SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: August 31, 2004
_________________
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
__________ ____________
Commission File Number: 0-12182
Exact Name of Registrant as
Specified in Its Charter: CalAmp Corp.
_______________________
DELAWARE 95-3647070
_______________________________ _______________
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification No.
Address of Principal Executive Offices: 1401 N. Rice Avenue
Oxnard, CA 93030
Registrant's Telephone Number: (805) 987-9000
California Amplifier, Inc.
__________________________________________
Former name, Former Address and Former
Fiscal Year, if Changed since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The registrant had 23,197,245 shares of Common Stock outstanding as of
October 7, 2004.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
August 31, February 28,
2004 2004
Assets -------- --------
Current assets:
Cash and cash equivalents $ 25,268 $ 22,885
Accounts receivable, less allowance for doubtful
accounts of $845 and $211, respectively 25,621 18,579
Inventories, net 25,208 20,253
Deferred income tax assets 1,814 2,404
Prepaid expenses and other current assets 3,915 3,244
-------- --------
Total current assets 81,826 67,365
Equipment and improvements, at cost, net of
accumulated depreciation and amortization 5,125 4,381
Deferred income tax assets, less current portion 3,292 4,359
Goodwill 100,942 20,938
Other intangible assets, net 4,800 200
Deposits and other assets 2,346 399
-------- --------
$198,331 $ 97,642
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Bank line of credit payable $ 3,000 $ -
Current portion of long-term debt 2,946 3,603
Accounts payable 23,428 17,395
Accrued payroll and employee benefits 3,820 1,513
Other current liabilities 4,787 2,078
Deferred revenue 1,647 -
-------- --------
Total current liabilities 39,628 24,589
-------- --------
Long-term debt, less current portion 6,116 7,690
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 3,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 40,000 shares
authorized; 23,194 and 14,910 shares issued
and outstanding, respectively 232 149
Additional paid-in capital 138,145 44,486
Less common stock held in escrow (9,594) -
Retained earnings 24,605 21,550
Accumulated other comprehensive loss (801) (822)
-------- --------
Total stockholders' equity 152,587 65,363
-------- --------
$198,331 $ 97,642
======== ========
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Three Months Ended Six Months Ended
August 31, August 31,
------------------- -------------------
2004 2003 2004 2003
------- ------- ------- -------
Revenues:
Product sales $45,094 $24,197 $86,750 $42,763
Service revenues 5,733 - 9,074 -
------- ------- ------- -------
Total revenues 50,827 24,197 95,824 42,763
------- ------- ------- -------
Cost of revenues:
Cost of product sales 36,138 20,997 70,262 38,257
Cost of service revenues 4,365 - 6,937 -
------- ------- ------- -------
Total cost of revenues 40,503 20,997 77,199 38,257
------- ------- ------- -------
Gross profit 10,324 3,200 18,625 4,506
------- ------- ------- -------
Operating expenses:
Research and development 2,068 1,236 3,875 2,598
Sales and marketing 1,732 549 2,804 1,043
General and administrative 3,179 843 5,624 1,661
Amortization of intangibles 461 26 721 52
In-process research and
development write-off - - 471 -
------- ------- ------- -------
Total operating expenses 7,440 2,654 13,495 5,354
------- ------- ------- -------
Operating income (loss) 2,884 546 5,130 (848)
Non-operating expense, net (75) (129) (139) (182)
------- ------- ------- -------
Income (loss) before income
taxes 2,809 417 4,991 (1,030)
Income tax (provision) benefit (1,063) (27) (1,936) 318
------- ------- ------- -------
Net income (loss) $ 1,746 $ 390 $ 3,055 $ (712)
======= ======= ======= =======
Net income (loss) per share:
Basic $ 0.08 $ 0.03 $ 0.15 $ (0.05)
Diluted $ 0.08 $ 0.03 $ 0.14 $ (0.05)
Shares used in per share
calculations:
Basic 22,292 14,747 20,524 14,746
Diluted 22,809 14,916 21,224 14,746
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six months
ended August 31,
---------------------
2004 2003
------- -------
Cash flows from operating activities:
Net income (loss) $ 3,055 $ (712)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 2,075 1,613
Write-off of in-process research and development 471 -
Equipment impairment writedowns 201 575
Gain on sale of equipment (36) (117)
Increase in equity associated with tax
benefit from exercise of stock options 179 -
Deferred tax assets, net 1,657 (289)
Changes in operating assets and liabilities:
Accounts receivable (1,960) 3,169
Inventories (4,278) 1,162
Prepaid expenses and other assets 1,537 (278)
Accounts payable 3,802 (222)
Accrued payroll and other accrued liabilities (1,092) (1,786)
Deferred revenue 116 -
------- -------
Net cash provided by operating activities 5,727 3,115
------- -------
Cash flows from investing activities:
Capital expenditures (1,243) (978)
Proceeds from sale of property and equipment 627 285
Acquisition of Vytek Corporation, net of
cash acquired (1,727) -
------- -------
Net cash used in investing activities (2,343) (693)
------- -------
Cash flows from financing activities:
Proceeds from debt borrowings 2,000 -
Debt repayments (3,557) (1,301)
Proceeds from exercise of stock options 556 12
------- -------
Net cash used in financing activities (1,001) (1,289)
------- -------
Net change in cash and cash equivalents 2,383 1,133
Cash and cash equivalents at beginning of period 22,885 21,947
------- -------
Cash and cash equivalents at end of period $25,268 $23,080
======= =======
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended August 31, 2004 and 2003
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
CalAmp Corp. ("CalAmp" or the "Company"), formerly known as California
Amplifier, Inc., designs, manufactures and markets microwave equipment used
in the reception of television programming transmitted from satellites and
wireless terrestrial transmission sites, and two-way transceivers used for
wireless high-speed Internet (broadband) service. The Company's principal
business is the design and sale of outdoor reception equipment used in the
U.S. Direct Broadcast Satellite ("DBS") subscription television market.
On April 12, 2004, the Company completed the acquisition of Vytek
Corporation ("Vytek"), a privately held company. The operations of Vytek
are included in the Company's consolidated financial statements since that
date. See Notes 2 and 13 for additional information concerning Vytek.
Effective with the acquisition of Vytek, the Company realigned its
operations into a divisional structure. The legacy operations of CalAmp,
previously segregated into the Satellite and Wireless Access business
units, have been combined and are now referred to as the Products Division.
The operations of Vytek, which are principally service oriented, comprise
the Company's Solutions Division.
All intercompany transactions and accounts have been eliminated in
consolidation. In the opinion of the Company's management, the
accompanying consolidated financial statements reflect all adjustments
necessary to present fairly the Company's financial position at August 31,
2004 and its results of operations for the three and six months ended
August 31, 2004 and 2003. The results of operations for such periods are
not necessarily indicative of results to be expected for the full fiscal
year.
The Company uses a 52-53 week fiscal year ending on the Saturday
closest to February 28, which for fiscal year 2004 fell on February 28,
2004. The actual interim periods ended on August 28, 2004 and August 30,
2003. In the accompanying consolidated financial statements, the 2004
fiscal year end is shown as February 28 and the interim period end for both
years is shown as August 31 for clarity of presentation.
Certain notes and other information are condensed or omitted from
the interim financial statements presented in this Quarterly Report on
Form 10-Q. Therefore, these financial statements should be read in
conjunction with the Company's 2004 Annual Report on Form 10-K as filed
with the Securities and Exchange Commission on May 28, 2004.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Note 2 - VYTEK ACQUISITION
On April 12, 2004, the Company completed the acquisition of Vytek, a
privately held company headquartered in San Diego, California, pursuant
to a merger agreement entered into and announced on December 23, 2003.
