilities (256) (1,467) 34
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,094 5,479 12,313
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (2,693) (1,670) (1,534)
Proceeds from sale of property and equipment 2,201 327 44
Acquisition of Kaul-Tronics - (16,534) -
Net proceeds from sale of discontinued
operations - - 2,956
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (492) (17,877) 1,466
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,000 12,000 -
Debt repayments (5,281) (971) (599)
Proceeds from exercise of stock options 617 160 69
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (3,664) 11,189 (530)
-------- -------- --------
EFFECT OF FOREIGN EXCHANGE RATES - - (102)
-------- -------- --------
Net change in cash and cash equivalents 938 (1,209) 13,147
Cash and cash equivalents at beginning of year 21,947 23,156 10,009
-------- -------- --------
Cash and cash equivalents at end of year $22,885 $21,947 $23,156
======== ======== ========
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of Business
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, as well as a line of
consumer and commercial products for video and data reception. The Wireless
Access business unit designs and markets integrated reception and two-way
transmission fixed wireless equipment for broadband data and video
applications.
As described further in Note 14, in July 2001 the Company sold its 51%
interest in Micro Pulse, a company engaged in the design, manufacture and
marketing of antennas and amplifiers used principally in global positioning
satellite (GPS) applications. Accordingly, the results of operations of
Micro Pulse, which represented a separate business segment of the Company,
have been presented as a discontinued operation in the accompanying
consolidated statement of operations for fiscal year 2002.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company (a Delaware corporation) and its wholly-owned French subsidiary,
California Amplifier SARL. All significant intercompany transactions have
been eliminated in consolidation.
Fiscal Year
The Company uses a 52-53 week fiscal year ending on the Saturday
closest to February 28, which for fiscal years 2004, 2003 and 2002 fell on
February 28, 2004, March 1, 2003 and March 2, 2002, respectively. In these
consolidated financial statements, the fiscal year end for all years is
shown as February 28 for clarity of presentation. Fiscal years 2004, 2003
and 2002 all consisted of 52 weeks.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed and
determinable and collection of the sales price is probable. Generally,
these criteria are met at the time product is shipped, except for shipments
made on the basis of "FOB Destination" terms, in which case title transfers
to the customer and the revenue is recorded by the Company when the shipment
reaches the customer. Customers do not have rights of return except for
defective products returned during the warranty period.
In accordance with Emerging Issues Task Force (EITF) Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs", the Company includes
shipping and handling fees billed to customers as sales. Shipping and
handling fees included in sales for fiscal years 2004, 2003 and 2002 were
$345,000, $574,000 and $224,000, respectively.
Concentrations of Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of money market
instruments and trade receivables. The Company currently invests its excess
cash in money market mutual funds managed by or affiliated with its U.S.
commercial bank. The Company had cash and cash equivalents in one U.S. bank
in excess of federally insured amounts. Cash and cash equivalents in U.S.
and foreign banks is as follows (in thousands):
February 28,
--------------------
2004 2003
------ ------
U.S. banks $22,280 $20,095
Foreign banks 605 1,852
------- -------
$22,885 $21,947
======= =======
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 annual sales in
any one of the last three years, as a percent of consolidated sales, are as
follows:
Year ended February 28,
------------------------------
Customer 2004 2003 2002
-------- ------ ------ ------
A 39.4% 43.8% 25.8%
B 22.9% 9.8% 0.2%
C 5.9% 9.5% 30.6%
D 0.1% - 13.5%
E - 0.1% 11.7%
The Company's four largest customers in fiscal 2004, including one
customer which does not appear in the table above, accounted for
approximately 77% of total sales in fiscal 2004.
Accounts receivable amounts at fiscal year-end from the customers
referred to in the table above, expressed as a percent of consolidated net
accounts receivable, are as follows:
February 28,
--------------------
2004 2003
------ ------
A 49.4% 58.0%
B 22.0% 5.5%
C 0.5% 15.1%
Customers A, B, C and E are customers of the Satellite segment, while D
is a customer of the Wireless Access segment.
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. During fiscal 2002, the
Company reserved for and wrote off accounts receivable in the net amount of
$817,000 due from a Wireless Access customer.
Inventories
Inventories include costs of materials, labor and manufacturing
overhead. Inventories are stated at the lower of cost or net realizable
value, with cost determined principally by the use of the first-in, first-
out method.
Investments
The Company classifies investments in one of three categories: trading,
available-for-sale or held-to-maturity. Trading securities are bought and
held principally for the purpose of selling them in the near term. Held-to-
maturity securities are those securities that the Company has the ability
and intent to hold until maturity. All other securities not included in
trading or held-to-maturity are classified as available-for-sale.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses on trading securities are included in earnings.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as
a component of accumulated other comprehensive income until realized, or
until holding losses are deemed to be permanent, at which time an impairment
charge is recorded.
At February 28, 2004 and 2003, the Company had no trading or held-to-
maturity investments. Its sole available-for-sale investment, acquired in
connection with the settlement during fiscal year 2002 of a former
customer's outstanding accounts receivable balance, had a carrying value of
$24,000 and $87,000 at February 28, 2004 and 2003, respectively, and is
included in prepaid expenses and other current assets in the accompanying
balance sheet at those dates. The Company recorded an impairment charge of
$258,000 on this investment during fiscal 2003, which is included in selling
expenses in the accompanying consolidated statement of operations because
the investment asset had been initially recorded in fiscal 2002 with an
offsetting reduction of bad debts expense, which is also classified as a
selling expense. During fiscal 2004, the Company sold a portion of this
investment, which generated net cash proceeds of $29,000. At February 28,
2004, the Company had an unrealized holding loss of $21,000 for this
available-for-sale investment that is carried as a component of accumulated
other comprehensive loss.
Property, equipment and improvements
Property, equipment and improvements are stated at cost. The Company
follows the policy of capitalizing expenditures that increase asset lives,
and charging ordinary maintenance and repairs to operations, as incurred.
When assets are sold or disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in operating income.
Depreciation and amortization are based upon the estimated useful lives
of the related assets using the straight-line method. Plant equipment and
office equipment are depreciated over useful lives ranging from two to five
years, while tooling is depreciated over 18 months. Leasehold improvements
are amortized over the shorter of the lease term or the useful life of the
improvements.
Goodwill
Goodwill represents the excess of purchase price and related costs over
the value assigned to the net tangible assets and identifiable intangible
assets of businesses acquired. Through the end of fiscal 2002, goodwill was
amortized on a straight-line basis over 15 years. As a result of adopting
Statement of Financial Accounting Standards No. 142, "Accounting for
Goodwill and Intangible Assets" effective March 3, 2002 (the first day of
fiscal 2003), beginning in fiscal year 2003 goodwill is no longer being
amortized. Instead, goodwill is evaluated periodically for impairment
pursuant to the provisions of this new pronouncement, as described in more
detail under "New Authoritative Pronouncements" below.
Accounting for Long-Lived Assets Other Than Goodwill
The Company reviews property and equipment and other long-lived assets
other than goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amounts of an asset may not be
recoverable. Recoverability is measured by comparison of the asset's
carrying amount to the undiscounted future net cash flows an asset is
expected to generate. If an asset is considered to be impaired, the
impairment to be recognized is measured by the amount at which the carrying
amount of the asset exceeds the projected discounted future cash flows
arising from the asset.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate:
Cash and cash equivalents, accounts receivable and accounts payable -
The carrying amount is a reasonable estimate of fair value given the short
maturity of these instruments.
Long-term debt - The carrying value approximates fair value since the
interest rate on the long-term debt approximates the interest rate which is
currently available to the Company for the issuance of debt with similar
terms and maturities.
Warranty
The Company 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. See Note 10 for a table
of annual increases in and reductions of the warranty liability for the last
three years.
Deferred Income Tax Assets
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
SFAS No. 109, "Accounting for Income Taxes". 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
assets to determine if a valuation allowance is needed.
