10KSB/A 1 phazar_fy2002-10ksba.txt AMENDED FY 2002 ANNUAL REPORT ================================================================================ 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, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 Commission file number 0-12866 ------- PHAZAR CORP (fka ANTENNA PRODUCTS, INC.) (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 Securities registered pursuant to Section 12(g) of the Act: 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 [ ] 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, 2002 was $10,815,669. As of August 1, 2002, 2,175,828 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 Smallcap Market) held by non-affiliates (887,394 shares) was approximately $1,473,074. DOCUMENTS INCORPORATED BY REFERENCE None. Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ] ================================================================================ PART 1 Item 1. BUSINESS General A majority of the shareholders of Antenna Products, Inc. approved changing the corporate name to PHAZAR CORP because there had been a tendency to confuse the Antenna Products, Inc. name with that of its original operating Subsidiary, Antenna Products Corp. The name change was effective on the Nasdaq Stock Market as of the open of business on March 12, 2001. The trading symbol remained "ANTP". At the same time, the name of API Acquisition Corp. dba The Upholstery Shop, Inc.!, another operating subsidiary, was changed to Phazar Aerocorp Inc. The Subsidiary began using the name Phazar Aerocorp Inc. in October 2001 after the Subsidiary moved into a new 59,500 square foot facility at Meacham International Airport in Fort Worth, Texas. PHAZAR CORP operates as a holding company with Antenna Products Corporation, Phazar Aerocorp Inc. (dba The Upholstery Shop, Inc.!), Phazar Antenna Corp. and Thirco, Inc. as its subsidiaries. Antenna Products Corporation, Phazar Aerocorp Inc. and Phazar Antenna Corp. are operating subsidiaries with Thirco, Inc. serving as an equipment leasing company to PHAZAR CORP's operating units. PHAZAR CORP has no other business activity. PHAZAR CORP's address 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 and at: //www.phazar.com. Antenna Products Corporation Antenna Products Corporation was incorporated in Texas in 1984 to continue a business started in 1972 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's address is 101 S.E. 25th Avenue, Mineral Wells, Texas 76067. The telephone number is (940) 325-3301. Antenna Products Corporation designs, manufactures and markets standard and custom antennas, guyed and self supported towers, monopoles, support structures, masts and communication accessories worldwide. Customers include the U.S. Government, both military and civil agencies, U.S. Government prime contractors and commercial clients. Examples of Antenna Products Corporation's U.S. Government supplied products include 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 panel, sector, omnidirectional and closed loop telecommunications antennas, automatic meter reading (AMR), instrument scientific medical (ISM), cellular, paging and yagi antennas, guyed towers, self supported towers and monopoles. 2 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 markets and has a limited amount of foreign sales. 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 2002 the U.S. Government was the single largest customer and accounted for 13% of the total sales volume. Thales ATM, Inc. (fka AIRSYS ATM, Inc.) was the second largest customer and accounted for 12% of total sales. Orders for equipment in some of these product categories are in backlog and, therefore, the U.S. Government and Thales ATM, Inc. are expected to be major clients again in 2003. 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 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 24% of total inventory, $487,661 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 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 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 3 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. Antenna Products Corporation plans to reinvest from 2% to 5% 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 2002 Antenna Products Corporation invested 2.8% of sales in independent research and development (R&D) and bid and proposal activities (B&P). The level of expenditures as a ratio to sales is expected to continue at this level in 2003. The level of expenditures for R&D and B&P as a ratio to sales was 2.1% of sales in 2001. Antenna Products Corporation does not consider patents to be material to its operations nor would the loss of any patents adversely affect operations. Phazar Aerocorp Inc. (fka API Acquisition Corp.) (dba "The Upholstery Shop, Inc.!") Phazar Aerocorp Inc. is an 80% owned Subsidiary of PHAZAR CORP. It was formed on January 24, 2000 as a Texas corporation. Phazar Aerocorp Inc. purchased the assets and business of The Upholstery Shop, Inc.! on January 27, 2000. The assets purchased included machinery and equipment. No land or buildings were included as part of this acquisition. The acquisition was recorded as a purchase transaction and the operations of the Upholstery Shop, Inc.! have been included in the financials from the date of acquisition. Phazar Aerocorp Inc. moved in October 2001 to a new 59,500 square foot facility at Meacham International Airport in Fort Worth Texas. Phazar Aerocorp Inc.'s address at Meacham International Airport is 4701 N. Main Street, Fort Worth, Texas 76106. The telephone number is (817) 626-2842. Phazar Aerocorp Inc. leased the new facility at Meacham International Airport from a partnership that is 80% owned by Gary W. Havener, Principal Executive Officer and Director of PHAZAR CORP and 20% owned by Brian Perryman, Vice President of Phazar Aerocorp Inc. Phazar Aerocorp Inc. provides complete refurbishment for a full range of corporate and executive aircraft interiors. The range and scope of these services includes design and fabrication of seats, side panels, headliners, galleys and cabinets, as well as the design and installation of custom lighting, entertainment systems and cabin management systems. Phazar Aerocorp Inc. removes existing interiors of aircraft and installs new interiors designed to customer specifications and coordinates the refurbishment of exteriors for customers when required. Phazar Aerocorp Inc. provides this service on virtually all-executive and corporate class aircraft, including, but not limited to: Lear, Cessna, Gulfstream, Galaxy, Dassault, and Bombardier. The refurbishments are diverse with the lower range being a minor upgrading of Lear 25's to total interior upgrading of the larger aircraft of the Gulfstream and Falcon family. 4 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. To reduce costs and streamline operations, Phazar Antenna Corp. closed the Company offices in Ronkonkoma, New York on May 31, 2002 and moved the Company offices to the facilities of Antenna Products Corporation. Phazar Antenna Corp.'s new address is 101 S.E. 25th Avenue, Mineral Wells, Texas 76067. The telephone number is (940) 325-3301. Phazar Antenna Corp. provides a complete line of commercial wireless fixed and mobile antennas for ISM (instrument scientific medical), wireless Internet, wireless LAN, wireless local loop, fixed GPS, MMDS (fixed wireless) and embedded Bluetooth market applications. This product line complements Antenna Products Corporations existing product lines of cellular, PCS, paging, ISM and AMR (automatic meter reading) omni-directional and sector wireless antennas. 