SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: May 31, 2005
_________________
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
__________ ____________
Commission File Number: 0-12182
Exact Name of Registrant as
Specified in Its Charter: CalAmp Corp.
_______________________
DELAWARE 95-3647070
_______________________________ _______________
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification No.
Address of Principal Executive Offices: 1401 N. Rice Avenue
Oxnard, CA 93030
Registrant's Telephone Number: (805) 987-9000
__________________________________________
Former name, Former Address and Former
Fiscal Year, if Changed since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The registrant had 22,720,493 shares of Common Stock outstanding as of
June 27, 2005.
<page>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
May 31, February 28,
2005 2005
Assets -------- --------
Current assets:
Cash $ 29,186 $ 31,048
Accounts receivable, less allowance for
doubtful accounts of $390 and $477 at
May 31, 2005 and February 28, 2005, respectively 24,101 27,027
Inventories, net 26,533 21,465
Deferred income tax assets 5,716 6,118
Prepaid expenses and other current assets 3,780 2,876
-------- --------
Total current assets 89,316 88,534
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 5,513 5,383
Deferred income tax assets 4,869 5,285
Goodwill 94,977 92,834
Other intangible assets, net 4,554 4,028
Other assets 682 691
-------- --------
$199,911 $196,755
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,880 $ 2,897
Accounts payable 21,835 18,389
Accrued payroll and employee benefits 2,099 3,652
Other accrued liabilities 3,285 3,127
Deferred revenue 1,474 1,597
-------- --------
Total current liabilities 31,573 29,662
-------- --------
Long-term debt, less current portion 6,965 7,679
Other non-current liabilities 1,093 1,126
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; 22,720 and 22,714 shares issued
and outstanding at May 31, 2005 and
February 28, 2005, respectively 227 227
Additional paid-in capital 131,799 131,784
Less common stock held in escrow (2,548) (2,548)
Retained earnings 31,603 29,626
Accumulated other comprehensive loss (801) (801)
-------- --------
Total stockholders' equity 160,280 158,288
-------- --------
$199,911 $196,755
======== ========
See notes to unaudited consolidated financial statements.
<page>
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share amounts)
Three Months Ended
May 31,
------------------
2005 2004
-------- -------
Revenues:
Product sales $ 42,392 $ 41,656
Service revenues 5,188 3,341
-------- --------
Total revenues 47,580 44,997
-------- --------
Cost of revenues:
Cost of product sales 32,988 34,124
Cost of service revenues 3,894 2,572
-------- --------
Total cost of revenues 36,882 36,696
-------- --------
Gross profit 10,698 8,301
-------- --------
Operating expenses:
Research and development 2,197 1,807
Selling 1,872 1,072
General and administrative 2,614 2,445
Amortization of intangibles 443 260
In-process research and development
write-off 293 471
-------- --------
Total operating expenses 7,419 6,055
-------- --------
Operating income 3,279 2,246
Non-operating income (expense) 43 ( 64)
-------- --------
Income before income taxes 3,322 2,182
Income tax provision (1,345) (873)
-------- --------
Net income $ 1,977 $ 1,309
======== ========
Earnings per share:
Basic $ 0.09 $ 0.07
Diluted $ 0.09 $ 0.07
Shares used in computing basic and
diluted earnings per share:
Basic 22,492 18,755
Diluted 22,910 19,750
See notes to unaudited consolidated financial statements.
<page>
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
May 31,
---------------------
2005 2004
------- -------
Cash flows from operating activities:
Net income $ 1,977 $ 1,309
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,080 959
Write-off of in-process research and development 293 471
Increase in equity associated with tax
benefit from exercise of stock options 2 41
Deferred tax assets, net 818 809
Changes in operating assets and liabilities:
Accounts receivable 2,926 2,606
Inventories (3,988) (2,416)
Prepaid expenses and other assets (895) 1,008
Accounts payable 3,446 854
Accrued payroll and other accrued liabilities (1,428) (1,783)
Deferred revenue (123) (184)
Other 7 (2)
------- -------
Net cash provided by operating activities 4,115 3,672
------- -------
Cash flows from investing activities:
Capital expenditures (373) (686)
Proceeds from sale of property and equipment - 177
Acquisition of assets of Skybility (4,886) -
Acquisition of Vytek Corporation, net of
cash acquired - (1,727)
------- -------
Net cash used in investing activities (5,259) (2,236)
------- -------
Cash flows from financing activities:
Proceeds from debt borrowings - 2,000
Debt repayments (731) (2,768)
Proceeds from exercise of stock options 13 87
------- -------
Net cash used in financing activities (718) (681)
------- -------
Net change in cash and cash equivalents (1,862) 755
Cash and cash equivalents at beginning of period 31,048 22,885
------- -------
Cash and cash equivalents at end of period $29,186 $23,640
======= =======
See notes to unaudited consolidated financial statements.