Foreign Currency Translation and Accumulated Other Comprehensive Loss
Account
Historically, the Company's French subsidiary used the local currency
as its functional currency. The local currency was the French franc until
January 1, 2002 and the Euro beginning on that date. The financial
statements of the French subsidiary were translated into U.S. dollars using
current or historical exchange rates, as appropriate, with translation gains
or losses included in the accumulated other comprehensive loss account in
the stockholders' equity section of the consolidated balance sheet.
In connection with the conversion of the French subsidiary's local
currency from the franc to the Euro, the Company evaluated which currency,
the Euro or the U.S. dollar, is best suited to be used as the functional
currency. On the basis of this evaluation, management determined that the
functional currency should be changed from the Euro to the U.S. dollar, and
this change was made effective February 1, 2002. As a result of this change,
the foreign currency translation account balance of $801,000 included in
accumulated other comprehensive loss will remain unchanged until such time
as the French subsidiary ceases to be part of the Company's consolidated
financial statements. No income tax expense or benefit has been allocated
to this component of accumulated other comprehensive loss because the
Company expects that undistributed earnings of this foreign subsidiary will
be reinvested indefinitely.
The aggregate foreign exchange gains included in determining income
from continuing operations were $75,000, $97,000 and $11,000 in fiscal 2004,
fiscal 2003 and fiscal 2002, respectively.
Earnings Per Share
Basic earnings per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution, using the treasury stock method, that could occur if
securities or other contracts to issue Common Stock were exercised or
converted into Common Stock or resulted in the issuance of Common Stock that
then shared in the earnings of the Company. In computing diluted earnings
per share, the treasury stock method assumes that outstanding options are
exercised and the proceeds are used to purchase common stock at the average
market price during the period. Options will have a dilutive effect under
the treasury stock method only when the average market price of the common
stock during the period exceeds the exercise price of the options.
Accounting for Stock Options
As allowed by Statement of Financial Accounting Standards No. 123
("SFAS 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") and comply with the pro forma disclosure
requirements of SFAS 123, as set forth in Note 8.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation (in thousands except per share
amounts):
Year ended February 28,
--------------------------------
2004 2003 2002
------ ------ ------
Net income as reported $5,714 $5,160 $4,464
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (2,672) (2,681) (4,494)
----- ----- -----
Pro forma net income (loss) $3,042 $2,479 $ (30)
===== ===== =====
Earnings per share:
Basic -
As reported $.39 $.35 $.33
Pro forma $.21 $.17 $.00
Diluted -
As reported $.37 $.35 $.32
Pro forma $.20 $.17 $.00
Recent Authoritative Pronouncements
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS
143"). SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs and applies to all entities. It
applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and / or
the normal operation of a long-lived asset, except for certain obligations
of lessees. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company adopted SFAS 143 in
March 2003 (the beginning of its fiscal year 2004). The adoption of
SFAS 143 did not have a material effect on the Company's results of
operations, financial position or liquidity.
In April 2002, the FASB issued Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections", which among other things
provides guidance in reporting gains and losses from extinguishments of debt
and accounting for leases. The Company adopted certain provisions of this
statement in fiscal 2003, and the remaining provisions were adopted in
fiscal 2004. The adoption of this statement had no impact on the Company's
financial position or its results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The
recognition and measurement provisions of FIN 46 are effective for newly
created variable interest entities formed after January 31, 2003, and for
existing variable interest entities, on the first interim or annual
reporting period beginning after June 15, 2003. The adoption of FIN 46 in
the fourth quarter of fiscal 2003 had no impact on the consolidated
financial statements. In December 2003, the FASB revised FIN 46 to exempt
certain entities from its requirements and to clarify certain issues arising
during the implementation of FIN 46. The adoption of this revised
interpretation in the fourth quarter of fiscal 2004 did not have any impact
on the Company's consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Areas where significant judgments are made include, but
are not limited to: allowance for doubtful accounts, inventory valuation,
product warranties, deferred income tax asset valuation allowances, and
valuation of long-lived assets and goodwill. Actual results could differ
materially from these estimates.
Note 2 - KAUL-TRONICS ACQUISITION
On April 5, 2002, the Company acquired substantially all of the assets,
properties and business of Kaul-Tronics, Inc., a Wisconsin corporation, and
two affiliated companies (collectively, "Kaul-Tronics"). The results of
Kaul-Tronics' operations have been included in the Company's consolidated
financial statements since that date. The operations acquired by the
Company involve primarily the design and manufacture of satellite antenna
dishes used in the DBS industry. The satellite antenna dishes of the type
produced by Kaul-Tronics, and the downconverter/amplifier devices ("LNBFs")
of the type produced by the Company, together comprise the outdoor portion
of customer premise equipment for DBS television reception. In calendar
year 2001, Kaul-Tronics had revenues of approximately $36 million and pretax
income of $4.8 million. Kaul-Tronics' 2001 revenues included approximately
$12 million of LNBFs of the type produced by the Company.
The acquisition of Kaul-Tronics was motivated principally by the
Company's desire to vertically integrate into the production and sale of DBS
dish antennas, so that the Company can provide the entire outdoor portion of
the customer premise equipment and solidify its relationship with the
satellite television system operators. Another reason for the acquisition
is that it provided the Company with new customers, specifically
distributors of satellite television reception products.
The total acquisition cost was $22,588,000, consisting of a cash
payment to the sellers of $16,063,000, issuance to the sellers of 929,086
shares of the Company's common stock valued at $6,054,000, and $471,000 for
direct costs of the acquisition including legal, accounting and financial
advisory fees. The acquisition gave rise to goodwill of $17,651,000, which
was assigned to the Company's Satellite business segment. The value of the
common shares issued was determined based on the average closing price of
the Company's common stock during the six trading day period beginning two
trading days before the acquisition was agreed to and ending two trading
days after the terms of the acquisition were announced.
Factors that contributed to a purchase price that resulted in the
recognition of goodwill include the following: (i) Kaul-Tronics has been
engaged in designing, manufacturing and selling satellite television
reception equipment for approximately 20 years, during which time it became
one of the largest suppliers of dish antennas to the U.S. market; (ii) it
had a reputation in the industry for high quality, reliable products, and it
developed strong customer relationships; (iii) Kaul-Tronics had a history of
profitable operations -- in 1999, 2000 and 2001, Kaul-Tronics, an S
Corporation, had pretax income of $6,157,000, $3,236,000 and $4,798,000,
respectively; and (iv) the agreed-upon purchase price was supported by a
fairness opinion issued by an independent financial advisor.
The source of funds for the cash payment was the Company's cash on hand
and the proceeds of a $12 million drawdown on the Company's existing bank
revolving line of credit which had been increased from $8 million to $13
million effective April 3, 2002. On May 2, 2002, the $12 million
outstanding principal balance on the revolver was converted into a new $12
million term loan. This term loan bears interest at LIBOR plus 2.0% or the
bank's prime rate.
Following is a computation of the goodwill arising from this
acquisition (in thousands):
Total acquisition costs $22,588
Fair value of net assets acquired:
Inventory $1,030
Prepaid expenses 4
Land 675
Buildings and equipment 3,323
Non-compete agreements 400
Accrued liabilities assumed (495)
-------
Total fair value of net assets acquired 4,937
-------
Goodwill $17,651
=======
The following pro forma information is presented as if the acquisition
had occurred at the beginning of fiscal 2003 (in thousands):
Year ended
February 28, 2003
-------------------
As Pro
reported forma
-------- --------
Sales $100,044 $102,671
Income from continuing
operations $ 5,160 $ 5,307
Income from continuing
operations per share:
Basic $ .35 $ .36
Diluted $ .35 $ .35
The "as reported" amounts for the year ended February 28, 2003 include the
operating results of Kaul-Tronics for the 11 month period beginning on the
April 5, 2002 acquisition date. Pro forma adjustments for the year ended
February 28, 2003 consist mainly of adding Kaul-Tronics' results for the
month of March 2002.
