10-Q 1 fy02_10q-3rd.txt FY02_10Q-2ND.XFD SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - Q (Mark One) [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: November 30, 2001 ----------------- [ ] 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: 012182 Exact Name of Registrant as Specified in Its Charter: CALIFORNIA AMPLIFIER, INC. -------------------------- DELAWARE 95-3647070 ------------------------------ ------------------ State or Other Jurisdiction of I.R.S. Employer Incorporation or Organization: Identification No. Address of Principal Executive Offices: 460 Calle San Pablo Camarillo, CA 93012 Registrant's Telephone Number: (805) 987-9000 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The registrant had 13,614,851 shares of Common Stock outstanding as of December 18, 2001. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except par value amounts) November 30, February 28, 2001 2001 -------- -------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 19,812 $ 9,778 Accounts receivable, less allowance of $398 and $380, respectively 15,581 11,382 Inventories 10,547 9,676 Deferred income taxes 2,252 2,222 Prepaid expenses and other current assets 360 1,163 -------- -------- Total current assets 48,552 34,221 Property and equipment, at cost, net of accumulated depreciation and amortization 8,419 9,885 Goodwill, net of accumulated amortization 3,354 3,557 Deposits and other assets 440 458 -------- -------- $ 60,765 $ 48,121 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 908 $ 644 Accounts payable 11,829 5,103 Accrued payroll and employee benefits 2,149 1,467 Other accrued liabilities 7,106 6,783 -------- -------- Total current liabilities 21,992 13,997 -------- -------- Long-term debt, net of current portion 3,889 4,500 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $1 par value; 3,000 shares authorized; no shares issued or outstanding - - Common stock, $.01 par value; 30,000 shares authorized; 13,602 and 13,601 shares issued and outstanding, respectively 136 136 Additional paid-in capital 25,804 23,975 Retained earnings 9,710 6,212 Accumulated other comprehensive loss (766) (699) -------- -------- Total stockholders' equity 34,884 29,624 -------- -------- $ 60,765 $ 48,121 ======== ======== See accompanying notes to unaudited consolidated financial statements. CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands except per share amounts) Three Months Ended Nine Months Ended November 30, November 30, ------------------- ------------------- 2001 2000 2001 2000 ------- ------- ------- ------- Sales $32,756 $30,902 $78,212 $92,506 Cost of goods sold 25,210 24,223 59,735 73,881 ------- ------- ------- ------- Gross profit 7,546 6,679 18,477 18,625 ------- ------- ------- ------- Operating expenses: Research and development 2,276 1,435 5,996 4,490 Selling 622 692 1,848 2,516 General and administrative 1,739 1,672 6,857 4,250 ------- ------- ------- ------- Total operating expenses 4,637 3,799 14,701 11,256 ------- ------- ------- ------- Operating income 2,909 2,880 3,776 7,369 Litigation settlement (925) - (925) - Other income (expense), net (4) (35) (3) (127) ------- ------- ------- ------- Income from continuing operations before income taxes 1,980 2,845 2,848 7,242 Income tax provision (628) (1,029) (940) (2,627) ------- ------- ------- ------- Income from continuing operations 1,352 1,816 1,908 4,615 Discontinued operation: Income (loss) from discontinued operation, net of tax - 34 (25) 194 Gain on sale of discontinued operation, net of tax - - 1,615 - ------- ------- ------- ------- Total discontinued operation - 34 1,590 194 ------- ------- ------- ------- Net income $ 1,352 $ 1,850 $ 3,498 $ 4,809 ======= ======= ======= ======= Basic earnings per share: Continuing operations $ 0.10 $ 0.14 $ 0.14 $ 0.35 Discontinued operation - - 0.12 0.01 ------- ------- ------- ------- $ 0.10 $ 0.14 $ 0.26 $ 0.36 ======= ======= ======= ======= Diluted earnings per share: Continuing operations $ 0.10 $ 0.13 $ 0.14 $ 0.33 Discontinued operation - - 0.11 0.01 ------- ------- ------- ------- $ 0.10 $ 0.13 $ 0.25 $ 0.34 ======= ======= ======= ======= Shares used in per share calculations: Basic 13,602 13,549 13,601 13,279 Diluted 13,906 14,298 13,955 14,237 See accompanying notes to unaudited consolidated financial statements. CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended November 30, --------------------- 2001 2000 ------- ------- Cash flows from operating activities: Net income $ 3,498 $ 4,809 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts 1,312 (35) Depreciation and amortization 2,800 2,594 Deferred income taxes 884 2,342 Gain on sale of discontinued operation (1,615) - Change in operating assets and liabilities: Increase