The transaction was approved by the stockholders of both companies during
special meetings held on April 8, 2004.
Vytek is a provider of technology integration solutions involving a
mix of professional services and proprietary software and hardware
products, serving the needs of enterprise customers and original
equipment manufacturers. This acquisition was motivated primarily by the
strategic goals of increasing the Company's presence in markets which
offer higher growth and profit margin potential, and diversifying the
Company's business and customer base beyond its current dependence on the
two major U.S. DBS system operators.
Pursuant to the Agreement, the Company issued approximately
8,123,400 shares of common stock as the purchase consideration, of which
854,700 share were placed into an escrow account and approximately
7,268,700 shares were issued to the selling shareholders of Vytek. The
Company also assumed all unexercised Vytek stock options and stock
purchase warrants that were outstanding at the time of the merger.
The Company entered into an escrow agreement with a designated
representative of the selling stockholders of Vytek and an independent
escrow agent. Under the terms of the escrow agreement, the 854,700 shares
of the CalAmp's common stock deposited into the escrow fund serve as
security for potential indemnity claims by the Company under the acquisition
agreement. The acquisition agreement provides that in the event Vytek's
balance sheet as of the acquisition date reflects working capital (as
defined in the acquisition agreement) of less than $4 million, then CalAmp
can recover such deficiency from the escrow fund (the "Working Capital
Adjustment"). Vytek's stockholder representative may direct the sale of
some or all of the escrow shares for a price of at least $11.00 per share,
and deposit the proceeds received from such sale into the escrow fund.
Subject to any claims by the Company for indemnification or for the Working
Capital Adjustment, except for an amount equal in value to $2 million, all
shares of the Company's common stock and any cash in the escrow fund would
be released to the selling stockholders of Vytek, in accordance with their
pro rata interests, 15 months after the April 12, 2004 closing date. All
remaining shares of the Company's common stock, if any, and any remaining
cash in the escrow fund would be released to the Vytek selling stockholders
two years after the April 12, 2004 closing date, subject to any then pending
and unresolved claims for indemnification or the Working Capital Adjustment.
Based on the information currently available, the Company estimates that
Vytek's working capital (as defined in the acquisition agreement) as of the
April 12, 2004 closing date was approximately $5 million below the required
working capital amount of $4 million. This deficiency amount has not yet
been agreed to by the selling stockholders of Vytek. The Company is
currently in discussions with the designated representative of Vytek's
selling stockholders to determine the final amount of the Working Capital
Adjustment.
For purchase accounting purposes, the fair market value per share
used to value the approximately 7,269,000 shares issued to the Vytek
selling stockholders is $11.26 per share, which is the average closing
price of the Company's common stock on the NASDAQ National Market for the
period beginning two trading days before and ending two trading days
after December 23, 2003, the day that the merger terms were agreed to and
announced. Also for purchase accounting purposes, the fair value of the
Vytek options and warrants assumed by the Company in the merger was
calculated using the Black-Scholes option pricing model. The fair value
of options and warrants assumed was estimated using the Black-Scholes
option pricing model with an interest rate of 3.3%, a dividend yield of
0%, a volatility factor of 134.8%, and an expected life of 5 years in
the case of stock options and 2.25 years to 9.25 years in the case of
warrants.
Following is the calculation of the recorded value of common stock
issued and options and warrants assumed in the Vytek acquisition (in
thousands):
Deposited
Issued to to escrow
sellers account Total
------ ------- -----
Number of common stock shares issued 7,268.7 854.7 8,123.4
Fair market value per share $ 11.26 $ 11.26
------ ------
Value of shares issued $81,846 $ 9,624 $91,470
Less stock registration costs (270) (30) (300)
------ ------ ------
Fair value of shares issued net
of registration costs 81,576 9,594 91,170
Fair value of fully vested Vytek stock
options and warrants assumed by
CalAmp 1,837 - 1,837
------ ------ ------
Recorded value of common stock issued
and assumed options and warrants $83,413 $ 9,594 $93,007
====== ====== ======
The common stock shares deposited to the escrow account are, for
accounting purposes, treated as contingent consideration, and accordingly
are excluded from the purchase price determination until such time as the
shares are released from escrow.
The Company has not yet obtained all information required to complete
the purchase price allocation related to the Vytek acquisition. The final
allocation is expected to be completed by the end of fiscal 2005.
Following is a preliminary purchase price allocation for the Vytek
acquisition (in thousands):
Recorded value of common stock issued to sellers
and assumed options and warrants (excluding shares
deposited to escrow account) ............................... $83,413
Direct costs of acquisition including legal,
accounting and financial advisory fees ..................... 2,580
------
Total cost of Vytek acquisition (excluding common
stock deposited to escrow account) ......................... 85,993
Fair value of net assets acquired:
Current assets .................................... $ 9,266
Property and equipment ............................ 1,185
Intangible assets:
Developed/core technology ............. $3,349
Customer lists ........................ 1,127
Contracts backlog ..................... 845
In-process research and development ... 471
-----
Total intangible assets........................ 5,792
Other assets ...................................... 2,066
Current liabilities ............................... (12,024)
Long-term liabilities ............................. (296)
------
Total fair value of net assets acquired ................... 5,989
------
Goodwill ..................................................... $80,004
======
The goodwill arising from this acquisition is not expected to be
deductible for income tax purposes.
The $471,000 allocated to in-process research and development in the
preliminary purchase price allocation above was charged to expense
immediately following the acquisition. The Company expects to incur
approximately $300,000 to complete the in-process technology.
The following is supplemental pro forma information presented as if
the acquisition of Vytek had occurred at the beginning of each of the
respective periods (in thousands):
Six months Ended Six Months Ended
August 31, 2004 August 31, 2003
-------------------- ------------------
As Pro As Pro
reported forma reported forma
-------- -------- -------- -------
Revenues $95,824 $99,985 $42,763 $67,090
Net income (loss) $ 3,055 $ 2,967 $ (712) $(2,006)
Net income (loss) per share:
Basic $ 0.15 $ 0.13 $ (0.05) $ (0.09)
Diluted $ 0.14 $ 0.13 $ (0.05) $ (0.09)
The pro forma adjustments for the six months ended August 31, 2004
consist of adding Vytek's estimated results of operations for the six weeks
ended April 12, 2004, because Vytek is included in the "As reported" amounts
for the 20 week period from the April 12 acquisition date to August 31, 2004.
The pro forma adjustments for the six months ended August 31, 2003
consist of adding Vytek's results of operations for the six months ended
September 30, 2003.
Note 3 - INVENTORIES
Inventories include the cost of material, labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in,
first-out method) or market, and consist of the following (in thousands):
August 31, February 28,
2004 2004
------ ------
Raw materials and subassemblies $18,867 $11,671
Work in process 666 417
Finished goods 5,675 8,165
------ ------
$25,208 $20,253
====== ======
Note 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of adopting Statement of Financial Accounting Standards
No. 142, "Accounting for Goodwill and Intangible Assets", at the beginning
of fiscal 2003, the Company no longer records amortization on goodwill.
Instead, goodwill is tested periodically for impairment.
Annual goodwill impairment tests were conducted as of December 31,
2003 and 2002. These tests indicated that there was no impairment of
goodwill as of those dates. Because of the write-down of certain assets
in the Products Division in the three months ended May 31, 2003, the
Company conducted an interim goodwill impairment test as of May 31, 2003.
