U.S. Securities and Exchange Commission
Washington D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2008
---------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to _______________
Commission file number 0-12866
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PHAZAR CORP
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 75-1907070
- ------------------------------------ ---------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
101 S.E. 25th Avenue, Mineral Wells, Texas 76067
------------------------------------------------
(Address of principal executive offices)
(940) 325-3301
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes (X) No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.)
Yes No (X)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 2,363,028 as of September 2, 2008.
PHAZAR CORP AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
PART I FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements for PHAZAR CORP
and Subsidiaries
Consolidated Balance Sheets - 3
August 31, 2008 (unaudited) and May 31, 2008
Unaudited Consolidated Statements of Operations - 4
Three Months Ended August 31, 2008 and August 31, 2007
Unaudited Consolidated Statements of Cash Flows - 5
Three Months Ended August 31, 2008 and August 31, 2007
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 18
Financial Condition and Results of Operation
Item 4(T). Controls and Procedures 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Certifications
2
Item 1. Financial Statements
PHAZAR CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2008 AND MAY 31, 2008
ASSETS
August 31, 2008 May 31, 2008
(Unaudited) (Audited)
---------------- ---------------
CURRENT ASSETS
Cash and cash equivalents $ 2,375,183 $ 2,446,563
Accounts receivable:
Trade, net of allowance for
doubtful accounts of $2,002 as of
August 31, 2008 and May 31, 2008 949,994 905,091
United States Government 134,370 82,167
Inventories 2,019,196 1,777,335
Prepaid expenses and other assets 76,574 47,761
Income taxes receivable 122,462 169,597
Deferred income taxes 67,697 67,697
---------------- ---------------
Total current assets 5,745,476 5,496,211
Property and equipment, net 913,119 939,084
Marketable securities 2,109,400 2,346,840
Long -term deferred income tax 296,957 178,739
---------------- ---------------
TOTAL ASSETS $ 9,064,952 $ 8,960,874
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 273,245 $ 298,192
Accrued liabilities 438,581 462,679
Deferred revenues 392,630 315,654
----------------- ----------------
Total current liabilities 1,104,456 1,076,525
TOTAL LIABILITIES 1,104,456 1,076,525
----------------- ----------------
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
2,363,028 and 2,357,728 issued and outstanding 23,631 23,578
Additional paid in capital 3,862,285 3,723,278
Retained earnings 4,431,376 4,337,579
Accumulated other comprehensive loss, net of tax (356,796) (200,086)
----------------- ----------------
Total shareholders' equity 7,960,496 7,884,349
----------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,064,952 $ 8,960,874
================= ================
The accompanying notes are an integral part of these consolidated financial
statements.
3
PHAZAR CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED AUGUST 31, 2008 AND 2007
(Unaudited)
Three Months Ended
August 31, 2008 August 31, 2007
------------------ -----------------
Sales and contract revenues $ 2,009,712 $ 1,861,576
Cost of sales and contracts 1,253,734 1,027,018
------------------ -----------------
Gross Profit 755,978 834,558
Sales and administration expenses 776,140 621,011
------------------ -----------------
Operating profit (loss) (20,162) 213,547
Other income
Interest income 89,408 11,764
Other income 34,193 31,896
------------------ -----------------
Total other income 123,601 43,660
Income from operations before income taxes 103,439 257,207
Income tax provision 9,647 80,965
------------------ -----------------
Net income $ 93,792 $ 176,242
================== =================
Basic earnings per common share $ 0.04 $ 0.08
Diluted earnings per common share $ 0.04 $ 0.08
Basic weighted average of common shares
outstanding 2,360,706 2,316,094
Diluted weighted average of common shares
outstanding 2,360,706 2,330,699
The accompanying notes are an integral part of these consolidated financial
statements.
4
PHAZAR CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED AUGUST 31, 2008 AND 2007
(Unaudited)
Three Months Ended
August 31, 2008 August 31, 2007
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 93,792 $ 176,242
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 25,965 28,420
Stock based compensation 139,060 43,387
Tax benefit for employee stock options exercised - (28,543)
Deferred federal income tax (37,489) (6,484)
Changes in assets and liabilities:
Accounts receivable (97,106) (700,699)
Inventory (241,861) (310,187)
Income taxes receivable 47,135 87,450
Prepaid expenses (28,813) (19,095)
Accounts payable (24,947) 159,264
Accrued expenses (24,098) 5,670
Deferred revenues 76,976 -
----------------- ----------------
NET CASH USED BY OPERATING ACTIVITIES (71,380) (564,575)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - -
----------------- ----------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES - -
CASH FLOWS FROM FINANCING ACTIVIITES:
Proceeds from exercise of stock options - 35,000
FIT benefit-stock options exercised - 28,543
----------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES - 63,543
Net change in cash and cash equivalents (71,380) (501,032)
Cash and cash equivalents, beginning of period 2,446,563 4,114,046
----------------- ----------------
Cash and cash equivalents, end of period $ 2,375,183 $ 3,613,014
================= ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ - $ -
Income taxes paid $ - $ 100,000
The accompanying notes are an integral part of these consolidated financial
statements.
