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Securities and Exchange Commission
Washington D.C. 20549
Form 10-KSB/A
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended May 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGE ACT OF 1934
Commission file number 0-12866
PHAZAR CORP
(Exact name of registrant as specified in its charter)
Delaware 75-1907070
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
101 S.E. 25th Avenue, Mineral Wells, Texas 76067 (940) 325-3301
- ------------------------------------------------ --------------
(Address of principal executive offices) (Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
None
Title of each class
-------------------
Common Stock, $0.01 par value
Check whether the issuer has (i) filed all reports required by Section 13 or
15(d) of the Exchange ACT during the past 12 months, and (ii) been subject to
such filing requirements for the past ninety (90) days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes No (X)
Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The Company's net sales for Fiscal Year ended May 31, 2008, was $9,247,245.
1
As of July 15, 2008 2,361,428 shares of Common Stock were outstanding and the
aggregate market value of the Common Stock (based on the latest price of known
transactions on the Nasdaq Capital Market) held by non-affiliates (2,070,228
shares) was approximately $9,999,201.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
EXPLANATORY NOTE
PHAZAR CORP (the "Company") is filing this Amendment to its Annual Report on
Form 10-KSB for the fiscal year ended May 31, 2008 (i) to amend Note 10 to its
Financial Statements to disclose that certain stock options granted to a Company
employee were granted under its 2006 Incentive Stock Option Plan, (ii) to add a
Subsequent Event Note to its Financial Statements that on August 12, 2008 stock
options to purchase 36,400 shares under its 2006 Incentive Stock Option Plan
were granted to certain employees of the Company and (iii) to replace the Item
8A disclosure with new Item 8A(T). In addition, in connection with the filing of
this Form 10-KSB/A and pursuant to Rule 12b-15 under the Securities Exchange Act
of 1934 (Exchange Act), we are including revised and currently-dated
certifications. The remainder of the Company's Annual Report on Form 10-KSB for
the fiscal year ended May 31, 2008 filed with the Securities and Exchange
Commission (SEC) on August 18, 2008 remains unchanged.
2
Item 7. Financial Statements.
PHAZAR CORP consolidated financial statements for the fiscal year ended May 31,
2008.
C O N T E N T S
Page
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.........................................5
Consolidated Statements of Operations...............................7
Consolidated Statements of Shareholders' Equity.....................8
Consolidated Statements of Cash Flows...............................9
Notes to Consolidated Financial Statements.........................10
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders
PHAZAR CORP and Subsidiaries
We have audited the accompanying consolidated balance sheets of PHAZAR CORP and
Subsidiaries as of May 31, 2008 and 2007, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PHAZAR CORP and
subsidiaries as of May 31, 2008 and 2007, and the results of their operations
and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
August 18, 2008
4
PHAZAR CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2008 AND 2007
ASSETS
2008 2007
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 2,446,563 $ 4,114,046
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $2,002 in 2008, and $7,021 in 2007 905,091 291,470
United States Government 82,167 42,278
Inventories 1,777,335 1,703,164
Prepaid expenses and other assets 47,761 64,132
Income taxes receivable 169,597 229,373
Deferred income taxes 67,697 54,836
------------ ------------
Total current assets 5,496,211 6,499,299
Property and equipment, net 939,084 1,052,766
Marketable securities 2,346,840 -
Long-term deferred income tax 178,739 36,818
------------ ------------
TOTAL ASSETS $ 8,960,874 $ 7,588,883
============ ============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
5
PHAZAR CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2008 AND 2007
LIABILITIES AND SHAREHOLDERS' EQUITY
2008 2007
------------- -------------
CURRENT LIABILITIES
Accounts payable $ 298,192 $ 128,579
Accrued expenses 462,679 305,148
Deferred revenues 315,654 -
------------ ------------
1,076,525 433,727
Total current liabilities
Total liabilities 1,076,525 433,727