This test also indicated that there was no impairment of goodwill. The
Company used a discounted cash flow approach to estimate the fair value
of its Products Division in these impairment tests.
The change in the carrying amount of goodwill for the six months ended
August 31, 2004 is as follows:
Balance as of February 28, 2004 $ 20,938
Estimated goodwill arising from the
acquisition of Vytek in April 2004 80,004
-------
Balance as of August 31, 2004 $100,942
=======
The goodwill arising from the Vytek transaction is an estimated amount
based on the preliminary purchase price allocation, and is subject to
change.
The goodwill balance at February 28, 2004 is associated with the
Company's Products Division. Substantially all goodwill arising from the
Vytek acquisition is associated with the Company's Solutions Division.
Intangible assets are comprised as follows at August 31, 2004 and
February 28, 2004 (in thousands):
August 31, 2004 February 28, 2004
------------------------ -------------------------
Amorti- Gross Accum. Gross Accum.
zation Carrying Amorti- Carrying Amorti-
Period Amount zation Net Amount zation Net
----- ------ ------ ----- ------ ------ -----
Developed/core
technology 5 yrs. $3,349 $ 257 $3,092 $ - $ - $ -
Customer lists 5 yrs. 1,127 87 1,040 - - -
Contracts
backlog 1 yr. 845 325 520 - - -
Covenants not
to compete 4.1 yrs. 400 252 148 400 200 200
------ ----- ----- ----- ----- -----
$5,721 $ 921 $4,800 $ 400 $ 200 $ 200
====== ====== ===== ===== ===== =====
All intangible assets in the table above resulted from the acquisition
of Vytek in April 2004 except for the covenants not to compete, which arose
from the acquisition of the satellite dish manufacturing business of Kaul-
Tronics in April 2002.
Amortization expense of intangible assets was $721,000 and $52,000 in
the six months ended August 31, 2004 and 2003, respectively. The
weighted average amortization period of the intangible assets at August
31, 2004 was 4.3 years.
Estimated amortization expense for the fiscal years ending February 28
is as follows:
2005 $1,644,000
2006 $1,087,000
2007 $ 895,000
2008 $ 895,000
2009 $ 895,000
2010 $ 105,000
Note 5 - FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Bank credit facility
The Company has a $10 million working capital line of credit with a
commercial bank. Borrowings under this line of credit bear interest at
LIBOR plus 2.0% or the bank's prime rate, and are secured by substantially
all of the Company's assets. The maturity date of the line of credit is
August 3, 2005. At August 31, 2004, there were outstanding borrowings of $3
million on the line of credit and $2,479,000 was reserved under the line for
issued letters of credit. The $3 million outstanding balance on the line of
credit is classified as a current liability at August 31, 2004 because the
line of credit matures within 12 months of that date. The Company also has
two bank term loans which had an aggregate outstanding principal balance of
$8,876,000 at August 31, 2004, of which $2,823,000 is classified as current
at that date. The bank credit agreement which encompasses the line of
credit and the two term loans contains a subjective acceleration clause
which enables the bank to call the loans in the event of a material adverse
change (as defined) in the Company's business. Based on the Company's
history of profitable operations and positive operating cash flow over the
past several years, and based on the Company's internal financial forecasts
for the next several quarters, the Company does not believe it is probable
that the bank will assert the material adverse change clause in the next 12
months.
At the time it was acquired by the Company on April 12, 2004, Vytek had
$2 million outstanding on a line of credit with another commercial bank.
Shortly after the acquisition was consummated, the Company borrowed $2
million on its bank line of credit and paid off Vytek's bank line of credit.
Vytek's bank line of credit was then terminated.
Other long-term debt
Vytek had capital lease obligations of $185,000 at August 31, 2004,
of which $123,000 was classified as current at that date.
Contractual cash obligations
Following is a summary of the Company's contractual cash obligations
as of August 31, 2004 (in thousands):
Future Cash Payments Due by Fiscal Year
----------------------------------------------
Contractual 2005 There-
Obligations (remainder) 2006 2007 2008 2009 after Total
- --------------- ------ ------ ------ ------ ------ ------ ------
Bank debt $ 1,412 $5,823 $2,139 $2,503 $ - $ - $11,877
Capital leases 67 80 30 8 - - 185
Operating leases 1,279 2,170 1,802 1,862 1,924 3,756 12,793
Purchase
obligations 23,450 422 - - - - 23,872
------- ------ ------ ------ ------ ------ ------
Total contractual
cash obligations $26,208 $8,495 $3,971 $4,373 $1,924 $3,756 $48,727
====== ====== ====== ====== ====== ====== ======
Note 6 - INCOME TAXES
Deferred income tax assets reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
A deferred income tax asset is recognized if realization of such asset is
more likely than not, based upon the weight of available evidence which
includes historical operating performance and the Company's forecast of
future operating performance. The Company evaluates the realizability of
its deferred income tax assets on a quarterly basis, and a valuation
allowance is provided, as necessary, in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". During this evaluation, the Company reviews its forecasts of
future operating performance in conjunction with the positive and negative
evidence surrounding the realizability of its deferred income tax asset to
determine if a valuation allowance is needed.
At February 28, 2004, the deferred tax asset valuation allowance was
$630,000, and the deferred tax asset net of this valuation allowance was
$6,763,000. The $630,000 valuation allowance relates to foreign tax
credits which can be utilized only after tax loss carryforwards and other
tax benefits have been fully utilized. Because these foreign tax credits
have a remaining carryforward period of only two to four years, management
believes that it is more likely than not that these foreign tax credits
will expire unutilized, and accordingly a full valuation allowance against
these credits was established.
During the six months ended August 31, 2004, the deferred tax asset
was reduced by $1,657,000 reflecting the utilization of tax loss
carryforwards and other tax assets as a result of the taxable income
generated in the period. There was no change in the $630,000 deferred tax
asset valuation allowance during the six months ended August 31, 2004.
The effective income tax rate was 38.1% and 30.9% in the six months
ended August 31, 2004 and 2003, respectively. The increase in effective
tax rate is attributable primarily to the fact that during the fiscal year
ended February 28, 2004 reductions of the deferred tax asset valuation
allowance caused a reduction in the overall effective income tax rate. In
the six months ended August 31, 2004, there was no reduction in the
valuation allowance.
Vytek, which was acquired by the Company effective April 12, 2004, has
tax loss carryforwards and other tax assets that the Company believes will
be utilizable to some extent in the future, subject to change of ownership
limitations pursuant to Section 382 of the Internal Revenue Code and to the
ability of the combined post-merger company to generate sufficient taxable
income to utilize the benefits before the expiration of the applicable
carryforward periods. In the preliminary purchase price allocation
described in Note 2 herein, no value has been assigned to Vytek's deferred
tax assets, pending completion by the Company of its analysis of the
estimated future realizability of these tax assets. Once this analysis is
completed, to the extent value is allocated to Vytek's deferred tax assets
in the final purchase price allocation, there will be a corresponding
reduction in the value ascribed to goodwill.
Note 7 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution, using the treasury stock method, that could occur if
securities or other contracts to issue Common Stock were exercised or
converted into Common Stock or resulted in the issuance of Common Stock
that then shared in the earnings of the Company. In computing diluted
earnings per share, the treasury stock method assumes that outstanding
options are exercised and the proceeds are used to purchase common stock at
the average market price during the period. Options will have a dilutive
effect under the treasury stock method only when the Company reports income
and the average market price of the common stock during the period exceeds
the exercise price of the options.