<page>
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2005 and 2004
Note 1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
CalAmp Corp. ("CalAmp" or the "Company") 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 networks, and digital multimedia
delivery applications.
The Company uses a 52-53 week fiscal year ending on the Saturday
closest to February 28, which for fiscal year 2005 fell on February 26,
2005. The actual interim periods ended on May 28, 2005 and May 29, 2004.
In the accompanying consolidated financial statements, the 2005 fiscal
year end is shown as February 28 and the interim period end for both years
is shown as May 31 for clarity of presentation.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form
10-Q. Therefore, these financial statements should be read in conjunction
with the Company's 2005 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on May 6, 2005.
In the opinion of the Company's management, the accompanying
consolidated financial statements reflect all adjustments necessary to
present fairly the Company's financial position at May 31, 2005 and its
results of operations for the three months ended May 31, 2005 and 2004.
The results of operations for such periods are not necessarily indicative
of results to be expected for the full fiscal year.
All intercompany transactions and accounts have been eliminated in
consolidation.
Note 2 ACQUISITIONS
Skybility
---------
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. The Skybility
business, which has 17 employees, became part of the Company's Products
Division.
Skybility's operations are included in the accompanying fiscal 2006
interim consolidated statement of income for the six week period from
April 18, 2005 to May 31, 2005.
The acquisition of Skybility was motivated primarily by the
strategic goals of increasing the Company's presence in markets that
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.
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
The Company has not yet obtained all information required to complete
the purchase price allocation related to this acquisition. The final
allocation will be completed in fiscal 2006. Following is a preliminary
purchase price allocation (in thousands):
Purchase price paid in cash $4,829
Direct costs of acquisition 57
------
Total cost of acquisition 4,886
Fair value of net assets acquired:
Inventories $1,080
Property and equipment 368
Intangible assets:
Customer lists 578
Covenants not to compete 250
Contracts backlog 167
In-process research and development 293
-----
Total fair value of net assets acquired 2,736
------
Goodwill $2,150
======
Factors that contributed to a purchase price that resulted in the
recognition of goodwill include the following: (i) Skybility operates in
the machine-to-machine industry which the Company believes is a rapidly
growing market; (ii) Skybility's products generate gross profit of
approximately 30%, which is higher than the Company's core DBS business;
(iii) the acquisition was expected to provide the opportunity for certain
operational cost efficiencies for the combined organization; (iv)
Skybility had a relatively small amount of net tangible assets, in part
because it subcontracted its manufacturing; and (v) the Skybility purchase
price reflects the fact that the Company was acquiring the future earnings
and cash flow potential of Skybility's business, rather than its tangible
assets.
The goodwill arising from this acquisition is expected to be
deductible for income tax purposes.
The $293,000 allocated to in-process research and development in the
preliminary purchase price allocation above was charged to expense
immediately following the acquisition.
Vytek
-----
In connection with the acquisition of Vytek Corporation on April 12,
2004, 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 CalAmp's common stock deposited into the escrow account at the time of
the acquisition were to serve as security for potential indemnity claims by
the Company under the acquisition agreement. In November 2004, 628,380
shares of common stock held in escrow were forfeited by the selling
stockholders of Vytek pursuant to the Working Capital Adjustment provisions
of the acquisition agreement. These 628,380 shares were canceled and were
returned to the status of authorized, unissued shares. At February 28, 2005
and May 31, 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. The shares in escrow are carried at a per share value of
$11.26, 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
acquisition terms were agreed to and announced.
