10-Q 1 fy05_10q-q3.txt QUARTERLY REPORT - NOVEMBER 30, 2004 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - Q (Mark One) [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: November 30, 2004 _________________ [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to __________ ____________ Commission File Number: 0-12182 Exact Name of Registrant as Specified in Its Charter: CalAmp Corp. _______________________ DELAWARE 95-3647070 _______________________________ _______________ State or Other Jurisdiction of I.R.S. Employer Incorporation or Organization Identification No. Address of Principal Executive Offices: 1401 N. Rice Avenue Oxnard, CA 93030 Registrant's Telephone Number: (805) 987-9000 __________________________________________ Former name, Former Address and Former Fiscal Year, if Changed since Last Report Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The registrant had 22,604,446 shares of Common Stock outstanding as of December 28, 2004. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CALAMP CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands except par value amounts) November 30, February 28, 2004 2004 Assets -------- -------- Current assets: Cash and cash equivalents $ 26,528 $ 22,885 Accounts receivable, less allowance for doubtful accounts of $699 and $211, respectively 28,565 18,579 Inventories, net 24,364 20,253 Deferred income tax assets 885 2,404 Prepaid expenses and other current assets 4,692 3,244 -------- -------- Total current assets 85,034 67,365 Equipment and improvements, at cost, net of accumulated depreciation and amortization 4,943 4,381 Deferred income tax assets, less current portion 3,269 4,359 Goodwill 100,885 20,938 Other intangible assets, net 4,514 200 Deposits and other assets 425 399 -------- -------- $199,070 $ 97,642 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 2,924 $ 3,603 Accounts payable 23,829 17,395 Accrued payroll and employee benefits 3,391 1,513 Other current liabilities 4,133 2,078 Deferred revenue 1,862 - -------- -------- Total current liabilities 36,139 24,589 -------- -------- Long-term debt, less current portion 8,395 7,690 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; 3,000 shares authorized; no shares issued or outstanding - - Common stock, $.01 par value; 40,000 shares authorized; 22,602 and 14,910 shares issued and outstanding, respectively 232 149 Additional paid-in capital 131,261 44,486 Less common stock held in escrow (2,548) - Retained earnings 26,392 21,550 Accumulated other comprehensive loss (801) (822) -------- -------- Total stockholders' equity 154,536 65,363 -------- -------- $199,070 $ 97,642 ======== ======== See notes to unaudited consolidated financial statements. CALAMP CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands except per share amounts) Three Months Ended Nine Months Ended November 30, November 30, ------------------- -------------------- 2004 2003 2004 2003 ------- ------- -------- ------- Revenues: Product sales $51,749 $44,248 $138,499 $87,011 Service revenues 5,317 - 14,391 - ------- ------- -------- ------- Total revenues 57,066 44,248 152,890 87,011 ------- ------- -------- ------- Cost of revenues: Cost of product sales 42,786 37,514 113,048 75,771 Cost of service revenues 3,981 - 10,918 - ------- ------- -------- ------- Total cost of revenues 46,767 37,514 123,966 75,771 ------- ------- -------- ------- Gross profit 10,299 6,734 28,924 11,240 ------- ------- -------- ------- Operating expenses: Research and development 2,315 1,338 6,190 3,936 Sales and marketing 1,847 627 4,651 1,670 General and administrative 2,786 899 8,410 2,560 Amortization of intangibles 486 26 1,207 78 In-process research and development write-off - - 471 - ------- ------- -------- ------- Total operating expenses 7,434 2,890 20,929 8,244 ------- ------- -------- ------- Operating income 2,865 3,844 7,995 2,996 Non-operating income (expense), net 8 (12) (131) (194) ------- ------- -------- ------- Income before income taxes 2,873 3,832 7,864 2,802 Income tax provision (1,086) (380) (3,022) (62) ------- ------- -------- ------- Net income $ 1,787 $ 3,452 $ 4,842 $ 2,740 ======= ======= ======== ======= Earnings per share: Basic $ 0.08 $ 0.23 $ 0.23 $ 0.19 Diluted $ 0.08 $ 0.22 $ 0.22 $ 0.18 Shares used in per share calculations: Basic 22,356 14,788 21,135 14,760 Diluted 23,113 15,555 21,891 15,128 See notes to unaudited consolidated financial statements. CALAMP CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended November 30, --------------------- 2004 2003 ------- ------- Cash flows from operating activities: Net income $ 4,842 $ 2,740 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,218 2,381 Write-off of in-process research and development 471 - Equipment impairment writedowns 241 575 Gain on sale of equipment (128) (273) Increase in equity