The following is a summary of the calculation of weighted average
shares used in the computation of basic and diluted earnings per share (in
thousands):
Three months ended Six months ended
August 31, August 31,
---------------- ----------------
2004 2003 2004 2003
------ ------ ------ ------
Basic weighted average number
of common shares outstanding 22,292 14,747 20,524 14,746
Effect of dilutive securities:
Stock options 517 169 700 -
------ ------ ------ ------
Diluted weighted average number
of common shares outstanding 22,809 14,916 21,224 14,746
====== ====== ====== ======
Options outstanding at August 31, 2004 to purchase approximately
1,302,000 shares of Common Stock at exercise prices of $6.88 and above were
excluded from the computation of diluted earnings per share for the three
and six months then ended because the exercise price of these options was
greater than the average market price of the common stock and accordingly
the effect of inclusion would be antidilutive.
Because the Company had a net loss for the six months ended August 31,
2003, outstanding stock options to purchase approximately 2,590,000 shares
of common stock at exercise prices ranging from $2.76 to $50.56 would have
been anti-dilutive and were therefore not included in the computation of
diluted earnings per share for 2003 period.
In connection with the acquisition of Vytek, 854,700 shares of common
stock were issued and are held in escrow pending the resolution of certain
matters as further described in Note 2 herein. All shares held in escrow
have been excluded from the basic weighted average number of common shares
outstanding. Of the common stock shares held in escrow, the Company
estimates that all 854,700 shares would have been subject to reversion to
the Company if the Working Capital Adjustment discussed in Note 2 had been
finalized on August 31, 2004. For this reason, all shares held in escrow
have also been excluded from diluted weighted average number of common
shares outstanding.
Note 8 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the total of net income
(loss) and all non-owner changes in equity. The following table details
the components of comprehensive income (loss) for the three and six months
ended August 31, 2004 and 2003 (in thousands):
Three months ended Six months ended
August 31, August 31,
---------------- ----------------
2004 2003 2004 2003
------ ------ ------ ------
Net income (loss) $1,746 $ 390 $3,055 $ (712)
Unrealized holding gain (loss) on
available-for-sale investments - (25) 21 (24)
------ ------ ------ ------
Comprehensive income (loss) $1,746 $ 365 $3,076 $ (736)
====== ====== ====== ======
Note 9 - STOCK OPTIONS
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock Based Compensation - Transition
and Disclosure" ("FAS No. 148"). FAS No. 148 amends Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS No. 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock based employee compensation. In addition, FAS No.
148 amends the disclosure requirements of FAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and
the effect of the method used on reported results.
As allowed by Statement of FAS No. 123, the Company has elected to
continue to measure compensation cost under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No.
25"). Under APB No. 25, compensation expense is measured on the first
date at which both the number of shares and the exercise price are known.
Under the Company's stock option plans, this would typically be the grant
date. To the extent that the exercise price equals or exceeds the market
value of the stock on the grant date, no compensation expense is
recognized. Because all of the options granted by the Company are at
exercise prices not less than the market value on the date of grant, no
compensation expense is recognized under this accounting treatment in the
accompanying unaudited consolidated statements of operations.
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following assumptions:
Options granted
during the six months
ended August 31,
-------------------
2004 2003
------ ------
Expected life (years) 5 5
Dividend yield 0% 0%
The range for interest rates is 2.58% to 3.96%, and the range for
volatility is 131% to 135%.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of FAS 123 to stock-based employee compensation
(in thousands except per share amounts):
Three months ended Six months ended
August 31, August 31,
---------------- ----------------
2004 2003 2004 2003
------ ------ ------ ------
Net income (loss) as reported $1,746 $ 390 $ 3,055 $ (712)
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (596) (539) (1,168) (1,193)
----- ----- ----- ------
Pro forma net income (loss) $1,150 $ (149) $ 1,887 $(1,905)
===== ===== ===== ======
Earnings (loss) per share:
Basic -
As reported $ 0.08 $ 0.03 $ 0.15 $(0.05)
Pro forma $ 0.05 $(0.01) $ 0.09 $(0.13)
Diluted -
As reported $ 0.08 $ 0.03 $ 0.14 $(0.05)
Pro forma $ 0.05 $(0.01) $ 0.09 $(0.13)
Note 10 - CONCENTRATION OF RISK
Because the Company sells into markets dominated by a few large
service providers, a significant percentage of consolidated revenue and
consolidated accounts receivable relate to a small number of customers.
Sales to customers which accounted for 10% or more of consolidated sales
for the three and six months ended August 31, 2004 or 2003, as a percent of
consolidated revenue, are as follows:
Three months ended Six months ended
August 31, August 31,
---------------- ----------------
Customer 2004 2003 2004 2003
-------- ------ ------ ------ ------
A 33.6% 35.5% 35.1% 34.0%
B 12.8% 21.5% 14.5% 19.6%
C 14.5% - 14.2% -
D 6.4% 13.5% 5.4% 8.8%
Accounts receivable from these customers as a percent of consolidated
net accounts receivable are as follows:
August 31, Feb. 28,
Customer 2004 2004
-------- ------ ------
A 21.0% 49.4%
B 14.9% 22.0%
C 20.5% 8.2%
D 2.1% 3.0%
Customers A, B, C and D are customers of the Company's Products Division.
Note 11 - PRODUCT WARRANTIES
The Company generally warrants its products against defects over
periods ranging from 3 to 24 months. An accrual for estimated future
costs relating to products returned under warranty is recorded as an
expense when products are shipped. At the end of each quarter, the
Company adjusts its liability for warranty claims based on its actual
warranty claims experience as a percentage of sales for the preceding
three years plus an additional reserve amount, as required, for specific
situations in which estimated warranty costs are in excess of that
historical claims rate. Activity in the warranty liability for the six
months ended August 31, 2004 and 2003 is as follows (in thousands):
Six months ended
August 31,
-----------------
2004 2003
------ ------
Balance at beginning of period $159 $491
Charged (credited) to costs
and expenses 584 (26)
Deductions (254) (73)
---- ----
Balance at end of period $489 $392
==== ====
Note 12 - OTHER FINANCIAL INFORMATION
"Net cash provided by operating activities" in the consolidated
statements of cash flows includes cash payments for interest and income
taxes as follows (in thousands):
Six months ended
August 31,
-------------------
2004 2003
------ ------
Interest paid $ 232 $ 281
Income taxes paid (net
refunds received) $ 70 (93)
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Six months ended
August 31,
-------------------
2004 2003
------ ------
Decrease in valuation allowance
for available-for-sale investment $ 21 $ -
Issuance of common stock and
assumption of stock options and
warrants as consideration for
acquisition of Vytek Corporation,
net of common stock issued and
held in escrow $83,413 $ -
Note 13 - SEGMENT INFORMATION
Effective with the acquisition of Vytek on April 12, 2004, the Company
realigned its operations into a divisional structure. The legacy
operations of CalAmp, previously segregated into the Satellite and Wireless
Access business units, have been combined and are now referred to as the
Products Division. The operations of Vytek, which are principally service
oriented, comprise the Company's new Solutions Division.