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 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 does not employ any full time employees and does not intend to employ any in the foreseeable future. Thirco does not intend to engage in any outside business transactions. Seasonality PHAZAR CORP's businesses are not dependent on seasonal factors. Backlog The backlog of orders at Antenna Products Corporation was $3.4 million at year-end. This compares to $3.1 million in backlog at the end of fiscal year 2001. In July, the backlog was $3.3 million. Over 90%of this backlog will be delivered in the 2003 fiscal year. The backlog of orders at Phazar Aerocorp Inc. was $128 thousand at year-end. This compares to $1.2 million in backlog at the end of fiscal year 2001. In July, the backlog was $417 thousand of which all will be delivered in the 2003 fiscal year. Phazar Antenna Corp. orders are normally shipped within 2 weeks; hence, Phazar Antenna Corp. backlog of orders was negligible at year-end. Raw Material Source and Supply 5 PHAZAR CORP's operating subsidiaries' principal raw materials are steel, aluminum, other metal alloys, plastic and composite tubing, hardware, electrical wire, wire rope, electronic or electro-mechanical components, leather, carpet, wood veneers and laminates. The materials are commonly available from numerous sources, including local distributors in quantities sufficient to meet the needs of the subsidiaries. The availability and supply of raw materials is not considered to be a problem for PHAZAR CORP. Employees As of August 1, 2002 Antenna Products Corporation employed a total of seventy-seven employees, seventy-one full time and six part time. Of the seventy-seven, ten are employed in administration and sales, ten in engineering and technical support, and fifty-seven in manufacturing. None of Antenna Products Corporation's employees are subject to collective bargaining agreements. Phazar Aerocorp Inc. employed a total of thirty-seven full time employees as of August 1, 2002. Of the thirty-seven, eight are employed in administration and sales, three in avionics design and support, twenty in the shop areas, and six in the installation crew. None of Phazar Aerocorp Inc.'s employees are subject to collective bargaining agreements. Phazar Antenna Corp. closed the offices in Ronkonkoma, New York on May 31, 2002 and relocated the Company offices to the facilities of Antenna Products Corporation in Mineral Wells, Texas. Two employees were terminated and four employees were asked to continue their employment with Phazar Antenna Corp in Texas. One employee continued his employment in sales and three employees elected to remain in New York and terminate their employment with the Company. Antenna Products Corporation employees have assumed the administrative and engineering duties for Phazar Antenna Corp. Phazar Antenna Corp. employees are not subject to collective bargaining agreements. Thirco does not employ any full time employees and does not intend to employ any in the foreseeable future. Foreign Sales Antenna Products Corporation's sales in international markets are primarily to foreign governments or prime contractors to foreign governments and, as such, represent a small percentage of the overall Company annual volume. The level of profits from the commitment of assets to this portion of the business is no greater or no less than that of other market segments. International sales for 2002 and 2001 were 8.2% and 6.2%, respectively, of total sales. Phazar Aerocorp Inc. and Phazar Antenna Corp. have no significant sales to international customers. Item 2. PROPERTIES Antenna Products Corporation owns a ten-acre industrial site located along US Highway 180 in Mineral Wells, Texas. The facility consists of a main building containing 60,000 square feet of manufacturing area and 10,000 square feet of administrative and engineering offices, a second building containing 20,000 6 square feet of manufacturing and shipping area; and a third building containing 15,000 square feet utilized for receiving and material control. Three additional auxiliary buildings, which total in excess of 13,350 square feet, are utilized for chemical etching, painting and storage. The facilities are in good condition and with the current compliment of machinery and equipment are suitable and more than adequate to meet production requirements. Dependent on the mix of product types in process in any given time period, the company could potentially more than double output with current and planned plant, property and equipment. Antenna Products Corporation carries a bank note on the manufacturing facility that is amortized over twenty years ending in the year 2011. Phazar Aerocorp Inc. moved to a new facility on Meacham International Airport in Fort Worth, Texas in October 2001. This leased facility contains 2,000 square feet of administrative and sales offices, 18,000 square feet of shop area and 39,500 square feet of aircraft hanger space. Phazar Antenna Corp. leases a facility in Ronkonkoma, New York. The leased space consists of 4,000 square feet of administrative, sales and engineering offices plus an outside area used as an antenna test range. The Company vacated this facility in June of 2002 and is attempting to sublet the facility. Thirco owns a fifty-acre test site in Mineral Wells, Texas. The site includes three buildings with 28,000 square feet of space. The space is currently being leased to Antenna Products Corporation for test activity with some storage of inventory. The two larger buildings, if needed, are suitable with rearrangement and some conversion expense, for additional manufacturing utilization. Item 3. LEGAL PROCEEDINGS None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of fiscal year 2002. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The information in this item should be read in conjunction with the Management Discussion and Analysis of Financial Condition and Results of Operations in Item 7, and the Consolidated Financial Statements and the Related Notes thereto in Item 8. Market Information For The Common Stock PHAZAR CORP's common stock is traded on the Nasdaq Smallcap Market and is quoted under the symbol "ANTP". The table below presents the high and low prices for the last two fiscal years and reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. 7 BID Quarter Ended High Low August 2000 3.125 1.5 November 2000 2.938 1.063 February 2001 2.50 1.00 May 2001 2.219 1.30 August 2001 1.90 1.30 November 2001 1.90 1.19 February 2002 1.81 1.19 May 2002 1.90 1.21 Holders At August 1, 2002 there were approximately 1,320 holders of record of common stock. Dividends PHAZAR CORP has never paid a regular cash dividend on common stock and has no plans to institute payment of regular dividends. Recent Sales of Unregistered Securities As partial consideration for attending the PHAZAR CORP Board of Directors' meetings, Gary W. Havener, Clark D. Wraight, James Miles, and R. Allen Wahl each received 1,000 shares of PHAZAR CORP common stock. James Kenney received 600 shares of PHAZAR CORP common stock and Billy J. Perry received 200 shares of PHAZAR CORP common stock. Also, as partial consideration for attending the PHAZAR CORP audit committee meetings, James Miles and R. Allen Wahl each received an additional 300 shares of PHAZAR CORP common stock, and 100 shares of PHAZAR CORP common stock was paid to James Kenney. Each Director agreed to hold the shares for investment and not for further distribution. The certificates representing the shares bear a legend restricting transfer without compliance with the registration requirements of the Federal Securities Act of 1933 or in reliance upon an applicable exemption therefrom. PHAZAR CORP relied on section 4(2) of the Securities Act of 1933 as its exemption from registration. Item 6. SELECTED FINANCIAL DATA The following table presents selected financial data of PHAZAR CORP. This historical data should be read in conjunction with Consolidated Financial Statements and the Related Notes thereto in Item 8. 