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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2005
COMMISSION FILE NUMBER: 0-12182
________________
CALAMP CORP.
(Exact name of Registrant as specified in its Charter)
Delaware 95-3647070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 N. Rice Avenue
Oxnard, California 93030
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-9000
________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
___________________ _____________________
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
$.01 par value Common Stock Nasdaq National Market
___________________________ ______________________
(Title of Class) (Name of each exchange on which registered)
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ X ] No [ ]
The aggregate market value of the common stock of the Registrant held by non-
affiliates computed by reference to the price at which the common stock was
last sold as of the last business day of the Registrant's most recently
completed second fiscal quarter was approximately $134,777,000.
There were 22,719,236 shares of the Registrant's Common Stock outstanding as
of May 3, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on August 2, 2005 are incorporated by reference
into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K. This Proxy
Statement will be filed within 120 days after the end of the fiscal year
covered by this report.
PART I
ITEM 1. BUSINESS
THE COMPANY
CalAmp Corp. ("CalAmp" or the "Company"), formerly known as California
Amplifier, Inc., is a provider of wireless products and engineering services
that enable anytime/anywhere access to critical information, data and
entertainment content. CalAmp is the leading supplier of direct broadcast
satellite (DBS) outdoor customer premise equipment to the U.S. satellite
television market. The Company also provides wireless connectivity solutions
for the healthcare industry, public safety organizations, telemetry and asset
tracking markets, enterprise-class 802.11 'Wi-Fi' networks, and digital
multimedia delivery applications.
On April 12, 2004, the Company completed the acquisition of Vytek
Corporation ("Vytek"), a privately held company. The acquisition of Vytek
was motivated primarily by the strategic goal 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 U.S. DBS system operators. Concurrent 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 to form the new Products Division.
The operations of Vytek, which are principally service oriented, comprise the
Company's Solutions Division.
PRODUCTS DIVISION
The Products Division develops, manufactures and sells devices and
systems utilizing wireless technology that receive television programming
transmitted from satellites and terrestrial transmission towers, that provide
wireless high-speed Internet (broadband) service, or that provide
connectivity for access to critical information, data and entertainment
content.
The Products Division currently generates most of its revenue from the
sale of DBS outdoor reception equipment, with such sales accounting for
approximately 95%, 93% and 87% of total Products Division revenues in fiscal
years 2005, 2004 and 2003, respectively. Sales of the Company's Products
Division amounted to $194.8 million, $128.6 million and $100.0 million in
fiscal years 2005, 2004 and 2003, respectively. The Company believes that
DBS reception equipment will continue to be a significant portion of its
overall Products Division revenue for the foreseeable future.
The Company's DBS reception products are installed at subscribers'
premises to receive subscription television programming signals that are
transmitted from orbiting satellites. These DBS reception products consist
principally of reflector dish antennae, feedhorns, and electronics which
receive, process and amplify satellite television signals for distribution
over coaxial cable into the building. The dish antenna reflects the
satellite microwave signal back to a focal point where a feedhorn collects
the microwaves and transfers the signals into an integrated
amplifier/downconverter that is referred to in the satellite industry as a
Low Noise Block Feed ("LNBF"). The microwave amplifier boosts the signal
millions of times for further processing. The downconverter changes the
signal from a microwave frequency into a lower intermediate frequency that
can be easily transmitted down coaxial cable and that a satellite television
receiver can acquire, recognize and process to create a picture.
SOLUTIONS DIVISION
The Company's Solutions Division provides technology integration
solutions consisting of a mix of professional services and proprietary
software and hardware to enterprise customers and original equipment
manufacturers. These solutions primarily involve wireless and mobile
computing applications in several different vertical markets, including
healthcare and medical devices, public safety, multimedia content delivery,
and transportation, and include customization services to adapt technology
and applications to a customer's specific needs. The Solutions Division
provides development and consulting services under either "time and
materials" or fixed price contracts.
The Solutions Division's experience includes mobile computing, embedded
computing, urgent messaging, enterprise content delivery, and integrated
networks. Its mobile computing expertise extends enterprise business
processes to mobile workers by establishing connectivity between enterprise
applications and a wide range of mobile and telephony devices. Embedded
computing offerings include the development of end-to-end solutions that
build and connect a wide range of devices to back-end systems. Its messaging
and paging offerings include an urgent messaging software platform known as
TelAlert as well as a series of paging hardware products. The Solutions
Division also provides industry specific solutions such as its suite of
public safety applications that address the needs of federal, state and local
law enforcement agencies.
For additional information regarding the Company's sales by business
segment and geographical area, see Note 13 to the accompanying consolidated
financial statements.
MANUFACTURING
Electronic devices, components and made-to-order assemblies used in the
Company's products are generally obtained from a number of suppliers,
although certain components are obtained from sole source suppliers. Some
devices or components are standard items while others are manufactured to the
Company's specifications by its suppliers. The Company believes that most
raw materials are available from alternative suppliers. However, any
significant interruption in the delivery of such items could have an adverse
effect on the Company's operations.
Over the past several years, printed circuit board assembly has been
outsourced to contract manufacturers in the Pacific Rim. The Company
performs final assembly and test of most its satellite LNBF and other
wireless access products at its facilities in Oxnard, California. Printed
circuit assemblies are mounted in various aluminum and plastic housings,
electronically tested, and subjected to additional environmental tests on a
sampled basis prior to packaging and shipping.
Satellite dish antennas are manufactured on a subcontract basis by a
non-affiliated metal fabrication company in the U.S. In addition, some of
the Company's satellite LNBF products are manufactured on a subcontract basis
by a company located in Taiwan.
A substantial portion of the Company's components, and substantially all
printed circuit board assemblies and housings, are procured from foreign
suppliers and contract manufacturers located primarily in China, Taiwan, and
other Pacific Rim countries. Any significant shift in U.S. trade policy
toward these countries, or a significant downturn in the economic or
financial condition of, or any political instability in, these countries,
could cause disruption of the Company's supply chain or otherwise disrupt the
Company's operations, which could adversely impact the Company's business.
ISO 9001 INTERNATIONAL CERTIFICATION
The Company became registered to ISO 9001:1994 in 1995, and upgraded its
registration to ISO9001:2000 in 2003. ISO 9001:2000 is the widely recognized
international standard for quality management in product design,
manufacturing, quality assurance and marketing. The Company believes that
ISO certification is important to its business because most of the Company's
key customers expect their suppliers to have and maintain ISO certification.
The registration assessment was performed by Underwriter's Laboratory, Inc.
according to the ISO 9001:2000 International Standard. Continuous
assessments to maintain certification are performed semi-annually, and the
Company has maintained its certification through each audit evaluation, most
recently in March 2005. In addition, the Company conducts internal audits of
processes and procedures on a quarterly basis. The Company believes that the
loss of its ISO certification could have a material adverse effect on its
operations, and the Company can provide no assurance that it will be
successful in continuing to maintain such certification.
RESEARCH AND DEVELOPMENT
Each of the markets the Company competes in is characterized by
technological change, evolving industry standards, and new product features
to meet market requirements. During the last three years, the Company has
focused its research and development resources primarily on satellite DBS
products and smart antenna technology for use in 802.11 "Wi-Fi" broadband
wireless networks. In addition, development resources were allocated to
broaden existing product lines, reduce product costs and improve performance
by product redesign efforts.
Research and development expenses in fiscal years 2005, 2004 and 2003
were $8,320,000, $5,363,000 and $5,982,000, respectively. During this three
year period the Company's research and development expenses have ranged
between 3.8% and 6.0% of annual sales.
SALES AND MARKETING
The Company's revenues were derived mainly from customers in the United
States, which represented 97%, 96% and 91% of consolidated revenues in fiscal
2005, 2004 and 2003, respectively. No other country's customers accounted
for more than 4% of revenues in any of these years.
The Products Division sells its satellite reception products primarily
to the two DBS system operators in the U.S. for incorporation into complete
subscription satellite television systems. Other wireless access products
are sold directly to system operators as well as through distributors and
system integrators.
The sales and marketing functions for the Products Division are located
primarily at the Company's corporate headquarters location in Oxnard,
California. In addition, the Products Division has a small sales office in
Paris, France. The sales and marketing functions for the Solutions Division
are located at several offices in California and on the East Coast.
Sales to customers that accounted for 10% or more of consolidated annual
sales in any one of the last three years, as a percent of consolidated sales,
are as follows:
Year ended February 28,
------------------------------
Customer Segment 2005 2004 2003
-------- --------- ------ ------ ------
Echostar Products 43.4% 39.4% 43.8%
DirecTV Products 17.1% 22.9% 9.8%
Echostar Communications Corporation owns and operates the DISH satellite
television service in the U.S. DirecTV Group Inc. is the largest satellite
television service provider in the U.S. The Company believes that the loss
of Echostar or DirecTV as a customer would have a material adverse effect on
the Company's financial position and results of operations.
COMPETITION
The Company's markets are highly competitive. In addition, if the
markets for the Company's products grow, the Company anticipates increased
competition from new companies entering such markets, some of whom may have
financial and technical resources substantially greater than those of the
Company. The Company believes that competition in its markets is based
primarily on performance, reputation, product reliability, technical support
and price. The Company's continued success in these markets will depend in
part upon its ability to continue to design and manufacture quality products
at competitive prices.
Products Division:
The Company believes that its principal competitors for its DBS outdoor
reception products include Sharp Corporation, Wistron NeWeb Corporation,
Winegard Company, Andrew Corporation, Microelectronics Technology, Inc. and
ProBrand. Based on information announced quarterly by the U.S. DBS system
operators as to the total number of subscribers and the subscriber turnover
rate, the Company believes that it is the leading supplier of outdoor
subscriber premise equipment to the U.S. DBS television industry. In the
U.S. DBS television market, the Company believes its reputation for
performance and quality allows the Company a competitive advantage if pricing
of its products is comparable to its competitors. Because the Company's
satellite products are not proprietary, it is possible that they may be
duplicated by low-cost producers, resulting in price and margin pressures.
Solutions Division:
The engineering solutions market in which the Solutions Division
operates includes a large number of companies, is intensely competitive and
faces rapid technological change. The Solutions Division expects the
competition to continue and intensify, which could result in price
reductions, reduced profitability and loss of current or future customers.
The Solutions Division's competitors fall into the following categories:
internal information technology or engineering departments of current and
potential customers; large information technology consulting services
providers such as Accenture, Electronic Data Systems Corporation and
International Business Machines Corporation; traditional information
technology services providers such as Sapient Corporation; Internet
professional services firms; mobile computing consulting and solutions
providers such as Wireless Facilities and Aether Systems; and emerging
offshore software developers such as Cognizant, Satyam, Infosys, and HCL. In
addition, the Solutions Division faces competition in its embedded products
business from software and hardware companies such as Wind River Systems,
BSQUARE Corporation, Accelent Systems, Inc., Intrinsyc Software, Inc. and
Venturcom, Inc.
The principal competitive factors in the Solutions Division's business
market are leading edge technical knowledge, the reputation and experience of
professionals delivering services, customer value and service; the success
and reliability of the delivered system; the ability to attract and retain
highly skilled, specialized, experienced engineering/consulting
professionals; and price. A number of the Solutions Division's competitors
and potential competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, greater name
recognition and a larger installed base of customers.
BACKLOG
The Company's products are sold to customers that do not usually enter
into long-term purchase agreements, and as a result, the Company's backlog at
any date is not significant in relation to its annual sales. In addition,
because of customer order modifications, cancellations, or orders requiring
wire transfers or letters of credit from international customers, the
Company's backlog as of any particular date may not be indicative of sales
for any future period.
INTELLECTUAL PROPERTY
Products Division:
The Company's timely application of its technology and its design,
development and marketing capabilities have been of substantially greater
importance to its business than patents or licenses.
The Products Division currently has 16 patents ranging from design
features for downconverter and antenna products to its MultiCipher broadband
scrambling system. Those that relate to its downconverter products do not
give the Company any significant advantage since other manufacturers using
different design approaches can offer similar microwave products in the
marketplace. In addition to its awarded patents, the Products Division
currently has 10 patent applications pending.
CalAmp(R) is a federally registered trademark of the Company.
Solutions Division:
The Solutions Division relies on a combination of trademark, patent,
copyright, service mark, trade secret laws and contractual restrictions to
establish and protect proprietary rights in the Solutions Division's products
and services. The Solutions Division has applied for various trademarks and
patents.
Use by customers of the Solutions Division's software is governed by
executed license agreements. The Solutions Division also enters into written
agreements with each of its resellers for the distribution of its software.
In addition, the Solutions Division seeks to avoid disclosure of trade
secrets by requiring each of its employees and others with access to
proprietary information to execute confidentiality agreements. The Solutions
Division protects its software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection.
EMPLOYEES
At February 28, 2005, the Company had approximately 400 employees and
approximately 200 contracted production workers. None of the Company's
employees are represented by a labor union. The contracted production
workers are engaged through independent temporary labor agencies in
California.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION
- -------------------------- --- --------------------------
Fred Sturm 47 Director, President and
Chief Executive Officer,
Patrick Hutchins 41 President, Products Division
Steven L'Heureux 49 President, Solutions Division
Richard Vitelle 51 Vice President, Finance,
Chief Financial Officer
and Corporate Secretary
FRED STURM was appointed Chief Executive Officer, President and
Director in August 1997. Prior to joining the Company from 1990 to 1997,
Mr. Sturm was President of Chloride Power Systems (USA), and Managing
Director of Chloride Safety, Security, and Power Conversion (UK), both of
which are part of Chloride Group, PLC (LSE: CHLD). From 1979 to 1990, he
held a variety of general management positions with M/A-Com and TRW
Electronics, which served RF and microwave markets.