associated with tax benefit from exercise of stock options 224 212 Deferred tax assets, net 2,609 (144) Changes in operating assets and liabilities: Accounts receivable (4,900) (1,346) Inventories (3,434) (1,013) Prepaid expenses and other assets 2,641 270 Accounts payable 4,136 4,385 Accrued payroll and other accrued liabilities (2,175) (1,048) Deferred revenue 357 - ------- ------- Net cash provided by operating activities 8,102 6,739 ------- ------- Cash flows from investing activities: Capital expenditures (1,970) (2,026) Proceeds from sale of property and equipment 835 579 Acquisition of Vytek Corporation, net of cash acquired (1,727) - ------- ------- Net cash used in investing activities (2,862) (1,447) ------- ------- Cash flows from financing activities: Proceeds from debt borrowings 2,000 1,000 Debt repayments (4,300) (3,325) Proceeds from exercise of stock options 703 372 ------- ------- Net cash used in financing activities (1,597) (1,953) ------- ------- Net change in cash and cash equivalents 3,643 3,339 Cash and cash equivalents at beginning of period 22,885 21,947 ------- ------- Cash and cash equivalents at end of period $26,528 $25,286 ======= ======= See notes to unaudited consolidated financial statements. CALAMP CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED NOVEMBER 30, 2004 and 2003 Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION CalAmp Corp. ("CalAmp" or the "Company"), formerly known as California Amplifier, Inc., designs, manufactures and markets microwave equipment used in the reception of television programming transmitted from satellites and wireless terrestrial transmission sites, and two-way transceivers used for wireless high-speed Internet (broadband) service. The Company's principal business is the design and sale of outdoor reception equipment used in the U.S. Direct Broadcast Satellite ("DBS") subscription television market. On April 12, 2004, the Company completed the acquisition of Vytek Corporation ("Vytek"), a privately held company. The operations of Vytek are included in the Company's consolidated financial statements since that date. See Notes 2 and 13 for additional information concerning Vytek. Effective with the acquisition of Vytek, the Company realigned its operations into a divisional structure. The legacy operations of CalAmp, previously segregated into the Satellite and Wireless Access business units, were combined together with Vytek's products manufacturing business into a new Products Division. The operations of Vytek, which are principally service oriented, comprise the Company's Solutions Division. The Company uses a 52-53 week fiscal year ending on the Saturday closest to February 28, which for fiscal year 2004 fell on February 28, 2004. The actual interim periods ended on November 27, 2004 and November 29, 2003. In the accompanying consolidated financial statements, the 2004 fiscal year end is shown as February 28 and the interim period end for both years is shown as November 30 for clarity of presentation. Certain notes and other information are condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company's 2004 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on May 28, 2004. In the opinion of the Company's management, the accompanying consolidated financial statements reflect all adjustments necessary to present fairly the Company's financial position at November 30, 2004 and its results of operations for the three and nine months ended November 30, 2004 and 2003. The results of operations for such periods are not necessarily indicative of results to be expected for the full fiscal year. All intercompany transactions and accounts have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation. Note 2 - VYTEK ACQUISITION On April 12, 2004, the Company completed the acquisition of Vytek, a privately held company headquartered in San Diego, California, pursuant to an acquisition agreement entered into and announced on December 23, 2003. The transaction was approved by the stockholders of both companies during special meetings held on April 8, 2004. Vytek is a provider of technology integration solutions involving a mix of professional services and proprietary software and hardware products, serving the needs of enterprise customers and original equipment manufacturers. This acquisition was motivated primarily by the strategic goals of increasing the Company's presence in markets which offer higher growth and profit margin potential, and diversifying the Company's business and customer base beyond its current dependence on the two major U.S. DBS system operators. Pursuant to the acquisition agreement, the Company issued approximately 8,123,400 shares of common stock as the purchase consideration, of which 854,700 shares were placed into an escrow account and approximately 7,268,700 shares were