SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: May 31, 2004
_________________
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
__________ ____________
Commission File Number: 0-12182
Exact Name of Registrant as
Specified in Its Charter: CALIFORNIA AMPLIFIER, INC.
______________________________
DELAWARE 95-3647070
_______________________________ _______________
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization: Identification No.
Address of Principal Executive Offices: 1401 N. Rice Avenue
Oxnard, CA 93030
Registrant's Telephone Number: (805) 987-9000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The registrant had 23,126,024 shares of Common Stock outstanding as of
July 9, 2004.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
May 31, February 28,
2004 2004
Assets -------- --------
Current assets:
Cash and cash equivalents $ 23,640 $ 22,885
Accounts receivable, less allowance for doubtful
accounts of $755 and $211, respectively 20,931 18,579
Inventories, net 23,408 20,253
Deferred income tax assets 3,018 2,404
Prepaid expenses and other current assets 5,130 3,244
-------- --------
Total current assets 76,127 67,365
Equipment and improvements, at cost, net of
accumulated depreciation and amortization 5,309 4,381
Deferred income tax assets, less current portion 2,936 4,359
Goodwill 100,562 20,938
Other intangible assets, net 5,260 200
Deposits and other assets 2,455 399
-------- --------
$192,650 $ 97,642
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 3,774 $ 3,603
Accounts payable 20,570 17,395
Accrued payroll and employee benefits 3,403 1,513
Other current liabilities 4,517 2,078
Deferred revenue 1,075 -
-------- --------
Total current liabilities 33,339 24,589
-------- --------
Long-term debt, less current portion 9,077 7,690
-------- --------
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; 23,071 and 14,910 shares issued
and outstanding, respectively 231 149
Additional paid-in capital 137,539 44,486
Less common stock held in escrow (9,594) -
Retained earnings 22,859 21,550
Accumulated other comprehensive loss (801) (822)
-------- --------
Total stockholders' equity 150,234 65,363
-------- --------
$192,650 $ 97,642
======== ========
See notes to unaudited consolidated financial statements.
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Three months
ended May 31,
------------------
2004 2003
------- -------
Revenues:
Product sales $41,656 $18,566
Service revenues 3,341 -
------- -------
Total revenues 44,997 18,566
------- -------
Cost of revenues:
Cost of product sales 34,124 17,260
Cost of service revenues 2,572 -
------- -------
Total cost of revenues 36,696 17,260
------- -------
Gross profit 8,301 1,306
------- -------
Operating expenses:
Research and development 1,807 1,362
Sales and marketing 1,072 494
General and administrative 2,445 844
Amortization of intangibles 260 -
In-process research and
development write-off 471 -
------- -------
Total operating expenses 6,055 2,700
------- -------
Operating income (loss) 2,246 (1,394)
Non-operating expense (64) (53)
------- -------
Income (loss) before income
taxes 2,182 (1,447)
Income tax (provision) benefit (873) 345
------- -------
Net income (loss) $ 1,309 $(1,102)
======= =======
Net income (loss) per share:
Basic $ 0.07 $ (0.07)
Diluted $ 0.07 $ (0.07)
Shares used in per share
calculations:
Basic 18,755 14,745
Diluted 19,750 14,745
See notes to unaudited consolidated financial statements.
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three months
ended May 31,
---------------------
2004 2003
------- -------
Cash flows from operating activities:
Net income (loss) $ 1,309 $(1,102)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 959 870
Write-off of in-process research and development 471 -
Equipment impairment writedowns - 586
Gain on sale of equipment (2) (80)
Increase in equity associated with tax
benefit from exercise of stock options 41 -
Deferred tax assets, net 809 (324)
Changes in operating assets and liabilities:
Accounts receivable 2,606 9,373
Inventories (2,416) (1,241)
Prepaid expenses and other assets 1,008 162
Accounts payable 854 (6,995)
Accrued payroll and other accrued liabilities (1,783) (774)
Deferred revenue (184) -
------- -------
Net cash provided by operating activities 3,672 475
------- -------
Cash flows from investing activities:
Capital expenditures (686) (376)
Proceeds from sale of property and equipment 177 100
Acquisition of Vytek Corporation, net of
cash acquired (1,727) -
------- -------
Net cash used in investing activities (2,236) (276)
------- -------
Cash flows from financing activities:
Proceeds from debt borrowings 2,000 -
Debt repayments (2,768) (250)
Proceeds from exercise of stock options 87 3
------- -------
Net cash used in financing activities (681) (247)
------- -------
Net change in cash and cash equivalents 755 (48)
Cash and cash equivalents at beginning of period 22,885 21,947
------- -------
Cash and cash equivalents at end of period $23,640 $21,899
======= =======
See notes to unaudited consolidated financial statements.
CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended May 31, 2004 and 2003
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
California Amplifier, Inc. (the "Company") designs, manufactures and
markets microwave equipment used in the reception of television programming
transmitted from satellites and wireless terrestrial transmission sites,
and two-way transceivers used for wireless high-speed Internet (broadband)
service. The Company's principal business is the design and sale of
outdoor reception equipment used in the U.S. Direct Broadcast Satellite
("DBS") subscription television market.