8 FISCAL YEAR ENDING MAY 31 ------------------------- 2002 2001 ------------- ------------- Net Sales $ 10,815,669 $ 15,060,237 Income (loss) from continuing operations $ (1,149,526) $ 162,175 Income per share from continuing operations $ (0.53) $ .08 Total Assets $ 7,810,120 $ 8,454,149 Long Term Debt $ 2,511,058 $ 2,851,385 Dividends $ 0.00 $ 0.00 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operation PHAZAR CORP's on-going operation is that of its subsidiaries, Antenna Products Corporation, Phazar Aerocorp Inc., Phazar Antenna Corp. and Thirco, Inc. As previously discussed in Item 1, for the purpose of this discussion, all results of Phazar Antenna Corp. are included with the results of Antenna Products Corporation. The management discussion presented in this item relates to the operations of Subsidiary units and the associated Consolidated Financials as presented in Item 8. Year ended May 31, 2002 ("2002") Compared with Year Ended May 31, 2001 ("2001") Antenna Products Corporation and Phazar Antenna Corp. combined, experienced lower sales in the third and fourth quarter of fiscal year 2002, resulting in overall sales of $6.8 million in 2002. This is $1.5 million or 18% less than the $8.3 million in sales in 2001. Orders were down in both military and commercial markets from a total of $7.6 million in 2001 to $7.2 million in 2002. This resulted in an ending backlog of firm orders at year-end of $3.4 million, up 10% from the prior year-end backlog of $3.1 million. The gross profit margin for fiscal year 2002 was 33% compared to 35% in 2001. Sales and administrative expenses as a ratio to sales were 46% of sales in 2002 compared to 32% in 2001. The combined operating margin for 2002 was (12.7%) compared to 3.4% in 2001. Warranty charges of $27,389 were lower than last year's rate of $37,331, and averaged less than 1% of sales. Discretionary products development spending was $273,350, or 4% of sales in 2002. This was a slight decrease from $274,563 or 3.3% of sales in 2001. Interest expense for Antenna Products Corporation and Phazar Antenna Corp. decreased from $205,905 in 2001 to $106,921 in 2002. These subsidiaries experienced a pre-tax loss of $1,171,921 in 2002 compared to a pre-tax profit of $89,646 in 2001. Phazar Antenna Corp. was unable to meet the sales volumes required to be self-supporting and required the financial support of Antenna Products Corporation in 2002. Since Phazar Antenna Corp.'s future 9 sales were uncertain, management closed the Ronkonkoma, New York offices of Phazar Antenna Corp. on May 31, 2002 and relocated the Company offices to the facilities of Antenna Products in Mineral Wells, Texas. Four employees were asked to continue their employment with Phazar Antenna Corp. in Texas and the balance of the staff was terminated. One employee continued his employment in sales for the Company. The other employees decided to remain in New York and terminated their employment with the Company. Antenna Products Corporation employees have assumed the administrative and engineering duties for Phazar Antenna Corp. This realignment of people and assets will help these subsidiaries cut costs and be in a position to become profitable in 2003. Phazar Aerocorp Inc. sales were down from the previous year due to the economic downturn that occurred in the general aviation industry after the tragic events on September 11, 2001. Phazar Aerocorp Inc.'s overall sales for 2002 were $4.0 million. This is $2.8 million or 41% less than the $6.8 million in sales in 2001. Demand for the services provided by Phazar Aerocorp Inc. remained slow during the fourth quarter and this resulted in an ending backlog of firm orders at year-end of $128 thousand, down 89% from the prior year-end backlog of $1.2 million. The gross profit margin for fiscal year 2002 was 10% compared to 18% in 2001. Sales and administrative expenses as a ratio to sales were 19% of sales in 2002 compared to 10% in 2001. Phazar Aerocorp Inc.'s operating margin for 2002 was (8.7%) compared to 8.1% in 2001. Interest expense for Phazar Aerocorp Inc. decreased from $166,219 in 2001 to $93,447 in 2002. The subsidiary experienced a pre-tax loss of $581,097 in 2002 compared to a pre-tax profit of $378,679 in 2001. Phazar Aerocorp Inc.'s business started to improve in July with an increase in customer requirements for quotes on aircraft refurbishment work. Phazar Aerocorp Inc.'s backlog has improved from $128 thousand at year-end to $417 thousand in July of this year. The subsidiary is expected to be profitable in 2003. PHAZAR CORP's consolidated sales from operations were $10,815,669 with a loss from operations before taxes of $1,788,907 in 2002. This compares to $15,060,237 in consolidated sales with income from operations before taxes of $335,766 in 2001. PHAZAR CORP's loss resulted from the continued flat market in the general aviation service industry through the end of 2002 and the inability of Phazar Antenna Corp. to gain market share in the commercial wireless communications markets. To reduce Phazar Antenna Corp.'s expenses and reduce the financial drain on the company, the facility in Ronkonkoma, New York was closed on May 31, 2002. Phazar Antenna Corp's operations have been relocated to the facilities of Antenna Products Corporation in Mineral Wells, Texas. This change plus the overall reduction in staff at Antenna Products Corporation and Phazar Antenna Corp. will significantly reduce costs and position PHAZAR CORP to become profitable in 2003. Liquidity and Capital Resources ------------------------------- Funds generated from operations are the major internal sources of liquidity and 10 are supplemented by funds derived from capital markets, principally bank facilities. PHAZAR CORP has a $2.0 million revolving demand line of credit that is partially guaranteed by a principal shareholder. The credit line is regulated under a borrowing base formula using inventories and accounts receivable as collateral. The interest rate is established as one percentage point over Wall Street prime and is subject to a loan agreement with restrictive covenants. The most restrictive financial covenant requires Antenna Products Corporation to maintain $1.5 million in tangible net worth and $1.0 million of working capital. At May 31, 2002 Antenna Products Corporation had a tangible net worth of $1.7 million and working capital of $1.5 million. As of July 31, 2002 Antenna Products Corporation and Phazar Aerocorp Inc. had drawn $1.5 million of the $2.0 million line of credit with $500 thousand of the borrowing base available and unused. The revolving credit line agreement is renewable in September 2002. PHAZAR CORP anticipates renewal of this credit line and has projected that the credit available is sufficient to cover the operational requirements of subsidiaries in 2003. Net cash flow from operations was a negative $479,007 in 2002 compared to a positive $1,458,599 in 2001. Inventory decreased $253,718 in 2002 compared to a decrease of $555,920 in 2001. Accounts payable and accrued liabilities increased $101,229 and accounts receivable decreased $185,222 in 2002. In 2001 accounts payable and accrued liabilities increased $6,205 and accounts receivable decreased $386,822. Cash flow provided by financing activities in 2002 was $595,411 compared to net cash used in financing activities of $1,359,734 in 2001. Cash and cash equivalents at the end of 2002 were $213,375, a decrease from $341,413 at the end of the prior year. Antenna Products Corporation has a long-term bank note for $1.2 million collateralized by the Antenna Products Corporation plant, property, and equipment. The current balance is $755 thousand with payments amortized over 20 years ending in 2011. The interest is variable at one half point over prime interest rate with the note supported by an FmHA guarantee under the federal guidelines of a rural business industry loan. The note is guaranteed by a principal shareholder. Antenna Products Corporation also has an $800,000 subordinated note to a principal shareholder on which it pays interest only at the prime interest rate. The commencement of principal payments on the subordinated note is prohibited under the terms of the bank note until the bank debt is paid in full. Phazar Aerocorp Inc. has a note payable to a bank with an initial balance of $1.75 million, payable in installments of $25,843 per month until the maturity date of January 26, 2007, when the remaining balance is due, including interest at the prime rate plus 1%. The current balance of the note is $1.26 million. The note is collateralized by Phazar Aerocorp Inc. equipment and guaranteed by PHAZAR CORP, guaranteed by a principal shareholder, and otherwise secured by a pledge of assets of PHAZAR CORP's subsidiaries. PHAZAR CORP does not expect any changes in payments or other provisions of the loan agreements now in place. Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PHAZAR CORP consolidated financial statements for the fiscal year ended May 31, 2002. 11 C O N T E N T S Page CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets........................................13 Consolidated Statements of Operations..............................15 Consolidated Statements of Shareholders' Equity....................16 Consolidated Statements of Cash Flows..............................17 Notes to Consolidated Financial Statements.........................19 12 PHAZAR CORP (fka ANTENNA PRODUCTS, INC.) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MAY 31, 2002 AND 2001 ASSETS 2002 2001 ------------- ------------- CURRENT ASSETS Cash and cash equivalents $ 213,375 $ 341,413 Accounts receivable: Trade, net of allowance for doubtful accounts of $56,208 and $45,898 in 2002 and 2001, respectively 915,458 1,074,572 United States Government 62,512 88,620 Inventories 2,016,720 2,270,438 Costs and estimated earnings in excess of billings on refurbishing contracts in progress 19,627 370,454 Prepaid expenses and other assets 90,423 33,340 Income taxes receivable 479,282 - Deferred income taxes 218,949 128,343 ------------ ------------ Total current assets 4,016,346 4,307,180 Property and equipment, net 2,073,682 2,165,288 Intangible Assets (Goodwill) 461,969 498,440 Identifiable Intangible Assets 1,258,123 1,483,241 ------------ ------------ TOTAL ASSETS $ 7,810,120 $ 8,454,149 ============ ============ The Notes to Consolidated Financial Statements are an integral part of these statements. 13 LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001 ------------- ------------- CURRENT LIABILITIES Notes payable 1,145,000 250,000 Current portion of long-term debt 307,594 266,856 Accounts payable 454,452 438,262 Accrued expenses 503,958 418,919 Billings in excess of costs and estimated earnings on refurbishing contracts in progress 42,593 52,907 Income taxes payable - 108,146 ------------ ------------ Total current liabilities 2,453,597 1,535,090 ------------ ------------ Long-term debt 1,711,058 2,051,385 Note payable to shareholder 800,000 800,000 Deferred income taxes 182,780 238,581 ------------ ------------ Total long-term liabilities 2,693,838 3,089,966 ------------ ------------ Total liabilities 5,147,435 4,625,056 ------------ ------------ COMMITMENTS AND CONTINGENCIES - - MINORITY INTEREST IN SUBSIDIARY - 25,546 SHAREHOLDER'S EQUITY Preferred stock, $1 par, 2,000,000 shares authorized, none issued or outstanding in 2002 and 2001, attributes to be determined when issued - - Common stock, $0.01 par, 6,000,000 shares authorized 2,174,828 and 2,169,328 issued and outstanding in 2002 and 2001, respectively 21,748 21,694 Additional paid in capital 2,753,136 2,744,526 Retained earnings (112,199) 1,037,327 ------------ ------------ Total shareholders' equity 2,662,685 3,803,547 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,810,120 $ 8,454,149 ============ ============ The Notes to Consolidated Financial Statements are an integral part of these statements. 14 PHAZAR CORP (fka ANTENNA PRODUCTS, INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MAY 31, 2002 AND 2001 2002 2001 -------------- -------------- Sales and contract revenues 10,815,669 15,060,237 Cost of sales and contracts 8,153,167 10,889,852 ------------ ------------ Gross Profit 2,662,502 4,170,385 Sales and administration expenses 4,248,228 3,443,836 ------------ ------------ Operating Profit (Loss) (1,585,726) 726,549 Other income (expense) Interest expense (236,341) (401,723) Interest income 575 333 Gain on sale of assets 361 - Other Income 32,224 10,607 ------------ ------------ Total Other Expense (203,181) (390,783) ------------ ------------ Income (loss) from operations before (1,788,907) 335,766 ------------ ------------ income taxes and minority interest Income tax provision (benefit) (613,835) 148,045 ------------ ------------ Income (loss) before minority interest (1,175,072) 187,721 Minority interest in Subsidiary's (income) loss 25,546 (25,546) ------------ ------------ Net Income (loss) (1,149,526) 162,175 ============ ============ Earnings (loss) per common share (0.53) 0.08 ============ ============ The Notes to Consolidated Financial Statements are an integral part of these statements. 15 PHAZAR CORP (fka ANTENNA PRODUCTS, INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MAY 31, 2002 AND 2001 Common Stock ------------------- Additional Number Paid In Retained of Shares Amount Capital Earnings Total --------- --------- ---------- ----------- ----------- BALANCE, MAY 31, 2000 2,135,728 $ 21,358 $2,678,766 $ 875,152 $ 3,575,276 Issuance of common stock 33,600 336 65,760 - 66,096 Net income - - - 162,175 162,175 --------- --------- ---------- ---------- ----------- BALANCE, MAY 31, 2001 2,169,328 21,694 2,744,526 1,037,327 3,803,547 Issuance of common stock 5,500 54 8,610 - 8,664 Net income - - - (1,149,526) (1,149,526) --------- --------- ---------- ---------- ----------- BALANCE, MAY 31, 2002 2,174,828 $ 21,748 $2,753,136 $ (112,199) $ 2,662,685 ========= ========= ========== ========== =========== The Notes to Consolidated Financial Statements are an integral part of these statements. 16 PHAZAR CORP (fka ANTENNA PRODUCTS, INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MAY 31, 2002 AND 2001 2002 2001 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (1,149,526) $ 162,175 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation 336,409 340,136 Amortization 261,589 267,669 Stock based compensation 8,664 6,096 Gain (loss) on disposal of fixed assets (361) - Deferred federal income tax (146,407) (107,573) Changes in assets and liabilities: Accounts receivable 185,222 386,822 Costs and estimated earnings in excess of billings on refurbishing contracts in progress 350,827 (77,293) Inventory 253,718 555,920 Prepaid expenses (57,083) 22,532 Income taxes receivable (479,282) 30,000 Accounts payable 16,190 (30,324) Accrued expenses 85,039 36,529 Billings in excess of costs and estimated earnings on refurbishing contracts in progress (10,314) (267,782) Income taxes payable (108,146) 108,146 Minority interest (25,546) 25,546 ------------ ------------ Net cash provided by operating activities (479,007) 1,458,599 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposal of fixed assets 3,000 - Purchase of property and equipment (247,442) (69,800) Purchase of intangible assets - (25,000) ------------ ------------ Net cash used in investing activities (244,442) (94,800) The Notes to Consolidated Financial Statements are an integral part of these statements. 