EXHIBIT 99-1
CONSOLIDATED FINANCIAL STATEMENTS
Vytek Corporation
(formerly Vytek Wireless, Inc.)
Years Ended December 31, 2003 and 2002
<page>
Report of Independent Registered Public Accounting Firm
Board of Directors
Vytek Corporation
We have audited the accompanying consolidated balance sheets of Vytek
Corporation (formerly Vytek Wireless, Inc., the "Company") as of December
31, 2003 and 2002, and the related consolidated statements of operations,
changes in stockholders' equity (deficit), and cash flows for each of the
two years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Vytek
Corporation (formerly Vytek Wireless, Inc.) at December 31, 2003 and 2002,
and the consolidated results of its operations and its cash flows for each
of the two years in the period ended December 31, 2003 in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 2002 the Company
changed its method of accounting for goodwill and other intangible assets.
/s/ Ernst & Young LLP
Stamford, Connecticut
June 22, 2004
<page>
Vytek Corporation
(formerly Vytek Wireless, Inc.)
Consolidated Balance Sheets
December 31,
2003 2002
Assets ------ ------
Current assets:
Cash and cash equivalents $ 2,457,669 $ 4,889,101
Accounts receivables, net of allowances
of $429,000 and $406,000, respectively 6,696,251 3,770,249
Inventories, net 1,310,966 1,631,808
Costs and estimated earnings in
excess of billings 1,755,403 233,416
Deferred costs - 1,844,589
Prepaids and other current assets 741,932 347,264
---------- ----------
Total current assets 12,962,221 12,716,427
Furniture, fixtures and equipment, net 1,580,019 1,125,745
Goodwill 22,736,850 15,818,960
Other intangible assets, net 2,773,700 2,994,247
Deposits and other assets 2,130,368 446,325
---------- ----------
Total assets $42,183,158 $33,101,704
========== ==========
Liabilities and stockholders' deficit
Current liabilities:
Bank line of credit $ 3,000,000 $ -
Current portion of long term debt and
capital lease obligations 222,539 1,902,647
Accounts payable 1,990,928 1,909,372
Accrued payroll and employee benefits 1,629,116 186,816
Accrued expenses 1,342,070 803,848
Billings in excess of costs and
estimated earnings 67,938 230,637
Customer deposits and other liabilities 924,416 820,974
Deferred revenue 2,083,078 3,706,272
---------- ----------
Total current liabilities 11,260,085 9,560,566
Long-term debt and capital lease
obligations, less current portion 123,498 31,350
Other non-current liabilities 257,531 -
Accrued preferred stock dividends - 10,986,949
Redeemable convertible preferred stock 50,270,274 42,000,000
Commitments (Note 13)
Stockholders' deficit:
Common stock - $0.01 par value,
63,000,000 and 48,660,000 shares
authorized; 13,584,748 and 8,842,855
shares issued and outstanding at
December 31, 2003 and 2002,
respectively 135,848 88,429
Additional paid-in capital 28,673,429 8,097,229
Notes receivable from stockholders (28,645) -
Unearned stock compensation (1,966,813) -
Accumulated deficit (46,542,049) (37,662,819)
---------- ----------
Total stockholders' deficit (19,728,230) (29,477,161)
---------- ----------
Total liabilities and
stockholders' deficit $42,183,158 $33,101,704
========== ==========
See accompanying notes.
<page>
Vytek Corporation
(formerly Vytek Wireless, Inc.)
Consolidated Statements of Operations
Years Ended December 31,
2003 2002
------ ------
Revenues
Product revenues $17,564,901 $ 12,235,421
Service revenues 24,634,926 9,998,435
---------- ----------
Total revenues 42,199,827 22,233,856
---------- ----------
Cost of Revenues
Cost of product revenues 13,595,137 9,063,056
Cost of service revenues 13,718,513 3,389,918
---------- ----------
Total cost of revenues 27,313,650 12,452,974
---------- ----------
Gross Profit 14,886,177 9,780,882
Operating expenses
Sales and marketing 5,902,969 4,836,123
Research and development 3,389,401 3,710,251
General and administrative 10,047,730 7,528,007
Depreciation 1,482,481 721,000
Amortization of intangibles 3,322,435 3,650,069
Impairment of goodwill and
other intangible assets - 16,725,699
---------- ----------
Total operating expense 24,145,016 37,171,149
---------- ----------
Operating loss (9,258,839) (27,390,267)
Non-operating income (expense):
Interest income (expense), net (77,813) 29,128
Gain on early extinguishment of debt 335,201 -
Other income 122,221 -
---------- ----------
Net loss (8,879,230) (27,361,139)
Preferred stock dividends and accretion 1,172,973 (4,983,388)
---------- ----------
Loss applicable to common shares $ (7,706,257) $(32,344,527)
========== ==========
See accompanying notes.
<page>
Vytek Corporation
(formerly Vytek Wireless, Inc.)
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 2003 and 2002
Notes
Receivable
Common Stock Additional from Unearned Accumu-
------------------ Paid-In Stock- Stock lated
Shares Par Value Capital holders Compensation Deficit Total
------ ------- ------- -------- --------- --------- -------
<c>
Balance at December 31, 2001 9,117,770 $ 91,178 $12,760,486 $ - $ - $(10,301,680) $ 2,549,984
Issuance of Common Stock in
connection with acquisition
and other 50,045 500 320,131 320,631
Purchase of shares from
employee (324,960) (3,249) (3,249)
Preferred stock dividends
accrued (4,983,388) (4,983,388)
Net loss (27,361,139) (27,361,139)
--------- ------- ---------- ------ ------- ---------- ----------
Balance at December 31, 2002 8,842,855 88,429 8,097,229 - - (37,662,819) (29,477,161)
Preferred stock cash dividends (38,132) (38,132)
Adjustment to liquidation
preference of previously
outstanding Series A
preferred shares 19,905,766 19,905,766
Issuance of Series A
preferred shares in
satisfaction of accrued
preferred dividend liability 7,640,495 7,640,495
Issuance of Series A
preferred shares in
connection anti-dilution
provisions (1,316,531) (1,316,531)
Issuance of Series B
preferred shares (3,253,283) (3,253,283)
Issuance of Common Stock in
connection with acquisition
of Stellcom 2,956,029 29,560 462,610 492,170
Accretion of liquidation
preference on preferred
shares (1,350,560) (1,350,560)
PIK dividends accrued on
preferred shares (3,762,349) (3,762,349)
Common Stock issued to
employees at less than
fair value 1,785,864 17,859 2,138,104 (28,645) (1,825,882) 301,436
Stock options granted to
employees at exercise prices
less than fair value 150,080 (140,931) 9,149
Net loss (8,879,230) (8,879,230)
---------- ------- ---------- ------ --------- ---------- ----------
Balance at Dec. 31, 2003 13,584,748 $135,848 $28,673,429 $(28,645) $(1,966,813) $(46,542,049) (19,728,230)
========== ======= ========== ====== ========= ========== ==========
See accompanying notes.