PATRICK HUTCHINS joined the Company as Vice President, Operations in
August 2001, and was appointed President of the Company's Products Division
effective April 12, 2004. From March 1997 until joining the Company,
Mr. Hutchins served in general management capacities with several units of
Chloride Group PLC and Genlyte Thomas LLC, most recently serving as the
President and General Manager of Chloride Systems, a division of Genlyte
Thomas.
STEVEN L'HEUREUX was appointed as President of the Company's Solutions
Division in December 2004. From 2003 to 2004, Mr. L'Heureux was the
President of the Automation Solutions Group at Encoda Systems, Inc., an
enterprise software solutions provider to the media industry. From 1999 to
2003, Mr. L'Heureux served as President of Odetics Broadcast, a subsidiary of
Odetics, Inc., a supplier of equipment for the television broadcast, video
security, telecommunications, and transportation safety industries.
RICHARD VITELLE joined the Company as Vice President, Finance, Chief
Financial Officer and Corporate Secretary in July 2001. Prior to joining
the Company, he served as Vice President of Finance and CFO of SMTEK
International, Inc., a publicly held electronics manufacturing services
provider, where he was employed for a total of 11 years. Earlier in his
career Mr. Vitelle served as a senior manager with Price Waterhouse.
Officers are appointed by and serve at the discretion of the Board of
Directors.
ITEM 2. PROPERTIES
The Company's principal facilities, all leased, are as follows:
Square
Location Footage Use
- ---------------------- ------- ---------------------------------
Oxnard, California 98,000 Corporate office, Products Division
offices and manufacturing plant
San Diego, California 36,000 Solutions Division offices
Oakland, California 3,000 Administrative and sales office
Newport Beach, California 1,000 Sales office
Vista, California 6,000 Product design facility
Reston, Virginia 3,000 Sales office
Chanhassen, Minnesota 4,000 Product design facility
Parsippany, New Jersey 12,000 Sales office and service center
Latham, New York 3,000 Administrative and sales office
Paris, France 150 Sales office
ITEM 3. LEGAL PROCEEDINGS
Investigation by the Securities and Exchange Commission:
In May 2001, the Securities and Exchange Commission ("SEC") opened an
investigation into the circumstances surrounding the misstatements in the
Company's consolidated financial statements for its 2000 and 2001 fiscal
years caused by its former controller. In April 2004, the SEC concluded its
investigation and issued a cease and desist order directing the Company to
not violate federal securities laws in the future.
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 building owner
contends that it is owed approximately $500,000 for damages to the premises
allegedly caused by the Company. In May 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. In March
2005, the lawsuit and the cross-complaint were voluntarily withdrawn, and
since that time the parties have been attempting to mediate the dispute. If
the mediation fails to resolve the dispute, the parties have agreed in
writing to submit the matter to binding arbitration. The Company believes
that the ultimate resolution of this matter will not have a material adverse
effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended February 28, 2005, no matters were
submitted to a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock trades on The Nasdaq Stock Market under the
ticker symbol CAMP. The following table sets forth for the last two years
the quarterly high and low sale prices for the Company's Common Stock, as
reported by Nasdaq:
LOW HIGH
Fiscal Year Ended February 28, 2005:
1st Quarter $ 6.63 $17.20
2nd Quarter 5.12 8.20
3rd Quarter 5.57 10.00
4th Quarter 6.76 10.18
Fiscal Year Ended February 28, 2004:
1st Quarter $ 3.07 $ 4.23
2nd Quarter 3.07 4.42
3rd Quarter 4.05 11.60
4th Quarter 7.40 16.87
At May 4, 2005 the Company had approximately 1,600 stockholders of
record. The number of stockholders of record does not include the number of
persons having beneficial ownership held in "street name" which are estimated
to approximate 10,000. The Company has never paid a cash dividend and has no
current plans to pay cash dividends on its Common Stock. The Company's bank
credit agreement prohibits payment of dividends without the prior written
consent of the bank.
At February 28, 2005, the Company had four stock option plans, the "1989
Plan", the "1999 Plan", the "2000 Plan" and the "2004 Plan". Options to
purchase the Company's common stock have been granted to both employees and
non-employee directors. Options can no longer be granted under the 1989,
1999 and 2000 Plans. The 1989, 1999 and 2004 Plans were approved by the
Company's stockholders. The 2000 Plan and outstanding employee stock options
thereunder were assumed by the Company in connection with the acquisition of
Vytek on April 12, 2004.
Further information about these plans is set forth in Note 8 to the
consolidated financial statements. Certain information about the plans is as
follows:
Number of Number of securities
securities to be Weighted-average remaining available for
issued upon exercise price future issuance under
exercise of of outstanding equity compensation
outstanding options, plans (excluding
options, warrants warrants and securities reflected in
and rights rights the first column)
----------- ---------- -------------
2,692,135 $10.48 2,797,500
========= ====== =========
ITEM 6. SELECTED FINANCIAL DATA
Year ended February 28,
-----------------------------------------------
(In thousands except per share amounts)
OPERATING DATA 2005 2004 2003 2002 2001
-------- -------- -------- -------- -------
Revenues $220,027 $128,616 $100,044 $100,715 $117,129
Cost of revenues 178,649 110,950 79,511 78,342 94,128
-------- -------- ------- ------- -------
Gross profit 41,378 17,666 20,533 22,373 23,001
-------- -------- ------- ------- -------
Operating expenses:
Research and development 8,320 5,363 5,982 7,337 6,066
Selling 6,397 2,336 2,560 3,456 3,460
General and administrative 11,499 3,880 3,685 6,051 5,096
Amortization of intangibles 1,643 104 96 270 270
In-process research and
development write-off 471 - - - -
-------- -------- ------- ------- -------
Total operating expenses 28,330 11,683 12,323 17,114 14,892
-------- -------- ------- ------- -------
Operating income 13,048 5,983 8,210 5,259 8,109
-------- -------- ------- ------- -------
Non-operating income (exp.):
Settlement of litigation - - - (1,125) -
Other income (expense), net (120) (243) (215) 47 (359)
-------- -------- ------- ------- -------
Total non-operating expense (243) (243) (215) (1,078) (359)
-------- -------- ------- ------- -------
Income from continuing
operations before income tax 12,928 5,740 7,995 4,181 7,750
Income tax provision (4,852) (26) (2,835) (1,307) (2,810)
-------- -------- ------- ------- -------
Income from continuing
operations 8,076 5,714 5,160 2,874 4,940
Income (loss) from discontinued
operations, net of tax - - - (25) 269
Gain on sale of discontinued
operations, net of tax - - - 1,615 -
-------- -------- ------- ------- -------
Net income $ 8,076 $ 5,714 $ 5,160 $ 4,464 $ 5,209
======== ======== ======= ======= ========
Basic earnings per share:
Income from
continuing operations $ 0.38 $ 0.39 $ 0.35 $ 0.21 $ 0.37
Income from discontinued
operations - - - - 0.02
Gain on sale of disc. ops. - - - 0.12 -
------- ------- ------- ------- -------
$ 0.38 $ 0.39 $ 0.35 $ 0.33 $ 0.39
======= ======= ======= ======= =======
Diluted earnings per share:
Income from
continuing operations $ 0.36 $ 0.37 $ 0.35 $ 0.21 $ 0.35
Income from discontinued
operations - - - - 0.02
Gain on sale of disc. ops. - - - 0.11 -
------- ------- ------- ------- -------
$ 0.36 $ 0.37 $ 0.35 $ 0.32 $ 0.37
======= ======= ======= ======= =======
ITEM 6. SELECTED FINANCIAL DATA (continued)
February 28,
-----------------------------------------------
(In thousands)
2005 2004 2003 2002 2001
------- ------- ------- ------- -------
BALANCE SHEET DATA
Current assets $ 88,534 $67,365 $53,092 $45,739 $35,523
Current liabilities $ 29,662 $24,722 $18,405 $15,480 $15,032
Working capital $ 58,872 $42,643 $34,687 $30,259 $20,491
Current ratio 3.0 2.7 2.9 3.0 2.4
Total assets $196,755 $98,619 $89,597 $56,688 $49,812
Long-term debt $ 7,679 $ 7,690 $12,569 $ 3,628 $ 4,500
Stockholders' equity $158,288 $65,363 $58,623 $37,580 $29,624
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
CalAmp is a provider of wireless products and engineering services that
enable anytime/anywhere access to critical information, data and
entertainment content. CalAmp is the leading supplier of direct broadcast
satellite (DBS) outdoor customer premise equipment to the U.S. satellite
television market. The Company also provides wireless connectivity solutions
for the healthcare industry, public safety organizations, telemetry and asset
tracking markets, enterprise-class 802.11 'Wi-Fi' networks, and digital
multimedia delivery applications.
The Company's DBS reception products are sold primarily to the two U.S.
DBS system operators, Echostar Communications Corporation and DirecTV Group
Inc., for incorporation into complete subscription satellite television
systems. The Company sells its other wireless access products directly to
system operators as well as through distributors and system integrators.
On April 12, 2004, the Company completed the acquisition of Vytek
Corporation ("Vytek"), a privately held company. The acquisition of Vytek
was motivated primarily by the strategic goal 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 U.S. DBS system operators. Concurrent 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 to form the new Products Division.
The operations of Vytek, which are principally service oriented, comprise the
Company's Solutions Division.
Revenue consists principally of sales of satellite television outdoor
reception equipment for the U.S. DBS industry, which accounted for 84% of
consolidated revenue in the fiscal year ended February 28, 2005. The DBS
system operators have approximately 25% share of the total subscription
television market in the U.S. In calendar 2004, the size of the U.S. DBS
market is estimated by industry analysts to have grown by 15% from 21.6
million subscribers to approximately 24.8 million subscribers at December 31,
2004.
Demand for the Company's satellite television reception products is
driven not only by the growth in the overall DBS subscriber base, but also by
product upgrade cycles and subscriber "churn". Churn, which is defined as
subscribers whose service is disconnected for any reason, is an important
factor driving demand for the Company's satellite products because the
outdoor reception equipment typically is not redeployed by the service
provider when churn occurs. Average monthly churn in the U.S. DBS market was
approximately 1.5% in calendar year 2004. Given the average size of the U.S.
satellite television market of about 23 million subscribers during calendar
2004, this means that in calendar 2004 the aggregate churn amounted to
approximately 4.4 million subscribers.
The demand for the Company's products has been affected in the past, and
may continue to be affected in the future, by various factors, including, but
not limited to, the following:
* the timing, rescheduling or cancellation of orders from one of
CalAmp's key customers in CalAmp's satellite products business and the
Company's ability, as well as the ability of its customers, to manage
inventory;
* the rate of subscriber churn in the U.S. DBS market, and the ability
of the system operators to manage and reduce their churn rates;
* the rate of growth in the overall subscriber base in the U.S. DBS
Market;
* the economic and market conditions in the wireless communications
markets;
* CalAmp's ability to specify, develop or acquire, complete, introduce,
market and transition to volume production new products and
technologies in a timely manner;
* the rate at which CalAmp's present and future customers and end-users
adopt the Company's products and technologies in its target markets; and
* the qualification, availability and pricing of competing products and
technologies and the resulting effects on sales and pricing of the
Company's products.
For these and other reasons, the Company's net revenue in fiscal 2005
may not necessarily be indicative of future years' revenue amounts. From
time to time, the Company's key customers significantly reduce their product
orders, or may place significantly larger orders, either of which can cause
the Company's quarterly revenues to fluctuate significantly. The Company
expects these fluctuations to continue in the future.
Material opportunities for the Company include increasing the Company's
market share for outdoor reception equipment in the U.S. DBS market,
expanding its presence in wireless industry market segments for both fixed
and mobile wireless applications, and leveraging CalAmp's high volume
manufacturing capabilities to gain production contracts with customers of the
Solutions Division's product design and consulting engineering services. The
Company's principal challenges include eliminating the operating losses in
the Solutions Division and improving Product Division gross margins.
Basis of Presentation
The Company uses a 52-53 week fiscal year ending on the Saturday closest
to February 28, which for fiscal years 2005, 2004 and 2003 fell on February
26, 2005, February 28, 2004 and March 1, 2003, respectively. In these
consolidated financial statements, the fiscal year end for all years is shown
as February 28 for clarity of presentation. Fiscal years 2005, 2004 and 2003
each consisted of 52 weeks.
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 1 to the accompanying consolidated financial statements, the Company's
customer base is quite concentrated, with two customers accounting for 60.5%
of the Company's fiscal 2005 sales. 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 write-downs of the inventory carrying amounts are
established through a charge to cost of 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 write-downs 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.
During fiscal year 2003, the valuation allowance was reduced by
$5,389,000, substantially all of which related to tax benefits associated
with exercises of non-qualified stock options in prior years and was
therefore recognized by increasing additional paid-in capital. This
reduction of the valuation allowance in fiscal year 2003 exhausted that
portion of the valuation allowance that was related to tax benefits from
option exercises. During fiscal years 2004 and 2005, the deferred tax asset
valuation allowance was further reduced by $1,405,000 and $630,000,
respectively, which had the effect of reducing income tax expense by
corresponding amounts in these respective years.
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 purchase price allocation described in Note 2
to the accompanying consolidated financial statements, $8,783,000 was the
value assigned to Vytek's deferred tax assets, which is net of a valuation
allowance of $1,892,000.
At February 28, 2005 the Company's net deferred income tax asset was
$11,403,000, which amount is net of a valuation allowance of $1,892,000.
If in the future a portion or all of the $1,892,000 valuation allowance
at February 28, 2005 is no longer deemed to be necessary, reductions of the
valuation allowance will decrease the goodwill balance associated with the
Vytek acquisition. 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.