5
PART 1
NOTE 1 DESCRIPTION OF BUSINESS
General
PHAZAR CORP operates as a holding company with Antenna Products
Corporation, Tumche Corp., Phazar Antenna Corp. and Thirco, Inc. as its
wholly owned subsidiaries. Antenna Products Corporation and Phazar Antenna
Corp. are operating subsidiaries with Thirco, Inc. serving as an equipment
leasing company to PHAZAR CORP's operating units. Tumche Corp. has no sales
or operations. PHAZAR CORP has no other business activity. The address for
PHAZAR CORP and subsidiaries is 101 S.E. 25th Avenue, Mineral Wells, Texas
76067. The telephone number is (940) 325-3301.
Product information is available from the Internet web page at:
www.antennaproducts.com, www.truemeshnetworks.com and www.phazar.com.
Antenna Products Corporation
Antenna Products Corporation was incorporated in Texas in 1984 to continue
a business started in 1947 and operated as a closely held "C" corporation
until January 24, 1992. Thereafter, Antenna Products Corporation has
operated, as a wholly owned Subsidiary of PHAZAR CORP.
Antenna Products Corporation designs, 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 United States Government, both military and civil
agencies, United States Government prime contractors and commercial
clients. Examples of Antenna Products Corporation's United States
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 include first responder emergency mesh radio systems, commercial
mesh radio systems, panel, sector, omnidirectional and closed loop
telecommunications antennas, automatic meter reading (AMR), instrument
scientific medical (ISM), cellular, paging and yagi antennas, guyed towers
and self supported towers.
The majority of Antenna Products Corporation's revenues come from
fixed-price contracts, secured through a bidding process, for particular,
custom ordered antenna production systems that Antenna Products Corporation
builds according to the specifications of the customer. Except for
inventory of standard products including small antennas, accessories and
some towers in the amount of $296,907 at August 31, 2008, Antenna Products
Corporation does not build and inventory equipment for future off the shelf
sales. The sales volume for a particular antenna or antenna system is,
therefore, a function of the fixed price contracts for build to order
antennas or systems awarded to Antenna Products Corporation. However, a
general product sales breakdown for fiscal year ended May 31, 2008, and the
three month period ended August 31, 2008, as a percentage of total sales
are, as follows:
For fiscal year For three months
Ended May 31, 2008 Ended August 31, 2008
Antennas 19% 19%
Instrument Landing System 7% 10%
Shipboard Equipment 0% 8%
Collinear Antennas 24% 16%
Towers and Masts 12% 0%
Spares, Accessories and Others 24% 25%
Commercial Wireless 14% 22%
--------------------- ---------------------
100% 100%
6
NOTE 1 DESCRIPTION OF BUSINESS - continued
Antenna Products Corporation's customer base is primarily government and
government prime contractor focused, but this is slowly changing as Antenna
Products Corporation continues to develop and market new commercial
products. Antenna Products Corporation's market is international in scope.
Antenna Products Corporation currently focuses on developing domestic and
international markets. The specialized need of Antenna Products
Corporation's customers and the technology required to meet those needs
change constantly. Accordingly, Antenna Products Corporation stresses its
engineering, installation, service and other support capabilities. Antenna
Products Corporation uses its own sales and engineering staff to service
its principal markets. Some of Antenna Products Corporation's contracts are
large relative to total annual sales volume and, therefore, the composition
of the customer base is different year to year. In 2008, the United States
Government was the single largest customer and accounted for 24% of the
total sales volume. Page Iberica, S.A. was the second largest customer and
accounted for 12% of total sales. General Dynamics was the third largest
customer and accounted for 9% of total sales. Orders for equipment in some
of these product categories are in backlog and, therefore, the United
States Government is expected to be a major client again in 2009.
Antenna Products Corporation is one of many suppliers of antennas and
related manufacturing services to the government and government prime
contractors. Antenna Products Corporation competes on the basis of cost and
product performance in a market with no dominant supplier. Due to
fixed-price contracts and pre-defined contract specifications prevalent
within this market, Antenna Products Corporation competes primarily on the
basis of its ability to provide state-of-the-art solutions in the
technologically demanding marketplace while maintaining its competitive
pricing.
Antenna Products Corporation, including its predecessors, has been building
antennas and related structures and systems for over 30 years. We believe
that Antenna Products Corporation enjoys a reputation for building quality
products at a competitive price, because we continue to be asked to bid for
new work. Because of our size and lack of significant liquid assets we are
at a competitive disadvantage to larger companies that have greater
resources to be able to bid a job at lower margins. In terms of gross
assets, sales and number of employees, Antenna Products Corporation is a
relatively small company compared to the companies with which we compete.
On the other hand, our customers know us, know our personnel and can rely
on us to build the antennas or towers or masts, etc. according to their
specifications. We, therefore, compete on the basis of our reputation and
history of building quality products at reasonable prices.
As discussed above, Antenna Products Corporation is primarily a
build-to-order company and most manufacturing requirements are established
on a contract basis. For this reason, the majority of the inventory is work
in process. Approximately 15% of total inventory, $296,907 is currently
maintained in stock for delivery to customers. Some raw materials are also
inventoried to support customer delivery schedules. Antenna Products
Corporation performs work for the United States Government primarily under
fixed-price prime contracts and subcontracts. Under fixed-price contracts,
Antenna Products Corporation realizes any benefit or detriment occasioned
by lower or higher costs of performance.