Note 3 INVENTORIES
Inventories include the cost of material, labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in,
first-out method) or market, and consist of the following (in thousands):
May 31, February 28,
2005 2005
------ ------
Raw materials $20,337 $17,680
Work in process 813 676
Finished goods 5,383 3,109
------- -------
$26,533 $21,465
======= =======
Note 4 GOODWILL AND OTHER INTANGIBLE ASSETS
The change in the carrying amount of goodwill is as follows (in
thousands):
Balance as of February 28, 2005 $ 92,834
Goodwill acquired in April 2005 (Note 2) 2,150
Other change (7)
-------
Balance as of May 31, 2005 $ 94,977
========
Goodwill associated with each reporting unit is as follows:
Products Division $ 59,928
Solutions Division 35,049
--------
$ 94,977
========
Impairment tests of goodwill associated with the Products Division
are conducted annually as of December 31. The annual tests conducted in
the last four fiscal years indicated no impairment of Products Division
goodwill. The initial annual impairment test of the goodwill associated
with the Solutions Division was performed during the first quarter of
fiscal 2006 using a testing date of April 30, 2005, which indicated that
there was no impairment of Solutions Division goodwill. The Company used
a discounted cash flow approach to estimate the fair value of the
Divisions in these impairment tests.
Other intangible assets are comprised as follows (in thousands):
May 31, 2005 February 28, 2005
------------------------ -------------------------
Amorti- Gross Accum. Gross Accum.
zation Carrying Amorti- Carrying Amorti-
Period Amount zation Net Amount zation Net
----- ------ ------ ----- ------ ------ -----
Developed/core
technology 5 yrs. $3,349 $ 760 $2,589 $3,349 $ 592 $2,757
Customer lists 5 yrs. 1,705 269 1,436 1,127 199 928
Contracts
backlog 1 yr. 1,012 922 90 845 748 97
Covenants not
to compete 4.4 yrs. 650 336 314 400 304 96
Licensing right 2 yrs. 200 75 125 200 50 150
------ ------ ----- ----- ----- -----
$6,916 $2,362 $4,554 $5,921 $1,893 $4,028
====== ====== ===== ===== ===== =====
Amortization of intangibles was $469,000 and $260,000 for the three
months ended May 31, 2005 and 2004, respectively. Amortization expense for
the three months ended May 31, 2005 is reported in the accompanying
consolidated statement of income in cost of revenues and operating expenses
in the amounts of $26,000 and $443,000, respectively.
Estimated amortization expense for the fiscal years ending February 28
is as follows:
2006 (remainder) $1,030,000
2007 $1,053,000
2008 $1,007,000
2009 $1,004,000
2010 $ 411,000
Thereafter $ 49,000
Note 5 FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Bank credit facility
The Company has a $10 million working capital line of credit with a
commercial bank. Borrowings under this line of credit bear interest at
LIBOR plus 1.75% or the bank's prime rate, and are secured by substantially
all of the Company's assets. The maturity date of the line of credit is
August 3, 2006. At May 31, 2005, $3,000,000 was outstanding on the line of
credit which is classified as long-term at that date. Also at that date,
$3,674,000 was reserved under the line for outstanding irrevocable stand-by
letters of credit. The Company also has two bank term loans which had an
aggregate outstanding principal balance of $6,759,000 at May 31,2005 of
which $2,823,000 is classified as current at that date. The bank credit
agreement which encompasses the line of credit and the two term loans
contains a subjective acceleration clause which enables the bank to call the
loans in the event of a material adverse change (as defined) in the
Company's business. Based on the Company's history of profitable operations
and positive operating cash flow over the past several years, and based on
the Company's internal financial forecasts for the next several quarters,
the Company does not believe it is probable that the bank will assert the
material adverse change clause in the next 12 months.
Other long-term debt
The Company had capital lease obligations of $86,000 at May 31,
2005, of which $57,000 was classified as current at that date.
Contractual cash obligations
Following is a summary of the Company's contractual cash obligations
as of May 31, 2005 (in thousands):
Future Cash Payments Due by Fiscal Year
----------------------------------------------
Contractual 2006 There-
Obligations (remainder) 2007 2008 2009 2010 after Total
- --------------- ------ ------ ------ ------ ------ ------ ------
Debt principal $ 2,117 $5,139 $1,800 $ 703 $ - $ - $ 9,759
Capital leases 53 34 8 - - - 95
Operating leases 1,765 1,818 1,856 1,872 1,939 1,805 11,055
Purchase
obligations 20,091 - - - - - 20,091
------- ------ ------ ------ ------ ------ ------
Total contractual
cash obligations $24,026 $6,991 $3,664 $2,575 $1,939 $1,805 $41,000
======= ====== ====== ====== ====== ====== =======
Purchase obligations consist of obligations under non-cancelable
purchase orders, primarily for inventory purchases of raw materials,
components and subassemblies.
