10-Q 1 fy05-10q_q1.txt FORM 10-Q 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)