Pursuant to the provisions of SFAS 142, which the Company adopted
effective at the beginning of fiscal 2003, goodwill which arose from this
transaction is not amortized. Instead, goodwill is evaluated on an annual
basis for impairment, as further discussed in Note 5. The goodwill arising
from this acquisition is deductible for income taxes.
NOTE 3 - INVENTORIES
Inventories consist of the following (in thousands):
February 28,
-----------------------
2004 2003
------- ------
Raw materials $11,671 $ 9,627
Work in process 417 -
Finished goods 8,165 3,235
------- -------
$20,253 $12,862
======= =======
NOTE 4 - PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following (in
thousands):
February 28,
-----------------------
2004 2003
------- ------
Land $ - $ 675
Buildings and improvements 243 3,414
Plant equipment and tooling 15,493 22,276
Office equipment, computers
and furniture 3,077 4,083
------- -------
18,813 30,448
Less accumulated depreciation
and amortization (14,432) (21,126)
------- -------
$ 4,381 $ 9,322
======= =======
In April 2002, as part of the acquisition of the satellite dish
manufacturing operation of Kaul-Tronics, Inc. (as further described in Note
2), the Company acquired land and buildings in Wisconsin, consisting of two
manufacturing plants and one warehouse. During fiscal 2004, the Company
outsourced this satellite dish manufacturing operation to a non-affiliated
metal fabrication company in the U.S. As a result of this outsourcing, two
of the three buildings in Wisconsin were sold during fiscal 2004. The third
building, along with the associated land and some manufacturing equipment no
longer used in the business, is classified as property held for sale at the
end of fiscal 2004. The $1,476,000 carrying amount of property held for
sale, which represents the estimated net realizable value of this property
and equipment, is included in Prepaid Expenses and Other Current Assets in
the consolidated balance sheet at February 28, 2004. A writedown of
$165,000 to adjust the carrying amount of property held for sale to net
realizable value is included in cost of goods sold for fiscal 2004.
Note 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of adopting SFAS 142 at the beginning of fiscal 2003, the
Company no longer records amortization on goodwill. Prior to fiscal 2003,
goodwill was being amortized at the rate of $270,000 per year. For the
year ended February 28, 2002, income from continuing operations and income
from continuing operations per share adjusted to exclude goodwill
amortization expense is as follows (in thousands except per share amounts):
Year
ended
Feb. 28,
2002
------
Income from continuing
operations as reported $2,874
Add back goodwill amortization 270
-----
Income from continuing
operations as adjusted $3,144
=====
Income from continuing
operations per share:
Basic -
As reported $.21
As adjusted $.23
Diluted -
As reported $.21
As adjusted $.22
The change in the carrying amount of goodwill in fiscal year 2003 is as
follows (in thousands):
Balance as of February 28, 2002 $ 3,287
Goodwill acquired in April 2002 (Note 2) 17,651
-------
Balance as of February 28, 2003 $ 20,938
=======
There was no change in the carrying amount of goodwill in fiscal year 2004.
All goodwill is associated with the Company's Satellite business
segment. The Company's transitional goodwill impairment test was conducted
as of March 3, 2002 (the first day of fiscal 2003). This test 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.
Annual goodwill impairment tests were conducted as of December 31, 2003
and 2002. These tests indicated that there was no impairment of goodwill at
those dates. The Company used a discounted cash flow approach to estimate
the fair value of its Satellite reporting unit.
At February 28, 2004, the gross carrying amount and accumulated
amortization of covenants not to compete acquired in conjunction with the
Kaul-Tronics purchase (Note 2) was $400,000 and $200,000, respectively. The
covenants not to compete, which are included in Other Assets in the
accompanying consolidated balance sheet at February 28, 2004, are being
amortized on a straight-line basis over a weighted average life of
approximately 4.1 years.
NOTE 6 - FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Working capital line of credit
At February 28, 2004 the Company had a $10 million working capital line
of credit with a commercial bank that matures on August 3, 2005. 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 February 28, 2004, $1 million was outstanding on this line of credit
which is classified as long-term at that date. At February 28, 2003, there
were no outstanding borrowings under the line of credit. At February 28,
2004 and 2003, amounts reserved under the line of credit for outstanding
irrevocable stand-by letters of credit were $2,479,000 and $1,582,000,
respectively.
Long-term Debt
Long-term debt consists of the following (in thousands):
February 28,
----------------------
2004 2003
------ ------
Bank term loan payable, interest fixed at 4.75%
until April 2, 2004 and thereafter floating at
bank prime rate or fixed at 1 or 3 month LIBOR
plus 2%, principal due in monthly installments
ranging from $85 to $86 through August 2, 2006 $ 2,390 $ 3,574
Bank term loan payable, interest floating at
LIBOR plus 2% or bank prime rate, principal
due in monthly installments of $150 through
April 2008 7,903 12,000
Bank working capital line of credit 1,000 -
------- -------
Total debt 11,293 15,574
Less portion due within one year (3,603) (3,005)
------- -------
Long-term debt $ 7,690 $12,569
======= =======
The bank credit agreement that encompasses the working capital line of
credit and the two bank term loans contains certain financial covenants and
ratios that the Company is required to maintain, including a fixed charge
coverage ratio of not less than 1.25, a current ratio of not less than 2.0,
a leverage ratio of not more than 2.25, tangible net worth of at least
$19,050,000 (such minimum amount increasing by $1 million annually beginning
on March 1, 2003), cash and cash equivalents not less than $8 million, and
net income of at least $1.00 in each fiscal year. At February 28, 2004 and
2003, the Company was in compliance with all such covenants. The bank
credit agreement requires the Company to make an annual accelerated
principal payment on the term loan that matures in April 2008, above and
beyond scheduled monthly principal payments, in an amount equal to 25% of
"free cash flow" (as defined in the agreement) in the immediately preceding
fiscal year. Pursuant to this provision, the Company has included $775,000
in the current portion of long-term debt at February 28, 2004. The due date
for this accelerated principal payment is August 31, 2004.
The bank credit agreement contains a subjective acceleration clause
that 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 four years, and based on the Company's internal financial forecasts for
the next year, the Company does not believe it is probable that the bank
will assert the material adverse change clause in the next 12 months.
Contractual Cash Obligations
Following is a summary of the Company's contractual cash obligations as
of February 28, 2004 (in thousands):
Future Cash Payments Due by Fiscal Year
----------------------------------------------
Contractual There-
Obligations 2005 2006 2007 2008 2009 after Total
- --------------- ------ ------ ------ ------ ------ ------ ------
Debt $ 3,603 $3,823 $2,139 $1,728 $ - $ - $11,293
Operating leases 697 732 732 741 763 1,874 5,539
Purchase
obligations 27,148 - - - - - 27,148
------- ------ ------ ------ ------ ------ ------
Total contractual
cash obligations $31,448 $4,555 $2,871 $2,469 $ 763 $1,874 $43,980
====== ====== ====== ====== ====== ====== ======
Purchase obligations consists of obligations under non-cancelable
purchase orders, primarily for inventory purchases of raw materials,
components and subassemblies.
Rent expense under operating leases was $929,000, $760,000 and
$1,062,000 for fiscal years 2004, 2003 and 2002, respectively.
