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: November 30, 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
__________________________________________
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 22,604,446 shares of Common Stock outstanding as of
December 28, 2004.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
November 30, February 28,
2004 2004
Assets -------- --------
Current assets:
Cash and cash equivalents $ 26,528 $ 22,885
Accounts receivable, less allowance for doubtful
accounts of $699 and $211, respectively 28,565 18,579
Inventories, net 24,364 20,253
Deferred income tax assets 885 2,404
Prepaid expenses and other current assets 4,692 3,244
-------- --------
Total current assets 85,034 67,365
Equipment and improvements, at cost, net of
accumulated depreciation and amortization 4,943 4,381
Deferred income tax assets, less current portion 3,269 4,359
Goodwill 100,885 20,938
Other intangible assets, net 4,514 200
Deposits and other assets 425 399
-------- --------
$199,070 $ 97,642
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,924 $ 3,603
Accounts payable 23,829 17,395
Accrued payroll and employee benefits 3,391 1,513
Other current liabilities 4,133 2,078
Deferred revenue 1,862 -
-------- --------
Total current liabilities 36,139 24,589
-------- --------
Long-term debt, less current portion 8,395 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; 22,602 and 14,910 shares issued
and outstanding, respectively 232 149
Additional paid-in capital 131,261 44,486
Less common stock held in escrow (2,548) -
Retained earnings 26,392 21,550
Accumulated other comprehensive loss (801) (822)
-------- --------
Total stockholders' equity 154,536 65,363
-------- --------
$199,070 $ 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 Nine Months Ended
November 30, November 30,
------------------- --------------------
2004 2003 2004 2003
------- ------- -------- -------
Revenues:
Product sales $51,749 $44,248 $138,499 $87,011
Service revenues 5,317 - 14,391 -
------- ------- -------- -------
Total revenues 57,066 44,248 152,890 87,011
------- ------- -------- -------
Cost of revenues:
Cost of product sales 42,786 37,514 113,048 75,771
Cost of service revenues 3,981 - 10,918 -
------- ------- -------- -------
Total cost of revenues 46,767 37,514 123,966 75,771
------- ------- -------- -------
Gross profit 10,299 6,734 28,924 11,240
------- ------- -------- -------
Operating expenses:
Research and development 2,315 1,338 6,190 3,936
Sales and marketing 1,847 627 4,651 1,670
General and administrative 2,786 899 8,410 2,560
Amortization of intangibles 486 26 1,207 78
In-process research and
development write-off - - 471 -
------- ------- -------- -------
Total operating expenses 7,434 2,890 20,929 8,244
------- ------- -------- -------
Operating income 2,865 3,844 7,995 2,996
Non-operating income
(expense), net 8 (12) (131) (194)
------- ------- -------- -------
Income before income
taxes 2,873 3,832 7,864 2,802
Income tax provision (1,086) (380) (3,022) (62)
------- ------- -------- -------
Net income $ 1,787 $ 3,452 $ 4,842 $ 2,740
======= ======= ======== =======
Earnings per share:
Basic $ 0.08 $ 0.23 $ 0.23 $ 0.19
Diluted $ 0.08 $ 0.22 $ 0.22 $ 0.18
Shares used in per share
calculations:
Basic 22,356 14,788 21,135 14,760
Diluted 23,113 15,555 21,891 15,128
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
November 30,
---------------------
2004 2003
------- -------
Cash flows from operating activities:
Net income $ 4,842 $ 2,740
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,218 2,381
Write-off of in-process research and development 471 -
Equipment impairment writedowns 241 575
Gain on sale of equipment (128) (273)
Increase in equity associated with tax
benefit from exercise of stock options 224 212
Deferred tax assets, net 2,609 (144)
Changes in operating assets and liabilities:
Accounts receivable (4,900) (1,346)
Inventories (3,434) (1,013)
Prepaid expenses and other assets 2,641 270
Accounts payable 4,136 4,385
Accrued payroll and other accrued liabilities (2,175) (1,048)
Deferred revenue 357 -
------- -------
Net cash provided by operating activities 8,102 6,739
------- -------
Cash flows from investing activities:
Capital expenditures (1,970) (2,026)
Proceeds from sale of property and equipment 835 579
Acquisition of Vytek Corporation, net of
cash acquired (1,727) -
------- -------
Net cash used in investing activities (2,862) (1,447)
------- -------
Cash flows from financing activities:
Proceeds from debt borrowings 2,000 1,000
Debt repayments (4,300) (3,325)
Proceeds from exercise of stock options 703 372
------- -------
Net cash used in financing activities (1,597) (1,953)
------- -------
Net change in cash and cash equivalents 3,643 3,339
Cash and cash equivalents at beginning of period 22,885 21,947
------- -------
Cash and cash equivalents at end of period $26,528 $25,286
======= =======
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 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, were combined together with Vytek's products manufacturing business
into a new Products Division. The operations of Vytek, which are
principally service oriented, comprise the Company's Solutions Division.