<page>
Vytek Corporation
(formerly Vytek Wireless, Inc.)
Consolidated Statements of Cash Flows
Years Ended December 31,
2003 2002
------ ------
Cash flows from operating activities
Net loss $(8,879,230) $(27,361,139)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 4,804,916 4,371,069
Non-cash stock compensation 310,585 20,440
Gain on early extinguishment of debt (335,201) -
Impairment of goodwill and other
intangibles assets - 16,725,699
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable (1,728,224) (1,013,602)
Inventories, net 320,843 (2,853)
Costs and estimated earnings in
excess of billings, net (2,336,635) (187,871)
Deferred costs 2,280,486 (1,670,671)
Prepaids and other current assets 255,427 611,560
Deposits and other assets (417,870) -
Accounts payable, accrued payroll
and employee benefits, and
other accrued expenses 124,291 1,010,565
Customer deposits and other
liabilities (301,701) 242,840
Deferred revenue (1,650,216) 1,819,027
---------- ----------
Net cash used in operating activities (7,552,529) (5,434,936)
---------- ----------
Cash flows from investing activities:
Purchases of furniture, fixtures
and equipment (126,162) (296,291)
Deferred acquisition costs - (62,333)
Cash paid for acquisitions, net of
cash acquired (866,178) (20,388)
---------- ----------
Net cash used in investing activities (992,340) (379,012)
---------- ----------
Cash flows from financing activities
Proceeds from bank line of credit 3,000,000 -
Principal payments on debt and capital
lease obligations (1,886,563) (382,405)
Issuance of Series B preferred stock 5,000,000 -
---------- ----------
Net cash provided by (used) in
financing activities 6,113,437 (382,405)
---------- ----------
Net decrease in cash and cash equivalents (2,431,432) (6,196,353)
---------- ----------
Cash and cash equivalents, beginning
of period 4,889,101 11,085,454
---------- ----------
Cash and cash equivalents, end of period $ 2,457,669 $ 4,889,101
========== ==========
See accompanying notes.
<page>
Vytek Corporation
(formerly Vytek Wireless, Inc.)
Notes to Consolidated Financial Statements
December 31, 2003
1. BUSINESS
Vytek Corporation (formerly Vytek Wireless, Inc.) ("Vytek") has
developed a wireless and mobile computing technology business by acquiring,
consolidating, integrating and operating wireless and mobile data solutions
companies. Vytek's methodology is to acquire the assets or stock of
companies providing wireless and mobile consulting and professional services,
application software and wirelessware"/ infrastructure products and value-
added services to their customers located primarily in the United States and
Europe.
Vytek was organized under the laws of the State of Delaware on April 25,
2000. In April 2003 Vytek amended and restated its Certificate of
Incorporation whereby the name of Vytek was changed to Vytek Corporation
from Vytek Wireless, Inc.
As further described in Note 16, on April 12, 2004, Vytek merged with
California Amplifier, Inc., a publicly held company (Nasdaq: CAMP).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of Vytek and
its wholly-owned subsidiaries, Vytek Consulting Group, Inc. ("VCG"), Vytek
Products, Inc. ("Products"), Vytek Messaging Services, Inc. ("VMS"), Vytek
Solutions, Inc. ("Solutions East"), MicroKnowledge, Inc. ("MicroKnowledge"),
Vytek Public Safety Solutions, Inc. ("VPSS"), and Stellcom, Inc. ("Solutions
West"). All significant intercompany transactions and balances have been
eliminated in consolidation.
Certain of Vytek's subsidiaries use a 52-53 week fiscal year ending on
the Saturday closest to December 31, which for fiscal years 2003 and 2002
was December 27, 2003 and December 28, 2002, respectively.
Reclassifications
Certain reclassifications were made to conform the prior year's data to
the current year presentation.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity date of three months or less when purchased to be the equivalent of
cash for the purpose of balance sheet and statement of cash flows
presentation. Cash equivalents, which consist primarily of interest-bearing
money market accounts, are carried at cost, which approximates fair value.
Concentration of credit risk
Financial instruments that potentially subject Vytek to concentrations
of credit risk are comprised principally of cash and cash equivalents and
accounts receivable. As of December 31, 2003, Vytek's cash and cash
equivalents have been deposited with high credit quality financial
institutions, which management believes limits Vytek's risk.
Vytek performs ongoing credit evaluations of its customers' financial
condition and limits the amount of credit extended as deemed appropriate,
but generally requires no collateral. Vytek reviews its trade accounts
receivable balances for collectibility whenever events and circumstances
indicate the carrying amount may not be collectible and provides currently
for any unrealizable amounts. To date, such losses have been within
management's expectations. During 2003, Vytek had sales to one customer
which represented 23% of total revenue. At December 31, 2003 receivables
from three customers individually exceeded 5% of accounts receivable and
totaled approximately $2,939,000 or 44% of total accounts receivable at that
date. During 2002, one customer accounted for approximately 14% of Vytek's
total revenue. At December 31, 2002 receivables from six customers
individually exceeded 5% of accounts receivable and totaled approximately
$3,034,000 or 80% of total accounts receivable at that date.
Use of estimates
The preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Inventories
Inventories are stated at the lower of cost or market using the first-
in first-out method.
Revenue recognition
Revenues consist of the sales of Company hardware products, software
and software maintenance, and services. Product revenues are generally
recognized by the Company upon shipment of goods, except that some product
revenues associated with systems design and engineering contracts are
recognized on the percentage of completion method principally utilizing
labor costs to measure the extent of progress toward completion. The
Company generally warrants its products for one year after the date of sale.
The accrued warranty liability at December 31, 2003 and 2002 was $300,000
and $0, respectively. During 2003, no payments were charged against
warranty accruals.
The Company generally licenses its software products pursuant to
multiple element arrangements that include maintenance. Where no
significant obligations remain, software license revenue is recognized upon
delivery of the software provided collection is considered probable, the fee
is fixed or determinable, there is evidence of an arrangement and vendor
specific objective evidence exists to allocate the total fee to the elements
of the arrangement.
Revenues from maintenance and software support services, which includes
upgrades, are generally collected before the services are performed and are
recognized ratably over the period of the services. The Company's software
maintenance arrangements do not contain specific upgrade rights.