Segment information for the three and six months ended August 31, 2004
and 2003 is as follows (dollars in thousands):
Three months ended Three months ended
August 31, 2004: August 31, 2003:
------------------------------------ ------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Products Solutions Products Solutions
Division Division Corporate Total Division Division Corporate Total
------- ------ ------- ----- ------- ------ ------- -----
Revenues:
Products $43,056 $ 2,038 $45,094 $24,197 $ - $24,197
Services - 5,733 5,733 - - -
------ ----- ------ ------ ----- ------
Total $43,056 $ 7,771 $50,827 $24,197 $ - $24,197
====== ===== ====== ====== ===== ======
Gross profit:
Products $ 8,503 $ 453 $ 8,956 $ 3,200 $ - $ 3,200
Services - 1,368 1,368 - - -
------ ----- ------ ------ ----- ------
Total $ 8,503 $ 1,821 $10,324 $ 3,200 $ - $ 3,200
====== ===== ====== ====== ===== ======
Gross margin:
Products 19.7% 22.2% 19.9% 13.2% - 13.2%
Services - 23.9% 23.9% - - -
Total 19.7% 23.4% 20.3% 13.2% - 13.2%
Operating
income
(loss) $ 6,036 $(2,083) $(1,069) $ 2,884 $ 1,040 $ - $ (494) $ 546
====== ===== ===== ====== ====== ===== ===== ======
Six months ended Six months ended
August 31, 2004: August 31, 2003:
------------------------------------ ------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Products Solutions Products Solutions
Division Division Corporate Total Division Division Corporate Total
------- ------ ------- ----- ------- ------ ------- -----
Revenues:
Products $83,555 $ 3,195 $86,750 $42,763 $ - $42,763
Services - 9,074 9,074 - - -
------ ------ ------ ------ ----- ------
Total $83,555 $12,269 $95,824 $42,763 $ - $42,763
====== ====== ====== ====== ===== ======
Gross profit:
Products $15,769 $ 719 $16,488 $ 4,506 $ - $ 4,506
Services - 2,137 2,137 - - -
------ ----- ------ ------ ----- ------
Total $15,769 $ 2,856 $18,625 $ 4,506 $ - $ 4,506
====== ===== ====== ====== ===== ======
Gross margin:
Products 18.9% 22.5% 19.0% 10.5% - 10.5%
Services - 23.6% 23.6% - - -
Total 18.9% 23.3% 19.4% 10.5% - 10.5%
Operating
income
(loss) $10,670 $(3,592) $(1,948) $ 5,130 $ 74 $ - $ (922) $ (848)
====== ===== ===== ====== ====== ===== ===== ======
Product revenue of the Solutions Division represents primarily hardware
that is bundled with software applications.
Included in cost of revenue for the Products Division were asset
impairment writedowns of $201,000 and $575,000 during the six months ended
August 31, 2004 and 2003, respectively, on plant and equipment which became
idled due to increased outsourcing to contract manufacturers. Also
included in Product Division cost of revenue were lower of cost or market
inventory writedowns of $504,000 and $242,000 in the six months ended
August 31, 2004 and 2003, respectively. As further discussed in Note 15
below, Product Division cost of revenue for the three and six months ended
August 31, 2004 includes a credit of $200,000 resulting from settling a
lawsuit for an amount less than the previously established reserve.
The Company considers operating income (loss) to be the primary
measure of profit or loss of its business segments. The amount shown for
each period in the "Corporate" column above for operating income (loss)
consists of corporate expenses not allocated to the business segments.
Non-allocated corporate expenses include salaries and wages for the CEO and
CFO, and corporate expenses such as audit fees, investor relations, stock
listing fees, director and officer liability insurance, and director fees
and expenses.
Note 14 - COMMITMENTS AND CONTINGENCIES
The Company leases its corporate office and manufacturing plant in
Ventura County, California under an operating lease that expires June 30,
2011. The lease agreement requires the Company to pay all maintenance,
property taxes and insurance premiums associated with the building. In
addition, the Company leases office space in California, New Jersey,
Virginia, New York, Minnesota and France under non-cancelable operating
leases, which expire at various dates through July 2010. Some of the
leases require the Company to pay maintenance, utilities and insurance
costs and contain renewal options (for periods ranging from two to five
years) and escalation clauses. Certain manufacturing equipment and
office equipment is also leased under operating lease agreements. A
summary of future operating lease commitments is included in the
contractual cash obligations table in Note 5.
At August 31, 2004, the Company had restricted cash in the aggregate
amount of $1,805,000 securing two irrevocable letters of credit for a
facility lease security deposit and a performance bond for a long-term
design and engineering contract. This restricted cash amount is included
in Deposits and Other Assets in the consolidated balance sheet at that
date.
Note 15 - LEGAL MATTERS
Wage-related class action lawsuit:
On April 21, 2004, the Company was served with a complaint alleging
certain violations of the California labor code. Among other charges,
the class action complaint alleges that from October 2000 to the present
time certain hourly employees did not take their lunch break within the
time period prescribed by state law. The Company established a reserve
in its financial statements for the year ended February 2004 that was
included in Product Division cost of revenue in the consolidated income
statement. In September 2004, the Company entered into a settlement
agreement with the plaintiffs that is subject to review and approval by
the court. As a result of the settlement agreement, the Company lowered
its reserve by $200,000 in the quarter ended August 31, 2004, which
reduced Product Division cost of revenue by the same amount.
Property lease lawsuit and cross-complaint
On May 21, 2004, the Company was served with a lawsuit filed by the
owner of a building in Camarillo, California that was formerly used as
the Company's corporate offices and principal manufacturing plant under a
15-year lease agreement that expired on February 28, 2004. The lawsuit
seeks damages for facility repairs that are allegedly required in the
range of $520,000 to $700,000. The Company believes the lawsuit is
without merit and intends to defend itself vigorously against all
allegations. On May 27, 2004, the Company filed a cross-complaint,
seeking payment by the building owner of approximately $180,000 in
deposits and other amounts which the Company believes it is owed. The
Company believes that the ultimate resolution of this matter will not
have a material adverse effect on the Company's results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting periods. Areas where significant judgments
are made include, but are not limited to: allowance for doubtful
accounts, inventory valuation, product warranties, the deferred tax asset
valuation allowance, and the valuation of long-lived assets and goodwill.
Actual results could differ materially from these estimates.
Allowance for Doubtful Accounts
The Company establishes an allowance for estimated bad debts based
upon a review and evaluation of specific customer accounts identified as
known and expected collection problems, based on historical experience,
due to insolvency, disputes or other collection issues. As further
described in Note 10 to the accompanying consolidated financial
statements, the Company's customer base is quite concentrated, with three
customers accounting for approximately 64% of the Company's total revenue
for the six months ended August 31, 2004. Changes in either a key
customer's financial position, or the economy as a whole, could cause
actual write-offs to be materially different from the recorded allowance
amount.
Inventories
The Company evaluates the carrying value of inventory on a quarterly
basis to determine if the carrying value is recoverable at estimated
selling prices. To the extent that estimated selling prices do not exceed
the associated carrying values, inventory carrying amounts are written
down. In addition, the Company generally treats inventory on hand or
committed with suppliers, which is not expected to be sold within the next
12 months, as excess and thus appropriate writedowns of the inventory
carrying amounts are established through a charge to cost of revenues.
Estimated usage in the next 12 months is based on firm demand represented
by orders in backlog at the end of the quarter and management's estimate of
sales beyond existing backlog, giving consideration to customers'
forecasted demand, ordering patterns and product life cycles. Significant
reductions in product pricing, or changes in technology and/or demand may
necessitate additional writedowns of inventory carrying value in the
future.