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock, $1 par, 2,000,000 shares
authorized, none issued or outstanding,
attributes to be determined when issued - -
Common stock, $0.01 par, 6,000,000 shares
authorized 2,357,728 and 2,308,128 issued
and outstanding 23,578 23,082
Additional paid in capital 3,723,278 3,417,399
Retained earnings 4,337,579 3,714,675
Accumulated other comprehensive loss, net of tax (200,086) -
------------ ------------
Total shareholders' equity 7,884,349 7,155,156
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,960,874 $ 7,588,883
============ ============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
6
PHAZAR CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 2008 AND 2007
2008 2007
------------- -------------
Sales and contract revenues $ 9,247,245 $ 5,220,868
Cost of sales and contracts 5,866,837 3,099,897
------------ ------------
Gross Profit 3,380,408 2,120,971
Sales and administration expenses 2,676,614 2,734,757
------------ ------------
Operating Profit (loss) 703,794 (613,786)
------------ ------------
Other income
Interest income 114,081 55,635
Other income 53,940 104,053
------------ ------------
Total other income 168,021 159,688
------------ ------------
Income (loss) from operations before income taxes 871,815 (454,098)
Income tax provision (benefit) 248,911 (151,058)
------------ ------------
Net income (loss) $ 622,904 $ (303,040)
============ ============
Basic earnings (loss) per common share $ 0.27 $ (0.13)
============ ============
Diluted earnings (loss) per common share $ 0.27 $ (0.13)
============ ============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
7
PHAZAR CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MAY 31, 2008 AND 2007
Common Stock Accumulated
------------ Additional Other
Number Paid In Comprehensive Retained
of Shares Amount Capital Income (loss) Earnings Total
--------- ------- ---------- ------------- ----------- ----------
BALANCE,
MAY 31, 2006 2,281,528 $22,816 $3,213,901 $ - $4,017,715 $7,254,432
Stock issued
to Directors 6,600 66 42,655 - - 42,721
Stock based
compensation - - 76,298 - - 76,298
Stock options
exercised 20,000 200 39,800 - - 40,000
Tax benefit
for employee
stock options - - 44,745 - - 44,745
Net income (loss) - - - - (303,040) (303,040)
--------- ------- ---------- ------------ ---------- ----------
BALANCE,
MAY 31, 2007 2,308,128 $ 23,082 $3,417,399 $ - $3,714,675 $7,155,156
========= ======== ========== ============ ========== ==========
Stock issued
to Directors 10,600 106 73,175 - - 73,281
Stock based
compensation - - 80,988 - - 80,988
Stock options
exercised 39,000 390 77,610 - - 78,000
Tax benefit
for employee
stock options - - 74,106 - - 74,106
Temporary impairment
on available for
sale securities,
net of tax - (200,086) - (200,086)
Net income (loss) - - - 622,904 622,904 -
--------- -------- ---------- ------------ ---------- ----------
BALANCE,
MAY 31, 2008 2,357,728 $ 23,578 $3,723,278 $ (200,086) $4,337,579 $7,884,349
========= ======== ========== ============ ========== ==========
The Notes to Consolidated Financial Statements
are an integral part of these statements.
8
PHAZAR CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2008, AND 2007
2008 2007
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 622,904 $ (303,040)
Depreciation 113,682 115,854
Amortization - 1,250
Stock based compensation 154,269 119,019
Tax benefit for employee stock options (74,106) (44,745)
Deferred federal income tax (51,707) (54,021)
Changes in assets and liabilities:
Accounts receivable (653,510) 127,737
Inventory (74,171) (408,516)
Income taxes receivable 133,882 (12,201)
Prepaid expenses 16,370 12,117
Accounts payable 169,613 (54,213)
Accrued expenses 157,531 (18,638)
Deferred revenue 315,654 -
------------ ------------
Net cash provided (used) by operating activities 830,411 (519,397)
CASH FLOWS FROM INVESTING ACTIVITIES:
Transfer to marketable securities (2,650,000) -
Purchase of property and equipment - -
------------ ------------
(2,650,000) -
CASH FLOWS FROM FINANCING ACTIVIITES:
Proceeds from exercise of stock options 78,000 40,000
FIT benefit-stock options exercised 74,106 44,745
------------ ------------
152,106 84,745
Net increase (decrease) in cash
and cash equivalents (1,667,483) (434,652)
------------ ------------
CASH AND CASH EQUIVALENTS, beginning of year 4,114,046 4,548,698
------------
CASH AND CASH EQUIVALENTS, end of year $ 2,446,563 $ 4,114,046
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest expense $ - $ -
Income taxes $ 160,000 $ 100,000
The Notes to Consolidated Financial Statements
are an integral part of these statements.
