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| ANTP > SEC Filings for ANTP > Form 10KSB/A on 20-Feb-2004 | All Recent SEC Filings |
20-Feb-2004
Annual Report
PHAZAR CORP's continuing operation is that of its subsidiaries, Antenna Products Corporation, Phazar Antenna Corp. and Thirco, Inc. As previously discussed in Item 1, for the purpose of this discussion, all results of Phazar Antenna Corp. are included with the results of Antenna Products Corporation. The management discussion presented in this item relates to the operations of Subsidiary units and the associated consolidated financials as presented in Item 7.
Overview
PHAZAR CORP operates as a holding company with Antenna Products Corporation, Phazar Antenna Corp., Tumche Corp. and Thirco, Inc. as its wholly owned subsidiaries. Antenna Products Corporation and Phazar Antenna Corp. are operating subsidiaries with Thirco, Inc. serving as an equipment leasing company to PHAZAR CORP's operating units. Tumche Corp. has no sales or operations. Antenna Products Corporation designs, manufactures and markets antenna systems, towers and communication accessories worldwide. The United States government, military and civil agencies and prime contractors are Antenna Products Corporation's principal customers. Phazar Antenna Corp. designs and markets fixed and mobile antennas for commercial wireless applications that include cellular, PCS, ISM (instrument scientific medical), AMR (automatic meter reading), wireless internet, and wireless local area network.
PHAZAR CORP is primarily a build to order company. As such, most United States government and commercial orders are negotiated firm fixed-price contracts. PHAZAR CORP's sales to major customers at May 31, 2003 as a percentage of total sales were United States government 21 percent, Thales ATM, Inc. (a prime contractor to the Federal Aviation Administration for Instrument Landing Systems) 16 percent and Titan Industries (a prime contractor to the United States Navy) 15 percent.
PHAZAR CORP sold the assets and business of Phazar Aerocorp Inc. on May 31, 2003. Phazar Aerocorp Inc. was an 80 percent owned subsidiary of PHAZAR CORP that operated in the aircraft interior refurbishing market. Phaero LLC purchased the assets except for deferred tax asset for net operating losses of Phazar Aerocorp Inc. including the name Phazar Aerocorp and assumed the liabilities, including all indebtedness and lease obligations of Phazar Aerocorp Inc. except intercompany debt. Phaero LLC also assumed PHAZAR CORP'S subsidiary, Antenna Products Corporation's $800,000 indebtedness to Sinan Corp. as a condition of the sale. The result of the sale of the assets and business of Phazar Aerocorp Inc. is identified in the consolidated financials and related notes in Item 7 as discontinued operations of the aircraft interiors segment.
Critical Accounting Policies
The preparation of PHAZAR CORP's consolidated financial statements in accordance with accounting principles and practices generally accepted in the United States of America requires PHAZAR CORP to make estimates and assumptions that affect: the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting periods. PHAZAR CORP is required to make judgments and estimates about the effect of matters that are inherently uncertain. Actual results could differ from PHAZAR CORP's estimates. The most significant areas involving PHAZAR CORP's judgments and estimates are described below.
Inventory Valuation
Inventory is stated at the lower of cost or market, net of any applicable progress payments, with cost being determined on a first-in, first-out basis. Provisions are made to reduce excess or obsolete inventory to its estimated net realizable value. The process for evaluating the value of excess and obsolete inventory often requires PHAZAR CORP to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory
will be able to be sold in the normal course of business. Accelerating the disposal process or incorrect estimates of future sales potential may necessitate future adjustments to these provisions.
Accounts Receivable Valuation
PHAZAR CORP maintains an allowance for doubtful accounts for estimated losses resulting from the inability of PHAZAR CORP's customers to make required payments. If the financial condition of PHAZAR CORP's customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required.
Revenue from short-term contracts calling for delivery of products is recognized as the product is shipped. Revenue and costs under certain long-term fixed price contracts with the U.S. Government are recognized on the units of delivery method. This method recognizes as revenue the contract price of units of the product delivered during each period and the costs allocable to the delivered units as the cost of earned revenue. Costs allocable to undelivered units are reported in the balance sheet as inventory. Amounts in excess of agreed upon contract price for customer directed changes, constructive changes, customer delays or other causes of additional contract costs are recognized in contract value if it is probable that a claim for such amounts will result in additional revenue and the amounts can be reasonable estimated. Revisions in cost and profit estimates are reflected in the period in which the facts requiring the revision become known and are estimable. Losses on contracts are recorded when identified.
Income Taxes
PHAZAR CORP accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) which utilizes the asset and liability method of computing deferred income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of PHAZAR CORP's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The current and deferred tax provision is allocated among members of the consolidated group of the separate income tax return basis.