Note 6 INCOME TAXES
Deferred income tax assets reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
A deferred income tax asset is recognized if realization of such asset is
more likely than not, based upon the weight of available evidence which
includes historical operating performance and the Company's forecast of
future operating performance. The Company evaluates the realizability of
its deferred income tax assets on a quarterly basis, and a valuation
allowance is provided, as necessary, in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". During this evaluation, the Company reviews its forecasts
of future operating performance in conjunction with the positive and
negative evidence surrounding the realizability of its deferred income tax
asset to determine if a valuation allowance is needed.
As of May 31, 2005, the valuation allowance was $1,892,000 pertaining
to the deferred tax assets acquired in the Vytek purchase. If in the
future a portion or all of this $1,892,000 valuation allowance is no
longer deemed to be necessary, reductions of the valuation allowance will
decrease the goodwill associated with the Solutions Division. Conversely,
if in the future the Company were to change its deferred tax asset
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.
The effective income tax rate was 40.5% and 40.0% in the three months
ended May 31, 2005 and 2004, respectively.
Note 7 EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution, using the treasury stock method, that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company. In computing diluted
earnings per share, the treasury stock method assumes that outstanding
options are exercised and the proceeds are used to purchase common stock
at the average market price during the period. Options will have a
dilutive effect under the treasury stock method only when the Company
reports income and the average market price of the common stock during the
period exceeds the exercise price of the options.
The following is a summary of the calculation of weighted average
shares used in the computation of basic and diluted earnings per share (in
thousands):
Three months
ended May 31,
----------------
2005 2004
------ ------
Basic weighted average number
of common shares outstanding 22,492 18,755
Effect of dilutive securities:
Stock options 365 885
Shares held in escrow 53 110
------ ------
Diluted weighted average number
of common shares outstanding 22,910 19,750
====== ======
Options and warrants outstanding at May 31, 2005 to purchase
approximately 1,096,000 shares of common stock at exercise prices of $6.13
and above were excluded from the computation of diluted earnings per share
for the three months then ended because the exercise price of these
options and warrants was greater than the average market price of the
common stock and accordingly the effect of inclusion would be
antidilutive.
As further discussed in Note 2, there are shares of the Company's
common stock held in escrow in connection with the April 2004 acquisition of
Vytek. The shares held in escrow have been excluded from the basic weighted
average number of common shares outstanding. However, the impact of these
shares has been included in the diluted weighted average number of common
shares outstanding for the three months ended May 31, 2005 and 2004.
Note 8 COMPREHENSIVE INCOME
Comprehensive income is defined as the total of net income and all
non-owner changes in equity. The following table details the components
of comprehensive income for the three months ended May 31, 2005 and 2004
(in thousands):
Three months
ended May 31,
----------------
2005 2004
------ ------
Net income $ 1,977 $ 1,309
Unrealized holding gain on
available-for-sale investments - 21
------ ------
Comprehensive income $ 1,977 $ 1,330
====== ======
Note 9 STOCK OPTIONS
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. Because 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.
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following assumptions:
Options granted
during the three months
ended May 31,
-------------------
2005 2004
------ ------
Expected life (years) 5 5
Dividend yield 0% 0%
Interest rates 3.9%-4.1% 3.5%-4.0%
Volatility 95% 133%
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):
Three months
ended May 31,
----------------
2005 2004
------ ------
Net income as reported $1,977 $1,309
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (205) (577)
----- -----
Pro forma net income $1,772 $ 732
===== =====
Earnings per share:
Basic -
As reported $0.09 $0.07
Pro forma $0.08 $0.04
Diluted -
As reported $0.09 $0.07
Pro forma $0.08 $0.04
Note 10 CONCENTRATION OF RISK
Because the Company's principal business involves the sale of
products into a market dominated by two large service providers, a
significant percentage of consolidated revenue and consolidated accounts
receivable relate to a small number of customers. Sales to customers
which accounted for 10% or more of consolidated sales for the three months
ended May 31, 2005 or 2004, as a percent of consolidated revenue, are as
follows:
Three months
ended May 31,
-----------------
Customer 2005 2004
-------- ------ ------
A 57.1% 36.8%
B 14.6% 16.4%
C - % 13.8%
Accounts receivable from these customers as a percent of consolidated
net accounts receivable are as follows:
May 31, Feb. 28,
2005 2005
------ ------
A 52.0 % 49.8%
B 13.5 % 25.2%
C - % 0.2%
Customers A, B and C are customers of the Company's Products Division.