NOTE 7 - INCOME TAXES
The Company's income from continuing operations before income taxes
consists of the following (in thousands):
Year ended February 28,
--------------------------------
2004 2003 2002
------ ------ ------
Domestic $ 5,649 $ 7,642 $ 3,930
Foreign 91 353 251
------- ------- -------
$ 5,740 $ 7,995 $ 4,181
======= ======= =======
The tax provision for income from continuing operations consists of the
following (in thousands):
Year ended February 28,
--------------------------------
2004 2003 2002
------ ------ ------
Current:
Federal $ (49) $ 59 $ (132)
State 1 79 (271)
Foreign (124) (57) 9
------ ------ ------
Total current (172) 81 (394)
------ ------ ------
Deferred:
Federal 245 (2,395) (725)
State (477) (490) (1,099)
Foreign - - -
------- ------- -------
Total deferred (232) (2,885) (1,824)
------- ------- -------
Charge in lieu of taxes
attributable to tax benefit
from employee stock options 430 5,639 3,525
------- ------- -------
$ 26 $ 2,835 $ 1,307
======= ======= =======
Differences between the income tax provision and income taxes computed
using the statutory federal income tax rate are as follows (in thousands):
Year ended February 28,
--------------------------------
2004 2003 2002
------ ------ ------
Income tax at statutory federal
rate (34%) $ 1,952 $ 2,718 $ 1,421
State income taxes, net of
federal income tax effect 193 106 (194)
Foreign taxes (155) (176) 38
Valuation allowance (1,405) 505 230
Tax credits (517) (264) (154)
Extraterritorial income exclusion (14) (68) (102)
Other, net (28) 14 68
------- ------- -------
$ 26 $ 2,835 $ 1,307
======= ======= =======
The components of the net deferred income tax asset at February 28,
2004 and 2003 are as follows (in thousands):
February 28,
----------------------
2004 2003
------ ------
Inventory reserve $ 221 $ 273
Allowance for doubtful accounts 84 80
Warranty reserve 63 196
Compensation and vacation accruals 121 139
Depreciation (274) 120
Goodwill amortization (1,099) (499)
Capitalized R&D cost amortization 400 495
Net operating loss carryforward 2,876 3,397
Research and development credits 2,803 2,701
Other tax credits 1,803 1,220
Other, net 395 443
------ ------
7,393 8,565
Valuation allowance (630) (2,035)
------ ------
6,763 6,530
Less current portion (2,404) (1,130)
------ ------
Non-current portion $4,359 $5,400
====== ======
At February 28, 2004, the Company has net operating loss carryforwards
("NOLs") of approximately $12.1 million and $790,000 for federal and state
purposes, respectively. The federal NOLs expire at various dates through
2022, and the state NOLs expire at various dates through 2009.
As of February 28, 2004, the Company had foreign tax credit
carryforwards of $633,000 expiring at various dates through 2008, research
and development tax credit carryforwards of $1,839,000 and $1,461,000 for
federal and state income tax purposes, respectively, expiring at various
dates through 2014, and manufacturing investment credit carryforwards of
$1,016,000 for state income tax purposes expiring at various dates through
2014.
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. These reductions of the valuation
allowance in fiscal years 2003 and 2002 exhausted that portion of the
valuation allowance that was related to tax benefits from option exercises.
In fiscal 2004, on the basis of management's updated assessment of the
future realizability of the deferred tax assets, the valuation allowance was
further reduced by $1,405,000, which had the effect of reducing the income
tax provision by a corresponding amount. At February 28, 2004 the Company's
net deferred income tax asset was $6,763,000, which amount is net of a
valuation allowance of $630,000.
The Company has not provided withholdings and U.S. federal income taxes
on approximately $485,000 of undistributed earnings of its foreign
subsidiaries because such earnings are or will be reinvested indefinitely in
such subsidiaries or will be approximately offset by credits for foreign
taxes paid. It is not practical to determine the U.S. federal income tax
liability, if any, that would be payable if such earnings were not
reinvested indefinitely.
NOTE 8 - STOCKHOLDERS' EQUITY
Stock Options
The Company has two stock option plans for its employees, the 1989 Key
Employee Stock Option Plan ("1989 Plan"), and the 1999 Stock Option Plan
("1999 Plan"). Under the 1999 Plan, stock options can be granted at prices
not less than 100% of the fair market value at the date of grant. Option
grants become exercisable on a vesting schedule established by the
Compensation Committee of the Board of Directors at the time of grant,
usually over a four-year period.
The following table summarizes the option activity for fiscal years
2004, 2003 and 2002 (in thousands except dollar amounts):
Weighted
Number Average
Shares Option Price
-------- --------
Outstanding at February 28, 2001 1,794 $15.85
Granted 754 4.68
Exercised (29) 2.34
Canceled (315) 23.06
----- ------
Outstanding at February 28, 2002 2,204 $11.17
Granted 341 5.22
Exercised (64) 2.53
Canceled (169) 11.44
----- ------
Outstanding at February 28, 2003 2,312 $10.51
Granted 534 6.95
Exercised (165) 3.73
Canceled (103) 14.46
----- ------
Outstanding at February 28, 2004 2,578 $10.05
===== ======
Options outstanding at February 28, 2004 and related weighted average
price and life information is as follows:
Weighted Total
Average Weighted Weighted
Range of Total Remaining Average Average
Exercise Options Life Exercise Options Exercise
Prices Outstanding (Years) Price Exercisable Price
-------- -------- -------- -------- -------- --------
$1.75-$1.88 155,500 4.8 $ 1.79 155,500 $ 1.79
2.06- 2.76 193,250 4.0 2.25 193,250 2.25
3.16- 4.99 1,023,050 7.3 3.99 553,550 4.35
5.00- 7.22 533,088 6.4 5.66 336,588 5.99
8.00-10.88 73,750 5.1 8.86 73,750 8.86
12.25-14.76 172,000 10.0 14.75 750 12.25
15.75-19.88 102,500 6.3 19.49 79,500 19.38
20.19-27.44 58,000 5.4 25.43 53,000 25.48
39.38-40.00 115,000 6.0 39.97 113,750 39.98
43.50-50.56 152,000 6.1 44.99 122,000 45.35
----------- --------- ---- ------ --------- ------
$1.75-$50.56 2,578,138 6.6 $10.05 1,681,638 $11.16
=========== ========= ==== ====== ========= ======
The weighted average fair value for stock options granted in fiscal
years 2004, 2003 and 2002 was $6.15, $4.48 and $4.58, respectively.
The number of stock options available for grant under the 1999 Stock
Option Plan at the end of each fiscal year was 62,250, 308,000 and 19,899
for 2004, 2003 and 2002, respectively. Pursuant to the Company's 1999 Stock
Option Plan, the number of options available to grant is replenished to
500,000 on the first day of each fiscal year. The 1989 Plan expired in May
1999 and no additional options may be granted under this plan.
As permitted by SFAS 123, the Company continues to apply the accounting
rules of APB No. 25 governing the recognition of compensation expense for
options granted under its stock option plans. Such accounting rules measure
compensation expense on the first date at which both the number of shares
and the exercise price are known. Under the Company's 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 expense is
recognized. As options are generally granted 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 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:
Year ended February 28,
--------------------------------
2004 2003 2002
------ ------ ------
Expected life (years) 5 5 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 stock-based compensation cost
calculated using the assumptions indicated totaled $3,686,000, $4,155,000
and $6,713,000 in fiscal years 2004, 2003, and 2002, respectively.
At February 28, 2004, 14,909,512 preferred stock purchase rights are
outstanding. Each right may be exercised to purchase one-hundredth of a
share of Series A Participating Junior Preferred Stock at a purchase price
of $50 per right, subject to adjustment. The rights may be exercised only
after commencement or public announcement that a person (other than a person
receiving prior approval from the Company) has acquired or obtained the
right to acquire 20% or more of the Company's outstanding common stock. The
rights, which do not have voting rights, may be redeemed by the Company at a
price of $.01 per right within ten days after the announcement that a person
has acquired 20% or more of the outstanding common stock of the Company. In
the event that the Company is acquired in a merger or other business
combination transaction, provision shall be made so that each holder of a
right shall have the right to receive that number of shares of common stock
of the surviving company which at the time of the transaction would have a
market value of two times the exercise price of the right. 750,000 shares
of Series A Junior Participating Cumulative Preferred Stock, $.01 par value,
are authorized.