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 November 27, 2004 and November
29, 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 November 30 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.
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 November 30, 2004 and
its results of operations for the three and nine months ended November 30,
2004 and 2003. The results of operations for such periods are not
necessarily indicative of results to be expected for the full fiscal year.
All intercompany transactions and accounts have been eliminated in
consolidation. 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 an acquisition 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 acquisition agreement, the Company issued
approximately 8,123,400 shares of common stock as the purchase
consideration, of which 854,700 shares 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.
For purchase accounting purposes, the fair market value per share
used to value the 7,268,700 shares issued to the Vytek selling
stockholders was $11.26 per share, which was 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.
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 account were to serve
as security for potential indemnity claims by the Company under the
acquisition agreement. The acquisition agreement provided that in the event
Vytek's balance sheet as of the acquisition date reflected working capital
(as defined in the acquisition agreement) of less than $4 million, then
CalAmp could recover such deficiency from the escrow account (the "Working
Capital Adjustment"). On November 19, 2004, the Company and the selling
stockholders of Vytek reached an agreement on the final Working Capital
Adjustment of $4,907,000, which equated to 628,380 shares of CalAmp's common
stock based on its average share price (as defined in the acquisition
agreement). These 628,380 shares were canceled and were returned to the
status of authorized, unissued shares. As of November 30, 2004, there were
226,320 shares of CalAmp's common stock remaining in the escrow account.
Subject to any claims by the Company for indemnification, except for an
amount equal in value to $2 million, all shares of the Company's common
stock in the escrow account will 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, in the escrow account will 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.
Following is the calculation of the recorded value of common stock
issued and options and warrants assumed in the Vytek acquisition (in
thousands, except per share amounts):
Deposited
Issued to to escrow
sellers account Total
------- ------- -------
Number of common shares issued 7,268.7 854.7 8,123.4
Escrow shares canceled - (628.4) (628.4)
------- ------- -------
Shares issued net of cancellation 7,268.7 226.3 7,495.0
Fair market value per share $ 11.26 $ 11.26 $ 11.26
------- ------- -------
Value of shares issued $81,846 $ 2,548 $84,394
Less stock registration costs (300) - (300)
------- ------- -------
Fair value of shares issued net
of registration costs 81,546 2,548 84,094
Fair value of fully vested Vytek options
and warrants assumed by CalAmp 1,837 - 1,837
------- ------- -------
Recorded value of common shares issued
and assumed options and warrants $83,383 $ 2,548 $85,931
======= ======= =======
The common 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
issued to the sellers from the escrow account.