Note 11 PRODUCT WARRANTIES
The Company generally warrants its products against defects over
periods ranging from 3 to 24 months. An accrual for estimated future
costs relating to products returned under warranty is recorded as an
expense when products are shipped. At the end of each quarter, the
Company adjusts its liability for warranty claims based on its actual
warranty claims experience as a percentage of sales for the preceding
three years. Activity in the warranty liability for the three months
ended May 31, 2005 and 2004 is as follows (in thousands):
Three months
ended May 31,
-----------------
2005 2004
------ ------
Balance at beginning of period $746 $159
Charged to costs and expenses 46 131
Deductions (100) (30)
---- ----
Balance at end of period $692 $260
==== ====
Note 12 OTHER FINANCIAL INFORMATION
"Net cash provided by operating activities" in the consolidated
statements of cash flows includes cash payments for interest and income
taxes as follows (in thousands):
Three months ended
May 31,
-------------------
2005 2004
------ ------
Interest paid $ 116 $ 103
Income taxes paid (net
refunds received) $ 221 $ 12
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Three months ended
May 31,
-------------------
2005 2004
------ ------
Decrease in valuation allowance
for available-for-sale investment $ - $ 21
Issuance of common stock and
assumption of stock options and
warrants as consideration for
acquisition of Vytek Corporation,
net of common stock issued and
held in escrow $ - $83,413
Note 13 SEGMENT INFORMATION
Segment information for the three months ended May 31, 2005 and 2004
is as follows (dollars in thousands):
Three months ended May 31, 2005:
Operating Segments
---------------------
Products Solutions
Division Division Corporate Total
------- ------ ------- -----
Revenues:
Products $41,168 $ 1,224 $42,392
Services - 5,188 5,188
------ ----- ------
Total revenues $41,168 $ 6,412 $47,580
====== ===== ======
Gross profit:
Products $ 8,810 $ 594 $ 9,404
Services - 1,294 1,294
------ ----- ------
Total gross profit $ 8,810 $ 1,888 $10,698
====== ===== ======
Gross margin:
Products 21.4% 48.5% 22.2%
Services - 24.9% 24.9%
Total gross margin 21.4% 29.4% 22.5%
Operating income (loss) $ 5,356 $(1,143) $ (934) $ 3,279
Three months ended May 31, 2004:
Operating Segments
---------------------
Products Solutions
Division Division Corporate Total
------- ------ ------- -----
Revenues:
Products $40,499 $ 1,157 $41,656
Services - 3,341 3,341
------ ----- ------
Total revenues $40,499 $ 4,498 $44,997
====== ===== ======
Gross profit:
Products $ 7,266 $ 266 $ 7,532
Services - 769 769
------ ----- ------
Total gross profit $ 7,266 $ 1,035 $ 8,301
====== ===== ======
Gross margin:
Products 17.9% 23.0% 18.1%
Services - 23.0% 23.0%
Total gross margin 17.9% 23.0% 18.4%
Operating income (loss) $ 4,634 $(1,509) $ (879) $ 2,246
Product revenue of the Solutions Division represents primarily hardware
that is bundled with software applications.
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.
Note 14 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 5.
Note 15 LEGAL PROCEEDINGS
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 contended that it was 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 was owed. On May 30,2005, the parties settled the dispute
and the Company recorded the effects of the settlement in its financial
statements for the three months ended May 31, 2005. The settlement
agreement did not have a material impact on the Company's financial
position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting periods. Areas where significant judgments
are made include, but are not limited to: allowance for doubtful
accounts, inventory valuation, product warranties, the deferred tax asset
valuation allowance, and the valuation of long-lived assets and goodwill.
Actual results could differ materially from these estimates.
Allowance for Doubtful Accounts
The Company establishes an allowance for estimated bad debts based
upon a review and evaluation of specific customer accounts identified as
known and expected collection problems, based on historical experience,
due to insolvency, disputes or other collection issues. As further
described in Note 10 to the accompanying consolidated financial
statements, the Company's customer base is quite concentrated, with two
customers accounting for 72% of the Company's total revenue for the three
months ended May 31, 2005. 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.