Antenna Products Corporation is subject to certain risks common to all
companies that derive a portion of their revenues from the United States
Government. These risks include rapid changes in technology, changes in
levels of government spending, and possible cost overruns. Recognition of
profits on major contracts is based upon estimates of final performance,
which may change as contracts progress. Contract prices and costs incurred
are subject to Government Procurement Regulations, and costs may be
questioned by the United States Government and are subject to disallowance.
United States Government contracts contain a provision that they may be
terminated at any time for the convenience of the United States Government.
In such event, the contractor is entitled to recover allowable costs plus
any profits earned to the date of termination. Collections are generally
set in accordance with federal acquisition standards, which require payment
in accordance with "Net 30" terms after acceptance of goods. Antenna
Products Corporation is not directly regulated by any governmental agency
in the United States. Most of Antenna Products Corporation's customers and
the antenna and tower industries in general, are subject to meeting various
government standards. These performance standards necessitate Antenna
Products Corporation's ability to produce antenna designs, which can be
updated to conform to customer requirements in a changing regulatory
environment. These regulations have not adversely affected operations.
7
NOTE 1 DESCRIPTION OF BUSINESS - continued
Antenna Products Corporation does not depend on any license, patent or
trademark, other than its good name, to secure business. While Antenna
Products Corporation does hold certain patents, they are not material to
its business.
While Antenna Products Corporation complies with all environmental laws,
the costs and effects of compliance are not material to its operations.
Antenna Products Corporation plans to reinvest approximately 5%-10% of
sales in research and development projects and bid and proposal activities.
The mix of expenditures between the two areas in any given year is a
function of the demand for new independently developed innovative systems
and the level of requirements solicited. In 2009, Antenna Products
Corporation continues development on a new mesh radio wireless networking
product line. This product line includes military, emergency first
responder and commercial mesh radio systems that utilize proprietary
embedded intelligent routing software and multiple frequency architecture
to create dynamic wireless mesh networking systems that transmit and share
data, voice and video applications. This development program resulted in a
total investment in independent research and development (R&D) and bid and
proposal activities (B&P) of 11.4% of sales in the first quarter of 2009.
The level of expenditures for R&D and B&P as a ratio to sales was 11.6% of
sales for the same period in 2008. Antenna Products Corporation does not
consider patents to be material to its operations nor would the loss of any
patents adversely affect operations.
Tumche Corp.
Tumche Corp. is a wholly owned subsidiary of PHAZAR CORP. It has no sales
or operations.
Phazar Antenna Corp.
Phazar Antenna Corp. is a wholly owned Subsidiary of PHAZAR CORP. It was
formed as a Delaware Corporation and activated on June 1, 2000. Phazar
Antenna Corp. operates as a marketing, research and development unit.
Phazar Antenna Corp. provides a line of commercial wireless fixed and
mobile antennas for ISM (instrument scientific medical), ITS (intelligent
transportation systems), wireless Internet, wireless LAN, wireless local
loop, fixed GPS, MMDS (fixed wireless) and other WiMAX market applications.
Phazar Antenna Corp. also supplies a broad range of multiple band antennas
for the telecommunication market for DAS (Distributed Antenna Systems). The
DAS antennas for Cellular/SMR, AWS and PCS frequencies are installed on
utility poles, street lights, rooftops and lamp posts in urban and remote
areas to increase wireless carrier services. These product lines compliment
Antenna Products Corporation's existing product lines of cellular, PCS,
paging, ISM and AMR (automatic meter reading), omni-directional and sector
wireless antennas. Phazar Antenna Corp. sales for the three months ended
August 31, 2008, amounted to approximately 22% of total sales. We expect
that for fiscal year ended May 31, 2009, this percentage will increase as
new products are added to the commercial wireless product lines. The Phazar
Antenna Corp. commercial wireless product lines are manufactured at Antenna
Products Corporation's plant in Mineral Wells, Texas.
Thirco, Inc.
Thirco, Inc. was formed on November 1, 1993 as a Delaware company to
purchase and lease equipment and facilities to the other operating units of
PHAZAR CORP. The primary lease arrangements are with Antenna Products
Corporation. Thirco, Inc. will occasionally assist in servicing the banking
needs of PHAZAR CORP's operating units. Since all activity is internal to
PHAZAR CORP and its operating subsidiaries, financial data is consolidated
with PHAZAR CORP. Thirco, Inc. does not employ any full time employees and
does not intend to employ any in the foreseeable future. Thirco, Inc. does
not intend to engage in any outside business transactions.
Seasonality
PHAZAR CORP's businesses are not dependent on seasonal factors.
8
NOTE 1 DESCRIPTION OF BUSINESS - continued
Backlog
The backlog of orders at Antenna Products Corporation and Phazar Antenna
Corp. was $2.0 million at August 31, 2008. This compares to $2.5 million in
backlog at the end of fiscal year 2008.
NOTE 2 BUSINESS SEGMENTS
PHAZAR CORP operates in one business segment.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and in the opinion of
management contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of August
31, 2008, the results of operations for the three months ended August 31,
2008 and August 31, 2007, and the cash flows for the three months ended
August 31, 2008 and August 31, 2007. These results have been determined on
the basis of United States generally accepted accounting principles and
practices applied consistently with those used in the preparation of the
Company's audited financial statements for its fiscal year ended May 31,
2008.
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.
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 out year. 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.
9
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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 U.S. generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
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
recognized 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 quarters
ended August 31, 2008, and 2007, were approximately $229,958 and $216,020,
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 $2.1 million principal amount of its auction rate
securities as long term marketable securities.