issued to the selling shareholders of Vytek. The Company also assumed all unexercised Vytek stock options and stock purchase warrants that were outstanding at the time of the merger. For purchase accounting purposes, the fair market value per share used to value the 7,268,700 shares issued to the Vytek selling stockholders was $11.26 per share, which was the average closing price of the Company's common stock on the NASDAQ National Market for the period beginning two trading days before and ending two trading days after December 23, 2003, the day that the merger terms were agreed to and announced. Also for purchase accounting purposes, the fair value of the Vytek options and warrants assumed by the Company in the merger was calculated using the Black-Scholes option pricing model. The fair value of options and warrants assumed was estimated using the Black-Scholes option pricing model with an interest rate of 3.3%, a dividend yield of 0%, a volatility factor of 134.8%, and an expected life of 5 years in the case of stock options and 2.25 years to 9.25 years in the case of warrants. The Company entered into an escrow agreement with a designated representative of the selling stockholders of Vytek and an independent escrow agent. Under the terms of the escrow agreement, the 854,700 shares of the CalAmp's common stock deposited into the escrow account were to serve as security for potential indemnity claims by the Company under the acquisition agreement. The acquisition agreement provided that in the event Vytek's balance sheet as of the acquisition date reflected working capital (as defined in the acquisition agreement) of less than $4 million, then CalAmp could recover such deficiency from the escrow account (the "Working Capital Adjustment"). On November 19, 2004, the Company and the selling stockholders of Vytek reached an agreement on the final Working Capital Adjustment of $4,907,000, which equated to 628,380 shares of CalAmp's common stock based on its average share price (as defined in the acquisition agreement). These 628,380 shares were canceled and were returned to the status of authorized, unissued shares. As of November 30, 2004, there were 226,320 shares of CalAmp's common stock remaining in the escrow account. Subject to any claims by the Company for indemnification, except for an amount equal in value to $2 million, all shares of the Company's common stock in the escrow account will be released to the selling stockholders of Vytek, in accordance with their pro rata interests, 15 months after the April 12, 2004 closing date. All remaining shares of the Company's common stock, if any, in the escrow account will be released to the Vytek selling stockholders two years after the April 12, 2004 closing date, subject to any then pending and unresolved claims for indemnification. Following is the calculation of the recorded value of common stock issued and options and warrants assumed in the Vytek acquisition (in thousands, except per share amounts): Deposited Issued to to escrow sellers account Total ------- ------- ------- Number of common shares issued 7,268.7 854.7 8,123.4 Escrow shares canceled - (628.4) (628.4) ------- ------- ------- Shares issued net of cancellation 7,268.7 226.3 7,495.0 Fair market value per share $ 11.26 $ 11.26 $ 11.26 ------- ------- ------- Value of shares issued $81,846 $ 2,548 $84,394 Less stock registration costs (300) - (300) ------- ------- ------- Fair value of shares issued net of registration costs 81,546 2,548 84,094 Fair value of fully vested Vytek options and warrants assumed by CalAmp 1,837 - 1,837 ------- ------- ------- Recorded value of common shares issued and assumed options and warrants $83,383 $ 2,548 $85,931 ======= ======= ======= The common shares deposited to the escrow account are, for accounting purposes, treated as contingent consideration, and accordingly are excluded from the purchase price determination until such time as the shares are issued to the sellers from the escrow account. The Company has not yet obtained all information required to complete the purchase price allocation related to the Vytek acquisition. The final allocation is expected to be completed by the end of fiscal 2005. Following is a preliminary purchase price allocation for the Vytek acquisition (in thousands): Recorded value of common stock issued to sellers and assumed options and warrants (excluding shares deposited to escrow account) ............................... $83,383 Direct costs of acquisition including legal, accounting and financial advisory fees ..................... 2,580 ------ Total cost of Vytek acquisition (excluding common stock held in the escrow account) .......................... 85,963 Fair value of net assets acquired: Current assets .................................... $ 9,266 Property and equipment ............................ 