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 final purchase price allocation,
Vytek's deferred tax assets were valued at $8,783,000, net of a valuation
allowance of $1,892,000.
At May 31, 2005 the Company's net deferred income tax asset was
$10,585,000, 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 May 31, 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 one of the following: (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.
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 tested for
impairment on an annual basis, or more frequently as impairment indicators
arise. The test for impairment involves the use of estimates related to
the fair values of the business operations with which goodwill is
associated and is usually based on projected cash flows or a market value
approach.
The Company believes the estimate of its valuation of long-lived
assets and goodwill is a "critical accounting estimate" because if
circumstances arose that led to a decrease in the valuation it could have
a material impact on the Company's results of operations.
RESULTS OF OPERATIONS
Effective with the acquisition of Vytek on April 12, 2004, the
Company realigned its operations into a divisional structure. The legacy
operations of CalAmp, previously segregated into the Satellite and
Wireless Access business units, were combined together with Vytek's
products manufacturing business into the Products Division. The
operations of Vytek, which are principally service oriented, comprise the
Company's Solutions Division. The Company's results of operations for the
three months ended May 31, 2004 include the operations of Vytek for seven
weeks.
The Skybility business that was acquired by the Company on April 18,
2005 became part of the Products Division and is included in the Company's
results of operations for the three months ended May 31, 2005 for six
weeks.
The Company's revenue, gross profit and operating income (loss) by
business segment are as follows:
REVENUE BY SEGMENT
Three months ended May 31,
------------------------------------
2005 2004
--------------- ---------------
% of % of
Segment $000s Total $000s Total
----------- ------- ----- ------- -----
Products Division $41,168 86.5% $40,499 90.0%
Solutions Division 6,412 13.5% 4,498 10.0%
------- ----- ------- -----
Total $47,580 100.0% $44,997 100.0%
======= ===== ======= =====
GROSS PROFIT BY SEGMENT
Three months ended May 31,
-----------------------------------
2005 2004
-------------- --------------
% of % of
Segment $000s Total $000s Total
----------- ------ ----- ------ -----
Products Division $ 8,810 82.4% $7,266 87.5%
Solutions Division 1,888 17.6% 1,035 12.5%
------ ----- ------ -----
Total $10,698 100.0% $8,301 100.0%
====== ===== ====== =====
OPERATING INCOME (LOSS) BY SEGMENT
Three months ended May 31,
-----------------------------------
2005 2004
-------------- --------------
% of % of
Segment $000s Sales $000s Sales
----------- ------ ----- ------ -----
Products Division $ 5,356 11.3% $4,634 10.3%
Solutions Division (1,143) (2.4%) (1,509) (3.4%)
Corporate expenses (934) (2.0%) (879) (1.9%)
------ ----- ------ -----
Total $ 3,279 6.9% $2,246 5.0%
====== ===== ====== =====
Revenue
Products Division revenue increased $669,000, or 2%, to $41,168,000
in the three months ended May 31, 2005 from $40,499,000 for the same
period in the previous fiscal year, primarily as a result of the Skybility
acquisition on April 18, 2005. Skybility products accounted for revenue
of $1.3 million during the latest quarter. On a sequential quarter basis,
Products Division revenue for the most recent three quarters was $50.4
million, $60.9 million and $41.2 million. The decline in Products
Division revenue in the latest quarter compared to the immediately
preceding quarter occurred because in the latest quarter the Company
experienced a significant reduction in orders from Echostar and DirecTV,
the U.S. DBS service providers which are the two principal customers of
the Company's Products Division. Based on information obtained from these
key customers, the Company believes that the primary reason for the
decline in orders is that both of these customers were adjusting their
inventory holding levels.
The Company believes that this is a temporary situation and that its
DBS business will improve in the fiscal 2006 second quarter as these two
key customers reach their target inventory levels.
Revenue of the Solutions Division, which was acquired effective April
12, 2004, increased from $4,498,000 in the seven weeks ended May 31, 2004
to $6,412,000 in the three months ended May 31, 2005. The revenue
increase of $1,914,000 is the net result of the shorter period of
inclusion last year and the Company's actions to eliminate lower margin
business in the current year in order to reduce operating losses in this
division.