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) ............................... $83,383
Direct costs of acquisition including legal,
accounting and financial advisory fees ..................... 2,580
------
Total cost of Vytek acquisition (excluding common
stock held in the escrow account) .......................... 85,963
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 ............................... (11,997)
Long-term liabilities ............................. (296)
------
Total fair value of net assets acquired ................... 6,016
------
Goodwill ..................................................... $79,947
======
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):
Nine Months Ended Nine Months Ended
November 30, 2004 November 30, 2003
-------------------- ------------------
As Pro As Pro
reported forma reported forma
-------- -------- -------- -------
Revenues $152,890 $157,051 $87,011 $124,605
Net income $ 4,842 $ 4,207 $ 2,740 $ 774
Earnings per share:
Basic $ 0.23 $ 0.19 $ 0.19 $ 0.04
Diluted $ 0.22 $ 0.18 $ 0.18 $ 0.03
The pro forma adjustments for the nine months ended November 30, 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 33 week period from the April 12 acquisition date to November 30,
2004.
The pro forma adjustments for the nine months ended November 30, 2003
consist of adding Vytek's results of operations for the nine months ended
December 31, 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):
November 30, February 28,
2004 2004
------ ------
Raw materials $19,812 $11,671
Work in process 802 417
Finished goods 3,750 8,165
------ ------
$24,364 $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.
Impairment tests of goodwill associated with the Company's Products
Division are conducted annually as of December 31. These tests,
conducted as of December 31, 2003 and 2002, indicated that there was no
impairment of goodwill as of those dates. 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 nine months ended
November 30, 2004 is as follows:
Balance as of February 28, 2004 $ 20,938
Estimated goodwill arising from the
acquisition of Vytek in April 2004 79,947
-------
Balance as of November 30, 2004 $100,885
=======
The goodwill arising from the Vytek transaction is an estimated amount
based on the preliminary purchase price allocation, and is subject to change
based on the analysis of deferred tax assets and allocation of goodwill to
the Products Division and Solutions Division.
The goodwill balance at February 28, 2004 is associated with the
Company's Products Division. A portion of the goodwill arising from the
Vytek acquisition is expected to be assigned to the Products Division in
the final purchase price allocation, and the remainder of this goodwill
will be assigned to the Company's Solutions Division. The Company
expects to perform the impairment tests of goodwill associated with the
Solutions Division annually as of April 30.
Intangible assets are comprised as follows at November 30, 2004 and
February 28, 2004 (in thousands):
November 30, 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 $ 425 $2,924 $ - $ - $ -
Customer lists 5 yrs. 1,127 143 984 - - -
Contracts
backlog 1 yr. 845 536 309 - - -
Covenants not
to compete 4.1 yrs. 400 278 122 400 200 200
Licensing right 2 yrs. 200 25 175 - - -
------ ------ ----- ----- ----- -----
$5,921 $1,407 $ 4,514 $ 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 and licensing
rights. The covenants not to compete arose from the acquisition of the
satellite dish manufacturing business of Kaul-Tronics in April 2002. The
licensing right was acquired by the Solutions Division during the quarter
ended November 30, 2004.
Amortization expense of intangible assets was $1,207,000 and $78,000
in the nine months ended November 30, 2004 and 2003, respectively.
Estimated amortization expense for the fiscal years ending February 28
is as follows:
2005 $1,694,000
2006 $1,187,000
2007 $ 945,000
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 1.75% 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, 2006. At November 30, 2004, there were outstanding borrowings of
$3,000,000 on the line of credit and $3,179,000 was reserved under the line
for issued letters of credit. The Company also has two bank term loans which
had an aggregate outstanding principal balance of $8,171,000 at November 30,
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 $148,000 at November 30,
2004, of which $101,000 was classified as current at that date.
Contractual cash obligations
Following is a summary of the Company's contractual cash obligations
as of November 30, 2004 (in thousands):
Future Cash Payments Due by Fiscal Year
----------------------------------------------
Contractual 2005 There-
Obligations (remainder) 2006 2007 2008 2009 after Total
- --------------- ------ ------ ------ ------ ------ ------ ------
Bank debt $ 706 $ 2,823 $ 5,139 $ 2,503 $ - $ - $11,171
Capital leases 30 80 30 8 - - 148
Operating leases 719 2,273 1,802 1,862 1,924 3,756 12,336
Purchase
obligations 20,203 1,530 - - - - 21,733
------- ------ ------ ------ ------ ------ ------
Total contractual
cash obligations $21,658 $ 6,706 $ 6,971 $ 4,373 $ 1,924 $ 3,756 $45,388
====== ====== ====== ====== ====== ====== ======
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 nine months ended November 30, 2004, the deferred tax
asset was reduced by $2,609,000 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 nine months ended November 30, 2004.