17 PHAZAR CORP (fka ANTENNA PRODUCTS, INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MAY 31, 2002 AND 2001 2002 2001 -------------- -------------- CASH FLOWS FROM FINANCING ACTIVIITES Net borrowings (payments) under bank lines of credit 895,000 (1,115,000) Principal payments on long-term debt (299,589) (244,734) ------------ ------------- Net cash (used in) provided by financing activities 595,411 (1,359,734) ------------ ------------- Net increase (decrease) in cash and cash equivalents (128,038) 4,065 CASH AND CASH EQUIVALENTS, beginning of year $ 341,413 $ 337,348 ------------ ------------- CASH AND CASH EQUIVALENTS, end of year $ 213,375 $ 341,413 ============ ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest (none capitalized) $ 236,341 $ 401,444 ============ ============= Income taxes $ 0 $ 100,000 ============ ============= SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Stock based compensation $ 8,664 $ 6,096 ------------ ------------- Issuance of common stock in exchange for non-compete agreements $ - $ 60,000 ============ ============= The Notes to Consolidated Financial Statements are an integral part of these statements. 18 NOTE 1. BUSINESS AND NATURE OF OPERATION PHAZAR CORP operates as a holding company with Antenna Products Corporation, Phazar Antenna Corp. and Thirco, Inc. as its wholly owned subsidiaries, and Phazar Aerocorp, Inc. (fka API Acquisition Corp) an 80% owned Subsidiary. Antenna Products Corporation is an operating Subsidiary that designs, manufactures and markets antenna systems, towers, and communication accessories worldwide. The U. S. 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. Phazar Aerocorp, Inc. was formed during the year ended May 31, 2000, and its operations consist primarily of contracting to refurbish the interiors of corporate and private jets. The length of the contracts varies but is typically less than one year. 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: 2002 2001 ---- ---- Federal Government 13% 8% Thales ATM, Inc. (fka AIRSYS ATM, Inc.) 12% 10% Gulfstream Aerospace, LP 17% 9% At May 31, 2002 and 2001, trade receivables from four customers comprised approximately 48% and 55%, respectively, of the trade receivable balance at those dates. NOTE 2. BUSINESS SEGMENTS The Company's operations are classified into two principal business segments based upon the nature of products and services. Antennas Design, manufacture and marketing of antenna systems, towers, and communications accessories worldwide. Aircraft Interiors Contracts to refurbish the interiors of corporate and private jets. Following is a summary of segmented information for 2002: Aircraft Antennas Interiors Total -------- --------- -------- Revenues from external customers-total $6,768,258 $4,047,411 $10,815,669 Foreign sales 890,418 - 890,418 Interest revenue 575 - 575 Interest expense 142,894 93,447 236,341 Depreciation and amortization 380,457 217,541 597,998 Income tax provision (benefit) (400,187) (196,722) (596,909) Segment profit (loss) (771,734) (384,375) (1,156,109) Segment assets 5,096,763 1,439,779 6,536,542 Expenditures for segment assets 19,686 227,756 247,442 19 NOTE 2. BUSINESS SEGMENTS - continued RECONCILIATIONS: REVENUES Total revenues for reportable segments $ 10,815,669 Other revenue - ------------ Total consolidated revenues $ 10,815,669 ============ PROFIT OR LOSS Total profit (loss) for reportable segments before income taxes (1,753,017) Other profit (loss) (35,890) ------------ Profit (loss) before income taxes $ (1,788,907) ============ ASSETS Total assets for reportable segments $ 6,536,542 Other assets 1,273,578 ------------ Consolidated total $ 7,810,120 ============ Following is a summary of segmented information for 2001: Aircraft Antennas Interiors Total -------- --------- -------- Revenues from external customers $ 8,302,411 $ 6,757,826 $15,060,237 Foreign sales 938,251 - 938,251 Interest revenue 333 - 333 Interest expense 235,504 166,219 401,723 Depreciation and amortization 388,171 219,633 607,804 Income tax provision (benefit) 48,074 104,675 152,749 Segment profit 89,646 274,004 363,650 Segment assets 5,340,760 2,437,501 7,778,261 Expenditures for segment assets 62,300 - 62,300 RECONCILIATIONS: REVENUES Total revenues for reportable segments $15,060,237 Other revenue - ----------- Total consolidated revenues $15,060,237 =========== PROFIT OR LOSS Total profit for reportable segments $ 363,650 Other loss (27,884) ----------- Profit before income taxes $ 335,766 =========== 20 NOTE 2. BUSINESS SEGMENTS - continued ASSETS Total assets for reportable segments $ 7,778,461 Other assets 675,688 ----------- Consolidated total $ 8,454,149 =========== Adjustments to reconcile total segment to total consolidated profit (loss) before taxes and total assets is attributable to corporate headquarters, which is not included in segment information. Corporate headquarters' activity is recorded on PHAZAR CORP and consists primarily of non-allocated general and administrative overhead costs and cash in bank. NOTE 3. 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. Sales and Contract Revenues and Related Costs - Antennas Antenna Products Corporation manufactures and markets standard and custom antennas, guyed and self-supported towers, monopoles, 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 supplied products include 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 panel, sector, omnidirectional and closed loop PCS antennas, automatic meter reading (AMR), cellular, paging and yagi antennas, guyed towers, self supported towers and monopoles. 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 21 NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued 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. Revenue and costs under certain long-term fixed price contracts with governments are recognized on the units of delivery method. This method recognizes as revenue the contract price of units of the product delivered during each period and the costs allocable to the delivered units as the cost of earned revenue. Costs allocable to undelivered units are reported in the balance sheet as inventory. Amounts in excess of agreed upon contract price for customer directed changes, constructive changes, customer delays or other causes of additional contract costs are recognized in contract value if it is probable that a claim for such amounts will result in additional revenue and the amounts can be 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. Accounting Basis for Revenue Recognition - Aircraft Interiors Revenue on contracts is recognized on the basis of the Company's estimates of the percentage of completion of individual contracts. That portion of the total contract price that is recognized as revenue is based upon net contract costs incurred as a percentage of net estimated costs. That method is used because management considers total cost to be the best available measure of progress on the contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, and repairs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period. Inventories Inventories are stated at the lower of first-in, first-out cost or market, net of any applicable progress payments. 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. 22 NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued 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 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. 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, 2002 and 2001 were approximately $273,000 and $275,000, 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. Stock-based Employee Compensation The Company accounts for stock based compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", which requires compensation cost to be measured at the date of grant based on the intrinsic value of the options granted. The intrinsic value of an option is equal to the difference between the market price of the common stock on the date of grant and the exercise price of the option. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which provides for an alternative measure of 23 NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued compensation cost based on the fair value of the options granted. The fair value of an option is based on the intrinsic value as well as the time value of the option. The Company has adopted the disclosure provisions of SFAS No. 123. Shares, Per Share Data, Earnings Per Share, and Stock Split, and Common Stock Par Value Earnings per share are computed by dividing net income available for common stock by the weighted average number of common shares outstanding during the year. Weighted average shares outstanding were 2,171,836 and 2,153,028 for the years ended May 31, 2002 and 2001, respectively. Stock options outstanding at May 31, 2002 and 2001 were not included in earnings per share because their effect would be anti-dilutive. New Accounting Pronouncements In June 2001 the Financial Accounting Standards Board (FASB) issued Financial Accounting Standards (SFAS) No. 141 "Business Combinations". This statement will require all business combinations, under the scope of this Statement, to be accounted for using only the purchase method of accounting. This pronouncement applies to all business combinations initiated after June 30, 2001 and will have no effect on the Company's current financial statement presentation. In addition, FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets". This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized. Goodwill and intangible assets that have indefinite useful lives will no longer be amortized but rather will be tested at least annually for impairment by comparing to fair value. Goodwill amortization expense for each of the years ended May 31, 2002 and 2001 was $36,471. The provisions of the statement will be required for the fiscal year beginning June 1, 2002. Implementation of these provisions may have an impact on the carrying value of the Company's goodwill and intangible assets upon adoption. However, it is not practicable to determine those effects at this time. NOTE 4. AIRCRAFT INTERIORS CONTRACTS RECEIVABLE Included in accounts receivable at May 31, 2002 and 2001 are aircraft interior contracts receivable of $204,482 and $222,357, respectively. At May 31, 2002 $180,731 of the balance pertains to contracts in progress. At May 31, 2001 $144,040 of the balance pertains to contracts in progress. NOTE 5. AIRCRAFT INTERIORS CONTRACTS IN PROGRESS Information with respect to aircraft interior contracts in progress at May 31 follows: 24 NOTE 5. AIRCRAFT INTERIORS CONTRACTS IN PROGRESS-continued 2002 2001 -------------- -------------- Cost incurred on contracts in progress $ 4,715,558 $ 6,291,703 Estimated earnings thereon 734,090 1,504,170 ------------ ------------ 5,449,648 7,795,873 Less billings applicable thereto 5,472,614 7,478,326 ------------ ------------ Net unbilled (overbilled) costs $ (22,966) $ 317,547 ============ ============ These amounts are included in the accompanying balance sheet under the following captions: 2002 2001 -------------- -------------- Costs and estimated earnings in excess of billings on contracts in progress $ 19,627 $ 370,454 Billings in excess of costs and estimated earnings on contracts in progress (42,593) (52,907) ------------ ------------ Net unbilled (overbilled) costs $ (22,966) $ 317,547 ============ ============ NOTE 6. INVENTORIES The major components of inventories are as follows: 2002 2001 -------------- -------------- Raw materials $ 810,611 $ 360,284 Work in process 718,448 1,297,008 Finished goods 487,661 613,146 ------------ ------------ $ 2,016,720 $ 2,270,438 ============ ============ 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, 2002 and 2001 were $644,891 and $864,001, respectively. All of the above stated inventories are that of the operating Subsidiary, Antenna Products Corporation. No other Subsidiaries carry inventory. NOTE 7. PROPERTY AND EQUIPMENT The following is a summary of the Company's property and equipment at May 31: 25 NOTE 7. PROPERTY AND EQUIPMENT-continued Estimated Useful Life 2002 2001 ----------- ------------- ------------- Land $ 375,136 $ 375,136 Buildings and improvements 15-30 years 1,931,829 1,873,217 Machinery and equipment 10 years 3,457,706 3,280,719 Automobiles and trucks 3 years 149,217 158,718 Office furniture and fixtures 10 years 602,281 590,438 ------------ ------------ 6,516,169 6,278,228 Less accumulated depreciation 4,442,487 4,112,940 ------------ ------------ Net property and equipment $ 2,073,682 $ 2,165,288 ============ ============ NOTE 8. INTANGIBLE ASSETS Included in intangible assets at May 31 are the following: 2002 2001 -------------- -------------- Goodwill (Phazar Aerocorp Inc.) $ 547,069 $ 547,069 Drawings, wiring diagrams, test procedures, production records, etc. (Phazar Aerocorp Inc.) 1,222,000 1,222,000 Non-compete agreement (Phazar Aerocorp Inc.) 75,000 75,000 Non-compete agreements (Phazar Antenna Corp.) 60,000 60,000 Patents, copyrights and other intellectual property (Phazar Antenna Corp.) 389,593 389,593 ------------ ------------ 2.293,662 2,293,662 Accumulated amortization (573,570) (311,981) ------------ ------------ $ 1,720,092 $ 1,981,681 ============ ============ Goodwill is being amortized on the straight-line basis over a fifteen-year period through May 31, 2002. Intangible assets including drawings, wiring diagrams, test procedures, production records, etc. are being amortized on the straight-line basis over a ten-year period through May 31, 2002. Patents, copyrights and other intellectual property and the non-compete agreements are being amortized on the straight-line basis over a five to six year period. NOTE 9. NOTES PAYABLE At May 31, 2002 and 2001, notes payable consist of a revolving note payable to a bank, with a maximum amount not to exceed the lesser of $2,000,000 and $3,000,000, respectively, 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. 26 NOTE 9. NOTES PAYABLE-continued Interest is payable monthly at the prime rate (4.75% and 7% at May 31, 2002 and 2001, respectively) plus 1% until September 30, 2002, when any unpaid principal and interest shall be due. Borrowings under the revolving note payable are collateralized by accounts receivable and inventories and are guaranteed by a principal shareholder. Under the agreement, the Company must maintain minimum net worth of $1,500,000 and working capital of $1,000,000. NOTE 10. LONG-TERM DEBT At May 31, 2002 and 2001, long-term debt consists of the following: 2002 2001 ------------- ------------ Mortgage note to a bank, guaranteed 80% by a U.S. government agency, payable $10,050 per month, including interest at the prime rate (4.75% and 7% at May 31, 2002 and 2001, respectively) plus 0.5% (matures September 11, 2011); collateralized by certain real estate, fixtures and assignment of life insurance policy with a principal shareholder. The note is also guaranteed by a principal shareholder and the Company is required to maintain certain covenants including $1,000,000 in working capital and a ratio of maximum debt to net worth of seven to one. The Company was in compliance with these covenants at May 31, 2002 and 2001. $ 755,028 $ 809,848 Note payable to a bank, payable in installments of $25,843 per month until maturity date of January 26, 2007, when remaining balance is due, including interest at the prime rate (4.75% and 7% at May 31, 2002 and 2001, respectively) plus 1%, secured by property and equipment. The note is also guaranteed by a principal shareholder. $ 1,263,623 $ 1,508,393 Less current portion of long-term debt 307,594 266,856 ------------ ------------ $ 1,711,057 $ 2,051,385 ============ ============ 27 NOTE 10. LONG-TERM DEBT-continued Note payable to a shareholder of the Company, interest only Payments due until June 2005 at the prime rate, (4.75% and 7% at May 31, 2002 and 2001, respectively). Beginning June 2005 interest and principal payments of $14,946 per month are due until maturity in May 2010. Interest charged to operations for the years ended May 31, 2002 and 2001 was $43,956 and $71,627, respectively. $ 800,000 $ 800,000 ------------ ------------ Maturities of long-term debt for each of the five years subsequent to May 31, 2002 are as follows (including $160,000 per year