9
NOTE 1. BUSINESS AND NATURE OF OPERATION
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 is an operating
subsidiary that designs, manufactures and markets antenna systems, wireless
mesh network solutions, towers, and communication accessories worldwide.
The United States Government, military and civil agencies, and prime
contractors represent Antenna Products Corporation's principal customers.
Phazar Antenna Corp. is a separate legal entity that currently operates as
a small division of Antenna Products Corporation. Thirco serves as an
equipment leasing company to Antenna Products Corporation. The Company's
operations are performed in Texas for customers throughout the country.
Following is a schedule of the Company's sales to major customers at May
31, as a percentage of total sales:
2008 2007
---- ----
United States Government 24% 21%
Paige Iberica, Spain 12% 0%
General Dynamics 9% 7%
BAE Systems 0% 4%
Thales ATM, Inc. 6% 11%
At May 31, 2008, and 2007, trade receivables from four customers comprised
approximately 50% and 59%, respectively, of the trade receivable balance at
those dates.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation.
Revenue Recognition
Antenna Products Corporation manufactures and markets standard and custom
antennas, wireless mesh network solutions, guyed and self-supported towers,
support structures, masts and communication accessories worldwide.
Customers include the U.S. Government, military and civil agencies, U.S.
Government prime contractors and commercial clients. Examples of Antenna
Products Corporation's U.S. Government products include tactical military
mesh radio wireless networking systems, ground to air collinear antennas,
instrument landing antennas and towers, fixed system multi-port antenna
arrays, tactical quick erect antennas and masts, shipboard antenna tilting
devices, transport pallets, surveillance antennas, antenna rotators,
positioners and controls, and high power broadcast baluns. Examples of the
Company's commercial products (Phazar Antenna Corp.) include first
responder emergency mesh radio systems, commercial mesh radio systems,
panel, sector, omnidirectional and closed loop PCS antennas; WiMax
Antennas, automatic meter reading (AMR), cellular, paging and yagi
antennas, guyed towers and self supported towers.
10
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Antenna Products Corporation is primarily a build-to-order company. As
such, most orders are negotiated firm-fixed price contracts. Most
commercial contracts are single order and single delivery firm-fixed price
contracts. Some government contracts are multi-year performance with
established option dates with a predetermined escalated price for delivery
in that outyear. These types of contracts can be valid from two to five
years. Other types of government contracts are called supply contracts
where the government buys a particular product and has estimated the
quantity required over an expected period. Antenna Products Corporation has
contracts with major prime contractors who negotiate contracts based on
large quantities with set escalation rates for future prices. The U.S.
Government is attempting to procure more and more products that have
commercial equivalents to military standards. These purchases are for
off-the-shelf products and, therefore, use credit cards and accept
commercial terms and shipping methods. Antenna Products Corporation
recognizes an order or resultant sale when official notification is
received that an option is being exercised and the order is shipped.
Revenue from short-term contracts calling for delivery of products is
recognized as the product is shipped. 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 reasonably 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.
Inventories
Inventories are valued at the lower of cost or market, with cost determined
on the first-in, first-out basis. Market is replacement cost or net
realizable value. Work in progress and finished goods include material,
labor and overhead.
Property and Equipment
Property and equipment are recorded at cost and depreciated by the
straight-line method over the expected useful lives of the assets. The
estimated useful lives are: building and improvement - 15-30 years;
machinery and equipment - 10 years; automobiles and equipment - 3 years;
and office furniture and fixtures - 10 years. Expenditures for normal
maintenance and repairs are charged to income, and significant improvements
are capitalized. The cost of assets sold or abandoned and the related
accumulated depreciation are eliminated from the accounts and the net
amount, less proceeds from disposal, is charged or credited to income.
Use of Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
11
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the
estimates that were used.
Income Taxes
The Company 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 the Company'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 the members of the consolidated group on the separate
income tax return basis.
In July, 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109 ("SFAS 109"). This
interpretation, which became effective for fiscal years beginning after
December 15, 2006, introduces a new approach that changes how an entity
recognizes and measures tax benefits associated with tax positions and how
to disclose uncertainties related to income tax provisions in their
financial statements.
Research and Development Costs
Research and development costs are charged to operations when incurred and
are included in operating expenses. The amounts charged for the years ended
May 31, 2008, and 2007, were approximately $563,160 and $316,000,
respectively.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and certificates of deposit with original maturities of three months
or less.
