UNITED STATES OF AMERICA
In the Matter of
CALIFORNIA AMPLIFIER, INC.,
|ORDER INSTITUTING CEASE-AND-|
DESIST PROCEEDINGS, MAKING
FINDINGS, AND IMPOSING A CEASE
-AND-DESIST ORDER PURSUANT TO
SECTION 21C OF THE SECURITIES
EXCHANGE ACT OF 1934
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against California Amplifier, Inc. ("California Amplifier" or "Respondent").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
California Amplifier is a Delaware corporation now located in Oxnard, California that manufactures microwave telecommunications products. During the relevant period, California Amplifier's common stock was registered with the Commission under Section 12(g) of the Exchange Act and traded on NASDAQ's National Market System.
Barry Richard Kusatzky, ("Kusatzky") age 52, is currently an Illinois resident. Kusatzky was California Amplifier's corporate controller from January 1997 to March 2001.
For fiscal 2000 and much of fiscal 2001, California Amplifier failed to establish or maintain internal accounting controls sufficient to provide reasonable assurance that its financial statements were prepared in accordance with generally accepted accounting principles ("GAAP"). This lack of adequate internal controls allowed Kusatzky to commit fraud, caused the failure of the company to discover that Kusatzky was not a CPA as he had represented, resulted in books and records that failed to accurately reflect the company's transactions, caused numerous other accounting errors, and caused California Amplifier to file materially false and misleading periodic reports with the Commission.
From November 1999 through January 2001, Kusatzky hid at least $7.8 million in expenses by fabricating financial statements, falsifying the company's books and records, and thereafter, concealing his fraud by presenting false records to auditors. In fiscal 2000, Kustazky hid expenses of $5.9 million, thereby causing the company to report a profit when it actually incurred a loss. For the subsequent three quarters of fiscal 2001, Kusatzky hid at least $1.9 million in expenses. Kusatzky's fraud went undetected because of the company's lack of adequate internal controls. In fiscal 2000 and the first three quarters of fiscal 2001, California Amplifier's financial statements were generated from a spreadsheet maintained by Kusatzky on his own desktop computer. This spreadsheet was wholly separate from the company's accounting system. California Amplifier had no internal control to verify the accuracy of the information in his spreadsheet, such as by tying the information to the company's general ledger. As a result, once Kusatzky improperly created lower expenses on this spreadsheet, he was able to falsify California Amplifier's financial statements because Kusatzky's fraudulent spreadsheet was incorporated directly into the company's quarterly filings with the Commission. In addition, Kusatzky later made fraudulent journal entries to the company's general ledger without any supervision or requirement that such entries be reviewed or adequately substantiated. These journal entries matched the false entries previously made on his spreadsheet and led the company to file a materially false Form 10-K for the year 2000. In addition and unconnected to Kusatzky's fraud, the company's inadequate internal controls also caused numerous accounting errors to go undetected. These errors led to the restatement by California Amplifier of additional financial statements to those restated due solely to Kusatzky's actions. California Amplifier addressed the internal controls deficiencies exposed by Kusatzky's actions in a prompt manner upon their discovery.
On March 29, 2001, California Amplifier issued a press release stating that its corporate controller had admitted -- in writing -- that he was responsible for concealing expenses that were originally recorded, thereby causing the company to overstate net income for fiscal year 2000.
After an internal investigation and review of its financial statements, California Amplifier confirmed that net income was misstated in each of the quarters of fiscal year 2000, and further revealed that net income for the first three quarters of fiscal year 2001 was also misstated. In addition, a reaudit of California Amplifier's books and records identified other inaccuracies on its financial statements for fiscal years 2000 and 2001. Thereafter, California Amplifier filed amendments to its Form 10-K for fiscal year 2000, and Forms 10-Q for the fiscal quarters during 2000 and 2001.
The net adjustments to California Amplifier's income statement for the period beginning in the first quarter of fiscal year 2000, through the third quarter of fiscal year 2001, were as follows:
Pretax Income (In thousands)
|1st Q FY 2000 |
|2nd Q FY 2000 |
|3rd Q FY 2000 |
Turned loss Into profit
|4th Q FY 2000 |
|Fiscal Year Totals||$5,731||72%|
Turned Gross Loss to Gross Profit
|1st Q FY 2001 |
|2nd Q FY 2001 |
|3rd Q FY 2001 |
As described below, Kusatzky was responsible for at least $7.83 million, or 91%, of the total $8.61 million overstatement of pretax income. By hiding expenses, Kusatzky not only inflated earnings by approximately $7.83 million, he also caused California Amplifier to overstate equity by the same amount. Concealing expenses also caused California Amplifier to improperly compute and recognize a deferred tax asset of approximately $5.0 million during fiscal 2000.2 Recognition of the deferred tax asset caused California Amplifier to further overstate equity.
Kusatzky was responsible for hiding manufacturing expenses totaling over $5 million for the purpose of inflating California Amplifier's reported profit during fiscal years 2000 and 2001. During this time, Kusatzky used his personal computer to create false quarterly financial statements that he knew would be the basis of California Amplifier's quarterly press releases and quarterly filings with the Commission. Kusatzky also made false entries in California Amplifier's accounting records to conceal his malfeasance from auditors.