beginning in June 2005 for the shareholder note, although it is subordinated to the note payable to a bank): 2003 $ 307,593 2004 326,542 2005 346,666 2006 505,402 2007 406,380 Thereafter 926,068 ------------ $ 2,818,651 NOTE 11. INCOME TAXES Components of the income tax provision (benefit) are as follows: 2002 2001 Federal income taxes (benefit) at -------------- ------------- statutory rate on income before income taxes $ (608,228) $ 114,161 State income taxes statutory rate - 17,471 Non-deductible expenses and other (5,607) 16,413 ------------- ------------ Total provision (benefit) $ (613,835) $ 148,045 ============= ============ Deferred portion (benefit) of provision $ (146,407) $ (107,573) Current portion (benefit) of provision (467,428) 255,618 ------------- ------------ Total provision (benefit) $ (613,835) $ 148,045 --=========== ============ The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: 28 NOTE 11. INCOME TAXES-continued 2002 2001 Deferred tax assets: -------------- -------------- Accounts receivable due to allowance for doubtful accounts $ 29,366 $ 15,605 Inventories, due to estimated losses on contracts - 34,000 Accrued expenses, due to warranty accrual 23,961 48,456 Accrued expenses, due to vacation accrual 46,014 30,282 Accrued expenses due to bonus accrual 16,784 - Intangible assets, due to difference in amortization 77,376 40,425 Net operating loss carryforward 102,823 - -------------- ------------- Total deferred tax assets 296,324 168,768 Deferred tax liabilities: Property and equipment, principally due to difference in depreciation (260,155) (279,006) -------------- ------------- Total deferred tax liability (260,155) (279,006) -------------- ------------- Net deferred tax asset (liability) $ 36,169 $ (110,238) ============== ============= The net deferred tax liabilities are classified on the balance sheet as follows: Current deferred tax assets $ 218,949 $ 128,343 Long-term deferred tax liabilities (182,780) (238,581) -------------- ------------- $ 36,169 $ (110,238) ============== ============= The Company has a net operating loss carryforward of approximately $302,000 that expires in 2022. NOTE 12. 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 $-0- for both years ended May 31, 2002 and 2001. 29 NOTE 12. COMMITMENTS AND CONTINGENCIES - continued 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, 2002. 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 estimate 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. The fair value of short-term and long-term debt approximate carrying value based on their effective interest rates compared to current market rates. Operating Leases The Company leases a building and software under two noncancelable operating lease arrangements. Rent expense under these lease agreements during the years ended May 31, 2002 and 2001 was $75,605 and $45,505, respectively. Future minimum lease obligations under the lease agreement are as follows: 2003 $ 77,265 2004 67,537 2005 29,264 ---------- $ 174,066 ========== The building lease agreement for property in Ronkonkoma, New York will expire in 2004 and will not be renewed. The software lease agreement will be paid in full in 2005. 30 NOTE 12. COMMITMENTS AND CONTINGENCIES - continued Facility Leases During the fiscal year 2001 and a portion of 2002, the Company leased facilities under a cancelable operating lease with a related party. Rent expense under this agreement for 2002 and 2001 was $43,680 and $35,819, respectively. In October 2001, the Company moved and began leasing land and hangar space under a cancelable operating lease with another related entity. Monthly rental payments under this lease are $17,842. Rent expense charged to operations under this lease for the year ended May 31, 2002 was $142,736. NOTE 13. STOCK OPTIONS In 1999, the Board of Directors approved a stock option plan that provided the option to purchase 60,000 shares at $2.00 to an officer of the Company. The plan has an expiration date of March 31, 2006 or the earlier of the officer's last day of employment. During the year ended May 31, 2001 the Board of Directors granted 428,000 stock options to six employees. The options become exercisable in equal increments on the anniversary of the grant date over each of the next three years. None of these options were exercisable during the year. The Company recognized no compensation cost related to the grant of these options during the year ended May 31, 2001. Had compensation cost for the Company's stock-based compensation been determined based on fair value at the grant date consistent with the method of FASB Statement 123, the Company would have recognized compensation expense of $194,662 for the stock-based employee compensation awards during the year ended May 31, 2001. During the year ended May 31, 2002, the Board of Directors did not grant any stock options. The Company's net income and earnings per share as of May 31, 2001, would have been reduced to the pro forma amounts indicated below: 2001 ------------ Net income (loss) As reported $ 162,175 Pro forma $ (32,487) Primary earnings (loss) per share As reported 0.08 Pro forma (0.02) The compensation cost was estimated using the Black-Scholes model with the following assumptions for 2001: $2.50 to $1.88 stock price at grant date; life of 4 years; expected volatility of 93 percent; and risk free interest rates of 6.6 and 7.8 percent. The assumptions used under the 2000 plan were as follows: $1.19 stock price at grant date; lives of 13 and 125 days; expected volatility of 98 percent; and risk free interest rate of 4.45 and 4.84 percent. 31 NOTE 13. STOCK OPTIONS-continued A summary of the status of the Company's stock option plans as of May 31, 2002 and 2001 and changes for the years then ended are as follows: Weighted Average Exercise Shares Price -------- -------- Outstanding at May 31, 2000 60,000 2.00 Granted 428,000 2.18 Exercised - - Forfeited - - -------- -------- Outstanding at May 31, 2001 488,000 2.16 -------- -------- Granted - - Exercised - - Forfeited 8,000 2.47 -------- -------- Outstanding at May 31, 2002 480,000 2.15 2002 2001 ---------- ----------- Exercisable at May 31 198,600 60,000 ========== =========== Weighted average fair value of options granted during the year $ 0 $ 1.38 ========== =========== Weighted averaged remaining contractual life (in years) 2001 5.2 3.8 and 2000 plans respectively Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Director Name Age Principal Occupation Since ---- --- -------------------- ----- Gary W. Havener 61 President and Chief Executive Officer, PHAZAR CORP; Sole Director Antenna Products Corp., Phazar Aerocorp Inc. and Thirco, Inc., subsidiaries of PHAZAR CORP; President, Phazar Aerocorp, Inc. Thirco, Inc. and Sinan Corp. January 1992 32 Clark D. Wraight 58 Vice President and Secretary, Treasurer, PHAZAR CORP; President and General Manager, Antenna Products Corp.; and Vice President, Thirco, Inc.; Secretary, Treasurer, Thirco, Inc., Phazar Aerocorp Inc., and Phazar Antenna Corp. October 1996 R. Allen Wahl 74 Independent Business Consultant and Past President & COO of Valmont Industries October 1999 James Miles 59 Past Vice President and General Manager, GTE Media Ventures; Past President, Contel of California November 1999 James Kenney 61 Executive Vice President and Owner San Jacinto Securities, Inc. November 1999 Mr. Havener served as the President of PHAZAR CORP from January 1992 until October 1999. Mr. Havener served as the President of Antenna Products Corporation from January 1996 until April 1999. Mr. Havener currently serves as President and CEO of PHAZAR CORP, President of Phazar Aerocorp Inc., and President of Thirco, Inc. Mr. Havener also serves as sole director of Antenna Products Corporation, Phazar Aerocorp Inc., Phazar Antenna Corp. and Thirco, Inc. Since December 1984 Mr. Havener has served as the President of Sinan Corp., an investment