Early in the fourth quarter of 2008, the Company's cash and cash
equivalents included $2.65 million of investment grade auction rate
securities with an active resale market to ensure liquidity. The securities
have long-term maturities, typically 30+ years; however the auctions were
held every 7, 28, or 35 days so that the holder of the auction rate
security could liquidate the investment on any auction date, making the
auction rate security the equivalent of cash. Then in February 2008, most
auctions of auction rate securities began to fail and they continue to
fail. Because the auctions continue to fail, the Company's auction rate
securities should not be considered the equivalent of cash. Thus, the
Company now carries the $2.35 million principal amount of its auction rate
securities as long term marketable securities.
12
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Warranties
The Company provides for the estimated cost of product warranties. Actual
costs as incurred are charged directly to cost of sales and the adequacy of
the liability is assessed on a quarterly basis.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income consists of net
income (loss), net holding gains (losses) on investments, net unrecognized
loss on pensions, deferred gains (losses) from derivatives and gains
(losses) from foreign currency translation. All transactions are shown net
of tax.
Stock-based Employee Compensation
On June 1, 2006, the Company adopted Statement of Financial Accounting
Standard No. 123R , Share-Based Payment ("SFAS 123R") which required all
share based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair
values at the time of the grant. The company uses the Black-Scholes Model
option pricing model to determine the fair value of stock options granted
to employees. Stock based compensation recognized in the twelve months
ended 2008 and 2007 were $154,269 and $119,019, respectively.
The income tax benefit related to stock-based compensation expense was
$74,106 and $44,745 for the years ended May 31, 2008 and 2007 respectively.
In accordance with SFAS 123R, the Company has presented excess tax benefits
from the exercise stock-based compensation awards as a financing activity
in the consolidated statement of cash flows.
Shares, Per Share Data, Earnings Per Share, and Stock Split, and Common Stock
Par Value
Earnings per share are computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the year.
Weighted average shares outstanding were 2,340,338 and 2,295,855 for the
years ended May 31, 2008, and 2007, respectively.
13
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Dilutive effect of stock options outstanding for the years ended May 31, 2008
and 2007, are computed as follows:
2008 2007
------------- -------------
Numerator:
Net income (loss) $ 622,904 $ (303,040)
------------ ------------
Numerator for basic and diluted earnings
per share $ 622,904 $ (303,040)
------------ ------------
Denominator:
Weighted-average shares outstanding-basic 2,340,338 2,295,855
Effect of dilutive securities:
Stock options 5,292 -
------------ ------------
Denominator for diluted earnings per share-
Weighted-average shares 2,345,630 2,295,855
------------ ------------
Basic earnings per share $ 0.27 $ (0.13)
============ ============
Diluted earnings per share $ 0.27 $ (0.13)
============ ============
Deferred Revenue
Payments which are received in advance of the completion of the related
phase of a contract are recorded as deferred revenue when received. Revenue
is recognized when earned based on cost incurred to date plus estimated
profit margin in relation to the total estimated cost plus profit margin on
the entire project. Estimated losses will be recognized in their entirety
when they become apparent. Deferred revenue recorded at each of the years
ended May 31, 2008 and 2007 is $315,652 and $0, respectively.
Shipping and Handling Costs
The Company includes all shipping and handling costs together with cost of
sales on the accompanying statements of operations.
New Accounting Pronouncements
In July, 2006, the FASB issued Interpretation (FIN) 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109".
FIN 48, prescribes a recognition threshold and measurement attribute for
tax positions. The Company adopted FIN 48 at the beginning of fiscal year
2008 and it did not have a material impact on the Company's financial
statements.
SFAS No. 157, Fair Value Measurements was issued in September, 2006 by the
Financial Accounting Standards Board (the "FASB"). SFAS No. 157 provides
guidance for using fair value to measure assets and liabilities and is
effective for fiscal years beginning after November 15, 2007. The Company
will adopt this standard as required and adoption of this statement is not
expected to have a material effect on the Company's financial statements.
14
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans was issued in September, 2006 by the Financial
Accounting Standards Board. This statement requires that employers measure
plan assets and obligations as of the balance sheet date. This requirement
is effective for fiscal years ending after December 15, 2008.