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 its 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 fiscal years 2005 and 2004, the Company
recorded impairment writedowns of $241,000 and $739,000, respectively, on
property and equipment which had become underutilized due to increased
outsourcing to contract manufacturers.
The Company also adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" at the beginning of fiscal 2003.
As a result, goodwill is no longer amortized, but is subject to a
transitional impairment analysis and 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.
As further described in Note 2 to the accompanying consolidated
financial statements, the goodwill of $71,896,000 that resulted from the
Vytek acquisition was apportioned on the basis of a valuation analysis
between the Company's Products Division and Solutions Division because both
of these reporting units are expected to benefit from the synergies of this
business combination. This valuation analysis resulted in an apportionment
of the Vytek acquisition goodwill to the Products Division and the Solutions
Division in the amounts of $36,847,000 and $35,049,000, respectively.
As further described in Note 5 to the accompanying consolidated
financial statements, the Company tested its Products Division goodwill for
impairment as of December 31, 2004, which indicated that there was no
impairment as of that date. The initial annual impairment test of the
Solutions Division goodwill will be performed during the first quarter of
fiscal 2006 using a testing date of April 30, 2005. Based on its most recent
financial projections, and specifically on the improving trend of operating
results that the Company expects for its Solutions Division in fiscal 2006
compared to fiscal 2005 as discussed further below under "Recent
Developments", at the present time the Company does not believe that this
fiscal 2006 first quarter impairment test will result in an impairment of the
Solutions Division goodwill.
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.
Recent Developments
Subsequent to February 28, 2005, the Company experienced a significant
reduction in orders from the U.S. DBS service providers, which are the two
key customers of its Products Division. Based on information obtained from
these key customers, the Company believes that the primary reason for the
decline in orders is that these key customers are adjusting their inventory
holding levels. The Company believes that this is a temporary situation and
does not, in management's judgment, represent a fundamental shift either in
its market share or the DBS industry as a whole. The Company expects that
this decline in orders will adversely affect sales and results of operations
for the first quarter of fiscal 2006. The Company believes that its DBS
business will improve in the fiscal 2006 second quarter as these two key
customers reach their target inventory levels and resume normal ordering
patterns.
The Company expects that the Solutions Division's operating loss in the
fiscal 2006 first quarter will be reduced significantly from the operating
loss of $2.1 million it incurred in the fourth quarter of fiscal 2005 as a
result of continuing actions that are being taken to eliminate the losses in
this division. It is a goal of the Company to bring this business into
operating profitability by the fourth quarter of fiscal 2006.
Results of Operations, Fiscal Years 2003 Through 2005
The following table sets forth, for the periods indicated, the
percentage of sales represented by items included in the Company's
Consolidated Statements of Income:
Year Ended February 28,
----------------------------
2005 2004 2003
------ ------ ------
Sales 100.0% 100.0% 100.0%
Cost of goods sold 81.2 86.3 79.5
----- ----- -----
Gross profit 18.8 13.7 20.5
----- ----- -----
Operating expenses:
Research and development 3.8 4.2 6.0
Selling 2.9 1.8 2.6
General and administrative 5.2 3.1 3.8
Amortization of intangibles 0.8 - -
In-process research and
development write-off 0.2 - -
----- ----- -----
Operating income 5.9 4.6 8.1
Other expense, net - (0.2) (0.2)
----- ----- -----
Income before income taxes 5.9 4.4 7.9
Income tax provision (2.2) - (2.8)
----- ----- -----
Net income 3.7% 4.4% 5.1%
===== ===== =====
The Company's sales and gross profit by business segment for the last
three years are as follows:
REVENUE BY SEGMENT
Year Ended February 28,
--------------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
Segment % of % of % of
(Division) $000s Total $000s Total $000s Total
----------- ------- ----- ------- ----- ------- -----
Products $194,835 88.6% $128,616 100.0% $100,044 100.0%
Solutions 25,192 11.4% - - - -
------- ----- ------- ----- ------- -----
Total $220,027 100.0% $128,616 100.0% $100,044 100.0%
======= ===== ======= ===== ======= =====
GROSS PROFIT BY SEGMENT
Year Ended February 28,
--------------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
Segment % of % of % of
(Division) $000s Total $000s Total $000s Total
----------- ------- ----- ------- ----- ------- -----
Products $ 35,765 86.4% $ 17,666 100.0% $20,533 100.0%
Solutions 5,613 13.6% - - - -
------- ----- ------- ----- ------ -----
Total $ 41,378 100.0% $ 17,666 100.0% $20,533 100.0%
======= ===== ======= ===== ====== =====
The Products Division generates substantially all of its revenue from
the sale of outdoor reception equipment for use with subscription satellite
television programming services. Such products accounted for approximately
95%, 93% and 87% of total Products Division revenues in fiscal years 2005,
2004 and 2003, respectively. The remaining portion of the Products Division
revenue in these fiscal years was generated primarily from the sale of
wireless access equipment.
Fiscal Year 2005 compared to Fiscal Year 2004
Revenue
Products Division revenue in fiscal 2005 increased $66,219,000, or 51%,
over fiscal 2004, primarily as the result of increased unit sales of DBS
reception equipment, specifically LNBFs. Sales of DBS products increased
during fiscal 2005 in part because the Company began volume shipments of two
new products in the fiscal 2005 third quarter in support of customers' multi-
satellite and digital video recorder service offerings. The increasing
availability of high-definition television programming and the introduction
of set-top boxes with integrated digital video recorders is driving demand
for increasingly complex DBS outdoor reception equipment that the Company
supplies. These latest generation satellite products typically have higher
average selling prices than earlier generation DBS outdoor reception
products.
The Solutions Division revenue in fiscal 2005 represents the service
operations of Vytek which was acquired effective April 12, 2004. The
products manufacturing business of Vytek is included in the Products
Division.
Gross Profit and Gross Margins
Products Division gross profit increased by $18,099,000, or 102%, in
fiscal 2005 compared to fiscal 2004. Approximately one-half of the gross
profit increase is attributable to the $66,219,000 increase in revenue in
fiscal 2005, and the remaining gross profit increase is attributable to the
year-over-year improvement in the gross margin percentage. The Products
Division gross margin improved from 13.7% in fiscal 2004 to 18.4% in fiscal
2005.
The gross margin improvement in fiscal 2005 is due mainly to the fact
that the Products Division gross margin during fiscal 2004 was adversely
affected by quarter-to-quarter volatility in ordering patterns from the
Company's two key customers. This demand volatility required the Company to
make a rapid contraction in production capability in the fiscal 2004 first
quarter, and a rapid expansion of production capability in the fiscal 2004
third quarter, all of which adversely affected manufacturing efficiencies and
gross margins during fiscal 2004.
Fiscal 2005 gross profit and gross margin of the Solutions Division were
$5,613,000 and 22.3%, respectively. During fiscal 2005 the Company took
action to improve the cost structure and gross margins of the Solutions
Division, and management expects that gross margins of this division will be
higher in fiscal 2006.
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
$2,957,000 to $8,320,000 in fiscal 2005 from $5,363,000 in fiscal 2004. This
increase in R&D expense was primarily due to the inclusion of the operations
of the Solutions Division (formerly known as Vytek) in fiscal 2005, which
accounted for $2,133,000 or 72% of the increase. The remaining increase is
primarily attributable to increased salaries and temporary labor expense
($522,000), increased incentive compensation expense ($99,000), and increased
workers compensation insurance expense ($155,000).
Consolidated sales and marketing expenses increased by $4,061,000 in
fiscal 2005 compared to fiscal 2004. Substantially all of this increase is
attributable to the inclusion of the Solution Division's operations in fiscal
2005.
Consolidated general and administrative expense increased from
$3,880,000 last year to $11,499,000 this year. The $7,619,000 increase is
primarily explained by the inclusion of the Solutions Division's operations
in fiscal 2005, which accounted for $5,848,000 of the increase. The
remaining increase is attributable primarily to increased auditing and
accounting fees ($584,000), increased incentive compensation expense
($272,000), increased legal expense ($260,000), increased salaries and wages
expense ($176,000), increased recruiting fees ($106,000), increased
consulting fees ($78,000), and the fact that the gain on sales of property
and equipment, which is netted against G&A expense, was $115,000 less in
fiscal 2005 compared to fiscal 2004.
Amortization expense of intangible assets in fiscal 2005 was $1,643,000,
compared to $104,000 in fiscal 2004. This increase is attributable to the
intangible assets arising from the acquisition of Vytek in April 2004. The
write-off of in-process R&D of $471,000 in fiscal 2005 is also attributable
to the Vytek acquisition.
Operating Income
Operating income was $13,048,000 and $5,983,000 during fiscal years 2005
and 2004, 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".
Fiscal 2005 operating income of $13,048,000 is comprised of operating
income of the Products Division of $25,316,000, an operating loss of the
Solutions Division of $8,051,000, and unallocated corporate expenses of
$4,217,000. 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
During fiscal years 2005 and 2004, the deferred tax asset valuation
allowance was reduced by $630,000 and $1,405,000, respectively, which had the
effect of reducing income tax expense by corresponding amounts in these
respective years. The effective income tax rate was 37.5% and 0.5% in fiscal
years 2005 and 2004, respectively. The increase in effective tax rate in
fiscal 2005 is attributable primarily to the fact that the reduction in the
valuation allowance in fiscal 2004 as a percentage of fiscal 2004 pretax
income was significantly greater than the reduction in the valuation
allowance in fiscal 2005 as a percentage of fiscal 2005 pretax income. In
addition, the Company was able to utilize a greater amount of tax credits in
fiscal 2004 compared to fiscal 2005.
Fiscal Year 2004 compared to Fiscal Year 2003
Sales
Substantially all of the Company's satellite product sales consist of
outdoor reception equipment for the U.S. Direct Broadcast Satellite (DBS)
industry. Sales of satellite products increased $32,563,000, or 37%, in
fiscal 2004 from fiscal 2003. This increase resulted primarily from
substantially higher customer orders in fiscal 2004 for the newer generation
LNBFs, which have higher average selling prices compared to older LNBF
products. Also, satellite product revenues in the second half of fiscal 2003
were depressed because of lower unit sales of LNBF products caused by a delay
in obtaining customer acceptance of new product designs that were approved in
the latter part of fiscal 2003's third quarter. A new LNBF product was
introduced during fiscal 2004 which generated sales of $8.8 million. Also,
the number of units sold in fiscal 2004 for all other LNBF products was
approximately 13% higher than in fiscal 2003, and the average selling price
of these other LNBF products increased by approximately 16% in fiscal 2004
compared to fiscal 2003.
Sales of non-satellite products in fiscal 2004 declined by $3,991,000,
or 34%, from fiscal 2003. This decline resulted mainly because fiscal 2003's
revenue included several large sales that were nonrecurring.
Gross Profit and Gross Margins
In fiscal 2004, gross profit on sales of satellite products declined by
$1,286,000, or 7%, from fiscal 2003, and gross margin declined to 13.2% in
fiscal 2004 from 19.5% in fiscal 2003. Despite the fact that satellite
product sales in fiscal 2004 were 37% higher than in fiscal 2003, the
quarter-to-quarter volatility of sales in fiscal 2004 was extreme, ranging
from a low of $16.6 million in the first quarter and a high of $42.6 million
in the third quarter. This volatility in fiscal 2004 sales, which resulted
in similar volatility in manufacturing activity, was caused by rapid shifts
in demand on the part of the two U.S. DBS system operators. This required
the Company to make a rapid contraction in production capability in the
fiscal 2004 first quarter, and a rapid expansion of production capability in
the third quarter, all of which adversely affected manufacturing efficiencies
and gross margins.
Also contributing to the declines in gross profit and gross margin for
satellite products in fiscal 2004 were the effect of persistent competitive
pricing pressures on certain satellite products and significantly higher
freight costs incurred for the procurement of raw materials and subassemblies
in the third quarter of fiscal 2004. In addition, included in satellite cost
of sales for fiscal 2004 were asset impairment writedowns of $739,000 on
property and equipment which had become underutilized due to increased
outsourcing to contract manufacturers, and a lower of cost or market
inventory writedown of $242,000.
Gross profit for non-satellite products decreased $1,581,000, or 48%,
and gross margin for non-satellite products decreased to 22.3% in fiscal 2004
from 28.3% in fiscal 2003. The decline in gross profit was primarily due to
the 34% year-over-year decrease in sales. The decline in gross margin in
fiscal 2004 was also attributable to the decrease in sales of non-satellite
products, which resulted in higher unabsorbed fixed overhead costs that are
included in cost of sales.
Operating Expenses
Research and development expense decreased by $619,000, or 10%, from
$5,982,000 in fiscal 2003 to $5,363,000 in fiscal 2004. The decline in R&D
expense in fiscal 2004 is due in part to the cancellation, in the third
quarter of fiscal 2003, of a product development contract for broadband
wireless application specific integrated circuits (ASICs) because the market
timing for large scale deployment of this technology was considered to be
uncertain in the near-term future. This cancellation resulted in a reduction
of approximately $345,000 in outside service expense in fiscal 2004. Also
contributing to the decline in R&D expense in fiscal 2004 was lower salaries
expense due to staffing reductions ($420,000).
Selling expense decreased by $224,000, or 9%, in fiscal 2004 to
$2,336,000 from $2,560,000 in fiscal 2003. This decrease was primarily due
to the fact that bad debts expense for fiscal 2003 included a charge of
$258,000 to write down the carrying amount of an available-for-sale
investment in common stock that had been received in fiscal 2002 in
satisfaction of an accounts receivable balance from a customer that went
through a legal reorganization.
General and administrative expense increased by $203,000 in fiscal 2004
compared to fiscal 2003. This increase was primarily due to the Company's
relocation of its facilities in Ventura County, California during the fourth
quarter of fiscal 2004. Expense incurred in connection with this relocation
amounted to approximately $255,000.