The effective income tax rate was 38.4% and 2.2% in the nine months
ended November 30, 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 nine months ended November 30, 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 Nine Months Ended
November 30, November 30,
---------------- ----------------
2004 2003 2004 2003
------ ------ ------ ------
Basic weighted average number
of common shares outstanding 22,356 14,788 21,135 14,760
Effect of dilutive securities:
Shares held in escrow 226 - 112 -
Stock options 531 767 644 368
------ ------ ------ ------
Diluted weighted average number
of common shares outstanding 23,113 15,555 21,891 15,128
====== ====== ====== ======
Options and warrants outstanding at November 30, 2004 to purchase
approximately 1,145,000 shares of common stock at exercise prices of $7.25
and above were excluded from the computation of diluted earnings per share
for the three and nine months then ended because the exercise price of
these options and warrants was greater than the average market price of
the common stock and accordingly the effect of inclusion would be
antidilutive.
In connection with the acquisition of Vytek, 226,320 shares of common
stock are being held in an escrow account to satisfy any claims by the
Company for indemnification as further described in Note 2 herein. These
shares held in escrow have been excluded from the basic weighted average
number of common shares outstanding. However, the impact of these shares
has been included in the diluted weighted average number of common shares
outstanding for the three and nine month period ended November 30, 2004.
Note 8 - COMPREHENSIVE INCOME
Comprehensive income is defined as the total of net income and all
non-owner changes in equity. The following table details the components
of comprehensive income for the three and nine months ended November 30,
2004 and 2003 (in thousands):
Three Months Ended Nine Months Ended
November 30, November 30,
---------------- ----------------
2004 2003 2004 2003
------ ------ ------ ------
Net income $1,787 $3,452 $4,842 $2,740
Unrealized holding gain (loss) on
available-for-sale investments - 20 21 (4)
------ ------ ------ ------
Comprehensive income $1,787 $3,472 $4,863 $2,736
====== ====== ====== ======
Note 9 - STOCK OPTIONS
As allowed by Statement of Financial Accounting Standards No. 123
("FAS 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 nine months
ended November 30,
-------------------
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 97% to 135%.
The following table illustrates the effect on net income and
earnings 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 Nine Months Ended
November 30, November 30,
---------------- ----------------
2004 2003 2004 2003
------ ------ ------ ------
Net income as reported $1,787 $3,452 $4,842 $2,740
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (460) (514) (1,623) (1,704)
----- ----- ----- ------
Pro forma net income $1,327 $2,938 $3,219 $1,036
===== ===== ===== ======
Earnings per share:
Basic -
As reported $ 0.08 $ 0.23 $ 0.23 $ 0.19
Pro forma $ 0.06 $ 0.20 $ 0.15 $ 0.07
Diluted -
As reported $ 0.08 $ 0.22 $ 0.22 $ 0.18
Pro forma $ 0.06 $ 0.19 $ 0.15 $ 0.07
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 nine months ended November 30, 2004 or 2003, as a
percent of consolidated revenue, are as follows:
Three Months Ended Nine Months Ended
November 30, November 30,
---------------- ----------------
Customer 2004 2003 2004 2003
-------- ------ ------ ------ ------
A 44.0% 40.6% 38.5% 37.4%
B 17.4% 23.1% 15.6% 21.4%
C 6.6% 2.5% 11.4% 1.3%
D 5.3% 10.2% 5.7% 9.5%
Accounts receivable from these customers as a percent of consolidated
net accounts receivable are as follows:
Nov. 30, Feb. 28,
Customer 2004 2004
-------- ------ ------
A 43.8% 49.4%
B 21.5% 22.0%
C 3.3% 8.2%
D 2.7% 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. The Company provides for the
estimated cost of product warranties at the time revenue is recognized.