On April 12, 2004, the Company completed the acquisition of Vytek
Corporation ("Vytek"), a privately held company. The operations of Vytek
are included in the Company's consolidated financial statements since that
date. See Notes 2 and 13 for additional information concerning Vytek.
Effective with the acquisition of Vytek, the Company realigned its
operations into a divisional structure. The legacy operations of
California Amplifier, previously segregated into the Satellite and Wireless
Access business units, have been combined and are now referred to as the
Products Division. The operations of Vytek, which are principally service
oriented, comprise the Company's new Solutions Division.
All intercompany transactions and accounts have been eliminated in
consolidation. In the opinion of the Company's management, the
accompanying consolidated financial statements reflect all adjustments
necessary to present fairly the Company's financial position at May 31,
2004 and its results of operations for the three months ended May 31, 2004
and 2003. The results of operations for such periods are not necessarily
indicative of results to be expected for the full fiscal year.
The Company uses a 52-53 week fiscal year ending on the Saturday
closest to February 28, which for fiscal year 2004 fell on February 28,
2004. The actual interim periods ended on May 29, 2004 and May 31, 2003.
In the accompanying consolidated financial statements, the 2004 fiscal year
end is shown as February 28 and the interim period end for both years is
shown as May 31 for clarity of presentation.
Certain notes and other information are condensed or omitted from
the interim financial statements presented in this Quarterly Report on
Form 10-Q. Therefore, these financial statements should be read in
conjunction with the Company's 2004 Annual Report on Form 10-K as filed
with the Securities and Exchange Commission on May 28, 2004.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Note 2 - VYTEK ACQUISITION
On April 12, 2004, the Company completed the acquisition of Vytek, a
privately held company headquartered in San Diego, California, pursuant
to a merger agreement entered into and announced on December 23, 2003.
The transaction was approved by the stockholders of both companies during
special meetings held on April 8, 2004.
Vytek is a provider of technology integration solutions involving a
mix of professional services and proprietary software and hardware
products, serving the needs of enterprise customers and original
equipment manufacturers. Vytek has approximately 280 employees with 10
offices nationwide. 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.
Pursuant to the Agreement, the Company issued approximately
8,123,400 shares of common stock as the purchase consideration, of which
854,700 share were placed into an escrow account and approximately
7,269,000 shares were issued to the selling shareholders of Vytek. The
Company also assumed all unexercised Vytek stock options and stock
purchase warrants that were outstanding at the time of the merger.
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 CalAmp'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 CalAmp 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 the Company's
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 the
Company's 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.
For purchase accounting purposes, the fair market value per share
used to value the approximately 7,269,000 shares issued to the Vytek
selling stockholders is $11.26 per share, which is 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 that the merger terms were agreed to and
announced. Also for purchase accounting purposes, the fair value of the
Vytek options and warrants assumed by the Company in the merger was
calculated using the Black-Scholes option pricing model. The fair value
of options and warrants assumed was estimated using the Black-Scholes
option pricing model with an interest rate of 3.3%, a dividend yield of
0%, a volatility factor of 134.8%, and an expected life of 5 years in
the case of stock options and 2.25 years to 9.25 years in the case of
warrants.
Following is the calculation of the recorded value of common stock
issued and options and warrants assumed in the Vytek acquisition (in
thousands):
Deposited
Issued to to escrow
sellers account Total
------ ------- -----
Number of common stock shares issued 7,268.7 854.7 8,123.4
Fair market value per share (3) $ 11.26 $ 11.26
------ ------
Value of shares issued $81,846 $ 9,624 $91,470
Less stock registration costs (270) (30) (300)
------ ------ ------
Fair value of shares issued net
of registration costs 81,576 9,594 91,170
Fair value of fully vested Vytek stock
options and warrants assumed by
California Amplifier 1,838 - 1,838
------ ------ ------
Recorded value of common stock issued
and assumed options and warrants $83,413 $ 9,594 $93,007
====== ====== ======
The common stock shares deposited to the escrow account are, for
accounting purposes, treated as contingent consideration, and accordingly
are excluded from the computation of goodwill until such time as the shares
are released from escrow.
The Company has not yet obtained all information required to complete
the purchase price allocation related to the Vytek acquisition. The final
allocation will be completed in fiscal 2005. Following is a preliminary
purchase price allocation for the Vytek acquisition (in thousands):
Recorded value of common stock issued to sellers
and assumed options and warrants (excluding shares
deposited to escrow account) ............................... $ 83,413
Direct costs of acquisition including legal,
accounting and financial advisory fees ..................... 2,580
------
Total cost of Vytek acquisition (excluding common
stock deposited to escrow account) ......................... 85,993
Fair value of net assets acquired:
Current assets .................................... $ 9,345
Property and equipment ............................ 1,185
Intangible assets:
Developed/core technology ............. $3,349
Customer lists ........................ 1,127
Contracts backlog ..................... 845
In-process research and development ... 471
-----
Total intangible assets........................ 5,792
Other assets ...................................... 2,066
Current liabilities ............................... (11,722)
Long-term debt .................................... (297)
------
Total fair value of net assets acquired ................... 6,369
------
Goodwill ..................................................... $79,624
======
The goodwill arising from this acquisition is not expected to be
deductible for income tax purposes.
The $471,000 allocated to in-process research and development in the
preliminary purchase price allocation above was charged to expense
immediately following the acquisition. The Company expects to incur
approximately $300,000 to complete the in-process technology.