Non-operating Expense, Net
Net non-operating expense increased by $28,000 from $215,000 in fiscal
2003 to $243,000 in fiscal 2004. This increase in net non-operating expense
was primarily attributable to a decline in foreign currency gains from
$97,000 in fiscal 2003 to $75,000 in fiscal 2004.
Income Taxes
The effective income tax rate was 0.5% and 35.5% in fiscal years 2004
and 2003, respectively. The decline in effective tax rate in fiscal 2004 was
attributable primarily to the fact that, in fiscal 2004, reductions in the
deferred tax asset valuation allowance had a corresponding impact on the
income tax provision. Prior to fiscal 2004, reductions of the deferred tax
asset valuation allowance were offset by increases in additional paid-in
capital, and accordingly the effective income tax rate in fiscal 2003 was not
impacted by reductions in the valuation allowance.
Liquidity and Capital Resources
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $31,048,000 at February 28, 2005, and its $10
million working capital line of credit with a bank. During fiscal year 2004,
cash and cash equivalents increased by $8,163,000. This net increase
consisted of cash provided by operating activities of $12,536,000, proceeds
from sale of property and equipment of $1,749,000, and proceeds from stock
option exercises of $1,056,000, less cash used for capital expenditures of
$2,359,000, net repayments of debt of $3,043,000 and cash used in the Vytek
acquisition of $1,776,000.
Net cash provided by operating activities during fiscal 2005 was
$12,536,000, comprised of $17,641,000 (net income of $8,076,000 after
adjustment for non-cash items of $9,565,000) reduced by cash used in
operating working capital of $5,105,000.
Cash was used by an increase in operating working capital during fiscal
2005 in the aggregate amount of $5,105,000, comprised of a $3,192,000
increase in accounts receivable, a $825,000 increase in inventories, a
$1,237,000 decrease in accounts payable, and a decrease of $3,114,000 in
accrued liabilities, partially offset by a $3,263,000 decrease in prepaid
expenses and other assets.
The Company believes that inflation and foreign currency exchange rates
did not have a material effect on its operations in fiscal 2005. The Company
believes that fiscal 2006 will not be impacted significantly by foreign
exchange since substantially all of the Company's sales are to U.S. markets,
or to international markets where its sales are denominated in U.S. dollars.
At February 28, 2005 the Company had a $10 million working capital line
of credit with a commercial bank that matures on August 3, 2006. 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. At
February 28, 2005, $3 million was outstanding on this line of credit which is
classified as long-term at that date. Also at that date, $3,674,000 was
reserved under the line of credit for outstanding irrevocable stand-by
letters of credit. The Company also has two term loans with this bank that
had an aggregate outstanding principal balance of $7,465,000 at February 28,
2005, as further described in Note 6 to the consolidated financial
statements.
The bank credit agreement that encompasses the working capital line of
credit and the two bank term loans contains certain financial covenants and
ratios that the Company is required to maintain, including a fixed charge
coverage ratio of not less than 1.25, a current ratio of not less than 2.0, a
leverage ratio of not more than 2.25, tangible net worth of at least
$19,050,000 (such minimum amount increasing by $1 million annually beginning
on March 1, 2003), cash and cash equivalents not less than $8 million, and
net income of at least $1.00 in each fiscal year. The Company's bank credit
agreement also prohibits payment of dividends without the prior written
consent of the bank. At February 28, 2005 and 2004, the Company was in
compliance with all such covenants. The bank credit agreement contains a
subjective acceleration clause that enables the bank to call the loans in the
event of a material adverse change (as defined in the credit agreement) in
the Company's business. Based on the Company's history of profitable
operations and positive operating cash flow over the past five years, and
based on the Company's internal financial forecasts for the next year, the
Company does not believe it is probable that the bank will assert the
material adverse change clause in the next 12 months.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Contractual Obligations
Following is a summary of the Company's contractual cash obligations as
of February 28, 2005 (in thousands):
Payments Due by Period
-------------------------------
Less
Contractual Than 1-3 3-5
Obligations 1 year years years Total
- --------------- ------ ------- ------ -------
Debt $ 2,823 $ 7,642 $ - $10,465
Capital leases 82 42 - 124
Operating leases 2,129 5,464 3,743 11,336
Purchase
obligations 22,513 - - 22,513
------- ------- ------ -------
Total contractual
cash obligations $27,547 $13,148 $3,743 $44,438
======= ======= ====== =======
Purchase obligations consist of obligations under non-cancelable
purchase orders, primarily for inventory purchases of raw materials,
components and subassemblies.
The Company believes that its cash on hand, its cash generated from
operations and the amount available under its working capital line of credit,
are collectively sufficient to support operations, fund capital equipment
requirements and discharge contractual cash obligations.
New Authoritative Pronouncements
See Note 1 of the accompanying consolidated financial statements for a
description of new authoritative accounting pronouncements either recently
adopted or which had not yet been adopted by the Company as of the end of
fiscal 2005
Forward Looking Statements
Forward looking statements in this Form 10-K 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",
"will", "could", "plans", "intends", "seeks", "believes", "anticipates",
"expects", "estimates", "judgment", "goal", and variations of these words 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 Company's ability to eliminate operating losses in its Solutions Division
and make this business segment profitable, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. At
February 28, 2005, the Company's term debt and credit facility with its bank
are subject to variable interest rates. The Company monitors its debt and
interest bearing cash equivalents levels to mitigate the risk of interest
rate fluctuations. A fluctuation of one percent in interest rates would have
an annual impact of approximately $100,000 net of tax on the Company's
consolidated statement of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of CalAmp Corp. is responsible for establishing and
maintaining adequate internal control over financial reporting.
CalAmp Corp. management has assessed the effectiveness of the Company's
internal control over financial reporting as of February 28, 2005. In making
this assessment, management used criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on its assessment, management of
CalAmp Corp. believes that, as of February 28, 2005, the Company's internal
control over financial reporting is effective based on those criteria.
CalAmp Corp. acquired Vytek Corporation on April 12, 2004, and as
permitted by the guidance issued by the Office of the Chief Accountant of the
Securities and Exchange Commission, management excluded from its assessment
of the effectiveness of CalAmp Corp.'s internal control over financial
reporting as of February 28, 2005, Vytek Corporation's internal control over
financial reporting associated with total assets of $82,663,000 and total
revenues of $26,912,000 included in the consolidated financial statements of
CalAmp Corp. and subsidiaries as of and for the year ended February 28, 2005.
KPMG LLP, the independent registered public accounting firm that
audited the consolidated financial statements included in this Annual Report
on Form 10-K for the fiscal year ended February 28, 2005, has issued an
attestation report on management's assessment of the Company's internal
control over financial reporting.
/s/ Richard K. Vitelle VP Finance, Chief Financial
______________________ Officer and Treasurer
Richard Vitelle (principal accounting officer)
/s/ Fred M. Sturm President, Chief Executive
______________________ Officer and Director
Fred M. Sturm (principal executive officer)
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CalAmp Corp:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that CalAmp
Corp. maintained effective internal control over financial reporting as of
February 28, 2005, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Cal Amp Corp.'s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control,
and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that CalAmp Corp. maintained
effective internal control over financial reporting as of February 28, 2005,
is fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, CalAmp
Corp. maintained, in all material respects, effective internal control over
financial reporting as of February 28, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
CalAmp Corp. acquired Vytek Corporation and subsidiaries ("Vytek") on April
12, 2004, and management excluded from its assessment of the effectiveness of
CalAmp Corp.'s internal control over financial reporting as of February 28,
2005, Vytek's internal control over financial reporting associated with total
assets of $82,663,000 and total revenues of $26,912,000 included in the
consolidated financial statements of CalAmp Corp. and subsidiaries as of and
for the year ended February 28, 2005. Our audit of internal control over
financial reporting of CalAmp Corp. also excluded an evaluation of the
internal control over financial reporting of Vytek.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets
of CalAmp Corp. and subsidiaries as of February 28, 2005 and 2004, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended February 28, 2005, and our report dated May 5, 2005 expressed an
unqualified opinion on those consolidated financial statements.
(signed) KPMG LLP
Los Angeles, California
May 5, 2005
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CalAmp Corp.:
We have audited the accompanying consolidated balance sheets of CalAmp Corp.
and subsidiaries as of February 28, 2005 and 2004, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
February 28, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CalAmp
Corp. and subsidiaries as of February 28, 2005 and 2004, and the results of
their operations and their cash flows for each of the years in the three-year
period ended February 28, 2005, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of CalAmp
Corp.'s internal control over financial reporting as of February 28, 2005,
based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated May 5, 2005 expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
(signed) KPMG LLP
Los Angeles, California
May 5, 2005
CALAMP CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
February 28,
---------------------
2005 2004
-------- --------
Assets
Current assets:
Cash $ 31,048 $ 22,885
Accounts receivable, less allowance for
doubtful accounts of $477 and $211 at
February 28, 2005 and 2004, respectively 27,027 18,579
Inventories, net 21,465 20,253
Deferred income tax assets 6,118 2,404
Prepaid expenses and other current assets 2,876 3,244
-------- --------
Total current assets 88,534 67,365
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 5,383 5,358
Deferred income tax assets, less current portion 5,285 4,359
Goodwill 92,834 20,938
Other intangible assets, net 4,028 200
Other assets 691 399
-------- --------
$196,755 $ 98,619
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,897 $ 3,603
Accounts payable 18,389 17,395
Accrued payroll and employee benefits 3,652 1,513
Other current liabilities 3,127 2,211
Deferred revenue 1,597 -
-------- --------
Total current liabilities 29,662 24,722
-------- --------
Long-term debt, less current portion 7,679 7,690
Other non-current liabilities 1,126 844
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; 22,714 and 14,910 shares issued
and outstanding at February 28, 2005 and
2004, respectively 227 149
Additional paid-in capital 131,784 44,486
Less common stock held in escrow (2,548) -
Retained earnings 29,626 21,550
Accumulated other comprehensive loss (801) (822)
-------- --------
Total stockholders' equity 158,288 65,363
-------- --------
$196,755 $ 98,619
======== ========
See accompanying notes to consolidated financial statements.
CALAMP CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended February 28,
-----------------------------
2005 2004 2003
-------- -------- -------
Revenues:
Product sales $200,098 $128,616 $100,044
Service revenues 19,929 - -
-------- -------- --------
Total revenues 220,027 128,616 100,044
-------- -------- --------
Cost of revenues:
Cost of product sales 163,154 110,950 79,511
Cost of service revenues 15,495 - -
-------- -------- --------
Total cost of revenues 178,649 110,950 79,511
-------- -------- --------
Gross profit 41,378 17,666 20,533
-------- -------- --------
Operating expenses:
Research and development 8,320 5,363 5,982
Selling 6,397 2,336 2,560
General and administrative 11,499 3,880 3,685
Amortization of intangibles 1,643 104 96
In-process research and development
write-off 471 - -
-------- -------- --------
Total operating expenses 28,330 11,683 12,323
-------- -------- --------
Operating income 13,048 5,983 8,210
Non-operating expense:
Other expense, net (120) (243) (215)
-------- -------- --------
Income before income taxes 12,928 5,740 7,995
Income tax provision (4,852) (26) (2,835)
-------- -------- --------
Net income $ 8,076 $ 5,714 $ 5,160
======== ======== ========
Earnings per share:
Basic $ 0.38 $ 0.39 $ 0.35
Diluted $ 0.36 $ 0.37 $ 0.35
Shares used in computing basic and
diluted earnings per share:
Basic 21,460 14,791 14,639
Diluted 22,193 15,390 14,870
See accompanying notes to consolidated financial statements.
CALAMP CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS)
Accum-
ulated
Common Other Total
Common Stock Additional Stock Compre- Stock-
-------------- Paid-in Held Retained hensive holders
Shares Amount Capital in escrow Earnings Loss Equity
------ ------ ------ --------- ------- ------ ------
Balances at
February 28, 2002 13,630 $ 136 $27,569 $ - $10,676 $(801) $37,580
Net income and compre-
hensive income - - - - 5,160 - 5,160
Exercise of stock
options 64 1 159 - - - 160
Issuances of
common stock 1,051 10 10,074 - - - 10,084
Tax benefits from
exercise of non-
qualified stock
options - - 5,639 - - - 5,639
------ ------ ------- -------- ------- ------ -------
Balances at
February 28, 2003 14,745 147 43,441 - 15,836 (801) 58,623
Net income - - - - 5,714 - 5,714
Unrealized loss on
available-for-sale
investments - - - - - (21) (21)
------
Comprehensive income 5,693
Exercise of stock
options 165 2 615 - - - 617
Tax benefits from
exercise of non-
qualified stock
options - - 430 - - - 430
------ ------ ------- -------- ------- ------ -------
Balances at
February 28, 2004 14,910 149 44,486 - 21,550 (822) 65,363
Net income - - - - 8,076 - 8,076
Change in unrealized
loss on available-
for-sale investments - - - - - 21 21
------
Comprehensive income 8,097
Issuance of common
stock for Vytek
acquisition 8,123 81 91,090 (9,624) - - 81,547
Cancellation of
escrow shares (628) (6) (7,070) 7,076 - - -
Fair value of options
and warrants assumed
in acquisition - - 1,837 - - - 1,837
Exercise of stock
options 309 3 1,053 - - - 1,056
Tax benefits from
exercise of non-
qualified stock
options - - 388 - - - 388
------ ------ ------- -------- ------- ------ --------
Balances at
February 28, 2005 22,714 $ 227 $131,784 $ (2,548) $ 29,626 $(801) $158,288
====== ====== ======== ========= ======== ====== ========
See accompanying notes to consolidated financial statements.