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 nine months ended November 30, 2004 and
2003 is as follows (in thousands):
Nine Months Ended
November 30,
-----------------
2004 2003
------ ------
Balance at beginning of period $159 $491
Charged (credited) to cost
of revenues 589 133
Deductions (469) (89)
---- ----
Balance at end of period $279 $535
==== ====
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):
Nine Months Ended
November 30,
-------------------
2004 2003
------ ------
Interest paid $ 347 $ 405
Income taxes paid (net
refunds received) $ 123 (93)
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Nine Months Ended
November 30,
-------------------
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 $83,383 $ -
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, were combined together with Vytek's
products manufacturing business into a new Products Division. The
operations of Vytek, which are principally service oriented, comprise the
Company's new Solutions Division.
Segment information for the three and nine months ended November 30,
2004 and 2003 is as follows (dollars in thousands):
Three Months Ended Three Months
Ended
November 30, 2004: November 30,
2003:
------------------------------------ ------------------------
- ------------
Operating Segments Operating Segments
------------------- -------------------
Products Solutions Products Solutions
Division Division Corporate Total Division Division
Corporate Total
------- ------ ------- ----- ------- ------ --
- ----- -----
Revenues:
Products $50,425 $ 1,324 $51,749 $44,248 $ -
$44,248
Services - 5,317 5,317 - -
- -
------ ----- ------ ------ -----
- ------
Total $50,425 $ 6,641 $57,066 $44,248 $ -
$44,248
====== ===== ====== ====== =====
======
Gross profit:
Products $ 8,737 $ 226 $ 8,963 $ 6,734 $ -
$ 6,734
Services - 1,336 1,336 - -
- -
------ ----- ------ ------ -----
- ------
Total $ 8,737 $ 1,562 $10,299 $ 6,734 $ -
$ 6,734
====== ===== ====== ====== =====
======
Gross margin:
Products 17.3% 17.1% 17.3% 15.2% -
15.2%
Services - 25.1% 25.1% - -
- -
Total 17.3% 23.5% 18.0% 15.2% -
15.2%
Operating
income
(loss) $ 6,191 $(2,379) $ (947) $ 2,865 $ 4,447 $ - $
(603) $ 3,844
====== ===== ===== ====== ====== =====
===== ======
Nine Months Ended Nine Months
Ended
November 30, 2004: November 30,
2003:
------------------------------------ ------------------------
- ------------
Operating Segments Operating Segments
------------------- -------------------
Products Solutions Products Solutions
Division Division Corporate Total Division Division
Corporate Total
------- ------ ------- ----- ------- ------ --
- ----- -----
Revenues:
Products $133,980 $ 4,519 $138,499 $87,011 $ -
$87,011
Services - 14,391 14,391 - -
- -
------- ------ ------- ------ -----
- ------
Total $133,980 $18,910 $152,890 $87,011 $ -
$87,011
======= ====== ======= ====== =====
======
Gross profit:
Products $ 24,506 $ 945 $ 25,451 $11,240 $ -
$11,240
Services - 3,473 3,473 - -
- -
------- ----- ------- ------ -----
- ------
Total $ 24,506 $ 4,418 $ 28,924 $11,240 $ -
$11,240
======= ===== ======= ====== =====
======
Gross margin:
Products 18.3% 20.9% 18.4% 12.9% -
12.9%
Services - 24.1% 24.1% - -
- -
Total 18.3% 23.4% 18.9% 12.9% -
12.9%
Operating
income
(loss) $ 16,861 $(5,971) $ (2,895) $ 7,995 $ 4,521 $ - $
(1,525) $ 2,996
======= ===== ====== ====== ====== =====
====== ======
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 $241,000 and $575,000 during the nine months
ended November 30, 2004 and 2003, respectively, on plant and equipment
that 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 $551,000 and $242,000 in the nine months
ended November 30, 2004 and 2003, respectively. As further discussed in
Note 15 below, Product Division cost of revenue for the nine months ended
November 30, 2004 included 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.