Note 9 - EARNINGS PER SHARE
Following is a summary of the calculation of basic and diluted weighted
average shares outstanding for fiscal 2004, 2003 and 2002 (in thousands):
Year ended February 28,
--------------------------------
2004 2003 2002
------ ------ ------
Weighted average shares:
Weighted average number of
common shares outstanding 14,791 14,591 13,605
Weighted average number of shares
issuable for legal settlement - 48 122
------ ------ ------
Basic weighted average number
of common shares outstanding 14,791 14,639 13,727
Effect of dilutive securities:
Stock options 599 231 252
------ ------ ------
Diluted weighted average number
of common shares outstanding 15,390 14,870 13,979
====== ====== ======
Outstanding stock options in the amount of 1,220,000, 1,128,000 and
828,000 at February 28, 2004, 2003 and 2002, respectively, which had
exercise prices ranging from $3.69 to $50.56, $4.95 to $50.56 and $5.69 to
$50.56, respectively, were not included in the computation of diluted
earnings per share for the years then ended because the exercise price of
these options was greater than the average market price of the Common Stock
and accordingly the effect of inclusion would be antidilutive.
NOTE 10 - OTHER FINANCIAL INFORMATION
"Net cash provided by operating activities" in the consolidated
statements of cash flows includes cash payments for interest and income as
follows (in thousands):
Year ended February 28,
--------------------------------
2004 2003 2002
------ ------ ------
Interest paid $ 527 $588 $323
Income taxes paid (net
refunds received) $(170) $262 $497
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Year ended February 28,
--------------------------------
2004 2003 2002
------ ------ ------
Increase in valuation allowance
for available-for-sale investment $ 21 $ - $ -
Issuance of common stock as
partial consideration for
acquisition of Kaul-Tronics $ - $6,054 $ -
Issuance of common stock to
reduce accrued liability $ - $4,030 $ -
Valuation and Qualifying Accounts and Reserves
Following is the Company's schedule of valuation and qualifying
accounts and reserves for the last three years (in thousands):
Charged
Balance at (credited) Balance
beginning to costs and at end
of period expenses Deductions of period
--------- -------- --------- ---------
Allowance for doubtful accounts:
- -------------------------------
Fiscal 2002 $467 $991 $(1,041) $417
Fiscal 2003 417 (96) (48) 273
Fiscal 2004 273 34 (96) 211
Warranty reserve:
- ----------------
Fiscal 2002 $447 $144 $ (215) $376
Fiscal 2003 376 396 (281) 491
Fiscal 2004 491 164 (496) 159
At February 28, 2003, the Company accrued warranty cost of $250,000 in
connection with a claim from a customer involving a potential product
replacement program. This amount was reversed out of the warranty reserve
at February 28, 2004. See Note 11 for further description of this matter.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company leases its corporate office and manufacturing plant in
Ventura County, California under an operating lease that expires June 30,
2011. The lease agreement requires the Company to pay all maintenance,
property taxes and insurance premiums associated with the building. In
addition, the Company leases small facilities in Minnesota and France. The
Company also leases certain manufacturing equipment and office equipment
under operating lease arrangements. A summary of future operating lease
commitments is included in the contractual cash obligations table in Note 6.
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. This $250,000 accrual was
reversed by the Company at February 28, 2004 because the customer that made
the claim did not provide any data to support its claim, and the Company
accordingly concluded that the matter was closed.
NOTE 12 - LEGAL PROCEEDINGS
Yourish class action litigation:
In March 2000, the Company entered into a settlement agreement in the
class action securities litigation entitled Yourish v. California Amplifier,
Inc., et al. The final portion of the settlement amount, consisting of
121,875 shares of Company common stock, that previously were accrued as part
of the Yourish legal settlement at $33.063 per share, were issued on July 24,
2002, upon receipt of instructions from plaintiffs' counsel. The primary
amount of the settlement was expensed by the Company in fiscal 2000. The
Company also expensed $200,000 for this litigation settlement in the fiscal
year ended February 2002 as a result of having to repay a settlement
contribution from an insurance company.
2001 securities litigation:
Following the announcement by the Company in March 2001 of the
resignation of its controller and misstatements of the fiscal 2000 and 2001
financial statements, the Company and certain officers were named as
defendants in separate lawsuits that were subsequently combined into a
single action. In December 2001, the parties reached an agreement to settle
this litigation for $1.5 million. Of this amount, the Company's directors
and officers liability insurance carrier agreed to contribute $575,000
toward the settlement, which amount was paid in December 2001. The Company
accrued its $925,000 share of the settlement in the fiscal year ended
February 28, 2002. Of this amount, $425,000 was paid by the Company in
December 2001, and the remaining $500,000 was paid in October 2002 upon the
Court's final approval of the settlement agreement.
Investigation by the Securities and Exchange Commission:
In May 2001, the Securities and Exchange Commission ("SEC") opened an
investigation into the circumstances surrounding the misstatements in the
Company's consolidated financial statements for its 2000 and 2001 fiscal
years caused by its former controller. In April 2004, the SEC concluded its
investigation and issued a cease and desist order directing the Company to
not violate federal securities laws in the future.
Wage-related class action lawsuit:
On April 21, 2004, the Company was served with a complaint alleging
certain violations of the California labor code. Among other charges, the
class action complaint alleges that from October 2000 to the present time
certain hourly employees did not take their lunch break within the time
period prescribed by state law. Notwithstanding that the delayed break was
at the request of, and for the convenience of, the affected employees, the
Company believes that it could have a liability to pay a wage premium for
these delayed lunch breaks. The Company intends to defend itself vigorously
against all allegations in the complaint and has established what management
believes to be an appropriate reserve in the quarter ended February 28, 2004.
Property lease lawsuit and cross-complaint
On May 21, 2004, the Company was served with a lawsuit filed by the
owner of a building in Camarillo, California that was formerly used as the
Company's corporate offices and principal manufacturing plant under a 15-
year lease agreement that expired on February 28, 2004. The lawsuit seeks
damages for facility repairs that are allegedly required in the range of
$520,000 to $700,000. The Company believes the lawsuit is without merit and
intends to defend itself vigorously against all allegations. On May 27,
2004, the Company filed a cross-complaint, seeking payment by the building
owner of approximately $180,000 in deposits and other amounts which the
Company believes it is owed.
NOTE 13 - SEGMENT AND GEOGRAPHIC DATA
Information by business segment is as follows:
Fiscal Year 2004:
WIRELESS
SATELLITE ACCESS CORPORATE TOTAL
------- ------ ------- -----
Sales $121,000 $ 7,616 - $128,616
Gross profit 15,965 1,701 - 17,666
Gross margin 13.2% 22.3% -
13.7%
Income (loss) from continuing
operations before income taxes 12,750 (2,782) (4,228) 5,740
Identifiable assets 80,169 9,208 8,266 97,642
Fiscal Year 2003:
WIRELESS
SATELLITE ACCESS CORPORATE TOTAL
------- ------ ------- -----
Sales $ 88,437 $ 11,607 - $100,044
Gross profit 17,251 3,282 - 20,533
Gross margin 19.5% 28.3% -
20.5%
Income (loss) from continuing
operations before income taxes 13,217 (1,226) (3,996) 7,995
Identifiable assets 71,420 10,309 7,868 89,597
Fiscal Year 2002:
WIRELESS
SATELLITE ACCESS CORPORATE TOTAL
------- ------ ------- -----
Sales $ 78,899 $ 21,816 - $100,715
Gross profit 15,469 6,904 - 22,373
Gross margin 19.6% 31.6% -
22.2%
Income (loss) from continuing
operations before income taxes 11,490 89 (7,398) 4,181
Identifiable assets 37,092 12,172 7,424 56,688
Included in cost of sales for Satellite products during the year ended
February 28, 2004 were impairment writedowns of $739,000 on property and
equipment which had become underutilized due to increased outsourcing to
contract manufacturers. These impairment writedowns had an adverse impact
of 0.6% on Satellite gross margin in fiscal 2004.
The Company considers income (loss) from continuing operations before
income taxes to be the primary measure of profit or loss of its business
segments. The amount shown for each year in the "Corporate" column above
for income (loss) from continuing operations 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, director fees and expenses, and costs of producing and
distributing the annual report to stockholders. Non-operating
income/expense includes interest income, interest expense, foreign currency
gains and losses, and, in fiscal year 2002, litigation settlement expense.