in accounts receivable (5,511) (496) Increase in inventories (871) (4,076) (Increase) decrease in prepaid expenses and other current assets 96 (140) Increase (decrease) in accounts payable 6,726 (921) Increase (decrease) in accrued payroll and other accrued liabilities 1,005 (3,231) Other, net 46 425 ------- ------- Net cash provided by operating activities 8,370 1,271 ------- ------- Cash flows from investing activities: Capital expenditures (1,173) (3,185) Net proceeds from sale of discontinued operation 3,231 - Proceeds from sale of property and equipment 14 - ------- ------- Net cash provided by (used in) investing activities 2,072 (3,185) ------- ------- Cash flows from financing activities: Proceeds from long-term debt - 5,000 Repayments of long-term debt (347) (2,697) Proceeds from exercise of stock options 6 1,870 ------- ------- Net cash provided by (used in) financing activities (341) 4,173 ------- ------- Effect of exchange rate changes on cash (67) 3 ------- ------- Increase in cash and cash equivalents 10,034 2,262 Cash and cash equivalents at beginning of period 9,778 2,451 ------- ------- Cash and cash equivalents at end of period $19,812 $ 4,713 ======= ======= Supplemental cash flow information: Interest paid $ 248 $ 308 Income taxes paid $ 282 $ 124 Non-cash activities: Conversion of debt to common stock - $ 2,231 Issuance of common stock to reduce accrued liability $ 2,166 Reduction of deferred tax asset valuation allowance and increase in additional paid-in capital for tax benefits arising from exercise of non-qualified stock options in prior years $ 1,823 - See accompanying notes to unaudited consolidated financial statements. CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended November 30, 2001 Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION California Amplifier, Inc. (the "Company") designs, manufactures and markets microwave telecommunications equipment used in the reception of video transmitted from satellites and wireless terrestrial transmission sites, and two-way wireless transceivers used in emerging fixed broadband wireless access markets for high speed internet and voice applications. As further described in Note 2, in July 2001 the Company sold its 51% interest in Micro Pulse, Inc. ("Micro Pulse"). The results of operations of Micro Pulse, which represented a separate segment of the Company's business, are shown as a discontinued operation in the accompanying unaudited consolidated statements of income. All significant intercompany transactions and accounts have been eliminated in consolidation. In the opinion of the Company's management, the accompanying consolidated financial statements reflect all adjustments necessary to present fairly the Company's financial position at November 30, 2001 and its results of operations and cash flows for the three and nine months ended November 30, 2001 and 2000. The results of operations and cash flows 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 2001 fell on March 3, 2001. The actual interim periods ended on December 1, 2001 and November 25, 2000. In the accompanying consolidated financial statements, the 2001 fiscal year end is shown as February 28 and the interim period end for both years is shown as November 30 for clarity of presentation. Certain notes and other information are condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company's 2001 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on June 1, 2001. Certain reclassifications have been made to the interim fiscal 2001 financial statements to conform with the interim fiscal 2002 financial statement presentation. Such reclassifications had no effect on the Company's results of operations or stockholders' equity. Note 2 - DISCONTINUED OPERATION On July 31, 2001, the Company sold its 51% ownership interest in Micro Pulse. The sale generated net cash proceeds of $3,231,000 and an after-tax gain of $1,615,000. Micro Pulse was the sole operating unit comprising the Company's Antenna segment. Accordingly, operating results for Micro Pulse have been presented in the accompanying consolidated statements of income as a discontinued operation, and are summarized as follows (in thousands): Three months ended Nine months ended November 30, November 30, ---------------- ---------------- 2001 2000 2001 2000 ------ ------ ------ ------ Sales $ - $1,831 $2,556 $5,992 ====== ====== ====== ====== Operating income (loss) $ - $ 94 $ (105) $ 583 ====== ====== ====== ====== Income (loss) from discontinued operation, net of tax $ - $ 34 $ (25) $ 194 ====== ====== ====== ===== 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 income 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 operation, net of tax $ 1,615 ======= Note 3 - INVENTORIES Inventories include the cost of material, labor and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market, and consist of the following (in thousands): November 30, February 28, 2001 2001 ------ ------ Raw materials and subassemblies $ 7,227 $6,824 Finished goods 3,320 2,852 ------ ------ $10,547 $9,676 ====== ===== Note 4 - 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. Common stock equivalents used in the determination of diluted earnings per share include the effect, when such effect is not antidilutive, of the Company's outstanding employee stock options. The following is a summary of the calculation of basic and diluted earnings per share (in thousands): Three months ended Nine months ended November 30, November 30, ---------------- ---------------- 2001 2000 2001 2000 ------ ------ ------ ------ Weighted average shares: Weighted average number of common shares outstanding (Basic) 13,602 13,549 13,601 13,279 Effect of dilutive securities: Stock options 182 621 232 708 Shares issuable for legal settlement 122 128 122 144 Convertible debt - - - 106 ------ ------ ------ ------ Diluted weighted average number of common shares outstanding 13,906 14,298 13,955 14,237 ====== ====== ====== ====== Options to purchase approximately 1,320,000 shares of Common Stock at prices ranging from $4.52 to $50.56 were outstanding at November 30, 2001, but were not included in the computation of diluted earnings per share for the three and nine months then ended because the exercise price of these options was greater than the average market price of the Common Stock and accordingly the effect of inclusion would be antidilutive. Note 5 - COMPREHENSIVE INCOME Comprehensive income is defined as the total of net income and all non- owner changes in equity. The following table details the components of comprehensive income for the three and nine months ended November 30, 2001 and 2000 (in thousands): Three months ended Nine months ended November 30, November 30, ---------------- ---------------- 2001 2000 2001 2000 ------ ------ ------ ------ Net income $1,352 $1,850 $3,498 $4,809 Foreign currency translation adjustments 62 - (67) 3 ------ ------ ------ ------ Comprehensive income $1,414 $1,850 $3,431 $4,812 ====== ====== ====== ====== Note 6 - CONCENTRATION OF RISK A significant percentage of consolidated sales and consolidated accounts receivable relate to a small number of customers, as summarized below. Sales to significant customers as a percent of consolidated sales are as follows: Three months ended Nine months ended November 30, November 30, ---------------- ---------------- Customer 2001 2000 2001 2000 -------- ------ ------ ------ ------ A 24.9% 18.0% 30.4% 25.1% B 29.5% 23.4% 21.2% 23.8% C 15.7% 8.3% 16.6% 7.0% D 10.2% 12.9% 13.1% 7.2% Accounts receivable from significant customers as a percent of consolidated net accounts receivable are as follows: November 30, February 28, 2001 2001 ------ ------ A 34.9% 19.5% B 29.1% 10.1% C 11.6% 22.4% D 4.8% 20.9% E - 10.2% Customers A, B and D are Satellite customers, while C and E are Wireless Access customers. Note 7 - SEGMENT INFORMATION The Company currently manages its business under two identifiable business segments: Satellite products and Wireless Access products. Segment information for the three and nine months ended November 30, 2001 and 2000 is as follows (in thousands): Three months ended November 30, 2001: Wireless General Satellite Access Corporate Total -------- -------- -------- ------- Sales $26,120 $ 6,636 $32,756 Gross profit $ 5,846 $ 1,700 $ 7,546 Gross margin 22.4% 25.6% 23.0% Income (loss) from continuing operations before income taxes $ 4,608 $ 39 $(2,667) $ 1,980 Three months ended November 30, 2000: Wireless General Satellite Access Corporate Total -------- -------- -------- ------- Sales $20,739 $10,163 $30,902 Gross profit $ 3,127 $ 3,552 $ 6,679 Gross margin 15.1% 35.0% 21.6% Income (loss) from continuing operations before income taxes $ 2,174 $ 2,378 $(1,707) $ 2,845 Nine months ended November 30, 2001: Wireless General Satellite Access Corporate Total -------- -------- -------- ------- Sales $59,135 $19,077 $78,212 Gross profit $12,088 $ 6,389 $18,477 Gross margin 20.4% 33.5% 23.6% Income (loss) from continuing operations before income taxes $ 9,044 $ 426 $(6,622) $ 2,848 Nine months ended November 30, 2000: Wireless General Satellite Access Corporate Total -------- -------- -------- ------- Sales $69,557 $22,949 $92,506 Gross profit $10,723 $ 7,902 $18,625 Gross margin 15.4% 34.4% 20.1% Income (loss) from continuing operations before income taxes $ 7,575 $ 4,043 $(4,376) $ 7,242 Gross profit for the Wireless Access segment for the three and nine months ended November 30, 2001 reflects a $478,000 