Product Warranties
The Company provides for the estimated cost of product warranties at
the time revenue is recognized. While it engages in extensive product
quality programs and processes, including actively monitoring and
evaluating the quality of its component suppliers, the Company's warranty
obligation is affected by product failure rates and material usage and
service delivery costs incurred in correcting a product failure. Should
actual product failure rates, material usage or service delivery costs
differ from management's estimates, revisions to the estimated warranty
liability would be required.
Deferred Income Tax Asset Valuation Allowance
The deferred income tax asset reflects the net tax effects of
temporary differences between the carrying amount of assets and liabilities
for financial reporting purposes and for income tax purposes. A deferred
income tax asset is recognized if realization of such asset is more likely
than not, based upon the weight of available evidence that includes
historical operating performance and the Company's forecast of future
operating performance. The Company evaluates the realizability of its
deferred income tax asset on a quarterly basis, and a valuation allowance
is provided, as necessary. During this evaluation, the Company reviews its
forecasts of income in conjunction with the positive and negative evidence
surrounding the realizability of its deferred income tax asset to determine
if a valuation allowance is needed.
At August 31, 2004 the Company's net deferred income tax asset was
$5,106,000, which amount is net of a valuation allowance of $630,000.
If in the future a portion or all of the $630,000 valuation allowance is no
longer deemed to be necessary, reductions of the valuation allowance will
decrease the income tax provision. Conversely, if in the future the
Company were to change its realization probability assessment to less than
50%, the Company would provide an additional valuation allowance for all or
a portion of the net deferred income tax asset, which would increase the
income tax provision.
Vytek, which was acquired by the Company in April 2004, has tax loss
carryforwards and other tax assets that the Company believes will be
utilizable to some extent in the future, subject to change of ownership
limitations pursuant to Section 382 of the Internal Revenue Code and to the
ability of the combined post-merger company to generate sufficient taxable
income to utilize the benefits before the expiration of the applicable
carryforward periods. In the preliminary purchase price allocation
described in Note 2 herein, no value has been assigned to Vytek's deferred
tax assets, pending completion by the Company of its analysis of the
estimated future realizability of these tax assets. Once this analysis is
completed, to the extent value is allocated to Vytek's deferred tax assets
in an updated purchase price allocation, there will be a corresponding
reduction in the value ascribed to goodwill.
Valuation of Long-lived Assets and Goodwill
The Company accounts for long-lived assets other than goodwill in
accordance with the provisions of Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment and Disposal of Long
Lived Assets" ("SFAS 144"), which supersedes Statement of Financial
Accounting Standards No. 121 and certain sections of Accounting Principles
Board Opinion No. 30 specific to discontinued operations. SFAS 144
classifies long-lived assets as either: (1) to be held and used; (2) to be
disposed of by other than sale; or (3) to be disposed of by sale. This
standard introduces a probability-weighted cash flow estimation approach to
address situations where alternative courses of action to recover the
carrying amount of a long-lived asset are under consideration or a range is
estimated for the amount of possible future cash flows. The Company has
adopted this statement, which has not had a material impact on our
financial position or results of operations. SFAS 144 requires, among
other things, that an entity review its long-lived assets and certain
related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
During the six months ended August 31, 2004 and 2003, the Company recorded
asset impairment writedowns of $201,000 and $575,000, respectively, on
plant and equipment which became idled due to increased outsourcing to
contract manufacturers.
The Company also adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets", in March 2002. As a
result, goodwill is no longer amortized, but instead is tested for
impairment on an annual basis, or more frequently as impairment indicators
arise. The test for impairment involves the use of estimates related to
the fair values of the business operations with which goodwill is
associated and is usually based on projected cash flows or a market value
approach.
The Company believes the estimate of its valuation of long-lived
assets and goodwill is a "critical accounting estimate" because if
circumstances arose that led to a decrease in the valuation it could have a
material impact on the Company's results of operations.
RESULTS OF OPERATIONS
Effective with the acquisition of Vytek on April 12, 2004, the
Company realigned its operations into a divisional structure. The legacy
operations of CalAmp, previously segregated into the Satellite and Wireless
Access business units, have been combined and are now referred to as the
Products Division. The operations of Vytek, which are principally service
oriented, comprise the Company's new Solutions Division. The operations of
Vytek's products manufacturing subsidiary Vytek Products, Inc. have been
combined with the Company's Products division effective at the April 12,
2004 acquisition date.
The Company's revenue and gross profit by business segment are as
follows:
SALES BY SEGMENT
Three months ended August 31, Six months ended August 31,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- ------------- --------------
Segment % of % of % of % of
(Division) $000s Total $000s Total $000s Total $000s Total
- --------- ------- ----- ------- ----- ------- ----- ------- -----
Products $43,056 84.7% $24,197 100.0% $83,555 87.2% $42,763 100.0%
Solutions 7,771 15.3% - - 12,269 12.8% - -
------- ----- ------- ----- ------- ----- ------- -----
Total $50,827 100.0% $24,197 100.0% $95,824 100.0% $42,763 100.0%
======= ===== ======= ===== ======= ===== ======= =====
GROSS PROFIT BY SEGMENT
Three months ended August 31, Six months ended August 31,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- ------------- --------------
Segment % of % of % of % of
(Division) $000s Total $000s Total $000s Total $000s Total
- --------- ------- ----- ------- ----- ------- ----- ------- -----
Products $ 8,503 82.4% $ 3,200 100.0% $15,769 84.7% $ 4,506 100.0%
Solutions 1,821 17.6% - - 2,856 15.3% - -
------- ----- ------- ----- ------- ----- ------- -----
Total $10,324 100.0% $ 3,200 100.0% $18,625 100.0% $ 4,506 100.0%
======= ===== ======= ===== ======= ===== ======= =====
OPERATING INCOME (LOSS) BY SEGMENT
Three months ended August 31, Six months ended August 31,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- ------------- --------------
Segment % of % of % of % of
(Division) $000s Sales $000s Sales $000s Sales $000s Sales
- --------- ------- ----- ------- ----- ------- ----- ------- -----
Products $ 6,036 14.0% $ 1,040 4.3% $10,670 12.8% $ 74 0.2%
Solutions (2,083) (26.8%) - - (3,592) (29.3%) - -
Corporate
expense (1,069) (2.1%) (494) (2.0%) (1,948) (2.0%) (922) (2.2%)
------- ------- ------- -------
Total $ 2,884 5.7% $ 546 2.3% $ 5,130 5.4% $ (848) (2.0%)
======= ======= ======= =======
Revenue
Products Division revenue increased $18,859,000, or 78%, in the three
months ended August 31, 2004 from the same period in the previous fiscal
year. This increase resulted primarily because revenue in the second
quarter of last fiscal year was adversely affected by substantially reduced
orders from key customers that began in the first quarter of last fiscal
year as a result of the customers' overstocked inventories of certain
satellite television reception products. The satellite products impacted
by this order slowdown were predominantly the more technologically advanced
products that have higher selling prices. Products Division revenue
rebounded strongly beginning in the third quarter of last fiscal year. On
a sequential quarter basis, Products Division revenue for the most recent
four quarters (beginning with the earliest) was $44.2 million, $41.6
million, $40.5 million and $43.1 million, respectively. The Company's
principal satellite product line consists of low noise block feed
downconverter/ amplifier units ("LNBFs") used for satellite television
reception. The number of LNBF units sold in the three months ended August
31, 2004 was twice the LNBF unit volume in the same period of last year,
while the average selling price for LNBFs was relatively unchanged between
these two periods.
For the six months ended August 31, 2004, Products Division revenue
increased $40,792,000, or 95%, over the same period of the prior year,
primarily for the same reason explained in the preceding paragraph. LNBF
units sold in the latest six month period was approximately 130% higher
than the same period of the prior year, while the average selling price was
relatively unchanged between these two periods.