company. Sinan Corp. is not a parent, subsidiary or affiliate of the Company. Mr. Wraight served as Vice President and Secretary/Treasurer of Antenna Products Corporation from 1996 until April 1999 when he was appointed President. Mr. Wraight has been employed with Antenna Products since 1979 and has served as an officer of the Company since 1981. Mr. Wraight currently serves as Vice President and Secretary/Treasurer of PHAZAR CORP, President and General Manager of Antenna Products Corporation and Secretary/Treasurer of Phazar Aerocorp Inc., Phazar Antenna Corp. and Thirco, Inc., subsidiaries of the Company. Mr. Wahl was President and COO of Valmont Industries. The principal business of Valmont Industries is manufacturing steel tubular poles and lattice towers for the communication industry. Mr. Wahl currently serves as an independent business consultant. Mr. Miles served as Vice President and General Manager of GTE Media Ventures, a cable television design and operations company, from 1994 until 1999 and as President of Contel of California, a telecommunications company from 1984 until 1996. Mr. Miles was a Director of Desert Community Bank until 1994. Mr. Kenney has served as Executive Vice President and owner of San Jacinto Securities since 1993. San Jacinto Securities is an institutional stock brokerage firm. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of 33 ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the Securities and Exchange Commission (the "SEC"). Such officers, directors and ten-percent shareholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that, during the fiscal year ended May 31, 2002, all Section 16(a) filing requirements applicable to its officers, directors and ten-percent shareholders have been filed. Item 11. EXECUTIVE COMPENSATION The following table sets forth certain information regarding compensation paid during each of the last three fiscal years to the Chief Executive Officer of the Company. SUMMARY COMPENSATION TABLE Name and Principal Position Annual Compensation --------------------------- ------------------- President and CEO ----------------- Fiscal Year Other Annual Ended May 31 Salary ($) Bonus ($) Compensation ($) ------------ ---------- --------- ---------------- Gary W. Havener 2002 $0 $0 $ 4,072(1) $ 1(2) Gary W. Havener 2001 $0 $0 $ 3,016(1) $ 98,000(3) William Poulin 2000 $51,923 $0 $ 2,000(1) 10-12-99 thru 5-31-00 $ 50,000(5) Gary W. Havener 2000 $0 $0 $ 2,000(1) 5-31-99 thru 10-11-99 $ 32,667(4) (1) PHAZAR CORP Director's Fee. (2) 2002 Antenna Products Corp. Director's Fee - $1 accrued (3) 2001 Antenna Products Corp. Directors' Fee - $98,000 paid (4) 2000 Antenna Products Corp. Director's Fee - $32,667 paid. (5) PHAZAR CORP supplemental Director's Fee - $50,000 paid. Accrued amounts are paid in the following year. Compensation for PHAZAR CORP Board members is set at $500 plus 200 shares of PHAZAR CORP common stock for each board meeting attended. A total of $2,500 and 1000 shares was paid each to Gary W. Havener, Clark D. Wraight, R. Allen Wahl and James Miles in the fiscal year ended May 31, 2002. $2,000 and 800 shares was paid to James Kenney and $500 and 200 shares was paid to Billy J. Perry in the fiscal year ended May 31, 2002. Compensation for PHAZAR CORP audit committee members is set at $250 plus 100 shares of PHAZAR CORP common stock for each audit committee meeting attended. $750 and 300 shares were paid each to James Miles and R. Allen Wahl and $250 plus 100 shares was paid to James Kenney in the fiscal year ended May 31, 2002. 34 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP The following table set forth the beneficial ownership of the Company's Common Stock as of August 30, 2002, (a) by each director, (b) by the named executive officers, and (c) by all persons known to the Company to be the beneficial owners of more that 5% of the Company's Common Stock and (d) all directors and executive officers as a group. Name and Address Shares Owned Directly Percent of of Beneficial Owners (1) and Indirectly Class (2) ------------------------ --------------------- --------- Gary W. Havener (3) Sinan Corp. 930,936 42.78% P.O. Box 121697 Ft. Worth, TX 76121 R. Allen Wahl 12,000 .55% 13 Collinway Place Dallas, TX 75230 Clark D. Wraight Antenna Products Corporation 152,610 7.01% 101 S.E. 25th Ave. Mineral Wells, TX 76067 James Miles 2,300 .11% 420 Private Rd. Pittsburg, TX 75686 James Kenney 1,700 .08% 5949 Sherry Lane, Suite 960 Dallas, TX 75225 Young Design, Inc. 267,793 12.31% 8000 Lee Highway Falls Church, VA 22042 All directors and officers 1,099,546 50.53% of PHAZAR CORP as a group (Five Persons) (1) The persons named herein have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and subject to the Texas laws for personal holding companies, as applicable. (2) Based on total outstanding shares of 2,176,128 as of August 30, 2002. 35 (3) Sinan Corp., wholly owned by Mr. Havener and his children, owns of record 397,390 of these shares representing 18.26% of the total outstanding shares. Mr. Havener as President of Sinan Corp. has sole voting and investment power with respect to all shares of common stock shown as beneficially owned by Sinan Corp. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Phazar Aerocorp Inc., the Company's 80% owned subsidiary moved in October to a new hanger facility at Meacham International Airport in Fort Worth, Texas. Phazar Aerocorp Inc. leased the new facility at Meacham International Airport from a limited partnership that is 80% owned by Gary W. Havener, Principal Executive Officer and Director of PHAZAR CORP and 20% owned by Brian Perryman, Vice President of Phazar Aerocorp Inc. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements. The following consolidated financial statements of PHAZAR CORP and subsidiaries and independent auditors' reports are presented in Item 8: Consolidated Balance Sheets - May 31, 2002 and 2001 Consolidated Statements of Operations - Years Ended May 31, 2002 and 2001 Consolidated Statement of Shareholders' Equity - Years Ended May 31, 2002 and 2001 Consolidated Statements of Cash Flows - Years Ended May 31, 2002 and 2001 Notes To Consolidated Financial Statements .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. --------- 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. 36 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. 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. 15. Independent Auditor's Report dated August 2, 2002. 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 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.1 Section 1350 Certification (b) Reports on Form 8-K. None Item 14. Controls and Procedures. As of May 31, 2002, an evaluation was performed under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of May 31, 2002. There has not been any change in the Company's internal controls during the Company's last fiscal quarter that has materially affected or is reasonably likely to materially affect internal controls over financial reporting as of May 31, 2002. 37 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: February 20, 2004 PHAZAR CORP /s/ Gary W. Havener --------------------------------- BY: Gary W. Havener Principal Executive Officer and Director 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/ Clark D. Wraight ---------------------------- Principal Financial Officer February 20, 2004 Clark D. Wraight and Principal Accounting Officer and Director /s/ James Miles ---------------------------- Director February 20, 2004 James Miles /s/ James Kenney ---------------------------- Director February 20, 2004 James Kenney /s/ R. Allen Wahl ---------------------------- Director February 20, 2004 R. Allen Wahl 38 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 15. - Independent Auditor's Report dated August 2, 2002. 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 Officers Exhibit 32.1 - Section 1350 Certification 39