Service revenues are recognized as the services are rendered, provided
that no significant obligations remain and collection of the receivable is
probable. Generally, contracts for services call for billings on a time and
material basis; however, in instances when a fixed-fee contract is signed,
revenue is recognized on a percentage of completion basis. Provisions for
estimated losses on uncompleted contracts are made in the period in which
such losses are determined.
Furniture, fixtures and equipment, net
Furniture, fixtures and equipment, net are stated at cost less
accumulated depreciation. Major additions and improvements are capitalized,
while replacements, maintenance and repairs that do not improve or extend
the life of the assets are charged to expense. Depreciation has been
provided using the straight-line method over the estimated useful lives of
the assets as follows:
Years
-----
Computer software and equipment ........... 3
Furniture, fixtures and office equipment .. 3 - 7
Machinery and equipment ................... 5
Leasehold improvements .................... Lesser of remaining lease
term or useful life
Goodwill
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") which superseded APB Opinion No. 17,
"Intangible Assets." SFAS No. 142 eliminated the requirement to amortize
goodwill and indefinite-lived intangible assets, addresses the amortization
of intangible assets with a defined life and future periodic testing of
goodwill and indefinite lived intangibles for impairment. Intangible assets
that do not meet the criteria for recognition apart from goodwill, such as
assembled work force, must be reclassified. SFAS No. 142 was effective for
fiscal years beginning after December 15, 2001. The Company adopted SFAS No.
142 as of January 1, 2002 and discontinued the amortization of goodwill and
assembled workforce (which was re-classified to goodwill upon adoption) in
the annual amount of approximately $5,200,000.
Other intangible assets, net
Other intangible assets, net are stated at cost less accumulated
amortization and consist primarily of customer lists, acquired software and
covenants not to compete, which arose from acquisitions and are being
amortized on a straight-line basis over periods ranging from two to three
years. The Company reviews its intangible and other long-lived assets for
impairment in the period in which the Company becomes aware of events or
occurrences that indicate an impairment may exist.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate:
Cash and cash equivalents, accounts receivable and accounts payable -- The
carrying amount is a reasonable estimate of fair value given the short
maturity of these instruments.
Bank line of credit, long-term debt and capital lease obligations -- The
carrying value approximates fair value since the interest rate on these
liabilities approximates the interest rate which is currently available to
Vytek for the issuance of debt with similar terms and maturities.
Preferred stock dividends accrued
On November 8, 2002, the Board of Directors determined that it
would not declare a cash dividend on any class of Vytek's outstanding
securities for the next succeeding fifteen months. Pursuant to this
determination, Vytek has classified preferred stock dividends accrued at
December 31, 2002 as long term. As further discussed in Note 10, the
accrued preferred stock dividends liability was satisfied in April 2003
through the issuance of additional shares of Series A preferred stock.
Software development costs
Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," requires the capitalization of certain software
development costs subsequent to the establishment of technological
feasibility. Based on the Company's product development process,
technological feasibility is established upon the completion of a working
model. Substantially all of the Company's software products were obtained
through acquisitions. Costs incurred by the Company between the completion
of the working model and the point at which the product is ready for general
release have been insignificant. Accordingly, the Company has charged all
such costs to research and development expense in the period incurred.
Research and development
Research and development costs are expensed as incurred.
Advertising expense
All advertising costs, which are included in sales and marketing
expense, are expensed as incurred. Advertising expense was approximately
$36,000 and $97,000 in 2003 and 2002, respectively.
Income taxes
The Company accounts for income taxes using the liability method in
accordance with the provisions of SFAS No. 109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax
bases of assets and liabilities.
Stock-based compensation
The Company accounts for stock-based compensation under the provisions
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" which requires the recognition of compensation expense
at the date of grant only if the current market price of the underlying
stock exceeds the exercise price of an option or the purchase price of
restricted stock.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Accordingly, compensation cost is not
recognized in the consolidated statement of operations for options granted
with exercise prices equal to fair value. As further described in Note 12,
in October 2003 Vytek granted options at less than fair value, and
recognized compensation expense of $9,000 in 2003 in the consolidated
statement of operations in connection with such grants.
Had the Company determined stock-based compensation relating to granted
options based on their fair value on the grant date in accordance with SFAS
No. 123, the Company's net loss would have been increased by $332,000 and
$435,000 in 2003 and 2002, respectively. As additional options may be
granted in future years and option grants vest over several years, the above
pro forma results are not necessarily indicative of future pro forma results.
3. INVENTORIES, NET
Inventories are comprised as follows:
December 31,
-----------------
2003 2002
---- ----
Raw materials and supplies $1,122,610 $1,251,372
Work-in-progress 732,067 329,882
Finished goods 240,084 319,973
Reserve for obsolescence (783,795) (269,419)
--------- ---------
$1,310,966 $1,631,808
========= =========
4. FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment are comprised as follows:
December 31,
-----------------
2003 2002
---- ----
Machinery and equipment $ 186,894 $ 185,093
Computer software and equipment 3,187,086 1,564,382
Leasehold improvements 301,387 147,168
Furniture fixtures and office
equipment 478,973 396,228
--------- ---------
4,154,340 2,292,871
Less: accumulated depreciation (2,574,321) (1,167,126)
--------- ---------
$1,580,019 $1,125,745
========= =========
Approximately $761,000 and $308,000 of office and computer equipment
was leased under capital leases at December 31, 2003 and 2002, respectively,
of which approximately $300,000 was acquired in the current year.
Accumulated amortization of office and computer equipment under capital
leases was approximately $412,000 and $170,000 at December 31, 2003 and 2002,
respectively. Amortization of assets recorded under capital leases is
included within depreciation expense.
5. ACQUISITIONS
In June 2002, Vytek Solutions, Inc., a wholly owned subsidiary of Vytek,
acquired various assets of Extendea, Inc., in a transaction accounted for
using the purchase method of accounting. The purchase price consisted of
50,000 shares of Vytek's common stock valued at $300,000. The allocation of
the Extendea purchase price was $14,000 to fixed assets and $286,000 to
goodwill. The operations of Extendea are included in the accounts of Vytek
from the date of acquisition.
Effective April 3, 2003, Vytek acquired all of the outstanding capital
stock of Stellcom, Inc. ("Stellcom"), a wireless and mobile computing
systems integrator, in a transaction accounted for using the purchase method
of accounting. The purchase price was comprised of 2,956,029 shares of
Vytek's Common Stock and 202,000 warrants to purchase common and Series A
preferred stock, collectively valued at approximately $492,000, 7,476,000
shares of Vytek's Series A preferred stock valued at approximately
$8,428,000, and 23,000 shares of Vytek's Junior preferred stock valued at
approximately $13,000. In addition, the selling stockholders of Stellcom
purchased approximately 1,401,000 shares of Vytek's Series B preferred stock
for an amount that was $1,596,000 less than the fair value of the Series B
preferred stock, and this $1,596,000 has been included in the Vytek's
purchase basis for this acquisition. Vytek also incurred transaction costs
of $835,000. The warrants to purchase Series A preferred stock have a 10
year life expiring April 2013, and entitle the holder to purchase Series A
preferred stock for $.01 per share.