In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Liabilities - including an amendment of FASB statement
No. 115. This statement permits all entities to choose, at specified
elections dates, to measure eligible items at fair value. The statement is
effective as the first fiscal year that begins after November 15, 2007. The
Company will adopt this standard as required and adoption of this statement
is not expected to have a material effect on the Company' financial
statements.
In December, 2007, the FASB issued SFAS No. 160, Non-controlling Interest
in Consolidated Financial Statements - an amendment of ARB NO. 51. This
FASB improves the financial statement information that a reporting entity
provides in its consolidated financial statements by establishing
accounting and reporting standards. SFAS No. 160 affects those entities
that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective
for fiscal years, beginning on or after December 15, 2008.
In December, 2007, the FASB issued SFAS No. 141R, Business Combination. The
revised statement improves on the information provided by a reporting
entity about a business combination and its effects. This statement applies
prospectively to business combination for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2008.
NOTE 3. INVENTORIES
The major components of inventories are as follows:
2008 2007
------------- -------------
Raw materials $ 691,096 $ 533,972
Work in process 778,633 876,981
Finished goods 307,606 292,211
------------ ------------
Total inventories $ 1,777,335 $ 1,703,164
============ ============
Certain allocable overhead costs such as depreciation, insurance, property
taxes and utilities are included in inventory based upon percentages
developed by the Company. The aggregate amount of these costs included in
inventory during the years ended May 31, 2008 and 2007, were $589,411 and
$559,774, respectively.
All of the above stated inventories are that of the operating subsidiaries,
Antenna Products Corporation and Phazar Antenna Corp. No other subsidiaries
carry inventory.
15
NOTE 4. PROPERTY AND EQUIPMENT
The following is a summary of the Company's property and equipment at May
31:
Estimated
Useful Life 2008 2007
----------- ------------- -------------
Land $ 375,136 $ 375,136
Buildings and improvements 15-30 years 1,873,217 1,873,217
Machinery and equipment 10 years 3,359,626 3,402,145
Automobiles and equipment 3 years 106,898 106,898
Office furniture and fixtures 10 years 435,210 454,266
------------ ------------
6,150,087 6,211,662
Less accumulated depreciation (5,211,003) (5,158,896)
------------ ------------
Net property and equipment $ 939,084 $ 1,052,766
============ ============
NOTE 5. INTANGIBLE ASSETS
2008 2007
Included in intangible assets at May 31 ------------- -------------
are the following:
Noncompete agreements (Phazar Antenna Corp.) $ 60,000 $ 60,000
Patents, copyrights and other intellectual
property (Phazar Antenna Corp.) 389,593 389,593
------------ ------------
Accumulated amortization 449,593 449,593
(449,593) (449,593)
------------ ------------
$ - $ -
============ ============
Patents, copyrights and other intellectual property are being amortized on
the straight-line basis over a weighted average five-year period.
Non-compete agreements are being amortized on the straight-line basis over
weighted average three and one third year contractual basis.
NOTE 6. NOTES PAYABLE
At May 31, 2008 and 2007, notes payable consist of a revolving note payable
to a bank, with a maximum amount not to exceed the lesser of $1,000,000 or
a calculated borrowing base determined by a formula based upon the amount
of certain qualified receivables and inventories as defined in the loan
agreement. Amount available under the revolving note at May 31, 2008 and
2007 was $1,000,000.
Interest is payable monthly at the prime rate (5.0% and 8.25% at May 31,
2008 and 2007, respectively) until September 30, 2008, when any unpaid
principal and interest shall be due. Borrowings under the revolving note
payable are collateralized by accounts receivable and inventories. Under
the agreement, the Company must maintain minimum net worth of $3,000,000
and working capital of $1,000,000.
16
NOTE 7. LONG-TERM DEBT
At May 31, 2008 and 2007, PHAZAR CORP had no long-term debt.