The Company does not have significant long-lived assets outside the
United States.
Sales information by geographical area for each of the three years in
the period ended February 28, 2004 is as follows (000s):
Year ended February 28,
--------------------------------
2004 2003 2002
------ ------ ------
United States $123,235 $ 90,543 $ 82,936
Africa 1,623 4,088 1,309
Latin America 1,877 2,428 1,738
Europe 1,263 2,255 2,258
Canada 227 290 11,816
All other 391 440 658
------- ------- -------
$128,616 $100,044 $100,715
======= ======= =======
See also "Concentrations of Risk" in Note 1 for sales by major customer.
NOTE 14 - DISCONTINUED OPERATIONS
On July 31, 2001, the Company sold its 51% ownership interest in Micro
Pulse. After giving consideration to disposition costs and cash of $275,000
which remained with the divested operation, the net cash proceeds of this
transaction amounted to $2,956,000. The sale generated an after-tax gain of
$1,615,000.
Micro Pulse was the sole operating unit comprising the Company's
Antenna segment. Accordingly, operating results for Micro Pulse have been
presented in the accompanying consolidated statements of operations for the
fiscal year ended February 28, 2002 as a discontinued operation, and are
summarized as follows (in thousands):
Sales $ 2,556
=======
Operating income (loss) $ (105)
=======
Income (loss) from discontinued
operations, net of tax $ (25)
=======
The net assets of Micro Pulse, and the Company's basis in its
investment in Micro Pulse, consisted of the following on July 31, 2001, the
date of sale (in thousands):
Current assets $ 1,845
Property, equipment and improvements, net 269
Other assets 142
Current liabilities (983)
-------
Net assets of Micro Pulse 1,273
Less: Minority interest in Micro Pulse (566)
-------
Basis in Micro Pulse investment $ 707
=======
The gain on sale of the Company's 51% interest Micro Pulse, shown in
the accompanying consolidated statements of operations as "Gain on sale of
discontinued operation, net of tax", is comprised as follows (in thousands):
Gross sales proceeds $ 3,408
Less disposal costs (177)
-------
Net sales proceeds 3,231
Less: Basis in Micro Pulse investment (707)
-------
Pre-tax gain on sale 2,524
Income tax provision (909)
-------
Gain on sale of discontinued
operations, net of tax $ 1,615
=======
NOTE 15 - QUARTERLY FINANCIAL INFORMATION (unaudited)
The following summarizes certain quarterly statement of operations data
for each of the quarters in fiscal years 2004 and 2003 (in thousands, except
percentages and per share data):
Fiscal 2004
----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ------
Sales $18,566 $24,197 $44,248 $41,605 $128,616
Gross profit 1,306 3,200 6,734 6,426 17,666
Gross margin 7.0% 13.2% 15.2% 15.4% 13.7%
Net income (loss) (1,102) 390 3,452 2,974 5,714
Net income (loss)
diluted share (0.07) 0.03 0.22 0.18 0.37
Fiscal 2003
----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ------
Sales $22,482 $27,526 $23,965 $26,071 $100,044
Gross profit 5,844 6,355 4,378 3,956 20,533
Gross margin 26.0% 23.1% 18.3% 15.2% 20.5%
Net income 1,466 1,818 905 971 5,160
Net income per
diluted share 0.10 0.12 0.06 0.06 0.35
Note 16 - SUBSEQUENT EVENT
On April 12, 2004, the Company completed the acquisition of 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 video, voice and data.
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.
In connection with this acquisition, the Company: (i) issued
approximately 7,268,800 shares of its common stock to Vytek's selling
stockholders; (ii) issued and deposited 854,700 shares of its common stock
into an escrow fund; (iii) paid approximately $5,000 in lieu of fractional
shares; (iv) converted all Vytek employee stock options outstanding at the
time of the merger into a total of 148,821 fully vested Company stock
options that had an aggregate fair value under the Black-Scholes formula of
approximately $1,850,000; and (v) incurred total transaction costs estimated
to be $2,550,000.
The Company entered into an escrow agreement with a designated
representative of the selling stockholders of Vytek and an independent
escrow agent. Under the terms of the escrow agreement, the 854,700 shares
of the Company's common stock deposited into the escrow fund serve as
security for potential indemnity claims by the Company under the acquisition
agreement. In addition, in the event Vytek's balance sheet as of the
acquisition date reflects working capital (as defined in the acquisition
agreement) of less than $4 million, then the Company can recover such
deficiency from the escrow fund (the "Working Capital Adjustment"). Vytek's
stockholder representative may direct the sale of some or all of the escrow
shares for a price of at least $11.00 per share, and deposit the proceeds
received from such sale into the escrow fund. Subject to any claims by the
Company for indemnification or for the Working Capital Adjustment, except
for an amount equal in value to $2 million, all shares of Company common
stock and any cash in the escrow fund will be released to the selling
stockholders of Vytek, in accordance with their pro rata interests, 15
months after the April 12, 2004 closing date. All remaining shares of
Company common stock and any remaining cash in the escrow fund will be
released to the Vytek selling stockholders two years after the closing date,
subject to any then pending and unresolved claims for indemnification or the
Working Capital Adjustment.
The common shares issued to Vytek's selling stockholders and
issued/deposited to the escrow fund were valued at $11.26 per share, which
was the average closing price of the Company's common stock on the Nasdaq
National Market for the period beginning two trading days before and ending
two trading days after December 23, 2003, the day the acquisition terms were
agreed to and announced. The aggregate purchase price, including the shares
deposited into the escrow fund, is approximately $96 million.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's principal executive officer and principal financial
officer have concluded, based on their evaluation of disclosure controls and
procedures (as defined in Regulations 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
Report, that the Company's disclosure controls and procedures are effective
to ensure that the information required to be disclosed in reports that are
filed or submitted under the Exchange Act is accumulated and communicated to
management, including the principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding
required disclosure and that such information is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the Securities Exchange Commission. There have been no significant
changes in the Company's internal controls or in other factors which could
significantly affect internal controls subsequent to the date that the
evaluation was carried out. Additionally, no significant deficiencies or
material weaknesses in such internal controls requiring corrective actions
were identified.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- -------------------------- --- --------------------------
Ira Coron (1) 75 Chairman of the Board
of Directors
Richard Gold (1)(4) 49 Director
Arthur Hausman (1)(2) 80 Director
A.J. "Bert" Moyer (2)(3) 60 Director
James Ousley 58 Director
Frank Perna, Jr. (2)(4) 66 Director
Thomas Ringer (2) 72 Director
Fred Sturm 46 Director, President and
Chief Executive Officer,
Patrick Hutchins 41 President, Products Division
Tracy Trent 40 President, Solutions Division
Richard Vitelle 50 Vice President, Finance,
Chief Financial Officer
and Corporate Secretary
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Designated as the Audit Committee financial expert.
(4) Member of Governance and Nominating Committee
IRA CORON has been Chairman of the Board for California Amplifier, Inc.
since March of 1994, and in addition was the Chief Executive Officer until
1997 and remained an officer of the Company until February 1999. From 1989
to 1994 he was an independent management consultant to several companies and
venture capital firms. He retired from TRW, Inc., after serving in numerous
senior management positions from June 1967 to July 1989 among which was Vice
President and General Manager of TRW's Electronic Components Group. He also
served as a member of the Executive Committee of the Wireless Communications
Association.
RICHARD GOLD has been a director of the Company since December
2000. He is a Venture Director with InnoCal II, L.P., a venture capital
partnership, a position held since May 2004. He served as President and
Chief Executive Officer of Nova Crystals, Inc., a supplier of optical
sensing equipment, from December 2002 until May 2004. From June 2002 to
July 2003, he was Chairman of Radia Communications, Inc., a supplier of
wireless communications semiconductors. From January 1999 to June 2002, he
was Chairman, President and Chief Executive Officer of Genoa Corporation, a
supplier of optical communications semiconductors. From November 1991
through December 1998, Mr. Gold held various senior-level executive
positions with Pacific Monolithics, Inc., a supplier of wireless
communications equipment, including Vice President-Engineering, Chief
Operating Officer and, from January 1997 through December 1998, President
and Chief Executive Officer.