Results of Operations
Year ended May 31, 2003 ("2003") Compared with Year Ended May 31, 2002 ("2002") PHAZAR CORP experienced improved sales in the third and fourth quarter of fiscal year 2003, resulting in overall sales of $7.4 million in 2003. This is $600 thousand or 9% more than the $6.8 million in sales in 2002. The increase in sales in 2003 is attributed to an increase in U.S. Government spending for shipboard equipment supplied to the U.S. Navy. Sales of these products may or may not continue to improve in fiscal year 2004.
Orders increased in both military and commercial markets from a total of $7.2 million in 2002 to $12.5 million in 2003. This resulted in an ending backlog of firm orders at May 31, 2003 of $8.2 million, up significantly from the prior year-end backlog of $3.4 million. The year-end backlog includes a $6.2 million contract awarded to Antenna Products Corporation on April 17, 2003 from BAE Systems ATI. The contract is for the production of 132 high power, high-frequency crossed dipole antennas plus 132 sixty foot tall antenna support
structures and the ground screen items that are used as above ground reflectors for the antennas. This equipment is for the high frequency active auroral research program (HAARP) ionospheric research site near Gokona, Alaska. The site is owned by the Department of Defense and is managed by the U.S. Navy Office of Naval Research. BAE Systems is the prime contractor responsible for the construction and operation of the research facility. Production of the equipment is scheduled to start in the first quarter of fiscal year 2004. The firm fixed-price contract has a scheduled completion date of July 31, 2004 and includes milestone payments during the life of the contract as shown below:
Milestone Date Schedule Amount
April 18, 2003 $ 500,000
April 30, 2003 $ 1,500,000
September 30, 2003 $ 1,000,000
December 30, 2003 $ 1,000,000
April 30, 2004 $ 500,000
June 30, 2004 $ 500,000
July 31, 2004 $ 227,008
When a milestone payment is received, it is recorded on the balance sheet under
current assets as cash and under current liabilities as deferred revenue: BAE
Systems ATI. PHAZAR CORP totals material costs, labor cost, overhead costs and
profit on the contract work orders monthly and recognizes this amount as revenue
at the end of the month. The amount recognized as revenue on the contract is
applied against the deferred revenue, reducing the deferred revenue balance. As
of May 31, 2003 approximately $100 thousand has been recognized as revenue on
this contract in fiscal year 2003. This contract is on schedule and it is
anticipated that approximately $5 million will be recognized as revenue on this
contract in fiscal year 2004. The balance of the contract value, approximately
$1 million, will be recognized as revenue in the first quarter of fiscal year
2005.
United States Government contracts contain a provision that they may be terminated at any time for the convenience of the Government. This provision is included in the BAE Systems ATI production contract. In such event, the contractor is entitled to recover allowable costs plus any profits earned to the date of termination. The possibility that Government priorities could change, causing a delay or cancellation of this contract and any potential follow-on work, makes it impossible to accurately predict whether revenues will increase or decrease in the upcoming year.
Cost of sales and contracts for the continuing operations and gross profit for fiscal year 2003 were $4.59 million and $2.83 million, respectively. For the same period in 2002, cost of sales and contracts for the continuing operations and gross profit were $4.52 million and $2.25 million, respectively. The gross profit margin for the continuing operations for fiscal year 2003 was 38% compared to 33% in 2002. The increase in gross margin is due to the mix of products sold in 2003 and is expected to return closer to the 2002 level in 2004. Sales and Administration expenses were $2.38 million in 2003 compared to $3.43 million in 2002. When expressed as a ratio to sales, sales and administration expenses were 32% of sales in 2003 compared to 51% in 2002. PHAZAR CORP decreased sales and administration expenses by closing the Phazar Antenna Corp. offices in Ronkonkoma, New York on May 31, 2002 and moving the reduced staff to the facilities of Antenna Products Corporation in Mineral Wells, Texas. This resulted in operating margins of 6% in 2003 compared to
(17.5%) in 2002. Bid and proposal activities and discretionary product development spending totaled $215, 338, or 2.9% of sales in 2003. This compares to $301,141 or 4.5% of sales in 2002. The decrease in discretionary product development is attributed to Phazar Antenna Corp.'s move to Texas and the ability to share engineering personnel with Antenna Products Corporation. Interest expense for the continuing operations decreased from $106,921 in 2002 to $101,866 in 2003 due to the reduction in the prime interest rate during this time period.
Income from continuing operations before income taxes was $389,837 in 2003 compared to a pre-tax loss of $1,207,810 in 2002. The return to profitability in 2003 is the result of the reorganization and relocation of Phazar Antenna Corp. in the first quarter of 2003 and the increase in sales in 2003.
The result of the sale of the assets and business of Phazar Aerocorp Inc. on May 31, 2003 is identified in the consolidated financials as discontinued operations of the aircraft interiors segment. The net loss from operations of the discontinued aircraft interiors segment in 2003 was $705, 882. This compares to a net loss from operations of the discontinued aircraft interiors segment of $384,375 in 2002. The net income as a result of the sale of the aircraft interiors segment in 2003 was $322,675. See the related note 2 of the consolidated financial statements in Item 7.