The following is a description of each of the restatements made by California Amplifier for the period beginning February 28, 1999 through November 25, 2000.
During the first quarter of fiscal 2000, California Amplifier overstated pretax income by a net total of $187,000. The overstatement was the result of errors in sales (net overstatement: $165,000), cost of sales (net understatement: $105,000), operating expenses (net overstatement: $66,000) and other income (net understatement: $17,000). None of these misstatements were due to intentional wrongdoing. These errors caused the company to materially overstate earnings per share by 50% (from $0.02 per share to $0.03 per share).
In addition to the overstatement of pretax income, numerous items on the company's balance sheet were misstated which required adjustments as follows:
|Balance Sheet Data|
|As Originally Reported||Restatement Adjustments||As Restated||% Change|
|Cash and cash equivalents||$6,280||$(73)||$6,207||1 %|
|Accounts receivable, net||8,376||404||8,780||- 5 %|
|Deferred tax asset||1,505||67||1,572||- 4 %|
|Prepaid expenses & other current assets||544||4||548||- 1 %|
|Property and equipment, net||5,649||(626)||5,023||12 %|
|Goodwill, net of amortization||3,826||17||3,843||- 0.4 %|
|Other assets||$ 481||$ 219||700||- 31.0 %|
|Accounts payable||4,172||(66)||4,106||2 %|
|Accrued liabilities||2,006||88||2,094||- 4 %|
|Stockholders' equity||20,398||(121)||20,277||0.59 %|
During the second fiscal quarter of 2000, California Amplifier understated pretax income by $51,000. The understatement was due to errors in sales (net understatement: $82,000), cost of goods sold (net understatement: $74,000), operating expenses (net overstatement: $51,000) and other expenses (net understatement: $8,000). In addition, due to the company's inadequate internal controls, the company's balance sheet contained numerous misstatements that required adjustment as follows:
|Balance Sheet Data
|As Originally Reported||Restatement Adjustments||As Restated||% Change|
|Cash and cash equivalents||$ 7,186||$ (4)||$ 7,182||1 %|
|Accounts receivable, net||10,810||1,912||12,722||- 15 %|
|Inventories||4,887||535||5,422||- 2 %|
|Deferred tax asset||988||132||1,120||- 12 %|
|Prepaid expenses & other current assets||552||(22)||530||4 %|
|Goodwill, net of amortization||3,748||219||3,967||- 6 %|
|Other assets||859||190||1,049||- 18 %|
|Accounts payable||6,002||3,315||9,317||- 36 %|
|Accrued liabilities||3,347||(266)||3,081||9 %|
|Stockholders' equity||21,604||(87)||21,517||0.4 %|
During the third quarter of fiscal year 2000, California Amplifier overstated pretax income by $3.37 million (376%) and similarly overstated shareholder's equity by $3.045 million (12%). The overstatement of income caused California Amplifier to report an after-tax profit of approximately $1.58 million, concealing the fact that the company had actually incurred a loss for the quarter. As described below, Kusatzky was responsible for the entire overstatement of income and equity during this fiscal quarter.
Beginning in November 1999, Kusatzky prepared false financial statements that he knew would be incorporated into California Amplifier's Form 10-Q for the three-month period ending November 27, 1999. During the preparation of California Amplifier's financial statements, Kusatzky used his personal computer to create a spreadsheet containing California Amplifier's consolidated financial statements. He then knowingly and purposely lowered the general ledger figures for expenses and liabilities by $3.4 million to increase California Amplifier's reported profit. In preparing the financial statements, Kusatzky input figures from the general ledger into an electronic spreadsheet. Kusatzky formulated the spreadsheet so that during the consolidation, it would automatically lower the general ledger figures for expenses and accounts payable. Kusatzky then provided the false financial statements to California Amplifier's CFO, with full knowledge that they would be reported to investors and filed with the Commission. At this point in time, Kusatzky did not alter the company's general ledger to match the changes he made to the spreadsheet because the company based its filings on Kusatzky's financial statements and did not have any internal control to verify whether the information matched the general ledger. California Amplifier has since addressed these internal control deficiencies.
After the market closed on December 8, 1999, California Amplifier publicly reported the false financial results for the quarterly period ended November 27, 1999. The market responded favorably to the news that the company had a quarterly profit of $1.58 million, and on December 9, 1999, California Amplifier's stock price opened at $31.44 per share, $4.44 (approximately 16%) above its closing price of $27.00 per share on December 8, 1999. Thereafter, on January 11, 2000, the company filed its Form 10-Q with the Commission. Kusatzky knew that instead of turning an after-tax profit of $1.58 million for the third quarter of fiscal year 2000, California Amplifier had actually incurred an after-tax loss of $570,000.
For fiscal year 2000, California Amplifier overstated pre-tax income by approximately $5.7 million (72%) and shareholders' equity by $9.47 million (51%). Kusatzky was directly responsible for all of the overstatement of income and shareholders' equity for the year-end totals.