1,185 Intangible assets: Developed/core technology ............. $3,349 Customer lists ........................ 1,127 Contracts backlog ..................... 845 In-process research and development ... 471 ----- Total intangible assets........................ 5,792 Other assets ...................................... 2,066 Current liabilities ............................... (11,997) Long-term liabilities ............................. (296) ------ Total fair value of net assets acquired ................... 6,016 ------ Goodwill ..................................................... $79,947 ====== The goodwill arising from this acquisition is not expected to be deductible for income tax purposes. The $471,000 allocated to in-process research and development in the preliminary purchase price allocation above was charged to expense immediately following the acquisition. The Company expects to incur approximately $300,000 to complete the in-process technology. The following is supplemental pro forma information presented as if the acquisition of Vytek had occurred at the beginning of each of the respective periods (in thousands): Nine Months Ended Nine Months Ended November 30, 2004 November 30, 2003 -------------------- ------------------ As Pro As Pro reported forma reported forma -------- -------- -------- ------- Revenues $152,890 $157,051 $87,011 $124,605 Net income $ 4,842 $ 4,207 $ 2,740 $ 774 Earnings per share: Basic $ 0.23 $ 0.19 $ 0.19 $ 0.04 Diluted $ 0.22 $ 0.18 $ 0.18 $ 0.03 The pro forma adjustments for the nine months ended November 30, 2004 consist of adding Vytek's estimated results of operations for the six weeks ended April 12, 2004, because Vytek is included in the "As reported" amounts for the 33 week period from the April 12 acquisition date to November 30, 2004. The pro forma adjustments for the nine months ended November 30, 2003 consist of adding Vytek's results of operations for the nine months ended December 31, 2003. Note 3 - INVENTORIES Inventories include the cost of material, labor and manufacturing overhead, are stated at the lower of cost (determined on the first-in, first-out method) or market, and consist of the following (in thousands): November 30, February 28, 2004 2004 ------ ------ Raw materials $19,812 $11,671 Work in process 802 417 Finished goods 3,750 8,165 ------ ------ $24,364 $20,253 ====== ====== Note 4 - GOODWILL AND OTHER INTANGIBLE ASSETS As a result of adopting Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill and Intangible Assets", at the beginning of fiscal 2003, the Company no longer records amortization on goodwill. Instead, goodwill is tested periodically for impairment. Impairment tests of goodwill associated with the Company's Products Division are conducted annually as of December 31. These tests, conducted as of December 31, 2003 and 2002, indicated that there was no impairment of goodwill as of those dates. The Company used a discounted cash flow approach to estimate the fair value of its Products Division in these impairment tests. The change in the carrying amount of goodwill for the nine months ended November 30, 2004 is as follows: Balance as of February 28, 2004 $ 20,938 Estimated goodwill arising from the acquisition of Vytek in April 2004 79,947 ------- Balance as of November 30, 2004 $100,885 ======= The goodwill arising from the Vytek transaction is an estimated amount based on the preliminary purchase price allocation, and is subject to change based on the analysis of deferred tax assets and allocation of goodwill to the Products Division and Solutions Division. The goodwill balance at February 28, 2004 is associated with the Company's Products Division. A portion of the goodwill arising from the Vytek acquisition is expected to be assigned to the Products Division in the final purchase price allocation, and the remainder of this goodwill will be assigned to the Company's Solutions Division. The Company expects to perform the impairment tests of goodwill associated with the Solutions Division annually as of April 30. Intangible assets are comprised as follows at November 30, 2004 and February 28, 2004 (in thousands): November 30, 2004 February 28, 2004 ------------------------ ------------------------- Amorti- Gross Accum. Gross Accum. zation Carrying Amorti- Carrying Amorti- Period Amount zation Net Amount zation Net ----- ------ ------ ----- ------ ------ ----- Developed/core technology 5 yrs. $3,349 $ 425 $2,924 $ - $ - $ - Customer lists 5 yrs. 1,127 143 984 - - - Contracts backlog 1 yr. 845 536 309 - - - Covenants not to compete 4.1 yrs. 400 278 122 400 200 200 Licensing right 2 yrs. 200 25 175 - - - ------ ------ ----- ----- ----- ----- $5,921 $1,407 $ 4,514 $ 400 $ 200 $ 200 ====== ====== ===== ===== ===== ===== All intangible assets in the table above resulted from the acquisition of