The Solutions Division revenue represents the operations of Vytek
which was acquired effective April 12, 2004.
Gross Profit and Gross Margins
Products Division gross profit increased by $5,303,000, or 166%, in
the latest quarter compared to the prior year, and gross margin improved
from 13.2% in last year's second quarter to 19.7% in the latest quarter.
Gross margin was depressed in last year's second quarter principally
because of the lower than normal sales volume, which resulted in less
absorption of fixed manufacturing costs.
For the six months ended August 31, 2004, Products Division gross
profit increased $11,263,000, or 250%, and gross margin improved from 10.5%
to 18.9%. The increased gross profit is attributable principally to the
revenue increase of $40,792,000 in the latest six month period over the
comparable period of the prior year. The gross margin improvement in the
current year is due mainly to the fact that gross margin in the first six
months of last year was adversely affected by manufacturing inefficiencies
caused by the need to rapidly reduce production capability in the first
quarter of last year in response to significant order cutbacks by key
customers for the Company's satellite products. Also contributing to the
lower Products Division gross margin last year were the inclusion in cost
of revenue of lower of cost or market inventory writedowns of $242,000 and
asset impairment writedowns of $575,000 on surface mount machines and other
manufacturing equipment which had become idled due to increased outsourcing
to contract manufacturers.
Gross margin of the Solutions Division in the three and six month
periods ended August 31, 2004 was 23.4% and 23.3%, respectively.
See also Note 13 to the accompanying unaudited consolidated financial
statements for additional operating data by business segment.
Operating Expenses
Consolidated research and development expense increased by $832,000 to
$2,068,000 in the latest quarter from $1,236,000 last year. This increase
was due to the inclusion of Vytek's operations for the quarter, which
accounted for $581,000 of the increase. The remaining increase is
attributable to higher salaries and wages ($86,000), higher incentive
compensation expense ($81,000), higher consulting expenses ($37,000), and
increased expenses for R&D materials ($36,000). For the six month year-to-
date periods, R&D expense increased $1,277,000 from $2,598,000 last year to
$3,875,000 this year. The inclusion of Vytek's operations for the 20-week
period from the April 12, 2004 acquisition date to August 31, 2004
accounted for $1,021,000 of the increase in R&D expense, and the remaining
increase in the six month year-to-date periods is attributable to the same
factors described above that contributed to increased R&D expense in the
latest quarter.
Consolidated sales and marketing expenses increased by $1,183,000 in
the second quarter, of which $1,194,000 results from the inclusion of Vytek
in the quarter. For the six month year-to-date periods, sales and
marketing expenses increased by $1,761,000, of which $1,700,000 is
attributable to the inclusion of Vytek's operations.
Consolidated general and administrative expense increased from
$843,000 in the second quarter of last year to $3,179,000 in the latest
quarter. Of this $2,336,000 increase, $1,739,000 is attributable to the
inclusion of Vytek's operations in the latest quarter. The remaining
increase is primarily due to higher accounting and auditing expense in the
latest quarter ($255,000) attributable to the requirements of Section 404
of the Sarbanes Oxley Act, higher incentive compensation expense
($162,000), and higher legal expense ($55,000). For the six month year-to-
date periods, general and administrative expense increased from $1,661,000
last year to $5,624,000 this year. The $3,963,000 increase is primarily
explained by the inclusion of Vytek's operations in the current year, which
accounted for $2,780,000 of the increase. The remaining increase is
attributable to increased auditing and accounting fees ($305,000),
increased incentive compensation expense ($254,000), increased legal
expense ($157,000), increased consulting fees ($65,000), and the expensing
in the current year of costs associated with a software implementation
project ($160,000).
Amortization expense of intangible assets in the three months ended
August 31, 2004 and 2003 was $461,000 and $26,000, respectively, and in the
six months ended August 31, 2004 and 2003 was $721,000 and $52,000,
respectively. These increases in the latest three- and six-month periods
compared to the prior year are attributable to the intangible assets
arising from the acquisition of Vytek in April 2004.
Operating Income (Loss)
Operating income (loss) was $5,130,000 and ($848,000) during the six
months ended August 31, 2004 and 2003, respectively. The increased
profitability is attributable to the improvement in the satellite products
portion of the Company's Products Division, as discussed above under the
headings Revenue and Gross Profit and Gross Margins.
Operating income of $5,130,000 in the latest six month period is
comprised of operating income of the Products Division of $10,670,000, an
operating loss for the Solutions Division (Vytek) of $3,592,000, and
corporate expense of $1,948,000 that is not allocated to the division
operating results. The Company has taken recent steps to reduce the
losses of the Solutions Division by strengthening the sales and marketing
organization and by reducing overhead costs. Management intends to
closely monitor the performance of this business unit with the objective
of achieving profitable results for the Solutions Division as soon as
possible.
Income Tax Provision
The effective income tax rate was 38.1% and 30.9% in the six months
ended August 31, 2004 and 2003, respectively. The increase in effective
tax rate is attributable primarily to the fact that during the fiscal year
ended February 28, 2004 reductions of the deferred tax asset valuation
allowance caused a reduction in the overall effective income tax rate. In
the six months ended August 31, 2004, there was no reduction in the
valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $25,268,000 at August 31, 2004, and its
working capital line of credit with a bank. During the six months ended
August 31, 2004, cash and cash equivalents increased by $2,383,000. This
increase was attributable primarily to increased net income in the current
six month period compared to the prior year (higher by $3.8 million),
offset by $1.7 million of cash used for the acquisition of Vytek.
Components of operating working capital increased by $1,875,000 during
the six months ended August 31, 2004, comprised of an increase of
$1,960,000 in accounts receivable, an increase of $4,278,000 in
inventories, a decrease of $1,537,000 in prepaid expenses and other assets,
an increase of $3,802,000 in accounts payable, a decrease of $1,092,000 in
accrued payroll and other accrued liabilities, and an increase in deferred
revenue of $116,000.
The Company believes that inflation and foreign currency exchange
rates have not had a material effect on its operations. The Company
believes that fiscal year 2005 will not be impacted significantly by
foreign exchange since a significant portion of the Company's sales are to
U.S. markets, or to international markets where its sales are denominated
in U.S. dollars.
The Company has a $10 million working capital line of credit with a
commercial bank. Borrowings under this line of credit bear interest at
LIBOR plus 2.0% or the bank's prime rate, and are secured by substantially
all of the Company's assets. The maturity date of the line of credit is
August 3, 2005. At August 31, 2004, there were outstanding borrowings of $3
million on the line of credit and $2,479,000 was reserved under the line for
issued letters of credit. The $3 million outstanding balance on the line of
credit is classified as a current liability at August 31, 2004 because the
line of credit matures within 12 months of that date. The Company also has
two bank term loans which had an aggregate outstanding principal balance of
$8,876,000 at August 31, 2004, of which $2,823,000 is classified as current
at that date. The bank credit agreement which encompasses the line of
credit and the two term loans contains a subjective acceleration clause
which enables the bank to call the loans in the event of a material adverse
change (as defined) in the Company's business. Based on the Company's
history of profitable operations and positive operating cash flow over the
past several years, and based on the Company's internal financial forecasts
for the next several quarters, the Company does not believe it is probable
that the bank will assert the material adverse change clause in the next 12
months.