10
NOTE 3. 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 three month period
ended August 31, 2008 and 2007 were $139,060 and $43,387, respectively.
The income tax benefit related to stock-based compensation expense was
$47,278 and $14,752 for the three month period ended August 31, 2008 and
2007 respectively. In accordance with SFAS 123R, the Company has presented
excess tax benefits from the exercise of 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 2,360,706 and 2,316,094 for the
three month period ended August 31, 2008, and 2007, respectively.
Dilutive effect of stock options outstanding for the quarters ended August
31, 2008 and 2007 are computed as follows:
2008 2007
--------------- ---------------
Numerator:
Net income (loss) $ 93,792 $ 176,242
--------------- ---------------
Numerator for basic and diluted earnings
per share $ 93,792 $ 176,242
--------------- ---------------
Denominator:
Weighted-average shares outstanding-basic 2,360,706 2,316,094
Effect of dilutive securities:
Stock options - 14,605
--------------- ---------------
Denominator for diluted earnings per share-
Weighted-average shares 2,360,706 2,330,699
--------------- ---------------
Basic earnings per share $ 0.04 $ 0.08
=============== ===============
Diluted earnings per share $ 0.04 $ 0.08
=============== ===============
11
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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
quarters ended August 31, 2008 and 2007, is $392,630 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
has adopted this standard as required and adoption of this statement did
not have a material effect on the Company's financial statements.
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 has adopted this standard as required and adoption of this
statement did not 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
statement 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.
12
NOTE 4 INVENTORIES
The major components of inventories are as follows:
August 31, 2008 May 31, 2008
--------------------- ----------------------
Raw materials $ 638,769 $ 691,096
Work in process 1,027,108 778,633
Finished goods 353,319 307,600
--------------------- ----------------------
Total inventories $ 2,019,196 $ 1,777,335
===================== ======================
NOTE 5 NOTES PAYABLE
At August 31, 2008, and May 31, 2008 there are no outstanding notes
payable. The Company has a revolving note facility 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. The
amount available under the revolving note at August 31, 2008 and May 31,
2008 was $1,000,000.
Interest is payable monthly at the prime rate (5% at August 31, 2008 and at
May 31, 2008 ) until November 24, 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 a minimum net worth of $3 million and working
capital of $1 million.
NOTE 6 LONG TERM DEBT
At August 31, 2008, and May 31, 2008, PHAZAR CORP had no long-term debt.
NOTE 7 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
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 August 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. 157,
Fair Value Measurements. The estimated fair value amounts have been
determined by the Company, using available market information and
appropriate valuation methodologies.
13
NOTE 7 COMMITMENTS AND CONTINGENCIES - continued
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 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.
On August 15, 2008, in the Circuit Court of the First Judicial Circuit in
and for Escambia County, Florida, Janet McCollum, as personal
representative of the Estate of Richard Alan Catoe, deceased, filed a
wrongful death complaint against the University of West Florida, Diamond
Enterprise, Inc., North Safety Products, L.L.C. a/k/a North Safety
Products, Inc. and Antenna Products Corporation (the "Lawsuit"). Antenna
Products Corporation is our wholly owned and principal operating
subsidiary.
The lawsuit alleges that the deceased fell to his death while climbing a
ladder inside a water tower on the University of West Florida campus to
install antennas. The lawsuit further alleges that while the deceased was
descending the ladder, he wore an Antenna Products Corporation safety
sleeve affixed to a safety rail manufactured by defendant North Safety
Products that was attached to the ladder and (among other allegations) that
the safety sleeve and rail were defective and failed to prevent the
deceased fall, causing his death. The plaintiff seeks recovery of an
unspecified amount from all the defendants. Antenna Products Corporation
denies any liability to plaintiff.
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.
14
NOTE 8 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. 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.
On August 12, 2008, the Board of Directors approved options to purchase
36,400 shares of common stock at $5.06 per share to certain employees of
the Company. The options were broken out into two groups, the first
consisted of 16,400 options were granted fully vested and the second group
of 20,000 options are exercisable pro-rata over a three year period. The
options expire between August 12, 2013 and August 12, 2016, 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 August 31, 2008 and changes for
the quarter then ended are as follows:
Outstanding Options
------------------------
Weighted
Average
Number Exercise
of Options Price
----------- -----------
Outstanding at May 31, 2008 80,000 8.61
Granted 36,400 5.06
Exercised - -
Forfeited - -
----------- -----------
Outstanding at August 31, 2008 116,400 7.50
August 31,
2008
-----------
Number of options vested 36,400
Weighted average remaining contract life - years 6.37
Number of options exercisable at August 31, 2008 36,400
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 have been 66,400 options granted under this
plan as of August 31, 2008.
15
NOTE 8 STOCK OPTIONS - continued
The following table details stock-based compensation expense included in
the statement of operations for the quarters ended August 31, 2008 and
2007.