CALAMP CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year ended February 28,
------------------------------
2005 2004 2003
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,076 $ 5,714 $ 5,160
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,340 3,400 3,669
Write-off of in-process research and
development 471 - -
Property and equipment impairment writedowns 241 739 -
Gain on sale of equipment (76) (227) (157)
Increase in equity associated with tax
benefit from exercise of stock options 388 430 5,639
Deferred tax assets, net 4,201 (233) (2,950)
Changes in operating assets and liabilities:
Accounts receivable (3,192) (2,351) (7,834)
Inventories (825) (7,391) (2,360)
Prepaid expenses and other assets 3,263 (573) (61)
Accounts payable (1,237) 5,842 5,840
Accrued liabilities (3,114) 744 (1,467)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,536 6,094 5,479
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,359) (3,693) (1,670)
Proceeds from sale of property and equipment 1,749 2,201 327
Acquisition of Kaul-Tronics - - (16,534)
Acquisition of Vytek, net of
cash acquired (1,776) - -
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,386) (1,492) (17,877)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,000 1,000 12,000
Debt repayments (5,043) (5,281) (971)
Proceeds from exercise of stock options 1,056 617 160
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (1,987) (3,664) 11,189
-------- -------- --------
Net change in cash and cash equivalents 8,163 938 (1,209)
Cash and cash equivalents at beginning of year 22,885 21,947 23,156
-------- -------- --------
Cash and cash equivalents at end of year $ 31,048 $ 22,885 $ 21,947
======== ======== ========
See accompanying notes to consolidated financial statements.
CALAMP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of Business
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.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company (a Delaware corporation) and its two wholly-owned subsidiaries,
California Amplifier SARL (a French corporation) and CalAmp Solutions
Holdings, Inc. (formerly known as Vytek Corporation). All significant
intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Areas where significant judgments are made include, but are not
limited to: allowance for doubtful accounts, inventory valuation, product
warranties, deferred income tax asset valuation allowances, and valuation of
long-lived assets and goodwill. Actual results could differ materially from
these estimates.
Fiscal Year
The Company uses a 52-53 week fiscal year ending on the Saturday
closest to February 28, which for fiscal years 2005, 2004 and 2003 fell on
February 26, 2005, February 28, 2004 and March 1, 2003, respectively. In
these consolidated financial statements, the fiscal year end for all years is
shown as February 28 for clarity of presentation. Fiscal years 2005, 2004
and 2003 each consisted of 52 weeks.
Revenue Recognition
The Company's Products Division recognizes revenue from product sales
when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed and determinable and collection of the sales price is
probable. Generally, these criteria are met at the time product is shipped,
except for shipments made on the basis of "FOB Destination" terms, in which
case title transfers to the customer and the revenue is recorded by the
Company when the shipment reaches the customer. Customers do not have rights
of return except for defective products returned during the warranty period.
Revenues of the Company's Solutions Division consist of the sales of
hardware products, software and software maintenance, and services. Product
revenues of the Solutions Division are generally recognized upon shipment of
goods, except that some product revenues associated with systems design and
engineering contracts are recognized on the percentage of completion method
principally utilizing labor costs to measure the extent of progress toward
completion.
The Company generally licenses its software pursuant to multiple
element arrangements that include maintenance. Where no significant
obligations remain, software license revenue is recognized upon delivery of
the software provided collection is considered probable, the fee is fixed or
determinable, there is evidence of an arrangement and vendor specific
objective evidence exists to allocate the total fee to the elements of the
arrangement.
Revenues from maintenance and software support services, which includes
upgrades, are generally collected before the services are performed and are
recognized ratably over the period of the services. The Company's software
maintenance arrangements do not contain specific upgrade rights.
Service revenues are recognized as the services are rendered, provided
that no significant obligations remain and collection of the receivable is
probable. Generally, contracts for services call for billings on a time and
material basis; however, in instances when a fixed-fee contract is signed,
revenue is recognized on a percentage of completion basis. Provisions for
estimated losses on uncompleted contracts are made in the period in which
such losses are determined.
In accordance with Emerging Issues Task Force Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs", the Company includes
shipping and handling fees billed to customers as sales. Shipping and
handling fees included in revenues for fiscal years 2005, 2004 and 2003 were
$239,000, $345,000 and $574,000, respectively.
Concentrations of Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of money market instruments
and trade receivables. The Company currently invests its excess cash in
money market mutual funds managed by or affiliated with its U.S. commercial
bank. The Company had cash and cash equivalents in one U.S. bank in excess
of federally insured amounts. Cash and cash equivalents in U.S. and foreign
banks are as follows (in thousands):
February 28,
--------------------
2005 2004
------ ------
U.S. banks $28,149 $22,280
Foreign banks 2,899 605
------- -------
$31,048 $22,885
======= =======
Because the Company sells into markets dominated by a few large service
providers, a significant percentage of consolidated revenues and consolidated
accounts receivable relate to a small number of customers. Revenues from
customers which accounted for 10% or more of consolidated annual revenues in
any one of the last three years, as a percent of consolidated revenues, are
as follows:
Year ended February 28,
------------------------------
Customer 2005 2004 2003
-------- ------ ------ ------
A 43.4% 39.4% 43.8%
B 17.1% 22.9% 9.8%
Accounts receivable amounts at fiscal year-end from the customers
referred to in the table above, expressed as a percent of consolidated net
accounts receivable, are as follows:
February 28,
--------------------
Customer 2005 2004
-------- ------ ------
A 49.8% 49.4%
B 25.2% 22.0%
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.
Inventories
Inventories include costs of materials, labor and manufacturing
overhead. Inventories are stated at the lower of cost or net realizable
value, with cost determined principally by the use of the first-in, first-out
method.
Investments
The Company classifies investments in one of three categories: trading,
available-for-sale or held-to-maturity. Trading securities are bought and
held principally for the purpose of selling them in the near term. Held-to-
maturity securities are those securities that the Company has the ability and
intent to hold until maturity. All other securities not included in trading
or held-to-maturity are classified as available-for-sale.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses on trading securities are included in earnings.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as
a component of accumulated other comprehensive income until realized, or
until holding losses are deemed to be permanent, at which time an impairment
charge is recorded.
At February 28, 2004, the Company had no trading or held-to-maturity
investments. Its sole available-for-sale investment, acquired in connection
with the settlement during fiscal year 2002 of a former customer's
outstanding accounts receivable balance, had a carrying value of $24,000 at
February 28, 2004 and is included in prepaid expenses and other current
assets in the accompanying balance sheet at that date. The Company recorded
an impairment charge of $258,000 on this investment during fiscal 2003, which
is included in selling expenses in the accompanying consolidated statement of
income because the investment asset had been initially recorded in fiscal
2002 with an offsetting reduction of bad debts expense, which is also
classified as a selling expense. During fiscal 2004, the Company sold a
portion of this investment, which generated net cash proceeds of $29,000. At
February 28, 2004, the Company had an unrealized holding loss of $21,000 for
this available-for-sale investment that was carried as a component of
accumulated other comprehensive loss. This loss of $21,000 was realized in
fiscal 2005 upon the sale of the investment. At February 28, 2005, the
Company had no investments.
Property, equipment and improvements
Property, equipment and improvements are stated at cost. The Company
follows the policy of capitalizing expenditures that increase asset lives,
and charging ordinary maintenance and repairs to operations, as incurred.
When assets are sold or disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in operating income.
Depreciation and amortization are based upon the estimated useful lives
of the related assets using the straight-line method. Plant equipment and
office equipment are depreciated over useful lives ranging from two to five
years, while tooling is depreciated over 18 months. Leasehold improvements
are amortized over the shorter of the lease term or the useful life of the
improvements.
Operating Leases
Rent expense under operating leases is recognized on a straight-line
basis over the lease term. The difference between the rent expense and the
rent payment is recorded as a deferred rent liability.
The Company accounts for tenant allowances in lease agreements as a
deferred rent liability. The liability is then amortized on a straight-line
basis over the lease term as a reduction of rent expense.
The deferred rent liability is included in other current liabilities
and other non-current liabilities in the accompanying consolidated balance
sheets.
Goodwill
Goodwill represents the excess of purchase price and related costs over
the value assigned to the net tangible assets and identifiable intangible
assets of businesses acquired. Through the end of fiscal 2002, goodwill was
amortized on a straight-line basis over 15 years. As a result of adopting
Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill
and Intangible Assets" at the beginning of fiscal 2003, goodwill is no longer
being amortized. Instead, goodwill is tested for impairment on an annual
basis and between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit
below its carrying amount.
Accounting for Long-Lived Assets Other Than Goodwill
The Company reviews property and equipment and other long-lived assets
other than goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amounts of an asset may not be
recoverable. Recoverability is measured by comparison of the asset's
carrying amount to the undiscounted future net cash flows an asset is
expected to generate. If an asset is considered to be impaired, the
impairment to be recognized is measured by the amount at which the carrying
amount of the asset exceeds the projected discounted future cash flows
arising from the asset.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate:
Cash and cash equivalents, accounts receivable and accounts payable -
The carrying amount is a reasonable estimate of fair value given the short
maturity of these instruments.
Long-term debt - The carrying value approximates fair value since the
interest rate on the long-term debt approximates the interest rate which is
currently available to the Company for the issuance of debt with similar
terms and maturities.
Warranty
The Company 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 revenues for the preceding three years. See Note 10 for a
table of annual increases in and reductions of the warranty liability for the
last three years.
Deferred Income Tax Assets
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 income in
conjunction with the positive and negative evidence surrounding the
realizability of its deferred income tax assets to determine if a valuation
allowance is needed.
Foreign Currency Translation and Accumulated Other Comprehensive Loss Account
Prior to February 1, 2002, the Company's French subsidiary used the
local currency as its functional currency. The local currency was the French
franc until January 1, 2002 and the Euro beginning on that date. The
financial statements of the French subsidiary were translated into U.S.
dollars using current or historical exchange rates, as appropriate, with
translation gains or losses included in the accumulated other comprehensive
loss account in the stockholders' equity section of the consolidated balance
sheet.
In connection with the conversion of the French subsidiary's local
currency from the French franc to the Euro, effective January 1, 2002, the
Company evaluated which currency, the Euro or the U.S. dollar, was best
suited to be used as the functional currency. On the basis of this
evaluation, management determined that the functional currency should be
changed from the Euro to the U.S. dollar, and this change was made effective
February 1, 2002. As a result of this change, the foreign currency
translation account balance of $801,000 included in accumulated other
comprehensive loss will remain unchanged until such time as the French
subsidiary ceases to be part of the Company's consolidated financial
statements. No income tax expense or benefit has been allocated to this
component of accumulated other comprehensive loss because the Company expects
that undistributed earnings of this foreign subsidiary will be reinvested
indefinitely.
The aggregate foreign exchange gains included in determining income
before income taxes were $35,000, $75,000 and $97,000 in fiscal 2005, 2004
and 2003, respectively.
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 average market price of the common
stock during the period exceeds the exercise price of the options.
Accounting for Stock Options
As allowed by Statement of Financial Accounting Standards No. 123
("SFAS 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") and comply with the pro forma disclosure
requirements of SFAS 123, as set forth in Note 8.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation (in thousands except per share
amounts):
Year ended February 28,
--------------------------------
2005 2004 2003
------ ------ ------
Net income as reported $8,076 $5,714 $5,160
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (1,647) (2,672) (2,681)
----- ----- -----
Pro forma net income $6,429 $3,042 $2,479
===== ===== =====
Earnings per share:
Basic -
As reported $.38 $.39 $.35
Pro forma $.30 $.21 $.17
Diluted -
As reported $.36 $.37 $.35
Pro forma $.29 $.20 $.17
Recent Authoritative Pronouncements
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" ("SFAS 151"). SFAS 151 clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). SFAS 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. SFAS 151 is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted. The Company plans to adopt SFAS 151 at the
beginning of its fiscal 2007. The Company believes that SFAS 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" ("SFAS 123R"). SFAS
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. SFAS 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 SFAS 123R at the
beginning of its fiscal 2007. The Company believes that the adoption of SFAS
123R could have a material impact on the amount of earnings it reports in
fiscal 2007. The Company has not yet determined the specific impact that
adoption of this standard will have on its financial position or results of
operations.
Reclassifications
The accompanying consolidated financial statements for fiscal 2004
contain certain reclassifications to conform with the presentation used in
fiscal 2005. Specifically, in the fiscal 2004 consolidated statement of cash
flows, a $1,000,000 reimbursement from the landlord for the cost of leasehold
improvements made to the Company's leased headquarters facility was
reclassified from cash flows from investing activities to cash flows from
operating activities. And in the February 28, 2004 consolidated balance
sheet, property, equipment and improvements was increased by $977,000 with a
corresponding increase in deferred rent. Of the deferred rent amount,
$133,000 was included in other current liabilities and $844,000 was included
in other non-current liabilities at February 28, 2004.
Note 2 - VYTEK ACQUISITION
On April 12, 2004, the Company acquired Vytek Corporation, 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 originally 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 February 28, 2005, 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 $81,847 $ 2,548 $84,395
Less stock registration costs (300) - (300)
------- ------- -------
Fair value of shares issued net
of registration costs 81,547 2,548 84,095
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 $83,384 $ 2,548 $85,932
======= ======= =======
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.