Following is a computation of the goodwill arising from this
acquisition (in thousands):
Total acquisition cost $11,494
Fair value of net assets acquired:
Accounts receivable $1,198
Furniture, fixtures and equipment 1,508
Customer lists 3,100
Other assets 2,576
Liabilities assumed (3,828)
-------
Total fair value of net assets acquired 4,554
-------
Goodwill $ 6,940
=======
The operations of Stellcom are included in the financial statements of
Vytek from the date of acquisition.
These acquisitions were undertaken in furtherance of Vytek's strategy
to develop a wireless and mobile computing technology business.
Vytek expects that the amortization of identifiable intangibles
acquired from its acquisitions will be deductible for tax purposes.
The fair value of the preferred and common consideration issued in the
Stellcom acquisition is based on an appraisal conducted by an independent
valuation firm. The fair value of the equity issued in earlier acquisitions
is the estimated fair value at the date of issuance as determined by Vytek's
management.
The following unaudited pro forma information is presented as if the
acquisition of Stellcom had occurred at the beginning of each of the periods
presented (in thousands):
Year ended Year ended
December 31, 2003 December 31, 2002
------------------- -------------------
As Pro As Pro
reported forma reported forma
-------- -------- -------- --------
Total revenues $42,200 $44,904 $ 22,234 $ 42,339
Net loss $(8,879) $(5,074) $(27,361) $(32,135)
The "as reported" amounts for the year ended December 31, 2003 include
the operating results of Stellcom for the 9-month period beginning on the
April 3, 2003 acquisition date. Pro forma adjustments for the year ended
December 31, 2003 consist of adding Stellcom's results for the three-month
period from January 1, 2003 to April 3, 2003. The historical operations of
Stellcom for the pre-acquisition period from January 1, 2003 to April 3,
2003 include a $6,437,000 credit arising from the reversal of a
restructuring reserve established in a prior year.
Pro forma adjustments for the year ended December 31, 2002 consist of
adding Stellcom's results for the entire year of 2002.
Pursuant to the provisions of SFAS 142, which Vytek adopted effective
at the beginning of fiscal 2002, goodwill which arose from this transaction
is not amortized. Instead, goodwill is evaluated on an annual basis for
impairment, as further discussed in Note 7. The goodwill arising from this
acquisition is deductible for income taxes.
The pro forma effects of the June 2002 Extendea, Inc. acquisition were
immaterial to results of operations for the year ended December 31, 2002.
6. OTHER INTANGIBLE ASSETS, NET
The acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed
have been recorded at their estimated fair values as of the respective
acquisition dates.
Intangible assets were as follows (in $000s):
December 31, 2003 December 31, 2002
------------------------ -------------------------
Amorti- Gross Accum. Gross Accum.
zation Carrying Amorti- Carrying Amorti-
Period Amount zation Net Amount zation Net
----- ------ ------ ----- ------ ------ -----
Customer lists 5 yrs. $11,182 $ 8,432 $2,750 $8,082 $5,540 $2,542
Software 3 yrs. 872 848 24 872 557 315
Covenants not
to compete 2 yrs. 1,000 1,000 - 1,000 863 137
------ ----- ----- ----- ----- -----
$13,054 $10,280 $2,774 $9,954 $6,960 $2,994
====== ====== ===== ===== ===== =====
Amortization expense of intangible assets was $3,322,000 and
$3,650,000 in 2003 and 2002, respectively. The weighted average
amortization period of the intangible assets at December 31, 2003 was 4.9
years.
Estimated amortization expense for the fiscal years ending December
31, is as follows:
2004 $759,000
2005 $620,000
2006 $620,000
2007 $620,000
2008 $155,000
During 2002, impairment assessments were performed as a result of
weakening economic conditions and decreased current and expected future
demand for products in the markets in which the Company operates. Fair
value of the intangible assets was determined using a discounted cash flow
model based on growth rates and margins reflective of lower demand for the
Company's products, as well as anticipated future demand. Discount rates
used were based upon the Company's weighted average cost of capital
adjusted for business risks. These amounts are based on management's best
estimate of future results. As a result of these assessments, the Company
determined that an impairment of intangible assets existed and accordingly,
the Company recorded a charge to reduce customer lists in the amount of
$498,000.
7. GOODWILL
The Company adopted SFAS No. 142 effective January 1, 2002. Under
SFAS No. 142, goodwill is no longer amortized but reviewed for impairment
annually, or more frequently if certain indicators arise. Upon adoption,
assembled workforce in the amount of $583,000 was reclassified to goodwill
in accordance with the requirements of SFAS No. 142. The Company was
required to complete the initial step of a transitional impairment test
within six months of adoption of SFAS No. 142 and to complete the final
step of the transitional impairment test by the end of the fiscal year.
The initial step was completed in the first quarter of 2002, and this test
indicated no impairment. In addition, the Company assesses the impairment
of goodwill whenever events or changes in circumstances indicate that the
carrying value of goodwill may not be recoverable. Management's judgment
regarding the existence of impairment is based on factors such as
significant changes in the manner or the use of acquired assets or the
Company's overall business strategy; significant negative industry or
economic trends; and significant declines in the estimate of the value of
the Company's common stock. Due to declining market conditions, as well
as a change in business strategy, it was determined that a $16.2 million
impairment charge was warranted in the fourth quarter of 2002. The Company
used a discounted cash flow analysis for purposes of estimating the fair
value of its reporting units.
The Company performed its 2003 impairment test as of December 31,
2003, and this test indicated no impairment.
8. INCOME TAXES
The components of the net deferred tax assets at December 31, 2003
and 2002 are as follows:
2003 2002
---- ----
Deferred current tax assets:
Deferred revenue $ - $ 301,088
Inventory reserves 210,555 -
Allowance for doubtful accounts 70,727 170,422
Restructuring charges 70,649 -
--------- ---------
351,931 471,510
--------- ---------
Deferred non-current tax assets:
Net operating losses 13,444,771 5,844,608
Stock compensation expense 93,115 -
Fixed assets 228,153 17,563
Intangible asset basis
differences 2,384,863 2,650,983
---------- ---------
16,150,902 8,513,154
---------- ---------
Total deferred tax asset 16,502,833 8,984,664
Valuation allowance (16,502,833) (8,984,664)
---------- ---------
Net deferred tax asset $ - $ -
========== =========
Based upon available evidence, management has recorded a full
valuation allowance for deferred tax assets as of December 31, 2003 and
2002, as management does not believe that it is more likely than not that
these assets will be realized.