In order to conceal the fraud from auditors, Kusatzky falsified California Amplifier's books and records by making improper adjustments to the company's general ledger. Specifically, during the latter half of February 2000, a short time before the annual audit was to start, Kusatzky made two improper journal entries. The first entry improperly reduced various cost of sales accounts (expense accounts) and reduced accounts payable by approximately $3.6 million. By making this adjustment, the false financial statements for the third quarter now agreed with the general ledger.
In addition to the false entries of $3.6 million (described above), during the fourth quarter of fiscal year 2000, Kusatzky made an additional improper adjustment to the company's general ledger. Kusatzky improperly increased assets and lowered liabilities by approximately $2.2 million. Kusatzky carefully concealed these improper adjustments from Arthur Andersen, the company's auditors. California Amplifier had no internal control requiring that Kusatzky's journal entries be substantiated or verified by anyone else at the company to determine their authenticity or accuracy. In effect, Kusatzky was able to make unsupervised journal entries to the company's general ledger and such entries went unchecked by any internal control. California Amplifier has since addressed this internal control deficiency.
As described below, Kusatzky continued to use his spreadsheet to falsify the company's financial statements throughout the first three quarters of fiscal 2001. For the first quarter of fiscal 2001, due to Kusatzky's actions, California Amplifier overstated pretax income by $906,000 (37%). During the second quarter of fiscal 2001, due to Kusatzky's actions, California Amplifier overstated pretax income by $1.29 million (58%). During the second quarter of fiscal 2000, Kusatzky also made several improper adjustments that together overstated earnings and equity by approximately $1.35 million. During the third quarter of fiscal 2001, California Amplifier overstated net income by $688,000 (23%). Kusatzky's fraudulent adjustments totaled at least $118,000.
Section 13(a) of the Exchange Act requires issuers of securities registered pursuant to Section 12 of the Exchange Act to file periodic reports containing information prescribed by Commission rules and regulations. Pursuant to Section 13(a), the Commission has promulgated Rules 13a-1 and 13a-13, which require issuers to file annual and quarterly reports, respectively. Exchange Act Rule 12b-20 requires that these periodic reports contain all additional information necessary to ensure that other statements in the reports are not, under the circumstances, materially misleading. The obligation to file reports under Rules 13a-1 and 13a-13 embodies the requirement that such reports be true and correct. See SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975); SEC v. IMC International, Inc., 384 F. Supp. 899, 893 (N.D. Texas) aff'd, 505 F.2d 733 (5th Cir. 1974).
By filing financial statements in quarterly and annual filings with the Commission for fiscal years 2000 and 2001 that were not prepared in conformity with GAAP, California Amplifier violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. See In the Matter of Oxford Health Plans, Inc., 2002 WL 1688400, SEC Release 34-46254 at 4. (Filing financial statements not in conformity with GAAP violates Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13 thereunder.)
Section 13(b)(2)(A) of the Exchange Act requires issuers to keep books, records and accounts that, in reasonable detail, accurately and fairly reflect company transactions and disposition of assets. Section 13(b)(2)(B) of the Exchange Act requires, among other things, that issuers "devise and maintain a system of internal accounting controls" that is sufficient to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles. Under Section 13(b)(7) of the Exchange Act, the phrases "reasonable detail" and "reasonable assurance" mean such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own business. Violations of Sections 13(b)(2)(A) and 13(b)(2)(B) do not require a showing of materiality or scienter. SEC v. World-Wide Coin Invs., Ltd., 567 F. Supp. 724, 749-51 (N.D. Ga. 1983).
During each of the quarters of fiscal 2000, and the first three quarters of fiscal 2001, California Amplifier materially overstated income and equity. It also caused numerous errors in its balance sheet and therefore violated Section 13(b)(2)(A) of the Exchange Act in that the company's books and records failed accurately and fairly to reflect company transactions and disposition of assets. The company similarly violated Section 13(b)(2)(B) of the Exchange Act because it failed to devise and maintain a system of internal accounting controls that was sufficient to provide reasonable assurance that transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles. The deficiency of California Amplifier's internal controls is demonstrated by the fact that the company failed to conduct an adequate background check that would have revealed that Kusatzky was not a CPA as he represented, and further, that Kusatzky had not earned a college degree in accounting. The company's internal control deficiency is also demonstrated by the fact that, during the third quarter of fiscal 2000, and during the first three quarters of fiscal 2001, California Amplifier published, and thereafter filed with the Commission, quarterly financial statements that were created by Kusatzky essentially on a computer system maintained independent of the company's general ledger. In addition, Kusatzky later made fraudulent journal entries to the company's general ledger without any supervision or requirement that such entries be reviewed or adequately substantiated. These journal entries matched the false entries previously made on his spreadsheet and led to the company's filing of a materially false 2000 Form 10-K. In such circumstances, California Amplifier failed to devise and maintain internal accounting controls sufficient to reasonably assure that reported financial statements agreed with the general ledger.
In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff.
In view of the foregoing, the Commission deems it appropriate to accept California Amplifier's Offer and to impose the sanctions specified therein.
Accordingly, it is hereby ORDERED:
Pursuant to Section 21C of the Exchange Act, that Respondent California Amplifier cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder.
By the Commission.
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