Unallocated corporate expenses include salaries and wages for the CEO, CFO
and two other corporate staff, 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 at several other sites in
California and in 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.
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 fiscal year 2004 that was included in
Product Division cost of revenue in the consolidated income statement.
In September 2004, the Company and the plaintiffs entered into a
settlement agreement, which was approved by the court in October 2004.
As a result of the settlement agreement, the Company lowered its reserve
by $200,000 in the nine months ended November 30, 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 66% of the Company's total revenue
for the nine months ended November 30, 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 product
sales. 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 November 30, 2004 the Company's net deferred income tax asset was
$4,154,000, 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 reduce the income tax provision. Conversely, if in the future the
Company were to change its realization probability assessment to less than
50%, the Company will provide an additional valuation allowance for all or
a portion of the net deferred income tax asset, which will 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" ("FAS 144"), which supersedes Statement of Financial
Accounting Standards No. 121 and certain sections of Accounting Principles
Board Opinion No. 30 specific to discontinued operations. FAS 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 its
financial position or results of operations. FAS 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 nine months ended November 30, 2004 and 2003, the
Company recorded asset impairment writedowns of $241,000 and $575,000,
respectively, on plant and equipment of the Products Division 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.
Impact of Recently Issued Accounting Standards
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 151, "Inventory
Costs, an amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151
clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). FAS 151 requires
that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal". In addition, it
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities.
FAS 151 is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is permitted. The
Company plans to adopt FAS 151 at the beginning of its fiscal 2006. The
Company believes that FAS 151, when adopted, will not have a significant
impact on its financial position or results of operations.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" ("FAS 123R"). FAS
123R requires companies to recognize in the income statement the grant-
date fair value of stock options and other equity-based compensation
issued to employees. FAS 123R eliminates the ability to account for
share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees". The Company will be required
to adopt FAS 123R in the third quarter of its fiscal 2006 (the quarter
ending November 30, 2005). The Company believes that the adoption of FAS
123R could have a material impact on the amount of earnings it reports in
fiscal 2006. The Company has not yet determined the specific impact that
adoption of this standard will have on its financial position or 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 now operate as the
Products Division. The operations of Vytek, which are principally service
oriented, comprise the Company's 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 segment are as follows:
SALES BY SEGMENT
Three Months Ended November 30, Nine Months Ended November 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- ------------- --------------
Segment % of % of % of % of
(Division) $000s Total $000s Total $000s Total $000s Total
- --------- ------- ----- ------- ----- ------- ----- ------- -----
Products $50,425 88.4% $44,248 100.0% $133,980 87.6% $87,011 100.0%
Solutions 6,641 11.6% - - 18,910 12.4% - -
------- ----- ------- ----- -------- ----- ------- -----
Total $57,066 100.0% $44,248 100.0% $152,890 100.0% $87,011 100.0%
======= ===== ======= ===== ======== ===== ======= =====
GROSS PROFIT BY SEGMENT
Three Months Ended November 30, Nine Months Ended November 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- ------------- --------------
Segment % of % of % of % of
(Division) $000s Total $000s Total $000s Total $000s Total
- --------- ------- ----- ------- ----- ------- ----- ------- -----
Products $ 8,737 84.8% $ 6,734 100.0% $24,506 84.7% $11,240 100.0%
Solutions 1,562 15.2% - - 4,418 15.3% - -
------- ----- ------- ----- ------- ----- ------- -----
Total $10,299 100.0% $ 6,734 100.0% $28,924 100.0% $11,240 100.0%
======= ===== ======= ===== ======= ===== ======= =====
OPERATING INCOME (LOSS) BY SEGMENT
Three Months Ended November 30, Nine Months Ended November 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- ------------- --------------
Segment % of % of % of % of
(Division) $000s Sales $000s Sales $000s Sales $000s Sales
- --------- ------- ----- ------- ----- ------- ----- ------- -----
Products $ 6,191 10.8% $ 4,447 10.1% $16,861 11.0% $ 4,521 5.2%
Solutions (2,379) (4.2%) - - (5,971) (3.9%) - -
Corporate
expenses (947) (1.6) (603) (1.4%) (2,895) (1.9%) (1,525) (1.8%)
------- ------- ------- -------
Total $ 2,865 5.0 $ 3,844 8.7% $ 7,995 5.2% $ 2,996 3.4%
======= ======= ======= =======
Revenue
Products Division revenue increased $6,177,000, or 14%, in the three
months ended November 30, 2004 compared to the same period of the prior
year. This increase resulted primarily from increased unit sales of the
Company's primary product line, consisting of low noise block feed
downconverter/amplifier units ("LNBFs") used for satellite television
reception.