At the time it was acquired by the Company on April 12, 2004, Vytek
had $2 million outstanding on a line of credit with another commercial
bank. Shortly after the acquisition was consummated, the Company
borrowed $2 million on its bank line of credit and paid off Vytek's bank
line of credit. Vytek's bank line of credit was then terminated.
See Note 5 to the accompanying consolidated financial statements for a
summary of the Company's contractual cash obligations as of August 31,
2004.
The Company believes that cash flow from operations, together with
amounts available under its working capital line of credit, are sufficient
to support operations, fund capital equipment requirements and discharge
contractual cash obligations over the next twelve months.
FORWARD LOOKING STATEMENTS
Forward looking statements in this Form 10-Q which include, without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, projections and other information
regarding future performance, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
words "may" "could", "plans", "believes," "anticipates," "expects," and
similar expressions are intended to identify forward-looking statements.
These forward-looking statements reflect the Company's current views with
respect to future events and financial performance and are subject to
certain risks and uncertainties, including, without limitation, product
demand, market growth, new competition, competitive pricing and continued
pricing declines in the DBS market, supplier constraints, manufacturing
yields, the ability to manage cost increases in inventory materials
including raw steel, timing and market acceptance of new product
introductions, new technologies, the ability to successfully integrate the
acquisition of Vytek Corporation that was completed on April 12, 2004, and
other risks and uncertainties that are set forth under the heading "Risk
Factors" in the Company's registration statement on Form S-4 (number 333-
112851) as filed with the Securities and Exchange Commission on February
13, 2004. Such risks and uncertainties could cause actual results to
differ materially from historical results or those anticipated. Although
the Company believes the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, it can give no assurance
that its expectations will be attained. The Company undertakes no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash equivalents, accounts
receivable, accounts payable and bank term loans payable. At August 31,
2004, the carrying values of cash equivalents, accounts receivable and
accounts payable approximate fair values given the short maturity of these
instruments.
The carrying value of bank term loans payable approximates fair value
since the interest rates on these loans approximate the interest rates
which are currently available to the Company for the issuance of debt with
similar provisions and maturities. Based on the amount of bank debt
outstanding at August 31, 2004, a change in interest rates of one percent
would result in an annual impact of approximately $100,000, net of tax, on
the Company's consolidated statement of income.
A portion of the Company's operations consists of an investment in a
foreign subsidiary. As a result, the consolidated financial results have
been and could continue to be affected by changes in foreign currency
exchange rates. However, the Company believes that it does not have
material foreign currency exchange rate risk since a significant portion of
the Company's sales are to U.S. markets, or to international markets where
its sales are denominated in U.S. dollars, and material purchases from
foreign suppliers are typically also denominated in U.S. dollars.
Additionally, the functional currency of the Company's foreign subsidiary
is the U.S. dollar.
It is the Company's policy not to enter into derivative financial
instruments for speculative purposes. Furthermore, the Company generally
does not enter into foreign currency forward exchange contracts. There are
no foreign currency forward exchange contracts outstanding at August 31,
2004.
ITEM 4. CONTROLS AND PROCEDURES
The Company's principal executive officer and principal financial
officer have concluded, based on their evaluation of disclosure controls
and procedures (as defined in Regulations 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934) as of the end of the period covered
by this Report, that the Company's disclosure controls and procedures are
effective to ensure that the information required to be disclosed in
reports that are filed or submitted under the Exchange Act is accumulated
and communicated to management, including the principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure and that such information is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities Exchange Commission.
There have been no significant changes in the Company's internal controls
or in other factors which could significantly affect internal controls
subsequent to the date that the evaluation was carried out. Additionally,
no significant deficiencies or material weaknesses in such internal
controls requiring corrective actions were identified.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 15 to the accompanying consolidated financial statements for
a description of pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2004 Annual Meeting of Stockholders held on July 30, 2004,
seven directors stood for reelection to a one year term expiring at the
fiscal 2005 Annual Meeting. All seven of the director nominees were
reelected. Following is a summary of the results of the director voting:
Votes
Against or
Votes For Withheld Unvoted
-------- ------- -------
Richard Gold 18,485,500 1,471,158 3,115,366
Arthur Hausman 18,102,564 1,854,094 3,115,366
A.J. "Bert" Moyer 18,662,824 1,293,834 3,115,366
James E. Ousley 18,837,027 1,119,631 3,115,366
Frank Perna 18,646,842 1,309,816 3,115,366
Thomas Ringer 18,653,786 1,302,872 3,115,366
Fred Sturm 18,530,770 1,425,888 3,115,366
In addition to the election of directors, the stockholders voted on
three other proposals. Following is a summary of the voting results on
these three proposals, all of which were approved by the stockholders:
Votes
Against or Votes
Votes For Withheld Abstained Unvoted
-------- ------- ------- -------
Increase in authorized shares
of Common Stock from 30 million
to 40 million shares 18,977,815 949,457 29,386 3,115,366
Change in Company's name from
California Amplifier, Inc.
to CalAmp Corp. 19,656,200 263,617 36,841 3,115,366
Adoption of 2004 Stock
Incentive Plan 10,292,686 1,887,235 40,936 10,851,167
The 2004 Stock Incentive Plan was approved because this proposal
received the affirmative vote of a majority of the total votes cast on the
proposal, excluding the unvoted shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 3.1 - Amended and Restated Certificate of Incorporation
reflecting the change in the Company's name to
CalAmp Corp. and the increase in authorized Common
Stock from 30 million to 40 million shares (1)
Exhibit 4.1 - Amended and Restated Rights Agreement, amended and
restated as of September 5, 2001, by and between
Registrant and Mellon Investor Services LLC, as
Rights Agent, filed as Exhibit 4.1 to the
Registrant's Current Report on Form 8-K filed on
September 6, 2001, and incorporated herein by
reference.
Exhibit 4.2 - Registration Rights agreement dated February 11,
2004, as Exhibit H to the Agreement and Plan of
Merger and Reorganization dated December 23, 2003
among the Registrant, Mobile Acquisition Sub, Inc.,
Vytek Corporation, and James E. Ousley, as
Stockholder Representative, filed as Exhibit 2.1 to
the Registrant's Registration Statement on Form S-4
filed on February 13, 2004, and incorporated herein
by reference.
Exhibit 10.1 - Stipulation of Settlement and Release by and between
plaintiff Kenneth Schnebly on behalf of himself and
other class plaintiffs and CalAmp Corp. entered into
effective September 29, 2004 (1)
Exhibit 10.2 - CalAmp Corp. 2004 Stock Incentive Plan approved by
stockholders at the 2004 annual meeting on July 30,
2004 (1)
Exhibit 31.1 - Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 31.2 - Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
(1) Filed herewith.
b. Reports on Form 8-K
During the three months ended August 31, 2004 the Company filed
the following reports on Form 8-K:
1. On June 1, 2004, the Company filed a report on Form 8-K with
a press release announcing the nomination of Richard Gold to
become Chairman of the Board at the 2004 annual stockholders
meeting, upon the retirement of Ira Coron from the Board of
Directors.
2. On April 27, 2004, a Form 8-K was filed which disclosed the
acquisition of Vytek Corporation effective April 12, 2004.
This Form 8-K was amended by the filing of a Form 8-K/A on
June 28, 2004 to provide the required audited financial
statements of Vytek Corporation and the unaudited pro forma
financial information for this acquisition.
3. On July 13, 2004, the Company filed a report on Form 8-K that
furnished a copy of its press release announcing the financial
results for the Company's first quarter ended May 31, 2004.
8
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
October 12, 2004 /s/ Richard K. Vitelle
- ------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)