Gross Profit and Gross Margins
Products Division gross profit increased $1,544,000, or 21%, which
was primarily attributable to the gross margin improvement from 17.9% in
the three months ended May 31, 2004 to 21.4% in the latest quarter. The
gross margin improvement was mainly due to the change in the mix of
products sold.
Solutions Division gross profit increased $853,000, or 82%, and gross
margin improved from 23.0% in the three months ended May 31, 2004 to 29.4%
in the latest quarter. During fiscal 2005 the Company took action to
improve the cost structure and gross margins of the Solutions Division,
and management expects that gross margin of this division will be
substantially higher in fiscal 2006 than the 22.3% gross margin generated
by this Division in fiscal 2005.
See also Note 13 to the accompanying unaudited consolidated financial
statements for additional operating data by business segment.
Operating Expenses
Consolidated research and development expense increased by $390,000
to $2,197,000 in the latest quarter from $1,807,000 last year. Almost
half of the increase was attributable to the operations of Skybility which
was acquired by the Company in April 2005. The remaining increase was
primarily attributable to higher salaries and wages in the Products
Division of $205,000.
Consolidated selling expenses increased to $1,872,000 in the latest
quarter from $1,072,000 last year. Of the $800,000 increase, $736,000 was
attributable to the Solutions Division. Solution Division's selling
expenses last year covered the 7-week week period ended May 31, 2004,
compared to the 13-week period this quarter.
Consolidated general and administrative expenses increased by
$169,000 from $2,445,000 in the first quarter of last year to $2,614,000
in the latest quarter. The increase was primarily from the Products
Division and corporate expenses in areas such as salaries and wages and
related benefits of new employees.
Amortization of intangibles increased by $183,000 to $443,000 in the
latest quarter from $260,000 last year. The increase was primarily
attributable to amortization expense related to intangible assets the
Company acquired from Skybility. The in-process research and development
("IPR&D") write-off decreased by $178,000 to $293,000 in the latest
quarter from $471,000 last year. Last year's IPR&D write-off was related
to the acquisition of Vytek and this year's IPR&D write-off was related to
the acquisition of Skybility. See also Note 2 to the accompanying
unaudited consolidated financial statements for additional information on
the acquisition of Skybility.
Operating Income
Operating income was $3,279,000 and $2,246,000 during the three
months ended May 31, 2005 and 2004, respectively. Of the $1,033,000
increase in operating income, $722,000 was attributable to the Products
Division's higher gross profit of $1,544,000, as discussed above under
the headings "Revenue" and "Gross Profit and Gross Margins", partially
offset by the Products Division's higher operating expenses of $822,000.
The Solutions Division also showed an improvement in its operating
results, reducing its operating loss of $1,509,000 in the three months
ended May 31, 2004 (which amount represented seven weeks of operations)
to $1,143,000 in the three months ended May 31, 2005, which is a result
of the Company's recent actions taken to reduce the losses of the
Solutions Division by strengthening the sales and marketing organization,
reducing overhead costs, and making a leadership change. Management is
closely monitoring the performance of this business unit with the
objective of achieving profitable results for the Solutions Division as
soon as possible.
Income Tax Provision
The effective income tax rate was 40.5% and 40.0% in the three months
ended May 31, 2005 and 2004, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $29,186,000 at May 31, 2005, and its $10
million working capital line of credit with a bank. During the first
quarter of fiscal 2006, cash and cash equivalents decreased by $1,862,000.
This decrease consisted of cash used for the Skybility acquisition of
$4,886,000, cash used for capital expenditures of $373,000 and debt
repayments of $731,000, partially offset by cash provided by operating
activities of $4,115,000 and proceeds from stock option exercises of
$13,000.
At May 31, 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 May 31, 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 bank term loans which had an aggregate outstanding principal balance
of $6,759,000 at May 31, 2005 of which $2,823,000 is classified as
current at that date. The bank credit agreement which encompasses the
line of credit and the two term loans contains a subjective acceleration
clause that enables the bank to call the loans in the event of a material
adverse change (as defined) in the Company's business. Based on the
Company's history of profitable operations and positive operating cash
flow over the past several years, and based on the Company's internal
financial forecasts for the next several quarters, the Company does not
believe it is probable that the bank will assert the material adverse
change clause in the next 12 months.