For the nine months ended November 30, 2004, Products Division
revenue increased $46,969,000, or 54%, over the same period of the prior
year, primarily from increased unit sales of LNBFs. Products division
revenue rebounded strongly beginning in the second quarter of last fiscal
year.
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 $2,003,000, or 30%, in
the latest quarter compared to the prior year, and gross margin improved
from 15.2% in last year's third quarter to 17.3% in the latest quarter.
Approximately one-half of the gross profit increase is attributable to the
$6,177,000 increase in revenue in the latest quarter, and the remainder of
the gross profit increase is attributable to the improvement in the gross
margin percentage.
For the nine months ended November 30, 2004, Products Division gross
profit increased $13,266,000, or 118%, and gross margin improved from
12.9% to 18.3%. The increased gross profit is attributable principally to
the revenue increase of $47 million in the latest nine 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 during the
nine month period 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.
Gross margin of the Solutions Division in the three and nine month
periods ended November 30, 2004 was 23.5% and 23.4%, 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 ("R&D") expense increased by
$977,000 to $2,315,000 in the latest quarter from $1,338,000 last year.
This increase in R&D expense was primarily due to the inclusion of Vytek's
operations for the quarter, which accounted for $585,000 or 60% of the
increase. The remaining increase is primarily attributable to increased
salaries and temporary labor expense ($234,000). For the nine month
periods, R&D expense increased $2,254,000 from $3,936,000 last year to
$6,190,000 this year. The inclusion of Vytek's operations for the 33-week
period from the April 12, 2004 acquisition date to November 30, 2004
accounted for $1,606,000 or 71% of the increase in R&D expense. The
remaining increase is attributable to increased salaries and temporary
labor expense ($303,000), increased incentive compensation expense
($115,000), and increased workers compensation insurance expense
($143,000).
Consolidated sales and marketing expenses increased by $1,220,000 and
$2,981,000 in the three- and nine-month periods ended November 30, 2004
compared to last year. Substantially all of these increases are
attributable to the inclusion of Vytek's operations in the current year.
Consolidated general and administrative expense increased from
$899,000 in the third quarter of last year to $2,786,000 for the same
quarter this year. Of this $1,887,000 increase, $1,598,000 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 ($144,000) associated with the requirements
of Section 404 of the Sarbanes-Oxley Act, higher salaries and wages
expense ($96,000), and higher legal expense ($56,000). For the nine month
periods, general and administrative expense increased from $2,560,000 last
year to $8,410,000 this year. The $5,850,000 increase is primarily
explained by the inclusion of Vytek's operations in the current year,
which accounted for $4,377,000 of the increase. The remaining increase is
attributable primarily to increased auditing and accounting fees
($449,000), increased incentive compensation expense ($269,000), increased
legal expense ($213,000), increased salaries and wages expense ($144,000)
increased recruiting fees ($69,000), and the fact that the gain on sales
of property and equipment, which is netted against G&A expense, was
$145,000 less in the current nine-month period compared to last year.