Following is the 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) ............................... $83,384
Direct costs of acquisition including legal,
accounting and financial advisory fees ..................... 2,630
------
Total cost of Vytek acquisition (excluding common
stock held in the escrow account) .......................... 86,014
Fair value of net assets acquired:
Current assets .................................... $ 8,341
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
Deferred tax assets, net........................... 8,783
Other assets ...................................... 2,124
Current liabilities ............................... (11,811)
Long-term liabilities ............................. (296)
------
Total fair value of net assets acquired ................... 14,118
------
Goodwill ..................................................... $71,896
======
Factors that contributed to a purchase price that resulted in the
recognition of goodwill include the following: (i) CalAmp's core satellite
products business is heavily dependent on just two key customers, and it was
believed that the Vytek acquisition would provide CalAmp with both customer
diversification and the opportunity to expand into product markets that offer
higher long-term growth potential; (ii) the acquisition was expected to
provide the opportunity for certain operational cost efficiencies for the
combined organization; (iii) Vytek, through its roll-up strategy, had
acquired seven operating companies from April 2000 through April 2003, and
CalAmp believed that acquiring Vytek would accelerate its expansion into the
wireless product vertical markets served by Vytek's various operating units;
(iv) Vytek is primarily a provider of professional design and engineering
services, and consequently it had a relatively small amount of net tangible
assets at the time of the acquisition by CalAmp; and (v) CalAmp's stock price
increased significantly immediately following the announcement of the merger
agreement on December 23, 2003, which increased the value ascribed to the
common stock shares issued, and the resultant goodwill, by approximately $17
million.
Another motivating factor for the acquisition of Vytek was the belief
that CalAmp and Vytek had complementary strengths -- CalAmp's radio frequency
(RF) engineering expertise, high volume manufacturing capability, leadership
position as a supplier of microwave reception and transmission equipment and
strong balance sheet, with Vytek's hardware and software design expertise for
wireless access and mobile computing solutions, diversified customer base
arrayed across a number of vertical markets, and a larger, more
geographically dispersed sales and marketing force.
Concurrent with the acquisition, CalAmp realigned its operations into a
divisional structure in which the Company's existing satellite products and
wireless access products businesses were combined, together with Vytek's
products manufacturing business, into a new Products Division. The remainder
of Vytek's operations, consisting of revenues generated by professional
engineering services and the development of software applications, comprise
the Solutions Division.
The goodwill of $71,896,000 that resulted from the Vytek acquisition
was apportioned between the Company's two reporting units (the Products
Division and the Solutions Division) because both reporting units are
expected to benefit from the synergies of the merger. An independent
valuation specialist was engaged to perform this goodwill apportionment
analysis. The Company provided the valuation specialist with (i) Vytek's
financial forecasts that existed at the time of the acquisition in April
2004, and (ii) management's estimate of the incremental revenue and profits
expected to be generated by the Products Division reporting unit that are
attributable to the business combination synergies. The valuation specialist
then segregated the projected cash flows between those associated with the
Products Division reporting unit and those associated with the Solutions
Division reporting unit. The cash flows attributable to the Products
Division reporting unit in this valuation analysis did not include any
revenues, profits or cash flows associated with CalAmp's legacy satellite
products and wireless access businesses. Residual values were then
calculated to estimate the earnings of the businesses beyond the forecast
period. Next, the present values of the forecasted cash flows and residual
values for each reporting unit were determined through a discounted cash flow
analysis to arrive at the fair value of the acquired business segregated into
the two reporting units. From these fair value amounts the valuation
specialist subtracted the fair value of the identifiable net assets acquired
to arrive at the goodwill amounts for each reporting unit. This process
resulted in an apportionment of the total Vytek acquisition goodwill to the
Products Division and the Solutions Division in the amounts of $36,847,000
and $35,049,000, respectively.
Following is a table that summarizes the results of the process
described in the preceding paragraph by which the Vytek acquisition goodwill
was assigned to the Company's two reporting units (in thousands):
Reporting Unit
----------------------
Products Solutions
Division Division Total
--------- --------- -------
Fair value of acquired business $36,064 $49,949 $86,013
Less fair value of identifiable
net assets acquired:
Deferred income tax assets, net (244) (8,539) (8,783)
Identifiable intangible assets - (5,792) (5,792)
Other 1,027 (569) 458
------- ------- -------
Goodwill $36,847 $35,049 $71,896
======= ======= =======
The goodwill arising from the Vytek acquisition is not deductible for
income tax purposes.
The $471,000 allocated to in-process research and development in the
purchase price allocation above was charged to expense immediately following
the acquisition. At the acquisition date, the Company was expected 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):
Year Ended Year Ended
February 28, 2005 February 28, 2004
-------------------- ------------------
As Pro As Pro
reported forma reported forma
-------- -------- -------- -------
Revenues $220,027 $224,188 $128,616 $176,484
Net income $ 8,076 $ 7,293 $ 5,714 $ (4,196)
Earnings per share:
Basic $ 0.38 $ 0.32 $ 0.39 $ (0.19)
Diluted $ 0.36 $ 0.31 $ 0.37 $ (0.19)
The pro forma adjustments for the year ended February 28, 2005 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 46 week period from the April 12 acquisition date to February 28, 2005.
The pro forma adjustments for the year ended February 28, 2004 consist
of adding Vytek's results of operations for the twelve months ended March 31,
2004.
NOTE 3 - INVENTORIES
Inventories consist of the following (in thousands):
February 28,
-----------------------
2005 2004
------- ------
Raw materials $17,680 $11,671
Work in process 676 417
Finished goods 3,109 8,165
------- -------
$21,465 $20,253
======= =======
NOTE 4 - PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following (in
thousands):
February 28,
-----------------------
2005 2004
------- ------
Buildings and improvements $ 1,344 $ 1,220
Plant equipment and tooling 14,619 15,493
Office equipment, computers
and furniture 4,657 3,077
------- -------
20,620 19,790
Less accumulated depreciation
and amortization (15,237) (14,432)
------- -------
$ 5,383 $ 5,358
======= =======
Note 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of adopting SFAS 142 at the beginning of fiscal 2003, the
Company no longer records amortization on goodwill. Instead, goodwill is
tested periodically for impairment. The change in the carrying amount of
goodwill is as follows (in thousands):
Balance as of February 28, 2004 $ 20,938
Goodwill acquired in April 2004 (Note 2) 71,896
-------
Balance as of February 28, 2005 $ 92,834
========
The goodwill balance of $20,938,000 at February 28, 2004 is associated
entirely with the Products Division. As described further in Note 2, the
$71,896,000 goodwill amount arising from the Vytek acquisition was allocated
to the Company's Products Division and Solutions Division in the amounts of
$36,847,000 and $35,049,000, respectively, based on the relative benefits
that were expected to be derived from the acquisition.
Impairment tests of goodwill associated with the Products Division are
conducted annually as of December 31. These tests, conducted as of December
31, 2004, 2003 and 2002, indicated that there was no impairment of Products
Division goodwill as of those dates. The Company used a discounted cash flow
approach to estimate the fair value of the Products Division in these
impairment tests. The initial annual impairment test of the Solutions
Division goodwill balance will be performed during the first quarter of
fiscal 2006 using a testing date of April 30, 2005.
Intangible assets are comprised as follows (in thousands):
February 28, 2005 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 $ 592 $2,757 $ - $ - $ -
Customer lists 5 yrs. 1,127 199 928 - - -
Contracts
backlog 1 yr. 845 748 97 - - -
Covenants not
to compete 4.1 yrs. 400 304 96 400 200 200
Licensing right 2 yrs. 200 50 150 - - -
------ ------ ----- ----- ----- -----
$5,921 $1,893 $4,028 $ 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 which was acquired by the Solutions Division in September
2004 is being amortized to cost of revenues.
Amortization expense of intangible assets was $1,693,000, $104,000 and
$96,000 for the years ended February 28, 2005, 2004 and 2003, respectively.
Estimated amortization expense for the fiscal years ending February 28
is as follows:
2006 $1,187,000
2007 $ 945,000
2008 $ 895,000
2009 $ 895,000
2010 $ 106,000
NOTE 6 - FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Working capital line of credit
At February 28, 2005, the Company had a $10 million working capital
line of credit with a commercial bank. The maturity date of the line of
credit is August 3, 2006. 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. At February 28, 2005, $3 million
was outstanding on this line of credit which is classified as long-term at
that date. Also at that date, $3,674,000 was reserved under the line of
credit for outstanding irrevocable stand-by letters of credit.
Long-term Debt
Long-term debt consists of the following (in thousands):
February 28,
----------------------
2005 2004
------ ------
Bank term loan payable, interest floating at
LIBOR plus 1.75% or bank prime rate, principal
due in monthly installments of $86 through
August 2006 $ 1,362 $ 2,390
Bank term loan payable, interest floating at
LIBOR plus 1.75% or bank prime rate, principal
due in monthly installments of $150 through
April 2008 6,103 7,903
Bank working capital line of credit 3,000 1,000
Capital lease obligations 111 -
------- -------
Total debt 10,576 11,293
Less portion due within one year (2,897) (3,603)
------- -------
Long-term debt $ 7,679 $ 7,690
======= =======
The bank credit agreement that encompasses the working capital line of
credit and the two bank term loans contains certain financial covenants and
ratios that the Company is required to maintain, including a fixed charge
coverage ratio of not less than 1.25, a current ratio of not less than 2.0, a
leverage ratio of not more than 2.25, tangible net worth of at least
$19,050,000 (such minimum amount increasing by $1 million annually beginning
on March 1, 2003), cash and cash equivalents not less than $8 million, and
net income of at least $1.00 in each fiscal year. At February 28, 2005 and
2004, the Company was in compliance with all such covenants.
The bank credit agreement contains a subjective acceleration clause
that enables the bank to call the loans in the event of a material adverse
change (as defined in the credit agreement) in the Company's business. Based
on the Company's history of profitable operations and positive operating cash
flow over the past five years, and based on the Company's internal financial
forecasts for the next year, the Company does not believe it is probable that
the bank will assert the material adverse change clause in the next 12
months.
Contractual Cash Obligations
Following is a summary of the Company's contractual cash obligations as
of February 28, 2005 (in thousands):
Future Cash Payments Due by Fiscal Year
----------------------------------------------
Contractual There-
Obligations 2005 2006 2007 2008 2009 after Total
- --------------- ------ ------ ------ ------ ------ ------ ------
Debt $ 2,823 $5,139 $1,800 $ 703 $ - $ - $10,465
Capital leases 82 34 8 - - - 124
Operating leases 2,129 1,783 1,821 1,860 1,939 1,804 11,336
Purchase
obligations 22,513 - - - - - 22,513
------- ------ ------ ------ ------ ------ ------
Total contractual
cash obligations $27,547 $6,956 $3,629 $2,563 $1,939 $1,804 $44,438
======= ====== ====== ====== ====== ====== =======
Purchase obligations consist of obligations under non-cancelable
purchase orders, primarily for inventory purchases of raw materials,
components and subassemblies.
Rent expense under operating leases was $2,363,000, $929,000 and
$760,000 for fiscal years 2005, 2004 and 2003, respectively.
NOTE 7 - INCOME TAXES
The Company's income before income taxes consists of the following (in
thousands):
Year ended February 28,
--------------------------------
2005 2004 2003
------ ------ ------
Domestic $13,089 $ 5,649 $ 7,642
Foreign (161) 91 353
------- ------- -------
$12,928 $ 5,740 $ 7,995
======= ======= =======
The tax provision consists of the following (in thousands):
Year ended February 28,
--------------------------------
2005 2004 2003
------ ------ ------
Current:
Federal $ 185 $ (49) $ 59
State 200 1 79
Foreign (121) (124) (57)
------ ------ ------
Total current 264 (172) 81
------ ------ ------
Deferred:
Federal 2,940 245 (2,395)
State 1,202 (477) (490)
------- ------- -------
Total deferred 4,142 (232) (2,885)
------- ------- -------
Charge in lieu of taxes
attributable to tax benefit
from employee stock options 446 430 5,639
------- ------- -------
$ 4,852 $ 26 $ 2,835
======= ======= =======
Differences between the income tax provision and income taxes computed
using the statutory federal income tax rate are as follows (in thousands):
Year ended February 28,
--------------------------------
2005 2004 2003
------ ------ ------
Income tax at statutory federal
rate (34%) $ 4,395 $ 1,952 $ 2,718
State income taxes, net of
federal income tax effect 800 193 106
Foreign taxes (66) (155) (176)
Valuation allowance (630) (1,405) 505
Tax credits - (517) (264)
Extraterritorial income exclusion (15) (14) (68)
In-process research and development 160 - -
Other, net 208 (28) 14
------- ------- -------
$ 4,852 $ 26 $ 2,835
======= ======= =======
The components of the net deferred income tax asset at February 28,
2005 and 2004 are as follows (in thousands):
February 28,
----------------------
2005 2004
------ ------
Inventory reserve $ 720 $ 221
Allowance for doubtful accounts 189 84
Warranty reserve 120 63
Compensation and vacation accruals 117 121
Depreciation (150) (274)
Goodwill amortization (1,641) (1,099)
Capitalized R&D cost amortization 303 400
Net operating loss carryforward 10,627 2,876
Research and development credits 2,668 2,803
Financial accounting basis of net
assets of acquired companies
different than tax basis (1,673) -
Other tax credits 1,861 1,803
Other, net 154 395
------- ------
13,295 7,393
Valuation allowance (1,892) (630)
------- ------
11,403 6,763
Less current portion (6,118) (2,404)
------- ------
Non-current portion $ 5,285 $4,359
======= ======
At February 28, 2005, the Company has net operating loss carryforwards
("NOLs") of approximately $37.7 million and $19 million for federal and state
purposes, respectively. The federal NOLs expire at various dates through
fiscal 2023, and the state NOLs expire at various dates through fiscal 2012.
As of February 28, 2005, the Company had foreign tax credit
carryforwards of $633,000 expiring at various dates through 2013, research
and development tax credit carryforwards of $1,839,000 and $1,257,000 for
federal and state income tax purposes, respectively, expiring at various
dates through 2023, and manufacturing investment credit carryforwards of
$809,000 for state income tax purposes expiring at various dates through
2012.