During 2003, the valuation allowance was increased by approximately
$4,400,000 for a net operating loss carryforward acquired in the
acquisition of Stellcom.
A reconciliation of significant differences between the federal
statutory income tax rate and the effective tax rate on pre-tax loss is as
follows:
2003 2002
---- ----
Federal statutory income tax rate (34.0)% (34.0)%
Meals and entertainment 0.4 1.0
Intangible asset basis differences - 21.0
Change to valuation allowance 33.6 12.0
---- ----
Effective rate - % - %
==== ====
As of December 31, 2003, Vytek has federal and state net operating
loss carryforwards of approximately $31,308,000. The net operating loss
carryforwards will expire in varying amounts from 2013 to 2023.
Utilization of net operating loss carryforwards may be subject to
substantial limitations due to ownership changes as provided by the
Internal Revenue Code and similar state provisions. These limitations may
result in the expiration of net operating loss carryforwards before full
utilization.
9. DEBT AND CAPITAL LEASE OBLIGATIONS
Bank line of credit:
Vytek entered into a revolving line of credit with a commercial bank
in October 2003 which provides for borrowings up to $3 million, subject to
availability based on a percentage of eligible accounts receivable.
Borrowings under the line bear interest at the bank's prime rate plus 1%,
and are secured by all of Vytek's tangible personal property, including
receivables, inventories and equipment. At December 31, 2003, outstanding
borrowings under the line amounted to $3 million.
The terms of the agreement require Vytek to remain in compliance with
certain financial covenants, including, among others: (a) liquidity
covenant, whereby the ratio of unrestricted cash held with the bank (which
shall not be less than $1.0 million until two consecutive quarters of net
profitability are achieved) plus eligible borrowing capacity on the line
of credit to outstanding borrowings under the line of credit shall not be
less than 2-to-1; and (b) EBITDA covenant, whereby Vytek's Earnings Before
Interest, Taxes, Depreciation and Amortization amount for each fiscal
quarter beginning with the quarter ended December 31, 2003 shall be no
less than negative $0.5 million. The Company was in compliance with the
covenants at December 31, 2003 but became in noncompliance during fiscal
2004 as a result of not delivering fiscal 2003 audited financial
statements to the bank within the time period specified in the loan
agreement. However, the loan was repaid in full in April 2004 after
Vytek's merger with California Amplifier (see Note 16), and the line was
terminated in May 2004.
Long-term debt:
On July 31, 2001, in connection with the acquisition of Planet
Technology Solutions, Inc., or Planet, Vytek issued a Subordinated Note
due July 31, 2003, in the original amount of $1,792,295 (the "Note"). The
noteholder requested and received payment of $1,430,000 in June 2003 in
full satisfaction of the Note resulting in a gain on early extinguishment
of debt of $335,000.
Long-term debt consisted of the following at December 31, 2003 and
2002:
December 31,
------------------
2003 2002
---- ----
Subordinated note payable to former
owners of Planet, due July 31, 2003 $ - $1,765,629
Capital lease obligations 346,037 116,322
Other notes payable - 52,046
--------- ---------
346,037 1,933,997
Less: Amounts classified as current (222,539) (1,902,647)
--------- ---------
$ 123,498 $ 31,350
========= =========
Interest paid amounted to $157,000 and $34,000 during the years ended
December 31, 2003 and 2002, respectively.
Future minimum payments under capital lease obligations are as follows:
2004 $240,949
2005 100,150
2006 33,578
2007 10,118
-------
384,795
Less imputed interest amounts
Included in minimum payments (38,758)
-------
$346,037
=======
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In April 2003, in connection with the acquisition of Stellcom, Vytek
amended and restated its Certificate of Incorporation. As a result of this
amendment the total number of authorized shares of preferred stock was
increased to 67,700,000, of which 23,200,000 were designated "Series A
Redeemable Convertible Preferred Stock" (the "Series A Preferred"),
12,000,000 were designated "Series A-DIV Convertible Preferred Stock" (the
"Series A-DIV Preferred"), 6,500,000 were designated "Series B Redeemable
Convertible Preferred Stock" (the "Series B Preferred"), 2,800,000 were
designated "Series B-DIV Convertible Preferred Stock" (the Series B-DIV
Preferred") and 23,200,000 were designated Junior Preferred ("Junior
Preferred"). The Series A Preferred and Series A-DIV Preferred are
collectively referred to as the "A Preferred". The Series B Preferred and
Series B-DIV Preferred are collectively referred to as the "B Preferred."
The A Preferred and the B Preferred are collectively referred to as the
"Redeemable Convertible Preferred Stock." The par value of all preferred
stock is $.01 per share.
Redeemable Convertible Preferred Stock consists of the following at
December 31, 2003 and 2002:
December 31,
------------------
2003 2002
---- ----
Series A Redeemable Convertible Preferred
Stock - $0.01 par value, shares authorized
of 35,200,000 and 11,340,000, issued and
outstanding of 22,950,784 and 11,340,000,
liquidation preference of $44,716,050 and
$42,000,000, presented at face value less
unaccreted discount of $8,072,850 and $0
plus accrued dividends of $3,456,229 and
$0 at December 31, 2003 and 2002,
respectively $ 40,099,429 $ 42,000,000
Series B Redeemable Convertible Preferred
Stock - $0.01 par value, shares authorized
of 9,300,000, issued and outstanding of
4,256,406, liquidation preference of
$5,000,000, presented at fair value at date
of issuance of $9,848,898 plus accrued
dividends of $306,120 at December 31, 2003 10,155,018 -
Series Junior Preferred Redeemable Preferred
Stock - $0.01 par value, shares authorized
of 23,200,000, issued and outstanding of
22,790, liquidation preference of $44,403,
presented at face value less unaccreted
discount of $28,576 at December 31, 2003 15,827 -
----------- -----------
$ 50,270,274 $ 42,000,000
=========== ===========
In connection with the acquisition of Stellcom on April 3, 2003, the
Company consummated several transactions in its Series A Preferred Stock
and Junior Preferred Stock, and issued a new Series B preferred stock as
follows (in thousands):
Total
Number Series A Series B Junior Preferred
of Shares Preferred Preferred Preferred Stock
--------- --------- --------- --------- --------
Balance at
December 31, 2002 11,340 $42,000 $ - $ - $42,000
Reduction of
liquidation
preference (19,906) (19,906)
Issuance of
shares in
satisfaction
of accrued
dividend
liability 2,977 3,385 3,385
Issuance of
shares as
consideration
for Stellcom
acquisition 7,499 8,500 13 8,513
Issuance as a
result of
anti-dilution
provisions 1,158 1,317 1,317
Issuance of
Series B
preferred shares 4,256 9,849 9,849
Accretion of
liquidation
preference 1,347 3 1,350
PIK dividends
accrued 3,456 306 3,762
------ ------ ------ ------ ------
Balance at
December 31, 2003 27,230 $40,099 $10,155 $ 16 $50,270
====== ====== ====== ====== ======
In connection with the acquisition of Stellcom, Vytek restated its
Certificate of Incorporation and the liquidation preference on previously
outstanding shares of Series A Preferred stock was reduced from $3.70 per
share to $1.9483 per share resulting in a $19,906,000 reduction to the
associated carrying value and a corresponding increase to additional paid-
in capital.