For the quarter ended
August 31,
-----------------------------
2008 2007
Selling, general and administrative expense $ 139,060 $ 43,387
FIT Provision (47,278) (14,752)
-----------------------------
Impact on net income $ 91,785 $ 28,635
=============================
Impact on net income per share -
Basic and diluted EPS $ 0.04 $ 0.01
NOTE 9. INVESTMENTS IN AUCTION-RATE SECURITIES
As of February 29, 2008, the Company held $2.65 million of auction-rate
securities at par value, which was equal to fair value as of that date. In
mid February 2008, liquidity issues in the global credit markets resulted
in the failure of auctions representing all of the auction rate securities
the Company holds. The principal associated with failed auctions will not
be accessible until successful auctions occur, a buyer is found outside the
auction process, the issuers establish a different form of financing to
replace these securities, or final payments come due according to
contractual maturities ranging from 28-30 years. The Company understands
that the issuers and financial markets are working on alternatives that may
improve liquidity, however it is not clear when or if such efforts will be
successful. We expect that we will receive the principal associated with
these auction-rate securities through one of the means described above. Due
to the failed auctions and uncertainty regarding the liquidity of these
securities, beginning in the fourth quarter of fiscal year 2008 we
reclassified our investments in auction-rate securities from short-term to
long-term investments.
On June 26, 2008, the Company filed a claim in arbitration against UBS
Financial Services seeking, among other relief rescission of its purchases
of the auction-rate securities and restoration in cash of its entire $2.65
million investment it purchased from UBS.
As of August 31, 2008 the Company continues to hold auction-rate securities
with a par value of $2.65 million. The securities are backed by student
loans covered by bond insurance and were rated AA3 by Moody's as of August
31, 2008.
During the first quarter of fiscal year 2009, UBS announced it had agreed
to a settlement with the Securities and Exchange Commission, the New York
Attorney General, the Massachusetts Securities Division, the Texas State
Securities Board and other state regulatory agencies to restore liquidity
to all remaining clients who hold auction-rate securities. UBS will
purchase, at full value, from clients during a two-year time period
beginning as early as October 31, 2008. These offers will be available for
client positions that were held in UBS accounts as of February 13, 2008.
The Company anticipates being able to sell it's auction-rate securities
back to UBS at par during the timeframe, January 1, 2009 through January 1,
2011 per the "Auction Rate Securities Summary of Settlement Terms" provided
by UBS.
NOTE 10. FAIR VALUE MEASUREMENT
As discussed in NOTE 2, SFAS No. 157 became effective for measuring and
reporting financial assets and liabilities in our financial statements as
of the first quarter of fiscal year 2009.
SFAS No. 157 established a three-tiered fair value hierarchy that
prioritizes inputs to valuation techniques used in fair value calculations.
The three levels of inputs are defined as follows:
Level 1 - Unadjusted quoted market prices for identical assets or
liabilities in active markets that the Company has the ability to access.
16
NOTE 10. FAIR VALUE MEASUREMENT - continued
Level 2 - Quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in
inactive markets; or valuations based on models where the significant
inputs are observable or can be corroborated by observable market data.
Level 3 - Valuations based on models where significant inputs are not
observable. The unobservable inputs reflect the Company's own assumptions
about the assumptions that market participants would use.
SFAS No. 157 requires the Company to maximize the use of observable inputs
and minimize the use of unobservable inputs. If a financial instruments
uses inputs that fall in different levels of the hierarchy, the instrument
will be categorized based upon the lowest level of input that is
significant to the fair value calculation. Investments in auction-rate
securities are our only financial asset and have been valued as a Level 2
based on the UBS Settlement Terms to purchase all outstanding securities at
par.
Items measured at fair value on a
recurring basis: Level 1 Level 2 Level 3 Total
Long-term investments
Auction Rate Securities $ - 2,109,400 - $2,109,400
=========== ============ =========== ==========
Changes in fair value during the period Level 2
Balance, May 31, 2008 $ 2,346,840
Unrealized loss - included in OCI (237,440)
------------
Balance, August 31, 2008 $ 2,109,400
============
All of our financial assets measured at fair value are classified as
available-for-sale securities. Adjustments to fair value of these
investments are recorded as an increase or decrease, net of taxes, in
accumulated other comprehensive income except where losses are considered
to be other-than-temporary, in which case the losses are recorded in other
income (expense) net.
NOTE 11 SUBSEQUENT EVENTS
On September 15, 2008, PHAZAR CORP announced the appointment of Garland P.
Asher as Chairman, President, and Chief Executive Officer for the company,
effective September 9, 2008. Under the terms of his employment agreement,
Mr. Asher shall receive a salary of $171,000 per year as an employee of the
Company's wholly owned subsidiary, Antenna Products Corporation and
participate in its employee benefit plans. In addition, Mr. Asher was
granted options to purchase 160,000 shares of common stock of the Company
under the Company's 2006 Incentive Stock Option Plan at an exercise price
of $4.12 per share. The options shall vest and become exercisable
contingent upon the Company achieving certain sales and pretax income
levels over a six year period.
In September, 2008, the Company took a $1 million advance from UBS
Financial Services, Inc. ("UBS") in anticipation of the sale of its auction
rate certificates ("ARCs") to UBS at their par value in January, 2009. This
advance was taken in the form of a margin loan collateralized by the ARCs
under terms that will result in no net interest costs to the Company.
On September 24, 2008, the Company received a 60 day temporary extension.
On October 3, 2008, Antenna Products Corporation completed the renewal of a
$2 million revolving note payable collateralized by the Company's inventory
and accounts with PHAZAR CORP signing as guarantor. Interest is payable
monthly at a prime rate until October 2, 2009, when any unpaid principal
and interest shall be due. Under the agreement, the Company must maintain a
minimum working capital of $2.5 million, tangible net worth of $4.0 million
and debt service ration of 1.25 and a maximum debt worth no greater that
.5:1.