charge to reserve for outstanding raw materials purchase commitments associated with a cancelled customer program. Also, income (loss) from continuing operations before income taxes for the Wireless Access segment for the nine months ended November 30, 2001 reflects a $1,162,000 write-off of an uncollectable account receivable. Note 8 - LEGAL MATTERS 2001 securities litigation and shareholder derivative lawsuit: Following the announcement by the Company on March 29, 2001 of the resignation of its controller and the possible overstatement of net income for the fiscal year ended February 28, 2000 and the subsequent restatement of the Company's financial statements for fiscal year 2000 and the interim periods of fiscal years 2000 and 2001, the Company and certain officers were named as defendants in twenty putative actions in Federal Court. Caption information for each of the lawsuits is set forth in Item 3 of the Company's Form 10-K for the fiscal year ended February 28, 2001. The twenty actions were consolidated into a single action pursuant to stipulation of the parties, and lead plaintiffs' counsel was appointed. In July 2001, all of the current directors of the Company were named as defendants in the above-entitled shareholder derivative lawsuit filed in Los Angeles Superior Court. The Company was named as a nominal defendant. The Complaint alleged claims against the directors for breach of fiduciary duty, abuse of control and gross mismanagement, arising out of the Company's recent restatement of earnings for fiscal year 2000 and portions of fiscal year 2001. In October 2001, the insurance company that provides the Company's primary director and officer liability coverage applicable to the above matters filed a lawsuit seeking to rescind the policy on the grounds that there was a misstatement in the policy application that incorporated by reference the Company's financial statements prior to their restatement. In December 2001, the parties reached an agreement to settle both the class action litigation and the shareholder derivative lawsuit for the aggregate sum of $1.5 million, subject to final court approval. Of this amount, $575,000 will be paid by the Company's primary directors and officers liability insurance carrier and the remaining $925,000 will be paid by the Company. The insurance company also agreed to withdraw its policy rescission lawsuit. At the Company's option, up to $500,000 of its portion of the settlement may be paid in the form of Common Stock. The Company has accrued its $925,000 share of the settlement in the accompanying consolidated financial statements for the quarter ended November 30, 2001. Other legal matters: See Item 1 of Part II captioned "Legal Proceedings", included elsewhere herein, for a description of other pending legal matters. Note 9 - NEW AUTHORITATIVE PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. In addition, SFAS No. 141 specifies the criteria for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment, at least annually, in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 142 must be adopted by the Company in its fiscal year beginning March 1, 2002. Upon adoption of SFAS No. 142 the Company will discontinue amortizing its goodwill, which is currently being amortized at the rate of $270,000 per year. The Company has not yet assessed any additional impact of SFAS No. 142 on its consolidated financial statements. In October 2001 the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of." The primary objectives of SFAS No. 144 were to develop one accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale and to address other significant implementation issues. While SFAS No. 144 supersedes SFAS No. 121, it retains many of the fundamental provisions of SFAS No. 121. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sales Total sales for the three months ended November 30, 2001 were $32,756,000, compared to $30,902,000 for the same period in the previous fiscal year. Sales of Satellite products increased $5,381,000, or 26%, from $20,739,000 to $26,120,000. Sales of Wireless Access products decreased $3,527,000, or 35%, from $10,163,000 to $6,636,000. Total sales for the nine months ended November 30, 2001 decreased by $14,294,000 from $92,506,000 to $78,212,000. Sales of Satellite products decreased $10,422,000, or 15%, from $69,557,000 to $59,135,000. Sales of Wireless Access products decreased $3,872,000, or 17%, from $22,949,000 to $19,077,000. Sales of the Satellite segment for the nine months ended November 30, 2001 declined from the sales level in the comparable period of last year primarily because system operators maintained higher ordering patterns in the first half of last fiscal year in an effort to avoid