Amortization expense of intangible assets in the three months ended
November 30, 2004 and 2003 was $486,000 and $26,000, respectively, and in
the nine months ended November 30, 2004 and 2003 was $1,207,000 and
$78,000, respectively. These increases in the latest three and nine month
periods compared to the prior year are attributable to the intangible
assets arising from the acquisition of Vytek in April 2004.
Operating Income
Operating income was $7,995,000 and $2,996,000 during the nine months
ended November 30, 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 $7,995,000 in the latest nine month period is
comprised of operating income of the Products Division of $16,861,000,
operating loss of the Solutions Division of $5,971,000, and unallocated
corporate expenses of $2,895,000. The Company has taken recent steps to
reduce the losses of the Solutions Division by strengthening the sales
and marketing organization, by reducing overhead costs, and by making a
leadership change. Management is closely monitoring 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 38.4% and 2.2% in the nine months
ended November 30, 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 nine months ended November 30, 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 $26,528,000 at November 30, 2004, and its
working capital line of credit with a bank. During the nine months ended
November 30, 2004, cash and cash equivalents increased by $3,643,000.
Net cash provided by operating activities during the nine months
ended November 30, 2004 was $8,102,000, comprised of $11,477,000 (net
income of $4,842,000 and adjustment for non-cash items of $6,635,000)
reduced by changes in the components of working capital of $3,375,000.
Components of operating working capital increased by $3,375,000
during the nine months ended November 30, 2004, comprised of an increase
of $4,900,000 in accounts receivable, an increase of $3,434,000 in
inventories, a decrease of $2,641,000 in prepaid expenses and other
assets, an increase of $4,136,000 in accounts payable, a decrease of
$2,175,000 in accrued payroll and other accrued liabilities, and an
increase in deferred revenue of $357,000.
The increase in cash from operating activities was offset by spending
in investing activities of $2,862,000 primarily as a result of $1,727,000
in cash used in the acquisition of Vytek in April 2004, and $1,597,000 in
cash used in financing activities primarily for repayments of borrowings
on a line of credit.
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 1.75% 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, 2006. At November 30, 2004, there were outstanding borrowings of
$3,000,000 on the line of credit and $3,179,000 was reserved under the line
for issued letters of credit. The Company also has two bank term loans which
had an aggregate outstanding principal balance of $8,171,000 at November 30,
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 November 30,
2004.
The Company believes that inflation and foreign currency exchange
rates have not had a material effect on its operations. The Company
believes that fiscal 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 believes that cash flow from operations, together with
amounts available under its working capital line of credit, are sufficient
to support operations, fund capital expenditures 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 statements on Form S-4 (number 333-
112851) and Form S-3 (number 333-119858) as filed with the Securities and
Exchange Commission on February 13, 2004 and October 20, 2004,
respectively. 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
November 30, 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 November 30, 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 operations.
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 November
30, 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 5. OTHER INFORMATION
(a) CalAmp Corp. and U.S. Bank National Association entered into an
Amendment Agreement Number Five to Loan and Security Agreement
("Amendment No. 5") dated as of November 23, 2004. Amendment No. 5,
attached as Exhibit 10.1 to this report, provides for, among other items,
a one year extension of the maturity date of the working capital line of
credit to August 3, 2006, lowering of the LIBOR-based interest rate by
0.25%, and deletion of the "excess cash flow recapture" requirement.
ITEM 6. EXHIBITS
Exhibit 10.1 - Amendment Agreement Number Five to Loan and
Security Agreement dated November 23, 2004, by and
Between CalAmp Corp. and U.S. Bank National
Association (1)
Exhibit 10.2 - Employment Letter Agreement between CalAmp Corp.
and Steven A. L'Heureux effective December 13,
2004(1)
Exhibit 10.3 - Separation Agreement between CalAmp Corp.
and Tracy Trent effective December 13, 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.
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.
January 11, 2005 /s/ Richard K. Vitelle
- ------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)