17
PHAZAR CORP AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected the Company's financial condition and operating
results for the period included in the consolidated financial statements in Item
1.
Company Overview
PHAZAR CORP's continuing operation is that of its subsidiaries, Antenna Products
Corporation, Phazar Antenna Corp., Tumche Corp. and Thirco, Inc. As previously
discussed in Item 1, for the purpose of this discussion, all results of Phazar
Antenna Corp. are included with the results of Antenna Products Corporation. The
management discussion presented in this item relates to the operations of
subsidiary units and the associated consolidated financials.
PHAZAR CORP operates as a holding company with Antenna Products Corporation,
Phazar Antenna Corp., Tumche Corp. and Thirco, Inc. as its wholly owned
subsidiaries. Antenna Products Corporation and Phazar Antenna Corp. are
operating subsidiaries with Thirco, Inc. serving as an equipment leasing company
to PHAZAR CORP's operating units. Tumche Corp. has no sales or operations.
Antenna Products Corporation designs, manufactures and markets antenna systems,
towers and communication accessories worldwide. The United States Government,
military and civil agencies and prime contractors are Antenna Products
Corporation's principal customers. Phazar Antenna Corp. designs and markets
fixed and mobile antennas for commercial wireless applications that include
cellular, PCS, ISM (instrument scientific medical), AMR (automatic meter
reading), wireless internet, wireless local area network, and other WiMax market
applications.
PHAZAR CORP is primarily a build-to-order company. As such, most United States
government and commercial orders are negotiated firm-fixed price contracts.
PHAZAR CORP's sales to major customers at May 31, 2008, as a percentage of total
sales were United States Government 24%, Page Iberica, S.A., 12% and General
Dynamics 9%.
Executive Level Overview
The following table presents selected data of PHAZAR CORP. This historical data
should be read in conjunction with consolidated financial statements and the
related notes.
Three Month Period ending
August 31, 2008 August 31, 2007
Net Sales $ 2,009,712 $ 1,861,576
Gross Profit Margin % 38% 45%
Operating Profit (loss) $ 755,978 $ 834,558
Net income (loss) $ 93,792 $ 176,242
Net income (loss) per share $ 0.04 $ 0.08
Total assets $ 9,064,952 $ 8,960,874
Long term debt $ - $ -
Total liabilities $ 1,104,456 $ 1,076,525
Capital expenditures $ - $ -
Dividends $ - $ -
18
Results of Operations
First Quarter Ended August 31, 2008 ("2009"), Compared to First Quarter Ended
August 31, 2007 ("2008")
PHAZAR CORP's consolidated sales from operations were $2,009,712 for the quarter
ended August 31, 2008 compared to sales of $1,861,576 for the first quarter
ended August 31, 2007. The Company's sales increased $148,136, or 8% in the
first quarter of fiscal year 2009 due to higher level of shipments in the
commercial wireless product line.
Cost of sales and contracts for the operations were $1,253,734 for the quarter
ended August 31, 2008 compared to $1,027,018 for the first quarter ended August
31, 2007, up $226,716, or 22%. The higher level of cost of sales is primarily
due to the mix of products sold in the quarter along with a non recurring
inventory adjustment resulting in a benefit in prior year.
The gross profit margin for the first quarter of fiscal year 2009 was 38%
compared to 45% for the first quarter of last year.
PHAZAR CORP's operating profit margin for the first quarter of fiscal year 2009
was -1% compared to 11% in the first quarter of fiscal year 2008.
Discretionary product development spending was $229,958, or 11.4% of sales,
compared to $216,020, or 11.6% of sales for the comparable period last year. The
spending level remains constant as the Company continues to develop new wireless
antennas for commercial and military applications.
Sales and administration expenses were higher in the first quarter of the fiscal
year 2009, $776,140 versus $621,011 for the first quarter of fiscal year 2008.
The $155,129, or 25% increase in sales and administration expense is due to a
rise in a compensation expense on fully vested stock options granted in August,
2008 along with an increase in legal fees associated with the UBS litigation and
other non recurring professional fees. Sales and administration expense as a
ratio of sales were 38.6% in the first quarter of this year compared to 33.4% in
the same period last year.
Other income for the three month period ending August 31, 2008 is $123,601 up
from $43,660, the increase is primarily due to interest income on a higher level
of monies invested in auction rate securities and other investment in
certificates of deposit.
United States Government contracts contain a provision that they may be
terminated at any time for the convenience of the Government. In such event, the
contractor is entitled to recover allowable costs plus any profits earned to the
date of termination. The possibility that Government priorities could change,
causing a delay or cancellation of this contract and any potential follow-on
work, makes it impossible to accurately predict whether revenues will increase
or decrease in the upcoming year.