The following is supplemental pro forma information presented as if
the acquisition of Vytek had occurred at the beginning of each of the
respective periods (in thousands):
Three Months Ended Three Months Ended
May 31, 2004 May 31, 2003
-------------------- -------------------
As Pro As Pro
reported forma reported forma
-------- -------- -------- -------
Revenue $44,997 $49,158 $18,566 $30,918
Net income (loss) $ 1,309 $ 1,113 $(1,102) $(1,830)
Net income (loss) per share:
Basic $ 0.07 $ 0.05 $ (0.07) $ (0.08)
Diluted $ 0.07 $ 0.05 $ (0.07) $ (0.08)
The pro forma adjustments for the three months ended May 31, 2004
consist of adding Vytek's estimated results of operations for the six weeks
ended April 12, 2004, because Vytek is included in the "As reported" amounts
for the seven week period from the April 12 acquisition date to the end of
the quarter.
The pro forma adjustments for the three months ended May 31, 2003
consist of adding Vytek's results of operations for the three months ended
June 30, 2003.
Note 3 - INVENTORIES
Inventories include the cost of material, labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in,
first-out method) or market, and consist of the following (in thousands):
May 31, February 28,
2004 2004
------ ------
Raw materials and subassemblies $14,354 $11,671
Work in process 730 417
Finished goods 8,324 8,165
------ ------
$23,408 $20,253
====== ======
Note 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of adopting Statement of Financial Accounting Standards
No. 142, "Accounting for Goodwill and Intangible Assets", at the beginning
of fiscal 2003, the Company no longer records amortization on goodwill.
Instead, goodwill is tested periodically for impairment.
Annual goodwill impairment tests were conducted as of December 31,
2003 and 2002. These tests indicated that there was no impairment of
goodwill as of those dates. Because of the write-down of certain assets
in the Products Division in the three months ended March 31, 2003, the
Company conducted an interim goodwill impairment test as of May 31, 2003.
This test also indicated that there was no impairment of goodwill. The
Company used a discounted cash flow approach to estimate the fair value
of its Products Division in these impairment tests.
The change in the carrying amount of goodwill for the three months
ended May 31, 2003 is as follows:
Balance as of February 28, 2004 $ 20,938
Estimated goodwill arising from the
acquisition of Vytek in April 2004 79,624
-------
Balance as of May 31, 2004 $100,562
=======
The goodwill arising from the Vytek transaction is an estimated amount
based on the preliminary purchase price allocation, and is subject to
change.
The goodwill balance at February 28, 2004 is associated with the
Company's Products Division. Substantially all goodwill arising from the
Vytek acquisition is associated with the Company's Solutions Division.
Intangible assets are comprised as follows at May 31, 2004 and February
28, 2004 (in thousands):
May 31, 2004 February 28, 2004
------------------------ -------------------------
Amorti- Gross Accum. Gross Accum.
zation Carrying Amorti- Carrying Amorti-
Period Amount zation Net Amount zation Net
----- ------ ------ ----- ------ ------ -----
Developed/core
technology 5 yrs. $3,349 $ 90 $3,259 $ - $ - $ -
Customer lists 5 yrs. 1,127 30 1,097 - - -
Contracts
backlog 1 yr. 845 115 730 - - -
Covenants not
to compete 4.1 yrs. 400 226 174 400 200 200
------ ----- ----- ----- ----- -----
$5,721 $ 465 $5,260 $ 400 $ 200 $ 200
====== ====== ===== ===== ===== =====
All intangible assets in the table above resulted from the acquisition of
Vytek in April 2004 except for the covenants not to compete, which arose from
the
acquisition of the satellite dish manufacturing business of Kaul-Tronics in
April
2002.
Amortization expense of intangible assets was $260,000 and $26,000 in
the three months ended May 31, 2004 and 2003, respectively. The weighted
average amortization period of the intangible assets at May 31, 2004 was
4.3 years.
Estimated amortization expense for the fiscal years ending February
28 is as follows:
2005 $1,644,000
2006 $1,087,000
2007 $ 895,000
2008 $ 895,000
2009 $ 895,000
2010 $ 105,000
Note 5 - FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Bank credit facility
At May 31, 2004 the Company had a $10 million working capital line
of credit with a commercial bank. Borrowings under this line of credit
bear interest at LIBOR plus 2.0% or the bank's prime rate, and are
secured by substantially all of the Company's assets. At May 31, 2004,
there were outstanding borrowings of $3 million on the line of credit and
$2,479,000 was reserved under the line for issued letters of credit. The
$3 million outstanding balance on the line of credit is classified as
long-term debt at May 31, 2004 because the revolver does not mature until
August 2005. The Company also has two bank term loans which had an
aggregate outstanding principal balance of $9,582,000 at May 31, 2004, of
which $3,598,000 is classified as current at that date. The bank credit
agreement which encompasses the line of credit and the two term loans
contains a subjective acceleration clause which enables the bank to call
the loans in the event of a material adverse change (as defined) in the
Company's business. Based on the Company's history of profitable
operations and positive operating cash flow over the past several years,
and based on the Company's internal financial forecasts for the next
several quarters, the Company does not believe it is probable that the
bank will assert the material adverse change clause in the next 12
months.