Vytek in April 2004 except for the covenants not to compete and licensing rights. The covenants not to compete arose from the acquisition of the satellite dish manufacturing business of Kaul-Tronics in April 2002. The licensing right was acquired by the Solutions Division during the quarter ended November 30, 2004. Amortization expense of intangible assets was $1,207,000 and $78,000 in the nine months ended November 30, 2004 and 2003, respectively. Estimated amortization expense for the fiscal years ending February 28 is as follows: 2005 $1,694,000 2006 $1,187,000 2007 $ 945,000 2008 $ 895,000 2009 $ 895,000 2010 $ 105,000 Note 5 - FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS Bank credit facility The Company has a $10 million working capital line of credit with a commercial bank. Borrowings under this line of credit bear interest at LIBOR plus 1.75% or the bank's prime rate, and are secured by substantially all of the Company's assets. The maturity date of the line of credit is August 3, 2006. At November 30, 2004, there were outstanding borrowings of $3,000,000 on the line of credit and $3,179,000 was reserved under the line for issued letters of credit. The Company also has two bank term loans which had an aggregate outstanding principal balance of $8,171,000 at November 30, 2004, of which $2,823,000 is classified as current at that date. The bank credit agreement which encompasses the line of credit and the two term loans contains a subjective acceleration clause which enables the bank to call the loans in the event of a material adverse change (as defined) in the Company's business. Based on the Company's history of profitable operations and positive operating cash flow over the past several years, and based on the Company's internal financial forecasts for the next several quarters, the Company does not believe it is probable that the bank will assert the material adverse change clause in the next 12 months. At the time it was acquired by the Company on April 12, 2004, Vytek had $2 million outstanding on a line of credit with another commercial bank. Shortly after the acquisition was consummated, the Company borrowed $2 million on its bank line of credit and paid off Vytek's bank line of credit. Vytek's bank line of credit was then terminated. Other long-term debt Vytek had capital lease obligations of $148,000 at November 30, 2004, of which $101,000 was classified as current at that date. Contractual cash obligations Following is a summary of the Company's contractual cash obligations as of November 30, 2004 (in thousands): Future Cash Payments Due by Fiscal Year ---------------------------------------------- Contractual 2005 There- Obligations (remainder) 2006 2007 2008 2009 after Total --------------- ------ ------ ------ ------ ------ ------ ------ Bank debt $ 706 $ 2,823 $ 5,139 $ 2,503 $ - $ - $11,171 Capital leases 30 80 30 8 - - 148 Operating leases 719 2,273 1,802 1,862 1,924 3,756 12,336 Purchase obligations 20,203 1,530 - - - - 21,733 ------- ------ ------ ------ ------ ------ ------ Total contractual cash obligations $21,658 $ 6,706 $ 6,971 $ 4,373 $ 1,924 $ 3,756 $45,388 ====== ====== ====== ====== ====== ====== ====== Note 6 - INCOME TAXES Deferred income tax assets reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A deferred income tax asset is recognized if realization of such asset is more likely than not, based upon the weight of available evidence which includes historical operating performance and the Company's forecast of future operating performance. The Company evaluates the realizability of its deferred income tax assets on a quarterly basis, and a valuation allowance is provided, as necessary, in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". During this evaluation, the Company reviews its forecasts of future operating performance in conjunction with the positive and negative evidence surrounding the realizability of its deferred income tax asset to determine if a valuation allowance is needed. At February 28, 2004, the deferred tax asset valuation allowance was $630,000, and the deferred tax asset net of this valuation allowance was $6,763,000. The $630,000 valuation allowance relates to foreign tax credits which can be utilized only after tax loss carryforwards and other tax benefits have been fully utilized. Because these foreign tax credits have a remaining carryforward period of only two to four years, management believes that it is more likely than not that these foreign tax credits will expire unutilized, and accordingly a full valuation allowance against these credits was established. During the nine months ended November 30, 2004, the deferred tax asset was reduced by $2,609,000 reflecting the utilization of tax loss carryforwards and other tax assets as a result of the taxable income generated in the period. There