Sources of Liquidity
Funds generated from operations are the major internal sources of liquidity and
are supplemented by funds derived from capital markets, principally bank
facilities. PHAZAR CORP has a $1.0 million revolving demand line of credit with
a bank. The credit line is regulated under a borrowing base formula using
inventories and accounts receivable as collateral. The interest rate is
established as equal to Wall Street prime and is subject to a loan agreement
with restrictive covenants. The most restrictive financial covenant requires the
Company to maintain $3.0 million in tangible net worth and to maintain $1.0
million of working capital. At August 31, 2008, the Company had a tangible net
worth of $8.0 million and had working capital of $4.6 million. As of August 31,
2008, Antenna Products Corporation had drawn $0 of the $1.0 million line of
credit with $1.0 million of the borrowing base available and unused. The
revolving credit line agreement was renewed with a $1.0 million limit on
September 26, 2006 for a period of two years and then extended to November 24,
2008. We are in the process of renewing this agreement. PHAZAR CORP believes
that its cash and the credit available at August 31, 2008, are sufficient to
fund the Company's operations for at least 12 months.
As of February 29, 2008, the Company held $2.65 million of auction-rate
securities at par value, which was equal to fair value as of that date. In mid
February 2008, liquidity issues in the global credit markets resulted in the
failure of auctions representing all of the auction rate securities the Company
holds. The principal associated with failed auctions will not be accessible
until successful auctions occur, a buyer is found outside the auction process,
the issuers establish a different form of financing to replace these securities,
or final payments come due according to contractual maturities ranging from
28-30 years.
19
The Company understands that the issuers and financial markets are working on
alternatives that may improve liquidity, however it is not clear when or if such
efforts will be successful. We expect that we will receive the principal
associated with these auction-rate securities through one of the means described
above. Due to the failed auctions and uncertainty regarding the liquidity of
these securities, beginning in the fourth quarter of fiscal year 2008 we
reclassified our investments in auction-rate securities from short-term to
long-term investments.
On June 26, 2008, the Company filed a claim in arbitration against UBS
Financial Services seeking, among other relief rescission of its purchases of
the auction-rate securities and restoration in cash of its entire $2.65 million
investment it purchased from UBS.
As of August 31, 2008 the Company continues to hold auction-rate securities with
a par value of $2.65 million. The securities are backed by student loans covered
by bond insurance and were rated AA3 by Moody's as of August 31, 2008.
During the first quarter of fiscal year 2009, UBS announced it had agreed to a
settlement with the Securities and Exchange Commission, the New York Attorney
General, the Massachusetts Securities Division, the Texas State Securities Board
and other state regulatory agencies to restore liquidity to all remaining
clients who hold auction-rate securities. UBS will purchase, at full value, from
clients during a two-year time period. These offers will be available for client
positions that were held in UBS accounts as of February 13, 2008. The Company
anticipates selling its auction-rate securities back to UBS during the
timeframe, January 1, 2009 through January 1, 2011 per the "Auction Rate
Securities Summary of Settlement Terms" provided by UBS.
Capital Resources
Management of the operating subsidiaries evaluates the facilities and review
equipment requirements for existing and projected contracts on a regular basis.
An annual capital plan is generated by management and submitted to the Board of
Directors for review and approval. In the first quarter of fiscal year 2009
there were no capital expenditures for new and replacement equipment. The
Company anticipates that the existing facilities and equipment are adequate to
handle the projected business in fiscal year 2009 and intends to limit the 2009
capital program to less than $100,000 for improvements and new equipment.
At August 31, 2008, PHAZAR CORP had cash and cash equivalents of $2.4 million.
Deferred revenue at August 31, 2008, is $392,630.
Cash Flows
Operating Activities
Cash used by operating activities for the first quarter of fiscal year 2009 was
$71,380 compared to $564,575 for the same period in prior year. Inventories
increased to $2,019,196 at August 31, 2008 from $1,777,335 at May 31, 2008 due
to normal completion and shipment of orders to customers. The increase in
accounts receivable to $1,084,364 at August 31, 2008 from $987,258 at May 31,
2008 is due primarily to the uplift in shipments in the commercial wireless
products line. Net income adjusted for non cash charges was $258, 820 for the
three month period ending August 31, 2008 compared to $248, 049 for the same
period in the prior year.
Investing Activities
Cash was not used in investing activities during the three month periods ending
August 31, 2008 and 2007
Financing Activities
There were no financing activities requiring cash during the three month period
ending August 31, 2008. The financing activities for the first quarter of fiscal
year 2008 consisted primarily of proceeds from the exercise of stock options and
the FIT benefit resulting from the exercise of stock options. At August 31, 2008
and 2007, PHAZAR CORP had no long-term debt outstanding.
20
Item 4(T). Controls and Procedures
An evaluation as of the end of the period covered by this report was carried out
under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 [the
"Exchange Act"]). Based upon that evaluation, the Chief Executive Officer and
Chief Financial officer concluded that those disclosure controls and procedures
were effective in providing reasonable assurance that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time period specified
in the Commission's rules and form. The Company's disclosure controls and
procedures were not effective at May 31, 2008, 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. As a result, 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 other changes in our
internal controls over financial reporting (as defined in Rule 13 a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the period covered by
this report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II-OTHER INFORMATION
Item 1. 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 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.
On August 15, 2008, in the Circuit Court of the First Judicial Circuit in
and for Escambia County, Florida, Janet McCollum, as personal
representative of the Estate of Richard Alan Catoe, deceased, filed a
wrongful death complaint against the University of West Florida, Diamond
Enterprise, Inc., North Safety Products, L.L.C. a/k/a North Safety
Products, Inc. and Antenna Products Corporation (the "Lawsuit"). Antenna
Products Corporation is our wholly owned and principal operating
subsidiary.