At the time it was acquired by the Company on April 12, 2004, Vytek
had $2 million outstanding on a working capital revolver with another
commercial bank. Shortly after the acquisition was consummated, the
Company borrowed $2 million on its bank line of credit and paid off
Vytek's bank line of credit. Vytek's bank line of credit was then
terminated.
Other long-term debt
Vytek had capital lease obligations of $269,000 at May 31, 2004, of
which $176,000 was classified as current at that date.
Contractual cash obligations
Following is a summary of the Company's contractual cash obligations
as of May 31, 2004 (in thousands):
Future Cash Payments Due by Fiscal Year
----------------------------------------------
Contractual 2005 There-
Obligations (remainder) 2006 2007 2008 2009 after Total
- --------------- ------ ------ ------ ------ ------ ------ ------
Bank debt $ 2,892 $5,823 $2,139 $1,728 $ - $ - $12,582
Capital leases 199 80 30 8 - - 317
Operating leases 1,875 2,166 1,802 1,869 1,924 3,756 13,392
Purchase
obligations 24,066 422 - - - - 24,488
------- ------ ------ ------ ------ ------ ------
Total contractual
cash obligations $29,032 $8,491 $3,971 $3,605 $1,924 $3,756 $50,779
====== ====== ====== ====== ====== ====== ======
Note 6 - INCOME TAXES
Deferred income tax assets reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
A deferred income tax asset is recognized if realization of such asset is
more likely than not, based upon the weight of available evidence which
includes historical operating performance and the Company's forecast of
future operating performance. The Company evaluates the realizability of
its deferred income tax assets on a quarterly basis, and a valuation
allowance is provided, as necessary, in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". During this evaluation, the Company reviews its forecasts of
future operating performance in conjunction with the positive and negative
evidence surrounding the realizability of its deferred income tax asset to
determine if a valuation allowance is needed.
At February 28, 2004, the deferred tax asset valuation allowance was
$630,000, and the deferred tax asset net of this valuation allowance was
$6,763,000. The $630,000 valuation allowance relates to foreign tax
credits which can be utilized only after tax loss carryforwards and other
tax benefits have been fully utilized. Because these foreign tax credits
have a remaining carryforward period of only two to four years, management
believes that it is more likely than not that these foreign tax credits
will expire unutilized, and accordingly a full valuation allowance against
these credits was established in fiscal 2004.
During the three months ended May 31, 2004, the deferred tax asset was
reduced by $809,000 reflecting the utilization of tax loss carryforwards
and other tax assets as a result of the taxable income generated in the
period. There was no change in the $630,000 deferred tax asset valuation
allowance during the three months ended May 31, 2004.
The effective income tax rate was 40.0% and 23.8% in the three months
ended May 31, 2004 and 2003, respectively. The increase in effective tax
rate is attributable primarily to the fact that during the fiscal year
ended February 28, 2004 reductions of the deferred tax asset valuation
allowance caused a reduction in the overall effective income tax rate. In
the three months ended May 31, 2004, there was no reduction in the
valuation allowance.
Vytek, which was acquired by the Company effective April 12, 2004, has
tax loss carryforwards and other tax assets that the Company believes will
be utilizable to some extent in the future, subject to change of ownership
limitations pursuant to Section 382 of the Internal Revenue Code and to the
ability of the combined post-merger company to generate sufficient taxable
income to utilize the benefits before the expiration of the applicable
carryforward periods. In the preliminary purchase price allocation
described in Note 2 herein, no value has been assigned to Vytek's deferred
tax assets, pending completion by the Company of its analysis of the
estimated future realizability of these tax assets. Once this analysis is
completed, to the extent value is allocated to Vytek's deferred tax assets
in the final purchase price allocation, there will be a corresponding
reduction in the value ascribed to goodwill.
Note 7 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution, using the treasury stock method, that could occur if
securities or other contracts to issue Common Stock were exercised or
converted into Common Stock or resulted in the issuance of Common Stock
that then shared in the earnings of the Company. In computing diluted
earnings per share, the treasury stock method assumes that outstanding
options are exercised and the proceeds are used to purchase common stock at
the average market price during the period. Options will have a dilutive
effect under the treasury stock method only when the Company reports income
and the average market price of the common stock during the period exceeds
the exercise price of the options.
The following is a summary of the calculation of weighted average
shares used in the computation of basic and diluted earnings per share (in
thousands):
Three months
ended May 31,
----------------
2004 2003
------ ------
Basic weighted average number
of common shares outstanding 18,755 14,745
Effect of dilutive securities:
Stock options 885 -
Shares held in escrow 110 -
------ ------
Diluted weighted average number
of common shares outstanding 19,750 14,745
====== ======
Options outstanding at May 31, 2004 to purchase approximately
1,154,000 shares of Common Stock at exercise prices of $7.25 and above were
excluded from the computation of diluted earnings per share for the three
months then ended because the exercise price of these options was greater
than the average market price of the common stock and accordingly the
effect of inclusion would be antidilutive.
Because the Company had a net loss for the three months ended May 31,
2003, outstanding stock options to purchase approximately 2,583,000 shares
of common stock at exercise prices ranging from $2.76 to $50.56 would have been
anti-dilutive and were therefore not included in the computation of diluted
earnings per share for 2003 period.