NOTE 8. INCOME TAXES
Components of the income tax provision are as follows:
2008 2007
------------- -------------
Federal income taxes at statutory rate
on income before income taxes $ 294,708 $ (154,643)
State income taxes statutory rate - 1,143
Non-deductible expenses and other (45,797) 2,442
------------ ------------
Total provision (benefit) $ 248,911 $ (151,058)
============ ============
Deferred portion of provision (51,707) (54,021)
Current portion of provision 300,618 (97,037)
------------ ------------
Total provision (benefit) $ 248,911 $ (151,058)
============ ============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
2008 2007
------------- -------------
Deferred tax assets:
Accounts receivable, due to
allowance for doubtful accounts $ 681 $ 2,387
Accrued expenses, due to warranty accrual 41,608 23,248
Accrued expenses, due to vacation accrual 25,408 29,201
Intangible assets, due to difference
in amortization 68,871 77,281
Compensation, stock options vested 53,476 25,942
Investments, due to impairment for
book purposes 103,072 -
------------ ------------
Total deferred tax assets $ 293,116 $ 158,059
Deferred tax liabilities:
Property and equipment, principally
due to difference in depreciation (46,680) $ (66,405)
------------ ------------
Total deferred tax liabilities (46,680) $ (66,405)
------------ ------------
Net deferred tax assets $ 246,436 $ 91,654
============ ============
17
NOTE 8. INCOME TAXES - continued
The net deferred tax assets are classified on the balance sheet as follows:
Current deferred tax assets $ 67,697 $ 54,836
Long-term deferred tax assets
(liabilities) 178,739 36,818
------------ ------------
Net deferred tax assets $ 246,436 $ 91,654
============ ============
On July 13, 2006, the FASB issued Interpretation No. 48 ("FIN"), Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement
No. 109. FIN 48 prescribes how the Company should recognize, measure and
present in the Company's financial statements uncertain tax positions that
have been taken or are expected to be taken in a tax return. Pursuant to
FIN 48, the Company can recognize a tax benefit only if it is "more likely
than not" that a particular tax position will be sustained upon examination
or audit by taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such
a position should be measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognition, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures.
The Company adopted the provisions of FIN 48 on June 1, 2007. The adoption
of FIN 48 did not result in the recording of any unrecognized tax benefits,
as there were no identifiable uncertain tax positions that were required to
be quantified and disclosed. Therefore, there were no recorded FIN 48
liabilities or adjustments to retained earnings on the Company's financial
statements.
There are no additional uncertain tax positions expected to be taken on the
2007 federal or state income tax returns to be filed. Accordingly, no
additional disclosures have been made on the current financial statements
regarding FIN 48.
As Company policy, accrued interest or penalties associated with
unrecognized tax benefits will be recorded as income tax expense. Since
there is no applicable FIN 48 liability for 2007, no interest or penalties
are included in the Consolidated Statement of Operations.
The Company and its subsidiaries file a consolidated federal tax return.
The 2004-2007 federal tax returns are currently open under the statute of
limitations. State income tax returns are generally open for examination
for a period of 3-5 years after the filing of the respective return. The
Company and its subsidiaries have no federal or state returns currently
under examination, appeals or litigation.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company has adopted an employee profit sharing plan under Section
401(k) of the Internal Revenue Code. All employees with a minimum of one
year of employment are eligible to participate. The Company will match
18
NOTE 9. COMMITMENTS AND CONTINGENCIES - continued
employee contributions for an amount up to 3% of each employee's salary if
certain earnings requirements are met. Contributions are invested at the
direction of the employee in one or more funds. Company contributions vest
after three years of service. Company contributions amounted to $70,237 and
$0 for the years ended May 31, 2008 and 2007, respectively.
Concentration of Credit Risk
The Company deposits its cash primarily in deposit accounts with major
banks. Certain cash deposits may occasionally be in excess of federally
insured limits. The Company has not incurred losses related to its cash.
The Company sells many of its products to the U.S. Government, both
military and civil agencies, and prime contractors. Although the Company
might be directly affected by the well being of the defense industry,
management does not believe significant credit risk exists at May 31,
2008.
Ongoing credit evaluations of customer's financial condition are
performed and, generally, no collateral is required. The Company
maintains reserves for potential credit losses and such losses have not
exceeded management's expectations.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies.
The fair value of financial instruments classified as current assets or
liabilities including cash and cash equivalents, receivables and accounts
payable approximate carrying value due to the short-term maturity of the
instruments.
Legal Proceedings
On June 26, 2008, the Company filed a claim in arbitration against UBS
Financial Services, Inc. ("UBS") with the Financial Industry Regulatory
Authority, Inc. ("FINRA") for fraud, breach of fiduciary duty, breach of
contract and negligence in connection with the sale by UBS to the Company
of certain "auction rate securities" in the aggregate principal amount of
$2,650,000 (the auction rate securities).