See Note 5 to the accompanying consolidated financial statements for
a summary of the Company's contractual cash obligations as of May 31,
2005.
The Company believes that inflation and foreign currency exchange
rates have not had a material effect on its operations. The Company
believes that fiscal 2006 will not be impacted significantly by foreign
exchange since a significant portion of the Company's sales are to U.S.
markets, or to international markets where its sales are denominated in
U.S. dollars.
The Company believes that cash flow from operations, together with
amounts available under its working capital line of credit, are sufficient
to support operations, fund capital expenditures and discharge contractual
cash obligations over the next twelve months.
FORWARD LOOKING STATEMENTS
Forward looking statements in this Form 10-Q which include, without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, projections and other information
regarding future performance, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
words "may" "could", "plans", "believes," "anticipates," "expects," and
similar expressions are intended to identify forward-looking statements.
These forward-looking statements reflect the Company's current views with
respect to future events and financial performance and are subject to
certain risks and uncertainties, including, without limitation, product
demand, market growth, new competition, competitive pricing and continued
pricing declines in the DBS market, supplier constraints, manufacturing
yields, the ability to manage cost increases in inventory materials
including raw steel, timing and market acceptance of new product
introductions, new technologies, the 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-3
(number 333-119858) as filed with the Securities and Exchange Commission
on October 20, 2004. Such risks and uncertainties could cause actual
results to differ materially from historical results or those anticipated.
Although the Company believes the expectations reflected in such forward-
looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be attained. The Company undertakes
no obligation to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash equivalents,
accounts receivable, accounts payable and bank term loans payable. At May
31, 2005, the carrying values of cash equivalents, accounts receivable and
accounts payable approximate fair values given the short maturity of these
instruments.
The carrying value of bank term loans payable approximates fair value
since the interest rates on these loans approximate the interest rates
which are currently available to the Company for the issuance of debt with
similar provisions and maturities. Based on the amount of bank debt
outstanding at May 31, 2005, a change in interest rates of one percent
would result in an annual impact of less than $100,000, net of tax, on the
Company's consolidated statement of operations.
A portion of the Company's operations consists of an investment in a
foreign subsidiary. As a result, the consolidated financial results have
been and could continue to be affected by changes in foreign currency
exchange rates. However, the Company believes that it does not have
material foreign currency exchange rate risk since a significant portion
of the Company's sales are to U.S. markets, or to international markets
where its sales are denominated in U.S. dollars, and material purchases
from foreign suppliers are typically also denominated in U.S. dollars.
Additionally, the functional currency of the Company's foreign subsidiary
is the U.S. dollar.
It is the Company's policy not to enter into derivative financial
instruments for speculative purposes. Furthermore, the Company generally
does not enter into foreign currency forward exchange contracts. There
are no foreign currency forward exchange contracts outstanding at May 31,
2005.
ITEM 4. 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 has been no change 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 15 to the accompanying consolidated financial statements for
a description of legal proceedings.
ITEM 5. OTHER INFORMATION
On July 5, 2005, the Company entered into an employment agreement
with Steven L'Heureux, President of the Company's Solutions Division.
The key terms of this employment agreement are as follows:
.. Mr. L'Heureux's base salary of $235,000 will be reviewed by and be
subject to adjustment at the sole discretion of the Board of
Directors during the agreement.
.. Mr. L'Heureux will be eligible to participate in the Company's
employee bonus program and employee stock option award program.
.. If Mr. L'Heureux's employment is terminated by the Company for
"Cause" (as defined), then he is not entitled to severance pay.
If his employment is terminated by the Company without Cause, or
following a "change in control" (as defined) of the Company his
employment is terminated or he resigns for "good reason" (as
defined), then he is entitled to severance in the form of
continuation of payments of base salary and employee benefits
coverage for 12 months.
.. The initial term of the employment agreement is 12 months, and
unless either the Company or Mr. L'Heureux provide notice of non-
renewal at least 30 days before the end of the employment agreement
term, the agreement will be automatically extended for a period of
one year, with such procedure to be followed in each successive
year.
ITEM 6. EXHIBITS
Exhibit 10.1 Employment Agreement between CalAmp Corp.
and Steven L'Heureux effective July 5,
2005(1)
Exhibit 31.1 Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 31.2 Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 32 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
(1) Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
July 7, 2005 /s/ Richard K. Vitelle
- ------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)