ARTHUR HAUSMAN has been a director of the Company since 1987. Mr.
Hausman, a private investor, currently serves as a director of Drexler
Technology Corporation, a manufacturer of optical data storage products.
Until his retirement in 1988, he served as Chairman of the Board of
Directors and Chief Executive Officer of Ampex Corporation, a manufacturer
of professional audio-video systems, data/memory products and magnetic tape,
where he was employed for 27 years. Mr. Hausman was appointed by President
Reagan to the President's Export Council, to the Council's Executive
Committee and to the Chairmanship of the Export Administration Subordinate
Committee of the Council for the period 1985 to 1989.
A.J. "BERT" MOYER has been a director of the Company since February 24,
2004. Mr. Moyer, a business consultant and private investor, served as
Executive Vice President and Chief Financial Officer of QAD Inc., a publicly
held software company, from March 1998 until February 2000, and he
subsequently served as a consultant to QAD, assisting in the Sales
Operations of the Americas Region. From February to July 2000, he served as
president of the commercial division of Profit Recovery Group International,
Inc. (now known as PRG-Schultz International, Inc.), a publicly held
provider of recovery audit services. Prior to joining QAD in 1998, Mr.
Moyer served as Chief Financial Officer of Allergan Inc., a specialty
pharmaceutical company based in Irvine, California, from 1995 to 1998. Mr.
Moyer also serves on the board of QAD Inc., a provider of enterprise
resource planning software applications, Collectors Universe, Inc., a
company engaged in grading, auctioning and selling high-end collectibles,
and Virco Manufacturing Corporation, which designs and produces furniture
for the commercial and education markets.
JAMES OUSLEY has been a director of the Company since April 20, 2004.
Mr. Ousley served as President and Chief Executive Officer of Vytek
Corporation, a wireless integration company, from September 2000 until Vytek
was acquired by the Company effective April 12, 2004. From 1999 to 2000, Mr.
Ousley was President, Chief Executive Officer and Chairman of Syntegra (USA)
Inc. From 1992 to 1999, Mr. Ousley was President and Chief Executive
Officer of Control Data Systems. Earlier in his career, Mr. Ousley held
executive management positions with Ceridian, including Executive Vice
President of Control Data Corp. (now Ceridian) and President of Ceridian's
Computer Products business. Mr. Ousley is also a director of ActivCard
Corp., an authentication software company; Bell Microproducts, a value-added
distributor of storage products and systems, semiconductors and computer
products and peripherals; Datalink Corporation, a developer of enterprise-
class information storage infrastructures; Norstan, Inc., a communications
integration company; and Savvis Communication Corporation, a provider of
Internet protocol (IP) applications and services.
FRANK PERNA, JR. has been a director since May 2000. From 1990 to 1993,
Mr. Perna was Chief Executive Officer of MagneTek. From 1994 to 1998 Mr.
Perna was Chairman and Chief Executive Officer of EOS Corporation, and from
1998 to the present has served as Chairman and Chief Executive Officer of
MSC Software. Mr. Perna also serves as Chairman of the Board of
Software.com and on the Board of Trustees of Kettering University.
THOMAS RINGER has been a director of the Company since August 1996.
Since 1990, Mr. Ringer has been actively involved as a member of the boards
of directors for various public and private companies. Mr. Ringer is
currently Chairman of Wedbush Morgan Securities, Inc., an investment banking
and financial services company, Chairman of Document Sciences Corporation, a
publicly held company engaged in developing and marketing document
automation and content management output software, Chairman of M.S.
Aerospace, Inc., a privately held manufacturer of aerospace fasteners,
Chairman of the Center for Innovation and Entrepreneurship, an executive
education services company, and a member of the Board of Directors of
Maxwell Technologies, Inc., a leading ultracapacitor company. Prior to 1990,
Mr. Ringer served as President and Chief Executive Officer of Recognition
Equipment Inc., a New York Stock Exchange listed company, President and
Chief Executive Officer of Fujitsu Systems of America, Inc. and President
and Chief Executive Officer of Computer Machinery Corporation.
FRED STURM was appointed Chief Executive Officer, President and
Director in August 1997. Prior to joining the Company from 1990 to 1997, Mr.
Sturm was President of Chloride Power Systems (USA), and Managing Director
of Chloride Safety, Security, and Power Conversion (UK), both of which are
part of Chloride Group, PLC (LSE: CHLD). From 1979 to 1990, he held a
variety of general management positions with M/A-Com and TRW Electronics,
which served RF and microwave markets.
PATRICK HUTCHINS joined the Company as Vice President, Operations in
August 2001, and was appointed President of the Company's Products Division
effective April 12, 2004. From March 1997 until joining the Company, Mr.
Hutchins served in general management capacities with several units of
Chloride Group PLC and Genlyte Thomas LLC, most recently serving as the
President and General Manager of Chloride Systems, a division of Genlyte
Thomas.
TRACY TRENT joined the Company as President of the Solutions Division
effective April 12, 2004. From April 3, 2003 until April 12, 2004, Mr.
Trent served as Chief Operating Officer of Vytek Corporation. Prior to his
role as COO of Vytek, Mr. Trent served as Chief Executive Officer of
Stellcom, Inc., a company engaged in the development and deployment of
mobile computing technologies, services and solutions for enterprises and
technology providers. Stellcom was acquired by Vytek in April 2003. Mr.
Trent also served in senior executive roles from 1993 to 2000 at SAIC where
he established and managed several technology divisions including the
Automotive Network Exchange (ANX) and the Health Solutions organization.
Before joining SAIC, Mr. Trent held business development roles at Digital
Equipment Corporation and Sun Microsystems.
RICHARD VITELLE joined the Company as Vice President, Finance, Chief
Financial Officer and Corporate Secretary in July 2001. Prior to joining
the Company, he served as Vice President of Finance and CFO of SMTEK
International, Inc., a publicly held electronics manufacturing services
provider, where he was employed for a total of 11 years. Earlier in his
career Mr. Vitelle served as a senior manager with Price Waterhouse.
Officers are appointed by and serve at the discretion of the Board of
Directors.
Board Committees
The Company has a Compensation Committee that reviews and makes
recommendations to the Board of Directors with respect to the compensation
of the Company's executive officers as well as administers the Company's
Stock Option Plans.
The Company has an Audit Committee that reviews the scope of audit
procedures employed by the Company's independent auditors, approves the
audit fee charged by the independent auditors, reviews the audit reports
rendered by the Company's independent auditors, and pre-approves all non-
audit services to be performed by the independent auditors. The Audit
Committee reports to the Board of Directors with respect to such matters and
recommends the selection of independent auditors.
The Company has a Governance and Nominating Committee that reviews and
makes recommendations on the composition of the Board and its committees,
evaluates and recommends candidates for election to the Board, and reviews
and makes recommendations to the full Board on corporate governance matters.