product shortages in the event electronic components supply disruptions affected manufacturers' production. This led to order cutbacks by the system operators in the third quarter of last fiscal year in order to work down their high inventory levels. The increase in Satellite segment sales in the fiscal 2002 third quarter compared to the prior year is primarily due to the impact of the order cutbacks on last year's third quarter sales. The decline in sales of Wireless Access products is attributable to a combination of the general slowdown in capital spending in the telecommunications industry and the anticipation of second generation non- line of sight products. In the near-term future the Company expects its Wireless Access sales to decline further. The Company does not anticipate that this downward trend will reverse until the development of second generation non-line of sight two-way transceiver products is completed, and until wireless access service providers resume the expansion of their subscriber bases. Gross Profit and Gross Margins Gross profit for the three months ended November 30, 2001 was $7,546,000, up 13% from $6,679,000 for the comparable period of the prior year. Consolidated gross margin increased from 21.6% to 23.0%. Gross profit for the nine months ended November 30, 2001 declined slightly to $18,477,000 from $18,625,000 in the first nine months of last year. Consolidated gross margin improved from 20.1% last year to 23.6% in the first nine months of this year. The increase in consolidated gross margin is attributable to higher gross margins for Satellite products. Gross margins for Satellite products improved to 22.4% and 20.4%, respectively, in the three and nine months ended November 30, 2001, from 15.1% and 15.4%, respectively, in the third quarter and first nine months of last fiscal year. Satellite gross margins improved primarily because the Company completed the consolidation of its manufacturing operations in February 2001, resulting in reduced manufacturing costs, and because last year was adversely impacted by electronic component shortages that caused production inefficiencies. Gross margins for Wireless Access products declined to 25.6% and 33.5%, respectively, in the three and nine months ended November 30, 2001, from 35.0% and 34.4%, respectively, in the third quarter and first nine months of last fiscal year. Wireless Access gross margins have declined principally due to the decline in sales as discussed above. See also Note 7 to the accompanying unaudited consolidated financial statements for additional operating data by business segment. Operating Expenses Research and development expense increased by $841,000 from $1,435,000 in the third quarter of last year to $2,276,000 in the latest quarter. For the nine month year-to-date periods, research and development expense increased $1,506,000 from $4,490,000 last year to $5,996,000 this year. Investment in R&D has been increased in an effort to improve the Company's market position in both of its business segments. Increased R&D spending is primarily in the form of additional engineering and design personnel, higher salaries to remain competitive with industry compensation trends, and higher material costs relating to new product design. Selling expense decreased by 10% from $692,000 in the three months ended November 30, 2000 to $622,000 in the three months ended November 30, 2001. For the nine month periods, selling expense decreased 27% from $2,516,000 last year to $1,848,000 this year. These declines are attributable primarily to decreases in discretionary marketing spending. General and administrative expense of $1,739,000 in the latest quarter increased 4% over last year's third quarter. For the nine month periods, general and administrative expense increased by $2,607,000 to $6,857,000 in fiscal 2002 from $4,250,000 in fiscal 2001. This increase was due primarily to expenses of $950,000 incurred in the fiscal 2002 first quarter in connection with the restatement of the Company's fiscal 2000 and fiscal 2001 interim financial statements, and to a $1,162,000 write-off of an uncollectable accounts receivable balance from a Wireless Access customer in the fiscal 2002 second quarter. Litigation Settlement The nonoperating expense captioned "Litigation settlement" in the amount of $925,000 for the three and nine months ended November 30, 2001 represents an accrued settlement as described further in Note 8 to the accompanying financial statements. Income from Continuing Operations Before Income Taxes Income from continuing operations before income taxes in the third quarter of fiscal 2002 was $1,980,000 compared to $2,845,000 in the third quarter of fiscal 2001. This decrease is primarily attributable