In connection with the acquisition of Vytek, 854,700 shares of common
stock were issued and are held in escrow pending the resolution of certain
matters as further described in Note 2 herein. All shares held in escrow
have been excluded from the basic weighted average number of common shares
outstanding. Of the common stock shares held in escrow, the Company
estimates that approximately 645,000 shares would have been subject to
reversion to the Company if the Working Capital Adjustment discussed in
Note 2 had been finalized as of May 31, 2004. The diluted share adjustment
in the table above of 110,000 shares represents the estimated escrowed
shares not subject to reversion, weighted for the amount of time
outstanding in the period.
Note 8 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the total of net income
(loss) and all non-owner changes in equity. The following table details
the components of comprehensive income (loss) for the three months ended
May 31, 2004 and 2003 (in thousands):
Three months
ended May 31,
----------------
2004 2003
------ ------
Net income (loss) $ 1,309 $(1,102)
Unrealized holding gain (loss) on
available-for-sale investments 21 1
------ ------
Comprehensive income (loss) $ 1,330 $(1,101)
====== ======
Note 9 - STOCK OPTIONS
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock Based Compensation - Transition
and Disclosure" ("FAS No. 148"). FAS No. 148 amends Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS No. 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock based employee compensation. In addition, FAS No.
148 amends the disclosure requirements of FAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and
the effect of the method used on reported results.
As allowed by Statement of FAS No. 123, the Company has elected to
continue to measure compensation cost under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No.
25"). Under APB No. 25, compensation expense is measured on the first
date at which both the number of shares and the exercise price are known.
Under the Company's stock option plans, this would typically be the grant
date. To the extent that the exercise price equals or exceeds the market
value of the stock on the grant date, no compensation expense is
recognized. Because all of the options granted by the Company are at
exercise prices not less than the market value on the date of grant, no
compensation expense is recognized under this accounting treatment in the
accompanying unaudited consolidated statements of operations.
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following assumptions:
Options granted
during the three
months ended May 31,
-------------------
2004 2003
------ ------
Expected life (years) 5 5
Dividend yield 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 $933,000 and
$1,078,000 in the three months ended May 31, 2004 and 2003, respectively.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of FAS 123 to stock-based employee compensation
(in thousands except per share amounts):
Three months
ended May 31,
----------------
2004 2003
------ ------
Net income (loss) as reported $ 1,309 $(1,102)
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (577) (841)
----- -----
Pro forma net income (loss) $ 732 $(1,943)
===== =====
Earnings (loss) per share:
Basic -
As reported $0.07 $(0.07)
Pro forma $0.04 $(0.13)
Diluted -
As reported $0.07 $(0.07)
Pro forma $0.04 $(0.13)
Note 10 - CONCENTRATION OF RISK
Because the Company sells into markets dominated by a few large
service providers, a significant percentage of consolidated revenue and
consolidated accounts receivable relate to a small number of customers.
Sales to customers which accounted for 10% or more of consolidated sales
for the three months ended May 31, 2004 or 2003, as a percent of
consolidated revenue, are as follows:
Three months
ended May 31,
-----------------
Customer 2004 2003
-------- ------ ------
A 36.8% 32.1%
B 16.4% 17.1%
C 13.8% 0.1%
D 1.9% 19.3%
Accounts receivable from these customers as a percent of consolidated
net accounts receivable are as follows:
May 31, Feb. 28,
2004 2004
------ ------
A 30.7% 49.4%
B 11.0% 22.0%
C 15.5% 8.2%
D 0.9% 0.5%
Customers A, B, C and D are customers of the Company's Products Division.
Note 11 - PRODUCT WARRANTIES
The Company generally warrants its products against defects over
periods ranging from 3 to 24 months. An accrual for estimated future
costs relating to products returned under warranty is recorded as an
expense when products are shipped. At the end of each quarter, the
Company adjusts its liability for warranty claims based on its actual
warranty claims experience as a percentage of sales for the preceding
three years. Activity in the warranty liability for the three months
ended May 31, 2004 and 2003 is as follows (in thousands):
Three months
ended May 31,
-----------------
2004 2003
------ ------
Balance at beginning of period $159 $491
Charged (credited) to costs
and expenses 131 (4)
Deductions (30) (22)
---- ----
Balance at end of period $260 $465
==== ====
Note 12 - OTHER FINANCIAL INFORMATION
"Net cash provided by operating activities" in the consolidated
statements of cash flows includes cash payments for interest and income
taxes as follows (in thousands):
Three months ended
May 31,
-------------------
2004 2003
------ ------
Interest paid $ 103 $ 145
Income taxes paid (net
refunds received) $ 12 4
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Three months ended
May 31,
-------------------
2004 2003
------ ------
Decrease in valuation allowance
for available-for-sale investment $ 21 $ -
Issuance of common stock and
assumption of stock options and
warrants as consideration for
acquisition of Vytek Corporation,
net of common stock issued and
held in escrow $83,413 $ -
Note 13 - SEGMENT INFORMATION
Effective with the acquisition of Vytek on April 12, 2004, the Company
realigned its operations into a divisional structure. The legacy
operations of California Amplifier, previously segregated into the
Satellite and Wireless Access business units, have been combined and are
now referred to as the Products Division. The operations of Vytek, which
are principally service oriented, comprise the Company's new Solutions
Division. The operations of Vytek's products manufacturing subsidiary
Vytek Products, Inc. have been combined with the Company's Products
Division effective at the April 12, 2004 acquisition date.