Code of Ethics
During fiscal 2004 the Company adopted a written Code of Business Conduct
and Ethics ("Code of Ethics") that applies to all of the Company's directors,
officers and employees. Section 14 of this Code of Ethics contains a
Financial Management Code of Ethics that applies specifically to the
Company's Chief Executive Officer and all finance and accounting employees
including the Company's senior financial officers, in accordance with
Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the
Securities and Exchange Commission promulgated thereunder. The Code of
Ethics is expected to be made available on the Company's corporate website
at www.calamp.com in the near future. Until such time, a copy of the Code
of Ethics may be obtained without charge upon request to the Corporate
Secretary of California Amplifier, 1401 N. Rice Avenue, Oxnard, California
93030. In the event that the Company makes changes in, or provides waivers
from, the provisions of this Code of Ethics that are required to be
disclosed by SEC regulations, the Company intends to disclose these events
on its corporate website.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" in the
Company's definitive proxy statement for the Annual Meeting of Stockholders
to be held on July 30, 2004 is incorporated herein by reference and made a
part hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information under the caption "Stock Ownership" in the Company's
definitive proxy statement for the Annual Meeting of Stockholders to be held
on July 30, 2004 is incorporated herein by reference and made a part hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement for the
Annual Meeting of Stockholders to be held on July 30, 2004 is incorporated
herein by reference and made a part hereof.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the caption "Principal Accountant Fees
and Services" in the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on July 30, 2004 is incorporated herein
by reference and made a part hereof.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of Financial Statements
The following financial statements are filed as part of this Report:
Form 10-K
1. Financial Statements: Page No.
-------------------- --------
Report of Independent Registered Public
Accounting Firm 26
Consolidated Balance Sheets 27
Consolidated Statements of Operations 28
Consolidated Statements of Stockholders' Equity
and Comprehensive Income 29
Consolidated Statements of Cash Flows 30
Notes to Consolidated Financial Statements 31
2. Financial Statements Schedules:
------------------------------
Financial statement schedules are either not applicable,
not required or the information required to be set forth
therein is included in the Consolidated Financial State-
ments or Notes thereto included in this report.
3. Exhibits
--------
Exhibits required to be filed as part of this report are:
Exhibit
Number Description
------ -----------
2.1 Asset Purchase Agreement dated April 5, 2002 between and
among the Company, Kaul-Tronics, Inc., NGP, Inc., and
Interactive Technologies International, LLC (incorporated
by reference to Exhibit 2.1 of the Company's Current Report
on Form 8-K dated April 5, 2002).
2.2 Agreement and Plan of Merger and Reorganization dated
December 23, 2003 between the Company and Vytek Corporation
(incorporated by reference to Exhibit 2.1 of the Company's
Registration Statement No. 333-112851 on Form S-4).
3.1 Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement No. 33-59702 on Form S-1).
3.1.1 Amendment to Certificate of Incorporation of the Company,
as filed with the Delaware Secretary of State on September
19, 1996 (incorporated by reference to Exhibit 3.1.1 of
the Company's Interim Report on Form 10-Q for the period
ended August 31, 1996).
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 of the Company's Current Report on Form 8-K dated
February 28, 1992).
3.2.1 Amendment to Bylaws of the Company (incorporated by
reference to Exhibit 99.2 of the Company's Current Report
on Form 8-K dated April 20, 2004).
4.1 Amended and Restated Rights Agreement, amended and
restated as of September 5, 2001, by and between California
Amplifier, Inc. and Mellon Investor Services LLC, as Rights
Agent (incorporated by reference to Exhibit 4.1 of the
Company's Form 8-K filed on September 6, 2001).
10.1 1989 Key Employee Stock Option Plan (incorporated by
reference to Exhibit 4.4 of the Company's Registration
Statement No. 33-31427 on Form S-8).
10.1.1 Amendment No. 1 to the 1989 Key Employee Stock Option Plan
(incorporated by reference to Exhibit 4.7 of the Company's
Registration Statement No. 33-36944 on Form S-8).
10.1.2 Amendment No. 2 to the 1989 Key Employee Stock Option Plan
(incorporated by reference to Exhibit 4.8 of the Company's
Registration Statement No. 33-72704 on Form S-8).
10.1.3 Amendment No. 3 to the 1989 Key Employee Stock Option Plan
(incorporated by reference to Exhibit 4.10 of the Company's
Registration Statement No. 33-60879 on Form S-8).
10.2 The 1999 Stock Option Plan (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement No.
333-93097 on Form S-8).
10.3 Building lease dated June 10, 2003 between the Company and
Sunbelt Enterprises for a facility in Oxnard, California
(incorporated by reference to Exhibit 10-1 filed with the
Company's Report on Form 10-Q for the quarter ended May 31,
2003).
10.4 Form of Indemnity Agreement (incorporated by reference to
an exhibit filed with Company's Annual Report on Form 10-K
for the year ended February 28, 1988).
10.5 Loan and Security Agreement by and between the Company and
U.S. Bank National Association dated May 2, 2002
(incorporated by reference to Exhibit 10.6 of the
Company's Annual Report on Form 10-K for the year ended
February 28, 2002).
10.5.1 Amendment No. 1 dated April 3, 2003 to the Loan and
Security Agreement between the Company and U.S. Bank
National Association dated May 2, 2002 (incorporated by
reference to Exhibit 10-2 filed with the Company's Report
on Form 10-Q for the quarter ended May 31, 2003).
10.5.2 Amendment No. 2 dated July 3, 2003 to the Loan and Security
Agreement between the Company and U.S. Bank National
Association dated May 2, 2002 (incorporated by reference to
Exhibit 10-2 filed with the Company's Report on Form 10-Q
for the quarter ended May 31, 2003).
10.5.3 Amendment No. 3 dated January 5, 2004 to the Loan and
Security Agreement between the Company and U.S. Bank
National Association dated May 2, 2002 (filed herewith).
10.5.4 Amendment No. 4 dated February 27, 2004 to the Loan and
Security Agreement between the Company and U.S. Bank
National Association dated May 2, 2002 (filed herewith).
10.6 Employment Agreement between the Company and Patrick
Hutchins dated May 31, 2002 (filed herewith).
10.7 Employment Agreement between the Company and Fred Sturm
dated May 31, 2002 (filed herewith).
10.8 Employment Agreement between the Company and Tracy Trent
dated February 2, 2004 (incorporated by reference to
Exhibit 10.15 of the Company's Registration Statement No.
333-112851 on Form S-4).
10.9 Employment Agreement between the Company and Richard
Vitelle dated May 31, 2002 (filed herewith).
21 Subsidiaries of the Registrant.
23 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
During the three months ended February 28, 2004 the Company filed the
following reports on Form 8-K:
1. On December 23, 2003, the Company filed a report on Form 8-K that
(i) furnished a copy of its press release announcing the financial
results for the Company's third quarter ended November 30, 2003,
and (ii) filed its press release announcing the signing on December
23, 2003 of a definitive agreement to acquired Vytek Corporation.
2. On January 5, 2004, the Company filed a report on Form 8-K that
set forth as an exhibit the definitive agreement entered into on
December 23, 2003 to acquire Vytek Corporation, subject to
stockholder approvals.
3. On February 25, 2004, the Company filed a report on Form 8-K with
a press release announcing the appointment of A.J. Moyer to the
Company's Board of Directors.
4. On February 27, 2004, the Company filed a report on Form 8-K with
a press release announcing the date of a special stockholders
meeting for the purpose of approving the Company's acquisition of
Vytek Corporation.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on May
27, 2004.
CALIFORNIA AMPLIFIER, INC.
By: /s/ Fred M. Sturm
__________________________
Fred M. Sturm
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Ira Coron Chairman of the May 27, 2004
______________________ Board of Directors ___________________
Ira Coron
/s/ Richard Gold Director May 27, 2004
______________________ ___________________
Richard Gold
/s/ Arthur Hausman Director May 27, 2004
______________________ ___________________
Arthur Hausman
/s/ A.J. Moyer Director May 27, 2004
______________________ ___________________
A.J. Moyer
/s/ James Ousley Director May 27, 2004
______________________ ___________________
James Ousley
/s/ Frank Perna, Jr. Director May 27, 2004
______________________ ___________________
Frank Perna, Jr.
/s/ Thomas Ringer Director May 27, 2004
______________________ ___________________
Thomas Ringer
/s/ Fred M. Sturm President, Chief Executive May 27, 2004
______________________ Officer and Director ___________________
Fred M. Sturm (principal executive officer)
/s/ Richard Vitelle VP Finance, Chief Financial May 27, 2004
______________________ Officer and Treasurer ___________________
Richard Vitelle (principal accounting officer)