to the $925,000 litigation settlement expense discussed above. For the nine month periods, income from continuing operations before income taxes decreased from $7,242,000 last year to $2,848,000 this year due to the $1,506,000 increase in research and development expense, the $2,607,000 increase in general and administrative expense, and to the $925,000 litigation settlement expense. Income Tax Provision The provisions for income taxes in the three and nine months ended November 30, 2001 are based upon effective tax rates of 32% and 33%, respectively. These rates are less than the effective tax rate of 36% used during fiscal 2001 because of the estimated tax benefit in fiscal 2002 associated with the new "Extraterritorial Income Exclusion" federal income tax regulations. During the three and nine month periods ended November 30, 2001, the Company recognized income tax benefits of $751,000 and $1,823,000, respectively, associated with tax deductions on non-qualified employee stock options which were exercised prior to fiscal 2002. These tax benefits were recognized by reducing the deferred tax asset valuation allowance in the aggregate amount of $1,823,000, with a corresponding increase in additional paid-in capital. The deferred tax asset valuation allowance was established in prior fiscal years because management believed at the time that it did not have the basis to conclude that it was more likely than not that the deferred tax assets would be realized in the future. Income from continuing operations in the first nine months of fiscal 2002 and the gain generated on the sale of the Company's ownership interest in Micro Pulse during the fiscal 2002 second quarter indicated that it was likely that the Company would generate sufficient taxable income for the year as a whole to utilize the $1,823,000, and accordingly the deferred tax asset valuation allowance was reduced. Discontinued Operation As described further in Note 2 to the accompanying unaudited consolidated financial statements, the Company sold its 51% ownership interest in Micro Pulse during the second quarter of fiscal 2002. A gain of $1,615,000 net of tax was recognized on this transaction. Net Income Net income, for reasons outlined above, decreased by $498,000 to $1,352,000 in the fiscal 2002 third quarter from $1,850,000 in the comparable prior year period. For the first nine months of fiscal 2002, net income decreased $1,311,000 to $3,498,000 from $4,809,000 in the first nine months of fiscal 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are its cash and cash equivalents, which amounted to $19,812,000 at November 30, 2001, and its $8 million working capital line of credit with a bank. During the nine months ended November 30, 2001, cash and cash equivalents increased by $10,034,000. This increase consisted of cash provided by operating activities of $8,370,000 and net proceeds from the sale of discontinued operations of $3,231,000, partially offset by capital expenditures of $1,173,000, debt repayments of $347,000, and other activity with a net cash outflow impact of $47,000. Components of operating working capital decreased by $1,445,000 during the first nine months of fiscal 2002, comprised of a $96,000 decrease in prepaid expenses and other current assets, a $6,726,000 increase in accounts payable and a $1,005,000 increase in accrued payroll and other accrued liabilities, partially offset by a $5,511,000 increase in accounts receivable and a $871,000 increase in inventories. 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 2002 will not be impacted significantly by foreign exchange since a significant portion of the Company's fiscal year 2002 projected sales are to U.S. markets, or to international markets where its sales are negotiated in U.S. dollars. Import tariffs in countries such as Brazil and China make it more difficult to compete with in-country manufacturers. NEW AUTHORITATIVE PRONOUNCEMENTS Reference is made to Note 9 of the accompanying unaudited consolidated financial statements for a description of new authoritative accounting pronouncements which have not yet been adopted by the Company. SAFE HARBOR STATEMENT Forward looking statements in this 10-Q which include, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions, projections and other information regarding future performance, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "believes," "anticipates," "expects," and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect the Company's current views with respect to future events and financial performance and are subject to certain risks and uncertainties, including, without limitation, product demand, market growth, new competition, competitive pricing and continued pricing declines in the DBS market, supplier constraints, manufacturing yields, timing and market acceptance of new product introductions, new technologies, litigation and related matters and other risks and uncertainties that are detailed from time to time in the Company's periodic reports filed with the Securities and Exchange Commission ("SEC"), copies of which may be obtained from the Company upon request, or directly from the SEC's website at http://www.sec.gov/. Such risks and uncertainties could cause 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. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Yourish class action and RLI Insurance Company litigation: On March 29, 2000 the Company and the individual defendants (present and former officers and directors of the Company) reached a settlement in the matter entitled Yourish v. California Amplifier, Inc., et al., Case No. CIV 173569 shortly after trial commenced in the Superior Court for the State of California, County of Ventura. The terms of the settlement called for the issuance by the Company of 187,500 shares of stock along with a cash payment of $3.5 million, funded in part by insurance proceeds, for a total settlement of approximately $11.0 million. Of the total settlement, $9.5 million was accrued in the consolidated financial statements for the year ended February 28, 2000. By Order dated September 14, 2000, the court approved the terms of the settlement and dismissed the action with prejudice. As of February 28, 2001, the Company had issued 65,625 of the 187,500 shares and paid $2.5 million of the $3.5 million with one of its insurance carriers paying the remaining $1.0 million. As of November 30, 2001, $4.8 million was accrued in the consolidated financial statements primarily related to the remaining 121,875 shares still to be issued under the settlement agreement. Pursuant to the terms of the settlement, the Company must wait for instructions from plaintiffs' counsel before issuing the remaining stock under the settlement. In connection with the settlement of the Yourish action, the Company and certain of its former and current officers and directors have filed a lawsuit (California Amplifier, Inc., et al. v. RLI Insurance Company, et al., Ventura County Superior Court Case No. CIV196258), against one of its insurance carriers to recover $2.0 million of coverage the insurance carrier has stated was not covered under its policy of insurance. The insurance carrier filed a Motion for Judgment on the Pleadings seeking judgment on the basis, inter alia, that the claims in the Yourish action for alleged violations of Sections 25400 and 25500 of the California Corporation Code were not insurable as a matter of law pursuant to Insurance Code Section 533. The Plaintiffs opposed the motion and a hearing was held on September 22, 2000. On October 18, 2000, the Court entered an Order on granting the motion for judgment on the pleadings. Judgment was entered on November 9, 2000, and Notice of Entry of Judgment given on November 15, 2000. California Amplifier filed a Notice of Appeal on November 21, 2000. The matter was fully briefed and argued before the Court of Appeals on September 12, 2001. On December 4, 2001, the Court of Appeals upheld the decision of the lower court in favor of the insurance carrier. The Company currently intends to file a petition for review with the California Supreme Court in early January 2002. Investigation by the Securities and Exchange Commission: In May 2001, the Company announced that it had received notice from the Securities and Exchange Commission (SEC) that the SEC was conducting an informal inquiry into the circumstances that caused the Company to announce that it would be restating earnings for fiscal year 2000 and certain interim quarters of fiscal year 2001. Subsequently, the Company learned that the SEC adopted an order directing a private investigation and designating officers to take testimony. The Company has been and expects to continue cooperating with the SEC in connection with its investigation. 2001 securities litigation and shareholder derivative lawsuit: See Note 8 to the accompanying consolidated financial statements for a description of litigation arising in 2001 for which a settlement agreement was reached in December 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: None. b. Reports on Form 8-K: On September 6, 2001, a Form 8-K was filed which disclosed certain amendments to the Company's stockholder rights plan. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. December 21, 2001 /s/ Richard K. Vitelle --------------------------------- ----------------------------------- Date Richard K. Vitelle Vice President Finance & CFO (Principal Financial Officer) 15