Segment information for the three months ended May 31, 2004 and 2003
is as follows (dollars in thousands):
Three months ended May 31, 2004:
Operating Segments
---------------------
Products Solutions
Division Division Corporate Total
------- ------ ------- -----
Revenues:
Products $40,499 $ 1,157 $41,656
Services - 3,341 3,341
------ ----- ------
Total revenues $40,499 $ 4,498 $44,997
====== ===== ======
Gross profit:
Products $ 7,266 $ 266 $ 7,532
Services - 769 769
------ ----- ------
Total gross profit $ 7,266 1,035 $ 8,301
====== ===== ======
Gross margin:
Products 17.9% 23.0% 18.1%
Services - 23.0% 23.0%
Total gross margin 17.9% 23.0% 18.4%
Income (loss) before
income taxes $ 4,634 $(1,509) $ (943) $ 2,182
Product revenue of the Solutions Division represents primarily
hardware that is bundled with software applications.
Three months ended May 31, 2003:
Operating Segments
---------------------
Products Solutions
Division Division Corporate Total
------- ------ ------- -----
Revenues:
Products $18,566 - $18,566
Services - - -
------ ----- ------
Total revenues $18,566 - $18,566
====== ===== ======
Gross profit:
Products $ 1,306 - $ 1,306
Services - - -
------ ----- ------
Total gross profit $ 1,306 - $ 1,306
====== ===== ======
Gross margin:
Products 7.0% - 7.0%
Services - - -
Total gross margin 7.0% - 7.0%
Loss before income taxes $ (914) $ - $ (533) $(1,447)
Included in cost of revenue for the Products Division during the three
months ended May 31, 2003 were impairment writedowns of $586,000 on surface
mount equipment which had become underutilized due to increased outsourcing
of printed circuit board subassemblies to contract manufacturers and
certain other manufacturing equipment which was taken out of service and
abandoned as of May 31, 2003. Also included in Product Division cost of
revenue were lower of cost or market inventory writedowns of $504,000 and
$242,000 in the three months ended May 31, 2004 and 2003, respectively.
The Company considers income (loss) before income taxes to be the
primary measure of profit or loss of its business segments. The amount
shown for each period in the "Corporate" column above for income (loss)
before income taxes consists of corporate expenses not allocated to the
business segments, and non-operating income (expense). Non-allocated
corporate expenses include salaries and wages for the CEO and CFO, and
corporate expenses such as audit fees, investor relations, stock listing
fees, director and officer liability insurance, and director fees and
expenses. Non-operating income (expense) includes interest income,
interest expense and foreign currency gains and losses.
Note 14 - 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.
Through its newly acquired Vytek subsidiary, the Company leases office
space and manufacturing facilities in California, New Jersey, Virginia,
and New York under non-cancelable operating leases, which expire at
various dates through July 2010. Some of the leases require Vytek to pay
maintenance, utilities and insurance costs and contain renewal options
(for periods ranging from two to five years) and escalation clauses.
Certain manufacturing equipment and office equipment is also leased under
operating lease agreements. A summary of future operating lease
commitments is included in the contractual cash obligations table in Note
6.
At May 31, 2004, the Company, through its Vytek subsidiary, had
restricted cash in the aggregate amount of $1,805,000 securing two
irrevocable letters of credit for a facility lease security deposit and a
performance bond for a long-term design and engineering contract. This
restricted cash amount is included in Deposits and Other Assets in the
consolidated balance sheet at that date.
Note 15 - LEGAL MATTERS
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
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. The
Company believes that the ultimate resolution of this matter will not
have a material adverse effect on the Company's results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting periods. Areas where significant judgments
are made include, but are not limited to: allowance for doubtful
accounts, inventory valuation, product warranties, 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 10 to the accompanying consolidated financial
statements, the Company's customer base is quite concentrated, with three
customers accounting for 67% of the Company's total revenue for the three
months ended May 31, 2004. 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.
At May 31, 2004 the Company's net deferred income tax asset was
$5,954,000, 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 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.
Vytek, which was acquired by the Company in April 2004, has tax loss
carryforwards and other tax assets that the Company believes will be
utilizable to some extent in the future, subject to change of ownership
limitations pursuant to Section 382 of the Internal Revenue Code and to the
ability of the combined post-merger company to generate sufficient taxable
income to utilize the benefits before the expiration of the applicable
carryforward periods. In the preliminary purchase price allocation
described in Note 2 herein, no value has been assigned to Vytek's deferred
tax assets, pending completion by the Company of its analysis of the
estimated future realizability of these tax assets. Once this analysis is
completed, to the extent value is allocated to Vytek's deferred tax assets
in an updated purchase price allocation, there will be a corresponding
reduction in the value ascribed to goodwill.
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 the three months ended May 31, 2003, the Company recorded an
impairment writedown of $586,000 on production 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
Effective with the acquisition of Vytek on April 12, 2004, the
Company realigned its operations into a divisional structure. The legacy
operations of California Amplifier, previously segregated into the
Satellite and Wireless Access business units, have been combined and are
now referred to as the Products Division. The operations of Vytek, which
are principally service oriented, comprise the Company's new Solutions
Division. The operations of Vytek's products manufacturing subsidiary
Vytek Products, Inc. have been combined with the Company's Products
division effective at the April 12, 2004 acquisition date.