The lawsuit alleges that the deceased fell to his death while climbing a
ladder inside a water tower on the University of West Florida campus to
install antennas. The lawsuit further alleges that while the deceased was
descending the ladder, he wore an Antenna Products Corporation safety
sleeve affixed to a safety rail manufactured by defendant North Safety
Products that was attached to the ladder and (among other allegations) that
the safety sleeve and rail were defective and failed to prevent the
deceased fall, causing his death. The plaintiff seeks recovery of an
unspecified amount from all the defendants. Antenna Products Corporation
denies any liability to plaintiff.
21
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements. See Item 1.
2. Financial Statement Schedules. Not applicable.
All other schedules have been omitted because the
required information is shown in the consolidated
financials or notes thereto, or they are not applicable.
3. Exhibits. See Index to Exhibits for listing of exhibits
which are filed herewith or incorporated by reference
(b) Reports on Form 8-K.
On October 6, 2004, the registrant filed a Form 8-K for the purpose of
disclosing the third amendment to the merger agreement related to the
contemplated merger between PHAZAR CORP and YDI Wireless, Inc.
On November 23, 2004 the registrant filed a Form 8-K for the purpose
of disclosing the agreement to terminate the contemplated merger
between PHAZAR CORP and YDI Wireless, Inc.
On February 7, 2005, the registrant filed a Form 8-K for the purpose
of disclosing the BAE SYSTEMS subcontract award granted to Antenna
Products Corporation, a wholly owned subsidiary of PHAZAR CORP.
On October 23, 2006, the registrant filed a Form 8-K for the purpose
of disclosing the Departure of Directors or Principal Officers;
Election of Directors; Appointment of Principal Officers
On March 26, 2008, the registrant filed a Form 8-K for the purpose of
disclosing the Departure of Directors or Principal Officers; Election
of Directors; Appointment of Principal Officers
On April 25, 2008, the registrant filed a Form 8-K for the purpose of
disclosing the change in reporting classification of investment in
auction rate securities
On July 11, 2008, the registrant filed a Form 8-K for the purpose of
disclosing a FINRA arbitration claim and suit against UBS Financial
Services
On July 15, 2008, the registrant filed a Form 8-K for the purpose of
disclosing the departure of Directors or Principal Officers; Election
of Directors; Appointment of Principal Officers
On September 15, 2008, the registrant filed a Form 8-K for the purpose
of disclosing the departure of Directors or Principal Officers;
Election of Directors; Appointment of Principal Officers
22
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHAZAR CORP
Date: October 15, 2008 /s/ Garland P. Asher
---------------------------------------------
Garland P. Asher, Principal Executive Officer
and Director
23
EXHIBIT INDEX
Exhibit 3.(i) - Registrant's Articles of Incorporation, as amended,
incorporated by reference to the like numbered exhibit in
the Registrant's Annual Report on Form 10-KSB/A for the
fiscal year ended May 31, 2000, filed on February 20, 2004
Exhibit 3.(ii) - Registrant's By Laws, incorporated by reference to the like
numbered exhibit in the Registrant's Annual Report on Form
10-KSB/A for the fiscal year ended May 31, 2000, filed on
February 20, 2004
Exhibit 4.(ii) - Loan Agreement between Antenna Products Corporation and
Texas Bank, dated September 30, 1991 incorporated by
reference to the like numbered exhibit in the Registrant's
Annual Report on Form 10-KSB/A for the fiscal year ended May
31, 2000, filed on February 20, 2004
Exhibit 10.(b) - BAE SYSTEMS Contract dated May 5, 2003 incorporated by
reference to the like numbered exhibit in the Registrant's
Annual Report on Form 10-KSB/A for the year ended May 31,
2003, filed on February 20, 2004
BAE SYSTEMS Subcontract dated April 23, 2004, incorporated
by reference to the like numbered exhibit in the
registrant's annual report on Form 10-KSB for the fiscal
year ended May 31, 2004, filed on August 6, 2004
Public Works and Government Services, Canada, Department of
Defence, dated July 15, 2004, incorporated by reference to
the like numbered exhibit in the registrant's quarterly
report on Form 10-QSB for the fiscal quarter ended August
31, 2004, filed on October 5, 2004.
BAE SYSTEMS Subcontract dated January 25, 2005, incorporated
by reference to the registrant's Form 8-K filed on February
7, 2005
BAE SYSTEMS Subcontract dated June 14, 2005, incorporated by
reference to the like numbered exhibit in the Registrant's
quarterly report on Form 10-QSB for the fiscal quarter ended
August 30, 2005, filed on October 10, 2005
Exhibit 14.1 - Code of Ethics and Business Conduct for the Senior Executive
Officers and Senior Financial Officers incorporated by
reference to the like numbered exhibit in the registrant's
annual report on form 10-KSB for the fiscal year ended May
31, 2004, filed on August 6, 2004.
Exhibit 21. - A list of all subsidiaries of the Registrant, incorporated
by reference to the like numbered exhibit in the
Registrant's Annual Report on Form 10-KSB/A for the fiscal
year ended May 31, 2000 filed on February 20, 2004
Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
Exhibit 32.1 - Section 1350 Certification
Exhibit 99.1 - Nominating Committee Charter incorporated by reference to
the like numbered exhibit in the Registrant's Form 8-K filed
on November 7, 2005
24