In the arbitration proceeding, the Company claims it invested its liquid
assets in auction rate securities in reliance on UBS repeated
representations to the Company that the auction rate securities were
safe, liquid investments, the equivalent of cash and a prudent investment
for the Company's cash. Further, the Company claims these representations
were false and that UBS also falsely represented that the auction markets
were stable and that the Company could liquidate its investment in the
auction rate securities on any auction date, making the auction rate
19
NOTE 9. COMMITMENTS AND CONTINGENCIES - continued
securities the equivalent of cash. The Company further claims that in
February 2008, with no prior notice to the Company, UBS unilaterally
abandoned the auction markets and allowed the auctions of auction rate
securities it had sold to the Company to fail. The Company further
alleges that the continued failure of the auctions has resulted in the
Company's auction rate securities becoming illiquid long term fixed
income investments. The Company seeks, among other relief, rescission of
its purchases of the auction rate securities and restoration in cash of
its entire $2,650,000 investment in the auction rate securities it
purchased from UBS.
The Company also announced that on June 27, 2008, the Company filed an
action against UBS in the 348th Judicial District Court of Tarrant
County, Texas (the "Injunctive Action"). In the Injunctive Action, the
Company seeks injunctive relief prohibiting UBS from denying the Company
access to the $2,650,000 in cash the Company invested in auction rate
securities.
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:
2008 2007
------------- -------------
Beginning balance $ 68,376 $ 41,792
Cost incurred for rework (150,652) (48,592)
Accrual for current year estimate 122,376 68,376
Change in accrued estimate 82,276 6,800
------------ ------------
Ending balance $ 122,376 $ 68,376
============ ============
The accrual for warranty reserve for 2008 was increased for the recall
and modification of a safety sleeve product.
NOTE 10. STOCK OPTIONS
In 2000, the board approved options to purchase 75,000 shares of common
stock at $2.00 per share to an employee of the Company, all were exercised
before the options expiration date of November 20, 2007.
In 2006, the Board approved options to purchase 50,000 shares of common
stock at $9.22 per share to an employee of the Company. The options are
exercisable pro-rata over a five year period. No options have been
exercised. The options expire between May 29, 2012 and May 29, 2016, or the
earlier of the employee's last day of employment.
In 2008, the Board approved options to purchase 30,000 shares of common
stock at $5.70 per share to an employee of the Company. The options are
exercisable at a rate of 6,000 shares per year over a five year period.
20
NOTE 10. STOCK OPTIONS - continued
No options have been exercised. The options expire between March 23, 2014
and March 23, 2019, or the earlier of the employee's last day of
employment.
A summary of the status of the Company's outstanding stock options issued
under separate employment agreements as of May 31, 2008 and May 31, 2007
and changes for the years then ended are as follows:
Outstanding Options
--------------------------
Weighted
Average
Number Exercise
of Options Price
---------- --------
Outstanding at May 31, 2006 109,000 5.31
Granted -
Exercised (20,000) 2.00
Forfeited -
--------- -------
Outstanding at May 31, 2007 89,000 6.06
Granted 30,000 5.70
Exercised (39,000) 2.00
Forfeited -
--------- -------
Outstanding at May 31, 2008 80,000 7.90
========= =======
May 31,
2008 2007
----------- -----------
Number of options vested 20,000 49,000
Weighted average remaining
contract life - years 6.75 4.15
Number of options exercisable
at May 31, 2008 20,000
In October 2006, a majority of the PHAZAR CORP shareholders approved the
2006 Incentive Stock Option Plan (the "Plan"). Options for 250,000 shares
of common stock are authorized under this plan. Options granted may be
either Incentive Stock Options or Non-Statutory Stock Options, at the
discretion of the Board. There were 30,000 options granted under this plan
as of May 31, 2008.
The following table details stock-based compensation expense included in
the statement of operations for the years ended May 31, 2008 and 2007.