The Company's revenue and gross profit by business segment are as
follows:
REVENUE BY SEGMENT
Three months ended May 31,
------------------------------------
2004 2003
--------------- ---------------
% of % of
Segment $000s Total $000s Total
----------- ------- ----- ------- -----
Products Division $40,499 90.0% $18,566 100.0%
Solutions Division 4,498 10.0% - -
------- ----- ------- -----
Total $44,997 100.0% $18,566 100.0%
======= ===== ======= =====
GROSS PROFIT BY SEGMENT
Three months ended May 31,
-----------------------------------
2004 2003
-------------- --------------
% of % of
Segment $000s Total $000s Total
----------- ------ ----- ------ -----
Products Division $7,266 87.5% $1,306 100.0%
Solutions Division 1,035 12.5% - -
------ ----- ------ -----
Total $8,301 100.0% $1,306 100.0%
====== ===== ====== =====
Revenue
Products Division revenue increased $21,933,000, or 118%, in the three
months ended May 31, 2004 from the same period in the previous fiscal year.
This increase resulted primarily because revenue in the first quarter of
last fiscal year was abnormally low as the result of substantially reduced
customer orders in response to the customers' overstocked inventories of
certain satellite television reception products. The satellite products
impacted by this order slowdown were predominantly the more technologically
advanced products that have higher selling prices. Products Division
revenue rebounded strongly beginning in the third quarter of last fiscal
year. On a sequential quarter basis, Products Division revenue for the
most recent three quarters was $44.2 million, $41.6 million and $40.5
million, respectively. Also contributing to the increase in revenue of the
Products Division is the fact that the operations of Vytek Products, Inc.,
a subsidiary of Vytek, are included in the Company's Products Division.
Vytek Products, Inc. had revenue of $356,000 in the seven week period from
the April 12, 2004 acquisition date to the end of the quarter.
The Solutions Division revenue represents the operations of Vytek for
the seven week period from the April 12, 2004 acquisition date to the end
of the quarter, except for the revenue of Vytek Products, Inc. which, as
noted in the preceding paragraph, is included in the revenue of the
Products Division.
Gross Profit and Gross Margins
Products Division gross profit increased $5,960,000, or over 450%, and
gross margin improved from 7.0% in the three months ended May 31, 2003 to
17.9% in the latest quarter. Gross margin was depressed in last year's
first quarter principally because of the low sales volume, which resulted
in less absorption of fixed manufacturing costs. Also, included in cost of
revenue for the Products Division during the three months ended May 31,
2003 were a lower of cost or market inventory writedowns of $242,000 and
impairment writedowns of $586,000 on surface mount equipment which had
become underutilized due to increased outsourcing of printed circuit board
subassemblies to contract manufacturers and certain other manufacturing
equipment which was taken out of service and abandoned as of May 31, 2003.
See also Note 13 to the accompanying unaudited consolidated financial
statements for additional operating data by business segment.
Operating Expenses
Research and development expense increased by $445,000 to $1,807,000
in the latest quarter from $1,362,000 last year. This increase was due to
the inclusion of Vytek's operations for seven weeks, or about 54%, of the
latest quarter, which accounted for $440,000 of the increase.
Selling expenses increased by $578,000 in the quarter, of which
$505,000 results from the inclusion of Vytek for seven weeks of the
quarter.
General and administrative expense increased from $844,000 in the
first quarter of last year to $2,445,000 in the latest quarter. Of this
$1,601,000 increase, $1,041,000 is attributable to the inclusion of Vytek.
The remaining increase is primarily due to higher legal expense ($103,000),
increased auditing and accounting fees ($50,000), increased consulting fees
($61,000), higher incentive expense ($91,000), the expensing in the latest
quarter of costs associated with a software implementation project
($160,000), and the fact that G&A expense in last year's first quarter was
netted down by a gain on sale of equipment ($80,000).
Income Tax Provision
The effective income tax rate was 40.0% and 23.8% in the three months
ended May 31, 2004 and 2003, respectively. The increase in effective tax
rate is attributable primarily to the fact that during the fiscal year
ended February 28, 2004 reductions of the deferred tax asset valuation
allowance caused a reduction in the overall effective income tax rate. In
the three months ended May 31, 2004, there was no reduction in the
valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $23,640,000 at May 31, 2004, and its working
capital line of credit with a bank. During the three months ended May 31,
2004, cash and cash equivalents increased by $755,000. This increase
consisted of cash provided by operating activities of $3,672,000, proceeds
from the sale of equipment of $177,000 and proceeds from stock option
exercises of $87,000, substantially offset by cash used for capital
expenditures of $686,000, net cash used for the Vytek acquisition of
$1,727,000 and debt repayments, net of borrowings, of $768,000.
Components of operating working capital increased by $86,000 during
the three months ended May 31, 2004, comprised of a decrease of $2,606,000
in accounts receivable, a decrease of $1,008,000 in prepaid expenses and
other assets, an increase of $2,416,000 in inventory, an increase of
$854,000 in accounts payable, a decrease of $1,783,000 in accrued payroll
and other accrued liabilities, and a decrease in deferred revenue of
$184,000.