On April 3, 2003, the Series A preferred stock accrued dividends
liability amounting to $11,025,081 was satisfied by the issuance of
2,976,772 shares of Series A preferred stock valued at approximately
$3,385,000, which resulted in a contribution to capital of approximately
$7,640,000.
Also in April 2003, Vytek issued 7,476,113 shares of Series A
preferred stock and 22,790 shares of Junior preferred stock collectively
valued at approximately $8,500,000 in connection with the acquisition of
Stellcom, with such issuance triggering the issuance of an additional
1,157,899 shares of Series A Redeemable Convertible Preferred stock in
accordance with anti-dilution provisions of the Redeemable Convertible
Preferred stock, which was accounted for as a charge to additional paid-in
capital in the amount of approximately $1,317,000. All shares of Series A
Preferred issued were recorded at the estimated fair value at the date of
issuance. As such shares are redeemable at the option of the stockholder
and therefore outside of the control of Vytek after the fifth anniversary
date of issuance at the higher of the then fair value or $1.9483 per share
plus accrued but unpaid dividends, the carrying value of such shares is
being accreted to $1.9483 per share plus dividends not currently declared
or paid as a charge to additional paid-in capital.
Also in 2003, Vytek issued 4,256,406 shares of Series B Redeemable
Convertible Preferred stock for $5,000,000. The Series B preferred shares
have been recorded at their estimated fair value of approximately
$9,849,000. Of the total $4,849,000 excess of fair value over cash
received on the sale of Series B preferred shares, $1,596,000 was included
in the purchase basis for the Stellcom acquisition relating to that
percentage of the Series B shares that were sold to then existing Stellcom
stockholders, and the remaining $3,253,000 was recorded as a reduction of
Additional Paid In Capital related to that percentage of the Series B
shares sold the then existing Vytek stockholders. In connection with the
issuance of Series B preferred shares, Vytek loaned two of its officers
and stockholders approximately $70,000 in aggregate to purchase Series B
Preferred. These notes were paid by the officers/stockholders in the
fourth quarter of 2003.
Dividends
The holders of the B Preferred are entitled to receive pro rata, out
of assets legally available therefor, dividends at the rate of $0.0940 per
share per annum, compounded quarterly. Such dividends are payable in
shares of Series B-DIV Preferred and each share of Series B-DIV Preferred
shall have a value, for such purposes, of $1.1747. Such dividends shall
accumulate commencing as of the original issuance date of the B Preferred
and be payable only when, as and if declared by the Board of Directors and
shall be cumulative.
The holders of the A Preferred are entitled to receive pari passu out
of assets legally available therefor, dividends at the rate of $0.19483
per share per annum compounded quarterly. Such dividends shall be payable
in shares of Series A-DIV Preferred and each share of Series A-DIV
Preferred shall have a value of $1.9483. Such dividends shall accumulate
commencing as of the original issuance date of the B Preferred and be
payable only when, as and if declared by the Board of Directors and shall
be cumulative.
After payment of the dividends to the holders of the B Preferred and
the holders of A Preferred, the Series A Preferred and the Series B
Preferred shall be entitled to participate pro rata in the dividends paid
on the Common Stock (with each share of Series A Preferred and Series B
Preferred being deemed, for such purpose, to be equal to the number of
shares of Common Stock including fractions of a share) into which such
share of Series A Preferred and Series B Preferred is convertible
immediately prior to the close of business on the business day fixed for
such dividend. Such dividends shall be payable only when, as and if
declared by the Board of Directors.
The holders of the Junior Preferred shall not be entitled to receive
any dividends.
Conversion
Each share of Redeemable Convertible Preferred Stock may be converted
to Common Stock at the option of the Holders at a one-to-one conversion
rate. The conversion rate shall be adjusted whenever Vytek shall issue or
sell, or is deemed to have issued or sold, any shares of Common Stock for
a consideration per share less than the conversion price in effect
immediately prior to the time of such issue or sale.
Each share of Redeemable Convertible Preferred Stock is
automatically converted into shares of Common Stock, at the defined
conversion rate, in a public offering, pursuant to an effective
registration statement under the Securities Act of 1933, resulting in at
least $30,000,000 of gross proceeds to Vytek, or upon the affirmative
consent or approval of the Holders representing a majority in interest of
the shares of Redeemable Convertible Preferred Stock.
Voting rights
Holders of Convertible Preferred Stock have the right to one vote
for each common share into which such shares could then be converted, as
described above.
Liquidation
In the event of liquidation, dissolution or winding up of Vytek, the
holders of the B Preferred shall be entitled to receive for each share of
B Preferred, prior and in preference to any distribution of any of the
assets or surplus funds of the Corporation to the holders of the A
Preferred, the Junior Preferred and the Common Stock at the option of each
such holder either (i) the amount of $1.1747 per share for each share of B
Preferred (as adjusted for any stock splits, stock dividends, combinations,
recapitalizations, reclassifications or other similar events with respect
to the B Preferred) plus any dividends accrued but unpaid on such share
(the "Participating Series B Liquidation Preference") or (ii) the amount
of $2.3494 per share for each share of B Preferred (as adjusted for any
stock splits, stock dividends, combinations, recapitalizations,
reclassifications or other similar events with respect to the B Preferred)
plus any dividends accrued but unpaid on such share (the "Non-
Participating Series B Liquidation Preference" together with the
Participating Series B Liquidation Preference, the "Series B Liquidation
Preference"). Any such distributions of dividends shall be paid in shares
of Series B-DIV Preferred.