Product Warranties
PHAZAR CORP's management estimates accrued warranty expense based on warranty work received but not performed and on analysis of historical trends including actual expense as a percent of sales.
Changes in accrued warranty liability for the years ended May 31, are as follows:
2003 2002
--------- ---------
Beginning balance $ 30,000 $ 30,000
Cost incurred for rework (31,092) (27,389)
Accrual for current year estimate 30,000 30,000
Change in accrued estimate 1,092 (2,611)
--------- ---------
Ending balance $ 30,000 $ 30,000
Liquidity and Capital Resources
Funds generated from operations are the major internal sources of liquidity and are supplemented by funds derived from capital markets, principally bank facilities. PHAZAR CORP has a $2.0 million revolving demand line of credit with a bank that is partially guaranteed by a principal shareholder. The credit line is regulated under a borrowing base formula using inventories and accounts receivable as collateral. The interest rate is established as one percentage point over Wall Street prime and is subject to a loan agreement with restrictive covenants. The most restrictive financial covenant requires PHAZAR CORP to maintain $2.0 million in tangible net worth and Antenna Products Corporation to maintain $1.0 million of working capital. At May 31, 2003 PHAZAR CORP had a
tangible net worth of $2.5 million and Antenna Products had working capital of $1.0 million. As of May 31, 2003 Antenna Products Corporation had drawn $20 thousand of the $2.0 million line of credit with $1.58 million of the borrowing base available and unused. The revolving credit line agreement is renewable in September 2003. The BAE Systems ATI contract milestone payments schedule was designed to provide Antenna Products Corporation with the cash to complete the contract without drawing on the Company's line of credit. As of May 31, 2003, Antenna Products Corporation has not received any milestone payments. With customer funding in place on this contract, PHAZAR CORP believes that its cash and the credit available at May 31, 2003 is sufficient to fund the Company's operations for at least 12 months.
Management of the operating subsidiaries evaluate the facilities and review equipment requirements for existing and projected contracts on a regular basis. An annual capital plan is generated by management and submitted to the Board of Directors for review and approval. In fiscal year 2003 capital expenditures for new and replacement equipment totaled approximately $62,000. The Company anticipates that the existing facilities and equipment are adequate to handle the projected business in fiscal year 2004 and intends to limit the 2004 capital program to less than $250,000 for improvements and new equipment.
At May 31, 2003 PHAZAR CORP had cash and cash equivalents of $190,988.
The increase in accounts receivable to $984,556 at May 31, 2003 from $773,487 at May 31, 2002 reflects the increase in sales at year end of commercial wireless antennas and antennas to the United States Government. The decrease in accounts payable and accrued expenses to $453,926 at May 31, 2003 from $564,452 at May 31, 2002 reflects PHAZAR CORP's efforts to reduce inventories at May 31, 2003. As a result of these efforts, Inventories decreased to $1,690,716 at May 31, 2003 from $2,016,720 at May 31, 2002.
Cash provided by the continuing operating activities in the year ended May 31, 2003 was $251,038 compared to cash used in continuing operations of $790,697 for the same period in 2002. PHAZAR CORP closed the Phazar Antenna Corp. offices in Ronkonkoma, New York on May 31, 2002 and this resulted in a reduction of sales and administration expenses of approximately $1.0 million in 2003. PHAZAR CORP sold Phazar Aerocorp Inc. (the aircraft interiors segment) on May 31, 2003. The resulted in the net cash provided by operating activities in the year ended May 31, 2003 of $233,186 compared to net cash used in operating activities of $931,267 for the same period in 2002.
Cash used in investing activities in the year ended May 31, 2003 was $59,498 compared to cash used in investing activities of $19,686 for the same period in 2002. In the years ended May 31, 2003 and 2002, these amounts related primarily to capital expenditures for production machinery and test equipment. Cash used in financing activities in the year ended May 31, 2003 was $184,506 compared to cash provided by financing activities of $840,217 for the same period in 2002. The financing activities for the year ended May 31, 2003 consisted primarily of payments on the revolving demand line of credit with a bank and principal payments on long term debt. The financing activities for the year ended May 31, 2002 consisted primarily of borrowings on the revolving demand line of credit with a bank and principal payments on long term debt. PHAZAR CORP closed Phazar Antenna Corp.'s offices in New York on May 31, 2002 and reorganized and relocated Phazar Antenna Corp. in Texas in the first quarter of 2003 and increased sales in 2003 to accomplish this change in financing activities from borrowing in 2002 to payments in 2003.
Antenna Products Corporation has a long-term bank note for $1.2 million collateralized by the Antenna Products Corporation plant, property, and equipment. The balance as of November 30, 2003 is $664 thousand with payments amortized over 20 years ending in 2011. The interest is variable at one half point over prime interest rate with the note supported by an FmHA guarantee under the federal guidelines of a rural business industry loan. The note is guaranteed by a principal shareholder.
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