The Company believes that inflation and foreign currency exchange
rates have not had a material effect on its operations. The Company
believes that fiscal year 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 May 31, 2004 the Company had a $10 million working capital line
of credit with a commercial bank. Borrowings under this line of credit
bear interest at LIBOR plus 2.0% or the bank's prime rate, and are
secured by substantially all of the Company's assets. At May 31, 2004,
there were outstanding borrowings of $3 million on the line of credit and
$2,479,000 was reserved under the line for issued letters of credit. The
$3 million outstanding balance on the line of credit is classified as
long-term debt at May 31, 2004 because the revolver does not mature until
August 2005. The Company also has two bank term loans which had an
aggregate outstanding principal balance of $9,582,000 at May 31, 2004, of
which $3,598,000 is classified as current at that date. The bank credit
agreement which encompasses the line of credit and the two term loans
contains a subjective acceleration clause which enables the bank to call
the loans in the event of a material adverse change (as defined) in the
Company's business. Based on the Company's history of profitable
operations and positive operating cash flow over the past several years,
and based on the Company's internal financial forecasts for the next
several quarters, the Company does not believe it is probable that the
bank will assert the material adverse change clause in the next 12
months.
At the time it was acquired by the Company on April 12, 2004, Vytek
had $2 million outstanding on a working capital revolver with another
commercial bank. Shortly after the acquisition was consummated, the
Company borrowed $2 million on its bank line of credit and paid off
Vytek's bank line of credit. Vytek's bank line of credit was then
terminated.
See Note 5 to the accompanying consolidated financial statements for a
summary of the Company's contractual cash obligations as of May 31, 2004.
The Company believes that cash flow from operations, together with
amounts available under its working capital line of credit, are sufficient
to support operations, fund capital equipment requirements and discharge
contractual cash obligations over the next twelve months.
FORWARD LOOKING STATEMENTS
Forward looking statements in this Form 10-Q which include, without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, projections and other information
regarding future performance, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
words "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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash equivalents, accounts
receivable, accounts payable and bank term loans payable. At May 31, 2004,
the carrying values of cash equivalents, accounts receivable and accounts
payable approximate fair values given the short maturity of these
instruments.
The carrying value of bank term loans payable approximates fair value
since the interest rates on these loans approximate the interest rates
which are currently available to the Company for the issuance of debt with
similar provisions and maturities. Based on the amount of bank debt
outstanding at May 31, 2004, a change in interest rates of one percent
would result in an annual impact of approximately $100,000, net of tax, on
the Company's consolidated statement of income.
A portion of the Company's operations consists of an investment in a
foreign subsidiary. As a result, the consolidated financial results have
been and could continue to be affected by changes in foreign currency
exchange rates. However, the Company believes that it does not have
material foreign currency exchange rate risk since a significant portion of
the Company's sales are to U.S. markets, or to international markets where
its sales are denominated in U.S. dollars, and material purchases from
foreign suppliers are typically also denominated in U.S. dollars.
Additionally, the functional currency of the Company's foreign subsidiary
is the U.S. dollar.
It is the Company's policy not to enter into derivative financial
instruments for speculative purposes. Furthermore, the Company generally
does not enter into foreign currency forward exchange contracts. There are
no foreign currency forward exchange contracts outstanding at May 31, 2004.
ITEM 4. 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 15 to the accompanying consolidated financial statements for
a description of pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of the Company's stockholders held on April 8,
2004, the stockholders approved the issuance of merger consideration in
connection with the acquisition of Vytek Corporation. Of the total
8,641,932 shares voted (which represented 56.5% of the then-outstanding
shares), 8,419,781 votes were cast for the proposal, 186,975 votes were
cast against the proposal, and there were 35,176 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 31.1 - Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
During the three months ended May 31, 2004 the Company filed the
following reports on Form 8-K:
1. On March 11, 2004, the Company filed a report on Form 8-K with
a press release announcing the date of a live audio webcast of
management's discussion of the then-pending acquisition of Vytek
Corporation.
2. On March 19, 2004, the Company filed a report on Form 8-K that
incorporated by reference a slide presentation that accompanied
the Company's live audio webcast of management's discussion of
the then-pending acquisition of Vytek Corporation.
3. On April 9, 2004, the Company filed a report on Form 8-K with
a press release announcing that the Company's stockholders
approved the issuance of merger consideration in connection
with the acquisition of Vytek Corporation at a special meeting
of stockholders on April 8, 2004.
4. On April 13, 2004, the Company filed a report on Form 8-K with
a press release announcing the completion of the merger with
Vytek Corporation and key management changes.
5. On April 21, 2004, the Company filed a report on Form 8-K with
a press release announcing James E. Ousley had been appointed to
its Board of Directors effective April 20, 2004.
6. On April 26, 2004, the Company filed a report on Form 8-K
which furnished a copy of its press release announcing results
of operations for the quarter and fiscal year ended February 28,
2004, and which disclosed a wage-related lawsuit served on the
Company on April 21, 2004.
7. On April 27, 2004, the Company filed a report on Form 8-K
which disclosed the acquisition of Vytek Corporation pursuant
to Item 2 of Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
July 13, 2004 /s/ Richard K. Vitelle
- -------------------------------- ----------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)