During fiscal year 2003, the deferred tax asset valuation allowance was
reduced by $5,389,000, substantially all of which related to tax benefits
associated with exercises of non-qualified stock options in prior years and
was therefore recognized by increasing additional paid-in capital. This
reduction of the valuation allowance in fiscal 2003 exhausted that portion of
the valuation allowance that was related to tax benefits from option
exercises. In fiscal 2004, on the basis of management's updated assessment
of the future realizability of the deferred tax assets, the valuation
allowance was further reduced by $1,405,000, which had the effect of reducing
the income tax provision by a corresponding amount. At February 28, 2004 the
Company's net deferred income tax asset was $6,763,000, which amount was net
of a valuation allowance of $630,000. The Company reversed the valuation
allowance of $630,000 in fiscal 2005 based on its assessment that the
deferred tax assets would be realized in the future. As of February 28,
2005, the valuation allowance was $1,892,000 pertaining to the deferred tax
assets acquired from Vytek.
The Company has not provided withholdings and U.S. federal income taxes
on approximately $211,000 of undistributed earnings of its foreign
subsidiaries because such earnings are or will be reinvested indefinitely in
such subsidiaries or will be approximately offset by credits for foreign
taxes paid. It is not practical to determine the U.S. federal income tax
liability, if any, that would be payable if such earnings were not reinvested
indefinitely.
NOTE 8 - STOCKHOLDERS' EQUITY
Stock Options
Effective July 30, 2004, the Company adopted the 2004 Incentive Stock
Plan which replaced the Company's 1999 Stock Option Plan. Beginning on such
date, the 1999 Stock Option Plan became frozen and stock options can no
longer be granted under this plan. The 1989 Key Employee Stock Option Plan
expired in May 1999 and no additional options may be granted under this plan.
Under the 2004 Plan, stock options can be granted at prices not less than
100% of the fair market value at the date of grant. Option grants become
exercisable on a vesting schedule established by the Compensation Committee
of the Board of Directors at the time of grant, usually over a four-year
period.
The following table summarizes the option activity for fiscal years
2005, 2004 and 2003 (in thousands except dollar amounts):
Weighted
Number of Average
Options Option Price
-------- --------
Outstanding at February 28, 2002 2,204 $11.17
Granted 341 5.22
Exercised (64) 2.53
Canceled (169) 11.44
----- ------
Outstanding at February 28, 2003 2,312 $10.51
Granted 534 6.95
Exercised (165) 3.73
Canceled (103) 14.46
----- ------
Outstanding at February 28, 2004 2,578 $10.05
Granted 762 9.44
Assumed in Vytek acquisition 149 42.87
Exercised (309) 3.41
Canceled (536) 18.25
----- ------
Outstanding at February 28, 2005 2,644 $10.46
===== ======
Options outstanding at February 28, 2005 and related weighted average
price and life information is as follows:
Weighted Total
Average Weighted Weighted
Range of Total Remaining Average Average
Exercise Options Life Exercise Options Exercise
Prices Outstanding (Years) Price Exercisable Price
--------- -------- -------- -------- -------- --------
$0.12 24,474(a) 8.6 $ 0.12 24,474 $ 0.12
1.75- 1.88 112,500 4.0 1.80 112,500 1.80
2.06- 2.76 137,000 3.0 2.20 137,000 2.20
3.16- 4.99 813,050 6.3 3.99 569,050 4.22
5.00- 7.95 837,313 7.7 6.43 317,063 5.67
8.00- 10.88 70,000 4.2 8.91 70,000 8.91
12.25- 14.76 288,500 9.0 14.17 46,750 14.71
15.75- 19.88 81,000 5.3 19.52 81,000 19.52
20.19- 27.44 33,000 5.1 25.15 33,000 25.15
39.38- 40.00 108,000 5.0 39.97 108,000 39.97
40.66- 50.56 107,138 5.1 45.03 107,138 45.03
50.80-304.67 31,871(a) 6.4 70.61 31,871 70.61
------------ --------- ---- ------ --------- ------
$0.12-$304.67 2,643,846 6.6 $10.46 1,637,846 $12.10
============ ========= ==== ====== ========= ======
(a) These outstanding fully-vested options were assumed by CalAmp in
the Vytek acquisition, as further discussed in Note 2.
CalAmp also assumed outstanding warrants in the Vytek acquisition.
These warrants entitle the holders to purchase CalAmp's common stock
aggregating 48,289 with exercise prices ranging from $0.12 to $34.54 per
share.
Excluding the options and warrants assumed in the Vytek acquisition,
the weighted average fair value for stock options granted by CalAmp in fiscal
years 2005, 2004 and 2003 was $8.06, $6.15 and $4.48, respectively.
The number of stock options available for grant under the 2004
Incentive Stock Plan at February 28, 2005 was 2,797,500.
As permitted by SFAS 123, the Company continues to apply the accounting
rules of APB No. 25 governing the recognition of compensation expense for
options granted under its stock option plans. Such accounting rules measure
compensation expense on the first date at which both the number of shares and
the exercise price are known. Under the Company's 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 expense is recognized.
As options are generally granted 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 consolidated statements of income.
The Company will be required to adopt SFAS 123R, which requires the expensing
of stock options, at the beginning of its fiscal 2007. See discussion under
Recent Authoritative Pronouncements in Note 1.
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following assumptions:
Year ended February 28,
--------------------------------
2005 2004 2003
------ ------ ------
Expected life (years) 5 5 5
Dividend yield 0% 0% 0%
Interest 3.3%-4.8% 2.6%-3.1% 3.5%-4.0%
Volatility 135%-136% 133%-135% 97%-133%
The estimated stock-based compensation cost calculated using the
assumptions indicated totaled $2,648,000, $3,686,000 and $4,155,000 in fiscal
2005, 2004, and 2003, respectively.
Preferred Stock Purchase Rights
At February 28, 2005, 14,909,512 preferred stock purchase rights are
outstanding. Each right may be exercised to purchase one-hundredth of a
share of Series A Participating Junior Preferred Stock at a purchase price of
$50 per right, subject to adjustment. The rights may be exercised only after
commencement or public announcement that a person (other than a person
receiving prior approval from the Company) has acquired or obtained the right
to acquire 20% or more of the Company's outstanding common stock. The
rights, which do not have voting rights, may be redeemed by the Company at a
price of $.01 per right within ten days after the announcement that a person
has acquired 20% or more of the outstanding common stock of the Company. In
the event that the Company is acquired in a merger or other business
combination transaction, provision shall be made so that each holder of a
right shall have the right to receive that number of shares of common stock
of the surviving company which at the time of the transaction would have a
market value of two times the exercise price of the right. 750,000 shares of
Series A Junior Participating Cumulative Preferred Stock, $.01 par value, are
authorized.
Note 9 - EARNINGS PER SHARE
Following is a summary of the calculation of basic and diluted weighted
average shares outstanding for fiscal 2005, 2004 and 2003 (in thousands):
Year ended February 28,
--------------------------------
2005 2004 2003
------ ------ ------
Weighted average shares:
Weighted average number of
common shares outstanding 21,460 14,791 14,591
Weighted average number of shares
issuable for legal settlement - - 48
------ ------ ------
Basic weighted average number
of common shares outstanding 21,460 14,791 14,639
Effect of dilutive securities:
Stock options 632 599 231
Shares held in escrow 101 - -
------ ------ ------
Diluted weighted average number
of common shares outstanding 22,193 15,390 14,870
====== ====== ======
Outstanding stock options in the amount of 836,000, 1,220,000 and
1,128,000 at February 28, 2005, 2004 and 2003, respectively, which had
exercise prices ranging from $7.95 to $304.67, $3.69 to $50.56 and $4.95 to
$50.56, respectively, were not included in the computation of diluted
earnings per share for the years 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.
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 dilutive impact of these
shares has been included in the diluted weighted average number of common
shares outstanding for the year ended February 28, 2005.
NOTE 10 - OTHER FINANCIAL INFORMATION
"Net cash provided by operating activities" in the consolidated
statements of cash flows includes cash payments for interest and income as
follows (in thousands):
Year ended February 28,
--------------------------------
2005 2004 2003
------ ------ ------
Interest paid $ 462 $ 527 $588
Income taxes paid (net
refunds received) $ 78 $(170) $262
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Year ended February 28,
--------------------------------
2005 2004 2003
------ ------ ------
Issuance of common stock and
assumption of stock options and
warrants as consideration for
acquisition of Vytek Corporation,
net of common stock held in escrow $83,384 $ - $ -
Issuance of common stock as
partial consideration for
acquisition of Kaul-Tronics $ - $ - $6,054
Issuance of common stock to
reduce accrued liability $ - $ - $4,030
Valuation and Qualifying Accounts and Reserves
Following is the Company's schedule of valuation and qualifying
accounts and reserves for the last three years (in thousands):
Charged
Balance at (credited) Balance
beginning to costs and at end
of period expenses Deductions Others of period
--------- -------- --------- --------- ---------
Allowance for doubtful accounts:
- -------------------------------
Fiscal 2003 $417 $(96) $ (48) $ - $273
Fiscal 2004 273 34 (96) - 211
Fiscal 2005 211 192 (236) 310 (1) 477
Warranty reserve:
- ----------------
Fiscal 2003 $376 $396 $(281) $ - $491
Fiscal 2004 491 164 (496) - 159
Fiscal 2005 159 234 (514) 867 (1) 746
(1) These represent amounts of allowances and reserves pertaining
to the assets acquired from Vytek.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company leases the building that houses its corporate office,
Products Division offices and manufacturing plant in Oxnard, 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's Products Division
leases small facilities in Minnesota and France. The Company's Solutions
Division leases offices in California, Virginia, New Jersey and New York.
The Company also leases certain manufacturing equipment and office equipment
under operating lease arrangements. A summary of future operating lease
commitments is included in the contractual cash obligations table in Note 6.
NOTE 12 - LEGAL PROCEEDINGS
Investigation by the Securities and Exchange Commission:
In May 2001, the Securities and Exchange Commission ("SEC") opened an
investigation into the circumstances surrounding the misstatements in the
Company's consolidated financial statements for its 2000 and 2001 fiscal
years caused by its former controller. In April 2004, the SEC concluded its
investigation and issued a cease and desist order directing the Company to
not violate federal securities laws in the future.
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 building owner
contends that it is owed approximately $500,000 for damages to the premises
allegedly caused by the Company. In May 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. In March
2005, the lawsuit and the cross-complaint were voluntarily withdrawn, and
since that time the parties have been attempting to mediate the dispute. If
the mediation fails to resolve the dispute, the parties have agreed in
writing to submit the matter to binding arbitration. The Company believes
that the ultimate resolution of this matter will not have a material adverse
effect on the Company's financial position or results of operations.
NOTE 13 - SEGMENT AND GEOGRAPHIC DATA
Information by business segment is as follows:
Year Ended Year Ended
February 28, 2005 February 28, 2004
------------------------------------ ------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Products Solutions Products Solutions
Division Division Corporate Total Division Division Corporate Total
-------- ------ ------- ----- -------- ------ ------- -----
Revenues:
Products $194,835 $ 5,263 $200,098 $128,616 $ - $128,616
Services - 19,929 19,929 - - -
------- ----- ------- ------- ----- -------
Total $194,835 $25,192 $220,027 $128,616 $ - $128,616
====== ===== ======= ======= ===== =======
Gross profit:
Products $ 35,765 $ 1,179 $ 36,944 $ 17,666 $ - $ 17,666
Services - 4,434 4,434 - - -
------- ----- ------- ------- ----- -------
Total $ 35,765 $ 5,613 $ 41,378 $ 17,666 $ - $ 17,666
======= ====== ======= ======= ===== =======
Gross margin:
Products 18.4% 22.4% 18.5% 13.7% - 13.7%
Services - 22.2% 22.2% - - -
Total 18.4% 22.3% 18.8% 13.7% - 13.7%
Operating
income
(loss) $ 25,316 $(8,051) $(4,217) $ 13,048 $ 8,112 $ - $(2,129) $ 5,983
======= ====== ===== ======= ======= ===== ====== ======
Identifiable
assets $150,996 $45,759 $ - $196,755 $ 98,619 $ - $ - $ 98,619
======= ====== ===== ======= ======= ===== ====== ======
Year Ended
February 28, 2003
------------------------------------
Operating Segments
-------------------
Products Solutions
Division Division Corporate Total
------- ------ ------- -----
Revenues:
Products $100,044 $ - $100,044
Services - - -
------- ------ -------
Total $100,044 $ - $100,044
======= ====== =======
Gross profit:
Products $ 20,533 $ - $ 20,533
Services - - -
------- ----- -------
Total $ 20,533 $ - $ 20,533
======= ===== =======
Gross margin:
Products 20.5% - 20.5%
Services - - -
Total 20.5% - 20.5%
Operating
income
(loss) $ 10,559 $ - $(2,349) $ 8,210
======= ===== ====== ======
Identifiable
assets $ 89,597 $ - $ - $ 89,597
======= ===== ====== ======
Product revenue of the Solutions Division represents primarily hardware
that is bundled with software applications.
Included in cost of revenues for Products Division during the year
ended February 28, 2004 were impairment writedowns of $739,000 on property
and equipment which had become underutilized due to increased outsourcing to
contract manufacturers. These impairment writedowns had an adverse impact of
0.6% on Products gross margin in fiscal 2004.
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 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.
The Company does not have significant long-lived assets outside the
United States.
The Company's revenues were derived mainly from customers in the United
States, which represented 97%, 96% and 91% of consolidated revenues in fiscal
2005, 2004 and 2003, respectively. No other country's customers accounted
for more than 4% of revenues in any of these years.