After payment of the Series B Liquidation Preference, the holders of
the Series A Preferred and Series A-DIV Preferred shall be entitled to
receive for each share of Series A Preferred and Series A-DIV Preferred,
prior and in preference to any distribution of any of the assets or
surplus funds of the Corporation to the holders of the Junior Preferred
and Common Stock the amount of $1.9483 per share for each share of
A Preferred (as adjusted for any stock splits, stock dividends,
combinations, recapitalizations, reclassifications or other similar events
with respect to the A Preferred) plus any dividends accrued but unpaid on
such share (the "Series A Liquidation Preference"). Any such distributions
of dividends shall be paid in shares of Series A-DIV Preferred.
After payment of the Series B Liquidation Preference, the Series A
Liquidation Preference and the liquidation preference of any other series
of preferred stock of Vytek, the holders of Junior Preferred shall be
entitled to receive for each share of Junior Preferred, prior and in
preference to any distribution of any of the assets or surplus funds of
Vytek to the holders of Common Stock, the amount of $1.9483 per share for
each share of Junior Preferred (as adjusted for any stock splits, stock
dividends, combinations, recapitalizations, reclassifications or other
similar events with respect to the Junior Preferred) (the "Junior
Liquidation Preference").
After payment has been made to the holders of the Redeemable
Convertible Preferred Stock and Junior Preferred of the full amounts to
which they are entitled then the entire remaining assets and funds of the
Corporation legally available for distribution, if any, shall be
distributed on a pro rata, as converted, basis to the holders of the
Series A Preferred the Series B Preferred that exercised the option to
receive the Participating Series B Liquidation Preference and the holders
of the outstanding Common Stock.
In the event that the assets of Vytek are insufficient to permit
payment of the above mentioned amounts, then the entire assets and funds
of Vytek legally available for distribution shall be distributed ratably
among the holders of the Redeemable Convertible Preferred Stock in
proportion to the preferential amount each such holder is otherwise
entitled to receive.
Redemption
At any time on or after the fifth anniversary of the date of initial
issuance of Series B Preferred, (the "Initial Redemption Date"), upon the
written request of the holders of shares representing a majority in
interest of the shares of Convertible Preferred Stock, Vytek shall redeem
the Convertible Preferred Stock as follows: first, the B Preferred and
then the A Preferred, in three (3) equal annual installments beginning on
the Initial Redemption Date and then on the first and second anniversary
of the Initial Redemption Date by paying an aggregate amount in cash
therefor for each share of B Preferred the greater of $1.1747 per share
and the then current fair market value of each such share and for each
share of A Preferred the greater of $1.9483 per share and the then current
fair market value of each such share (in each case, as adjusted for any
stock splits, stock dividends, combinations, recapitalizations,
reclassifications or other similar events with respect to the Redeemable
Convertible Preferred Stock), plus, in each case, all accrued but unpaid
dividends on such shares (the "Redemption Price").
11. COMMON STOCK
Between inception and July 31, 2000, Vytek sold 600 shares of Common
Stock ($.01 par value) to its founders at $100.00 per share. In August
2000, Vytek amended its Certificate of Incorporation increasing its
authorized shares of Common Stock to 48,660,000. At that time, Vytek split
the original shares 10,000 to 1. All other share amounts have been
restated to reflect such split.
In April 2003, Vytek amended and restated its Certificate of
Incorporation increasing its authorized shares of Common Stock to
63,000,000 ($0.01 par value).
In connection with the acquisition of Stellcom in April 2003, Vytek
established the Vytek Corporation Restricted Stock Plan of 2003, (the
"Plan"). The aggregate number of shares of stock that may be issued
pursuant to all awards under the Plan is 3,700,000, (i) 3,100,000 of which
shall be issuable to employees of Stellcom who shall be employed by Vytek
following completion of the acquisition of Stellcom (the "Continuing
Employees") and (ii) 600,000 of which shall be issuable to Vytek's Chief
Executive Officer. In connection with the issuance of any restricted
shares to a participant, each such participant shall pay to Vytek the
purchase price for such restricted shares specified in the restricted
stock award agreement as the cash consideration therefor. The restricted
stock to be issued shall vest on terms determined by Vytek, but in no
event shall the restricted stock vest (a) more rapidly than sixty percent
(60%) vested on the date of issuance and the balance vesting in equal
monthly installments over the following 18 months and (b) more slowly than
at least twenty percent (20%) vested per year from the date of grant. Any
shares of restricted stock which do not vest prior to the termination of
employment of a Continuing Employee shall be repurchased by Vytek at the
lesser of (i) the purchase price paid for such shares or (ii) the fair
market value at the time of repurchase.
In 2003 Vytek issued 2,899,000 shares of common stock to Continuing
Employees (of which 1,713,000 shares are included in the purchase basis
for the Stellcom acquisition) and 600,000 shares to the Chief Executive
Officer of Vytek for $0.01 per share. The shares generally vest forty
percent (40%) to sixty percent (60%) upon grant, an additional twenty
percent (20%) on March 31, 2004, with the remainder vesting ratably over
the period from March 31, 2004 to March 31, 2007. The estimated fair
value of this stock at the time of issuance was $0.1557 per share based
upon an independent valuation. The excess of fair value over the issuance
price of $.01 per share has been recorded as part of the purchase basis of
the Stellcom acquisition for the shares that were fully vested at the date
of issuance ($267,000) and stock-related compensation for the shares that
were issued subject to vesting restrictions to Continuing Employees and
the Chief Executive Officer of Vytek ($260,000). Of this latter amount,
$40,000 was amortized to expense during 2003, and the remainder is
included in Unearned Stock Compensation in the stockholders' deficit
section of the consolidated balance sheet at December 31, 2003. A portion
of the shares of restricted common stock were issued in exchange for non-
recourse notes received from employees. The Company has applied variable
accounting to these shares and has computed variable stock compensation of
approximately $1,900,000 at December 31, 2003 based on the estimated fair
value of $1.18 per share at that date. Of this amount, approximately
$300,000 was amortized to expense during 2003, and the remainder is
included in Unearned Stock Compensation at December 31, 2003.
12. STOCK OPTIONS
In July 2000, Vytek's Board of Directors approved the Vytek Wireless,
Inc. 2000 Stock Option Plan (the "Plan") pursuant to which 2,660,000
shares of Common Stock have been reserved for the grant of options to
employees and consultants at terms and prices to be determined by the
committee designated by the Board of Directors to administer the plan. The
plan specifies that the exercise price of incentive stock options cannot
be less than 100% of the fair market value of the stock on the date of
grant. The maximum term for options granted is 10 years. Options granted
under the plan generally vest over a four-year period.