21
NOTE 10. STOCK OPTIONS - continued
For the year ended
May 31,
---------------------------
2008 2007
Selling, general and administrative expense $ 80,988 $ 76,298
FIT Provision (27,535) (25,941)
------------- -----------
Impact on net income $ 53,453 $ 50,357
============= ===========
Impact on net income per share -
Basic and diluted EPS $ 0.02 $ 0.02
NOTE 11. LONG TERM MARKETABLE SECURITIES
The Company accounts for marketable securities in accordance with Statement
of Financial Accounting Standard (SFAS) No. 115, Accounting for Certain
Investment in Debt and Equity Securities. The Company determined the
appropriate classification for its marketable securities was "available for
sale". As such, on May 31, 2008 and 2007, all of the Company's investments
in marketable securities were reported at fair value. Unrealized holding
gains or losses, net of tax are reported as a component of accumulated
other comprehensive income (loss) in stockholders' equity. Fair value
unrealized holding losses (net of tax) incurred were $303,160 ($200,086)
and $0 ($0) for years ending May 31, 2008 and 2007, respectively.
2008 2007
------------- -------------
Marketable Securities
Par value $ 2,650,000 $ -
Unrealized holding loss (303,160) -
------------- ------------
Fair Value $ 2,346,840 $ -
Maturity Grouping
Within one year - -
Between one to five years - -
Between five to ten years - -
After ten years 2,346,840 -
------------- ------------
Total $ 2,346,840 $ -
NOTE 12. SUBSEQUENT EVENT
On July 11, 2008, James Miles, our President, Chief Executive Officer and
Director, resigned from these offices to seek other personal business
opportunities. The Board of Directors expects to name his successor in the
near future.
On August 8, 2008, UBS agreed to a settlement in principle with the
Securities and Exchange Commission (SEC), the New York Attorney General
(NYAG), the Massachusetts Securities Division (MSD), the Texas State
Securities Board and other state regulatory agencies represented by North
22
NOTE 12. SUBSEQUENT EVENT - continued
American Securities Administrators Association to restore liquidity to all
remaining clients who hold auction rate securities. All UBS clients -
individual investors, corporations and institutional clients - who hold ARS
will be able to redeem their securities at par.
On August 12, 2008, the Board of Directors granted 36,400 options to
certain employees under the PHAZAR CORP's 2006 Incentive Stock Option Plan.
The options were broken into two groups, the first consisted of 16,400
options that were 100% vested on the date of the grant and the second
consisted of 20,000 options to vest over a three year period.
Item 8A(T). Controls and Procedures
Management's Evaluation of Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule
13a-15(f) of the Exchange Act. This system is designed to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of the consolidated financial statements for external
purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and
procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect our transactions and
disposition of our assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
consolidated financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. The scope of management's assessment of the
effectiveness of internal control over financial reporting includes all of
our Company's subsidiaries.
The Company's Principal Executive Officer and Chief Financial Officer
evaluated the Company's disclosure controls and procedures as of May 31,
2008. In making their assessment, the Company's Principal Executive Officer
and Chief Financial Officer were guided by the releases issued by the SEC
and to the extent applicable was based upon the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
23
Organizations of the Treadway Commission. The Company's Principal Executive
Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were not effective due to the Company's
inadvertent failure to include in its Annual Report on Form 10-KSB,
management's assessment of internal controls over financial reporting. Such
disclosure was required due to changes in securities regulations applicable
to the Company. As a result of such failure, we have taken measures to
enhance the ability of our systems of disclosures controls and procedures
to timely identify and respond to changes in securities filing regulations
that are applicable to us. There have been no changes in our internal
control over financial reporting during the quarter ended May 31, 2008,
that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
This Annual Report on Form 10-KSB does not include an attestation report of
the Company's independent registered public accounting firm regarding
internal control over financial reporting. Management's report was not
subject to attestation by the Company's independent registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management's report in
this annual report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DATE: September 26, 2008
PHAZAR CORP
/s/ Garland P. Asher
--------------------------------
BY: Garland P. Asher
Principal Executive Officer and Director
24
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Gary W. Havener Director September 26, 2008
- -------------------------------
Gary W. Havener
/s/ James Kenney Director September 26, 2008
- -------------------------------
James Kenney
/s/ R. Allen Wahl Director September 26, 2008
- -------------------------------
R. Allen Wahl
/s/ Dennis Maunder Director September 26, 2008
- -------------------------------
Dennis Maunder
/s/ Clark D. Wraight Director September 26, 2008
- -------------------------------
Clark D. Wraight
25