NOTE 14 - QUARTERLY FINANCIAL INFORMATION (unaudited)
The following summarizes certain quarterly statement of income data for
each of the quarters in fiscal years 2005 and 2004 (in thousands, except
percentages and per share data):
Fiscal 2005
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ------
Revenues $44,997 $50,827 $57,066 $67,137 $220,027
Gross profit 8,301 10,324 10,299 12,454 41,378
Gross margin 18.4% 20.3% 18.0% 18.6% 18.8%
Net income 1,309 1,746 1,787 3,234 8,076
Net income per
diluted share 0.07 0.08 0.08 0.14 0.36
Fiscal 2004
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ------
Revenues $18,566 $24,197 $44,248 $41,605 $128,616
Gross profit 1,306 3,200 6,734 6,426 17,666
Gross margin 7.0% 13.2% 15.2% 15.4% 13.7%
Net income (loss) (1,102) 390 3,452 2,974 5,714
Net income (loss)
Per diluted share (0.07) 0.03 0.22 0.18 0.37
Note 15 - SUBSEQUENT EVENT
On April 18, 2005, the Company acquired the business and certain assets
of Skybility, a privately held company located in Carlsbad, California,
pursuant to an Asset Purchase Agreement dated April 18, 2005 (the
"Agreement"). Skybility is a developer and supplier of embedded cellular
transceivers used in telemetry and asset tracking applications that operate
on the Global System for Mobile Communications (GSM) network and the Advanced
Mobile Phone Service (AMPS) network. During calendar 2004, Skybility had
unaudited revenues of approximately $9 million with a gross margin of
approximately 30%. The Skybility business, which has 17 employees, became
part of the Company's Products Division.
The Company acquired the business of Skybility, its inventory, fixed
assets, intellectual property, tradename and other intangible assets. No
liabilities were assumed in the acquisition. Pursuant to the Agreement, the
Company made an initial cash payment of $4,829,000 and agreed to make a
future cash payment (the "Earn-out Payment"). The formula for the Earn-out
Payment is as follows:
Net sales during the
12-month period ending
4/18/06 ("Earn-out Period") Earn-out Payment
========================== ===============================
Less than $10 million None
---------------------------------------------------------------------
$10 million or more but 50% of gross profit on all net
not more than $13 million sales during the Earn-out Period
----------------------------------------------------------------------
More than $13 million but 75% of gross profit on all net
not more than $20 million sales during the Earn-out Period
----------------------------------------------------------------------
$20 million or more 75% of gross profit on the first
$20 million of net sales during
the Earn-out Period
----------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure 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 Rules 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.
Internal Control Over Financial Reporting
There have been no significant changes in the Company's internal
control over financial reporting that occurred during the Company's most
recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting. See "Management's Report on Internal Control Over
Financial Reporting" and "Report of Independent Registered Public Accounting
Firm" preceding the Company's consolidated financial statements.
ITEM 9B. OTHER INFORMATION
On May 4, 2005, the Company entered into indemnification agreements
with each of its directors and executive officers. The indemnification
agreements, which were approved by the Board of Directors, provide that the
Company must indemnify the director or officer in the event that the director
or officer is involved in any threatened, pending, or completed action, suit
or other proceeding, whether civil, criminal, administrative, legislative,
investigative or any, by reason of the director's or officer's relationship
with the Company, against all expenses (as defined in the indemnification
agreements), liability and loss (including attorneys' fees, judgments, fines,
ERISA excise and other taxes penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith. Each indemnification agreement also provides for the Company to
advance all expenses incurred in advance of the final disposition of such
proceeding so long as the director or officer delivers an undertaking to
repay all amounts advanced if it should be determined that such person is not
entitled to the payment of such expenses. The Company also must maintain
directors' and officers' liability insurance in reasonable amounts unless the
Company makes a good faith determination that the premium costs for such
insurance are disproportionate to the amount of coverage provided.
On May 4, 2005, the Company's Board of Directors, upon the
recommendation of the Compensation Committee, approved fiscal 2005 bonus
payments to its named executive officers in the following amounts: Fred
Sturm, President and Chief Executive Officer, $183,600; Patrick Hutchins,
President - Products Division, $178,800; Steven L'Heureux, President -
Solutions Division, $25,000; and Richard Vitelle, Vice President Finance and
Chief Financial Officer, $106,600.
On May 4, 2005, the Company's Board of Directors, upon the
recommendation of the Compensation Committee, approved new annual base
salaries for Messrs. Sturm, Hutchins and Vitelle in the amounts of $400,000,
$260,000 and $260,000, respectively, retroactive to March 1, 2005, the
beginning of fiscal 2006.
On May 4, 2005, the Company's Board of Directors, upon the
recommendation of the Compensation Committee, established the target and
maximum bonuses and performance goals under the fiscal 2006 executive officer
incentive compensation plan for Messrs. Sturm, Hutchins, L'Heureux and
Vitelle. Mr. Sturm is eligible for target and maximum bonuses of up to 80%
and 130%, respectively, of his annual salary. Messrs. Hutchins, L'Heureux
and Vitelle are each eligible for target bonuses of up to 60% of annual
salary, and maximum bonuses of up to 100% of annual salary. The target and
maximum bonuses for Messrs. Sturm and Vitelle are based on the Company's
fiscal 2006 consolidated pretax income. The target and maximum bonuses for
Mr. Hutchins are based 70% on Products Division fiscal 2006 operating income
and 30% on fiscal 2006 consolidated pretax income. The target and maximum
bonuses for Mr. L'Heureux are based 70% on Solutions Division fiscal 2006
operating income and 30% on fiscal 2006 consolidated pretax income.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about executive officers is included in Part I, Item 1 of
this Annual Report on Form 10-K.
The following information is included in the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on August 2, 2005
and is incorporated herein by reference:
* Information regarding directors of the Company who are standing for
reelection.
* Information regarding the Company's Audit Committee and designated "audit
committee financial experts".
* Information on the Company's "Code of Business Conduct and Ethics" for
directors, officers and employees.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" in the
Company's definitive proxy statement for the Annual Meeting of Stockholders
to be held on August 2, 2005 is incorporated herein by reference and made a
part hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information under the caption "Stock Ownership" in the Company's
definitive proxy statement for the Annual Meeting of Stockholders to be held
on August 2, 2005 is incorporated herein by reference and made a part hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement for the
Annual Meeting of Stockholders to be held on August 2, 2005 is incorporated
herein by reference and made a part hereof.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained under the caption "Independent Public
Accountants" in the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on August 2, 2005 is incorporated herein
by reference and made a part hereof.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report:
Form 10-K
1. All Financial Statements: Page No.
-------------------- --------
Report of Independent Registered Public
Accounting Firm 25
Consolidated Balance Sheets 28
Consolidated Statements of Income 29
Consolidated Statements of Stockholders' Equity
and Comprehensive Income 30
Consolidated Statements of Cash Flows 31
Notes to Consolidated Financial Statements 32
2. Financial Statements Schedules:
------------------------------
Financial statement schedules are either not applicable,
not required or the information required to be set forth
therein is included in the Consolidated Financial State-
ments or Notes thereto included in this report.
3. Exhibits
--------
Exhibits required to be filed as part of this report are:
Exhibit
Number Description
------ -----------
2.1 Asset Purchase Agreement dated April 5, 2002 between and
among the Company, Kaul-Tronics, Inc., NGP, Inc., and
Interactive Technologies International, LLC (incorporated
by reference to Exhibit 2.1 of the Company's Current Report
on Form 8-K dated April 5, 2002).
2.2 Agreement and Plan of Merger and Reorganization dated
December 23, 2003 between the Company and Vytek Corporation
(incorporated by reference to Exhibit 2.1 of the Company's
Registration Statement No. 333-112851 on Form S-4).
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 (incorporated by reference to Exhibit
3.1 of the Company's Report on Form 10-Q for the period
Ended August 31, 2004).
3.2 Bylaws of the Company (filed herewith).
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 (incorporated
by reference to Exhibit 4.1 of the Company's Current Report
on Form 8-K filed on September 6, 2001).
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 (incorporated by
reference to Exhibit 2.1 of the Registrant's Registration
Statement on Form S-4 filed on February 13, 2004).
10. Material Contracts:
(i) Other than Compensatory Plan or Arrangements:
10.1 Building lease dated June 10, 2003 between the Company and
Sunbelt Enterprises for a facility in Oxnard, California
(incorporated by reference to Exhibit 10-1 filed with the
Company's Report on Form 10-Q for the quarter ended May 31,
2003).
10.2 Loan and Security Agreement by and between the Company and
U.S. Bank National Association dated May 2, 2002
(incorporated by reference to Exhibit 10.6 of the
Company's Annual Report on Form 10-K for the year ended
February 28, 2002).
10.2.1 Amendment No. 1 dated April 3, 2003 to the Loan and
Security Agreement between the Company and U.S. Bank
National Association dated May 2, 2002 (incorporated by
reference to Exhibit 10-2 filed with the Company's Report
on Form 10-Q for the quarter ended May 31, 2003).
10.2.2 Amendment No. 2 dated July 3, 2003 to the Loan and
Security Agreement between the Company and U.S. Bank
National Association dated May 2, 2002 (incorporated by
reference to Exhibit 10-2 filed with the Company's Report
on Form 10-Q for the quarter ended May 31, 2003).
10.2.3 Amendment No. 3 dated January 5, 2004 to the Loan and
Security Agreement between the Company and U.S. Bank
National Association dated May 2, 2002 (incorporated by
reference to Exhibit 10.5.3 filed with Company's Annual
Report on Form 10-K for the year ended February 28, 2004).
10.2.4 Amendment No. 4 dated February 27, 2004 to the Loan and
Security Agreement between the Company and U.S. Bank
National Association dated May 2, 2002 (incorporated by
reference to Exhibit 10.5.4 filed with Company's Annual
Report on Form 10-K for the year ended February 28, 2004).
10.2.5 Amendment No. 5 dated November 23, 2004 to the Loan and
Security Agreement between the Company and U.S. Bank
National Association dated May 2, 2002 (incorporated by
reference to Exhibit 10.1 filed with Company's Report
on Form 10-Q for the quarter ended November 30, 2004).
10.3 Form of Directors and Officers Indemnity Agreement (filed
herewith)
(ii) Compensatory Plans or Arrangements required to be filed as
Exhibits to this Report pursuant to Item 15 (b) of this
Report:
10.4 1989 Key Employee Stock Option Plan (incorporated by
reference to Exhibit 4.4 of the Company's Registration
Statement No. 33-31427 on Form S-8).
10.4.1 Amendment No. 1 to the 1989 Key Employee Stock Option Plan
(incorporated by reference to Exhibit 4.7 of the Company's
Registration Statement No. 33-36944 on Form S-8).
10.4.2 Amendment No. 2 to the 1989 Key Employee Stock Option Plan
(incorporated by reference to Exhibit 4.8 of the Company's
Registration Statement No. 33-72704 on Form S-8).
10.4.3 Amendment No. 3 to the 1989 Key Employee Stock Option Plan
(incorporated by reference to Exhibit 4.10 of the
Company's Registration Statement No. 33-60879 on Form S-
8).
10.5 The 1999 Stock Option Plan (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement No.
333-93097 on Form S-8).
10.6 CalAmp Corp. 2004 Stock Incentive Plan approved by
stockholders at the 2004 annual meeting on July 30,
2004 (incorporated by reference to Exhibit 10.2 of
the Company's Report on Form 10-Q for the period ended
August 31, 2004).
10.7 Vytek Wireless, Inc. 2000 Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.14 of the Company's
Registration Statement on Form S-4 as filed February 13,
2004).
10.8 Employment Agreement between the Company and Patrick
Hutchins dated May 31, 2002 (incorporated by
reference to Exhibit 10.6 filed with Company's Annual
Report on Form 10-K for the year ended February 28, 2004).
10.9 Employment Agreement between the Company and Fred Sturm
dated May 31, 2002 (incorporated by reference to Exhibit
10.7 filed with Company's Annual Report on Form 10-K for
the year ended February 28, 2004).
10.10 Employment Agreement between the Company and Richard
Vitelle dated May 31, 2002 (incorporated by reference to
Exhibit 10.9 filed with Company's Annual Report on Form
10-K for the year ended February 28, 2004).
10.11 Employment Letter Agreement between CalAmp Corp.
and Steven A. L'Heureux effective December 13, 2004
(incorporated by reference to Exhibit 10.2 filed with
Company's Report on Form 10-Q for the quarter ended
November 30, 2004).
21 Subsidiaries of the Registrant.
23 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Each management contract or compensatory plan or arrangement required to
be filed as an exhibit to this form is filed as part of Item 15(a)(3)Exhibits
and specifically identified as such.
(c) Other Financial Statement Schedules. None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on May 5, 2005.
CALAMP CORP.
By: /s/ Fred M. Sturm
__________________________
Fred M. Sturm
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Richard Gold Chairman of the May 5, 2005
______________________ Board of Directors ___________________
Richard Gold
/s/ Arthur Hausman Director May 5, 2005
______________________ ___________________
Arthur Hausman
/s/ A.J. Moyer Director May 5, 2005
______________________ ___________________
A.J. Moyer
/s/ James Ousley Director May 5, 2005
______________________ ___________________
James Ousley
/s/ Frank Perna, Jr. Director May 5, 2005
______________________ ___________________
Frank Perna, Jr.
/s/ Thomas Ringer Director May 5, 2005
______________________ ___________________
Thomas Ringer
/s/ Fred M. Sturm President, Chief Executive May 5, 2005
______________________ Officer and Director ___________________
Fred M. Sturm (principal executive officer)
/s/ Richard Vitelle VP Finance, Chief Financial May 5, 2005
______________________ Officer and Treasurer ___________________
Richard Vitelle (principal accounting officer)