On October 3, 2003, Vytek granted 1,206,000 options to employees at
an exercise price of $0.01 per share (of which 134,000 were subsequently
forfeited), vesting ratably over four years. Based on an valuation of the
underlying Common Stock performed by an independent valuation firm, the
options were determined to have an intrinsic value of $0.14 each on the
grant date. In accordance with APB No. 25, the aggregate intrinsic value
of these options is being recorded as compensation expense on a ratable
basis over the four-year vesting period and is included in the
consolidated statement of operations. Vytek recorded compensation expense
of approximately $9,000 during 2003 in connection with these options. No
other options were granted during 2003. Because all stock options granted
during 2003 have a diminimus exercise price of $0.01, the intrinsic value
of $0.14 per option that is being expensed over the vesting period is
deemed to exceed the fair value that would be calculated pursuant to SFAS
No. 123. For this reason, the SFAS No. 123 pro forma compensation expense
for 2003 reported under the "Stock-based compensation" heading of Note 2
herein excludes the options granted during 2003.
For purposes of computing the SFAS No. 123 pro forma compensation
expense on stock options for fiscal 2002, the estimated fair value of each
option on the date of grant for options granted during 2002 and prior
years was determined using the minimum value method with the following
assumptions:
Expected life (in years) 5
Risk free interest rate 4.25%
Dividend yield 0%
It has been assumed that the estimated weighted average fair value of
the options granted in 2002 of $1.36 per option is amortized on a
straight-line basis to compensation expense over the vesting period of the
grant.
The following table sets forth the Plan activity for the years ended
December 31, 2003 and 2002:
2003 2002
-------------------- -----------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------ ------- ------ ------
Options outstanding,
beginning of year 1,817,208 $5.76 1,593,441 $5.00- $6.00
Options granted 1,206,000 $0.01 506,500 $6.00
Options assumed in
connection with
acquisitions 238,768 $3.41-$25.55
Options exercised - - - -
Options forfeited (549,747) $5.92 (521,501) $5.00- $5.70
--------- ----- --------- -----------
Options outstanding,
end of year 2,473,461 $2.92 1,817,208 $5.76
========= ===== ========= =====
The following table summarizes information about stock options
outstanding as of December 31, 2003:
Options Outstanding Options Exercisable
- ----------------------------------------------------- ------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices Options Life Price options Price
- -------- ------ ----- ------ ----- -----
$0.01 1,189,000 9.76 $ 0.01 - $ -
3.41 124,489 5.85 3.41 124,489 3.41
3.75 19,254 6.01 3.75 19,254 3.75
4.00 6,250 6.75 4.00 6,250 4.00
4.26 19,781 5.80 4.26 18,893 4.26
5.00 96,445 6.96 5.00 72,514 5.00
5.32 1,408 5.17 5.32 1,408 5.32
5.70 119,375 7.21 5.70 84,215 5.70
6.00 886,017 7.77 6.00 495,180 6.00
8.52 10,271 6.20 8.52 8,495 8.52
17.04 175 6.18 17.04 130 17.04
25.55 996 6.64 25.55 745 25.55
--------- ---- ----- ------- -----
2,473,461 8.53 $ 2.92 831,573 $ 5.43
========= ==== ===== ======= =====
13. COMMITMENTS
Vytek leases its manufacturing and office space 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. Total rent expense for all operating leases was
approximately $2,080,000 and $961,000 for the years ending December 31,
2003 and 2002, respectively, (of which $236,000 and $226,000 in 2003 and
2002, respectively, was paid to the former Products stockholders in each
period).
Future minimum lease commitments for non-cancelable operating leases
are as follows at December 31, 2003 (of which approximately $243,000 in
2004 and $144,000 in 2005 is payable to the former Products stockholders):
2004 $2,268,800
2005 1,620,154
2006 1,066,837
2007 1,115,445
2008 1,189,451
Thereafter 2,080,718
---------
Total minimum
lease payments $9,341,405
=========
Minimum rentals to be received in the future under non-cancelable
subleases extending through March 2005 are as follows:
2004 $ 235,268
2005 48,427
--------
Total $ 283,695
========
At December 31, 2003, Vytek 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 Noncurrent Assets in the consolidated balance sheet
at that date.
14. BENEFIT PLAN
Vytek sponsors a defined contribution 401(k) savings plan. Employees
are eligible to participate beginning on quarterly specified entry dates
following the attainment of age 18. The 401(k) Plan allows employees to
contribute up to 25% of earnings and permits Vytek to make discretionary
matching contributions. Participants are immediately vested in their
contributions and generally become vested in matching contributions
ratably over a five-year period. Vytek's matching contributions were
$44,702 and $135,776 for 2003 and 2002, respectively.
15. ARCH CONTRACT
Between April 2001 and April 2002, Vytek received cash payments of
approximately $2,387,000 from Arch Wireless, Inc. ("Arch") for certain
products manufactured by Vytek. At the request of Arch, Vytek was holding
the product in its warehouses at December 31, 2002. As a result,
approximately $2.4 million of revenue, $1.7 million of costs and $.7
million of gross profit had been deferred at December 31, 2002. All such
deferred amounts were recognized by Vytek during 2003 upon the shipment of
products to the customer.
16. MERGER WITH CALIFORNIA AMPLIFIER, INC.
On December 23, 2003, Vytek entered into an Agreement and Plan of
Merger (the "Merger Agreement") with California Amplifier, Inc. ("CalAmp"),
a publicly held company that 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 merger was approved by the stockholders of both companies on April 8,
2004, and the merger was consummated on April 12, 2004.
In connection with this merger, CalAmp: (i) issued approximately
7,268,800 shares of its common stock to Vytek's selling stockholders; (ii)
issued and deposited 854,700 shares of its common stock into an escrow
fund; (iii) paid approximately $5,000 in lieu of fractional shares; and
(iv) converted all Vytek employee stock options outstanding at the time of
the merger into a total of 148,821 fully vested CalAmp stock options that
had an aggregate fair value under the Black-Scholes formula of
approximately $1,850,000.
CalAmp 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 CalAmp 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 CalAmp for indemnification or for the Working Capital Adjustment,
except for an amount equal in value to $2 million, all shares of CalAmp
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
CalAmp common stock and any remaining cash in the escrow fund will be
released to the Vytek selling stockholders two years after the closing
date, subject to any then pending and unresolved claims for
indemnification or the Working Capital Adjustment.
The common shares issued to Vytek's selling stockholders and
issued/deposited to the escrow fund were valued at $11.26 per share, which
was the average closing price of CalAmp's common stock on the Nasdaq
National Market for the period beginning two trading days before and
ending two trading days after December 23, 2003, the day the acquisition
terms were agreed to and announced. The aggregate purchase price,
including the shares deposited into the escrow fund, is approximately $96
million.