was no change in the $630,000 deferred tax asset valuation allowance during the nine months ended November 30, 2004. The effective income tax rate was 38.4% and 2.2% in the nine months ended November 30, 2004 and 2003, respectively. The increase in effective tax rate is attributable primarily to the fact that during the fiscal year ended February 28, 2004 reductions of the deferred tax asset valuation allowance caused a reduction in the overall effective income tax rate. In the nine months ended November 30, 2004, there was no reduction in the valuation allowance. Vytek, which was acquired by the Company effective April 12, 2004, has tax loss carryforwards and other tax assets that the Company believes will be utilizable to some extent in the future, subject to change of ownership limitations pursuant to Section 382 of the Internal Revenue Code and to the ability of the combined post-merger company to generate sufficient taxable income to utilize the benefits before the expiration of the applicable carryforward periods. In the preliminary purchase price allocation described in Note 2 herein, no value has been assigned to Vytek's deferred tax assets, pending completion by the Company of its analysis of the estimated future realizability of these tax assets. Once this analysis is completed, to the extent value is allocated to Vytek's deferred tax assets in the final purchase price allocation, there will be a corresponding reduction in the value ascribed to goodwill. Note 7 - EARNINGS PER SHARE Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. In computing diluted earnings per share, the treasury stock method assumes that outstanding options are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options will have a dilutive effect under the treasury stock method only when the Company reports income and the average market price of the common stock during the period exceeds the exercise price of the options. The following is a summary of the calculation of weighted average shares used in the computation of basic and diluted earnings per share (in thousands): Three Months Ended Nine Months Ended November 30, November 30, ---------------- ---------------- 2004 2003 2004 2003 ------ ------ ------ ------ Basic weighted average number of common shares outstanding 22,356 14,788 21,135 14,760 Effect of dilutive securities: Shares held in escrow 226 - 112 - Stock options 531 767 644 368 ------ ------ ------ ------ Diluted weighted average number of common shares outstanding 23,113 15,555 21,891 15,128 ====== ====== ====== ====== Options and warrants outstanding at November 30, 2004 to purchase approximately 1,145,000 shares of common stock at exercise prices of $7.25 and above were excluded from the computation of diluted earnings per share for the three and nine months then ended because the exercise price of these options and warrants was greater than the average market price of the common stock and accordingly the effect of inclusion would be antidilutive. In connection with the acquisition of Vytek, 226,320 shares of common stock are being held in an escrow account to satisfy any claims by the Company for indemnification as further described in Note 2 herein. These shares held in escrow have been excluded from the basic weighted average number of common shares outstanding. However, the impact of these shares has been included in the diluted weighted average number of common shares outstanding for the three and nine month period ended November 30, 2004. Note 8 - COMPREHENSIVE INCOME Comprehensive income is defined as the total of net income and all non-owner changes in equity. The following table details the components of comprehensive income for the three and nine months ended November 30, 2004 and 2003 (in thousands): Three Months Ended Nine Months Ended November 30, November 30, ---------------- ---------------- 2004 2003 2004 2003 ------ ------ ------ ------ Net income $1,787 $3,452 $4,842 $2,740 Unrealized holding gain (loss) on available-for-sale investments - 20 21 (4) ------ ------ ------ ------ Comprehensive income $1,787 $3,472 $4,863 $2,736 ====== ====== ====== ====== Note 9 - STOCK OPTIONS As allowed by Statement of Financial Accounting Standards No. 123 ("FAS 123"), the Company has elected to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25, compensation expense is measured on the first date at which both the number of shares and the exercise price are known. Under the Company's stock option plans, this would typically be the grant date. To the extent that the exercise price equals or exceeds the market value of the stock on the grant date, no compensation expense is recognized. Because all of the options granted by the Company are at exercise prices not less than the market value on the date of grant, no compensation expense is recognized under this accounting treatment in the accompanying unaudited consolidated statements of operations. The fair value of options at date of grant was estimated using the Black-Scholes option pricing model with the following assumptions: Options granted during the nine months ended November 30, ------------------- 2004 2003 ------ ------ Expected life (years) 5 5 Dividend yield 0% 0% The range for interest rates is 2.58% to 3.96%, and the range for volatility is 97% to 135%. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation (in thousands except per share amounts): Three Months Ended Nine Months Ended November 30, November 30, ---------------- ---------------- 2004 2003 2004 2003 ------ ------ ------ ------ Net income as reported $1,787 $3,452 $4,842 $2,740 Less total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (460) (514) (1,623) (1,704) ----- ----- ----- ------ Pro forma net income $1,327 $2,938 $3,219 $1,036 ===== ===== ===== ====== Earnings per share: Basic - As reported $ 0.08 $ 0.23 $ 0.23 $ 0.19 Pro forma $ 0.06 $ 0.20 $ 0.15 $ 0.07 Diluted - As reported $ 0.08 $ 0.22 $ 0.22 $ 0.18 Pro forma $ 0.06 $ 0.19 $ 0.15 $ 0.07 Note 10 - CONCENTRATION OF RISK Because the Company sells into markets dominated by a few large service providers, a significant percentage of consolidated revenue and consolidated accounts receivable relate to a small number of customers. Sales to customers which accounted for 10% or more of consolidated sales for the three and nine months ended November 30, 2004 or 2003, as a percent of consolidated revenue, are as follows: Three Months Ended Nine Months Ended November 30, November 30, ---------------- ---------------- Customer 2004 2003 2004 2003 -------- ------ ------ ------ ------ A 44.0% 40.6% 38.5% 37.4% B 17.4% 23.1% 15.6% 21.4% C 6.6% 2.5% 11.4% 1.3% D 5.3% 10.2% 5.7% 9.5% Accounts receivable from these customers as a percent of consolidated net accounts receivable are as follows: Nov. 30, Feb. 28, Customer 2004 2004 -------- ------ ------ A 43.8% 49.4% B 21.5% 22.0% C 3.3% 8.2% D 2.7% 3.0% Customers A, B, C and D are customers of the Company's Products Division. Note 11 - PRODUCT WARRANTIES The Company generally warrants its products against defects over periods ranging from 3 to 24 months. The Company provides for the estimated cost of product warranties at the time revenue is recognized. At the end of each quarter, the Company adjusts its liability for warranty claims based on its actual warranty claims experience as a percentage of sales for the preceding three years plus an additional reserve amount, as required, for specific situations in which estimated warranty costs are in excess of that historical claims rate. Activity in the warranty liability for the nine months ended November 30, 2004 and 2003 is as follows (in thousands): Nine Months Ended November 30, ----------------- 2004 2003 ------ ------ Balance at beginning of period $159 $491 Charged (credited) to cost of revenues 589 133 Deductions (469) (89) ---- ---- Balance at end of period $279 $535 ==== ==== Note 12 - OTHER FINANCIAL INFORMATION "Net cash provided by operating activities" in the consolidated statements of cash flows includes cash payments for interest and income taxes as follows (in thousands): Nine Months Ended November 30, ------------------- 2004 2003 ------ ------ Interest paid $ 347 $ 405 Income taxes paid (net refunds received) $ 123 (93) Following is the supplemental schedule of non-cash investing and financing activities (in thousands): Nine Months Ended November 30, ------------------- 2004 2003 ------ ------ Decrease in valuation allowance for available-for-sale investment $ 21 $ - Issuance of common stock and assumption of stock options and warrants as consideration for acquisition of Vytek Corporation, net of common stock issued and held in escrow $83,383 $ - Note 13 - SEGMENT INFORMATION Effective with the acquisition of Vytek on April 12, 2004, the Company realigned its operations into a divisional structure. The legacy operations of CalAmp, previously segregated into the Satellite and Wireless Access business units, were combined together with Vytek's products manufacturing business into a new Products Division. The operations of Vytek, which are principally service oriented, comprise the Company's new Solutions Division. Segment information for the three and nine months ended November 30, 2004 and 2003 is as follows (dollars in thousands): Three Months Ended Three Months Ended November 30, 2004: November 30, 2003: ------------------------------------ ------------------------ ------------ Operating Segments Operating Segments ------------------- ------------------- Products Solutions Products Solutions Division Division Corporate Total Division Division Corporate Total ------- ------ ------- ----- ------- ------ -- ----- ----- Revenues: Products $50,425 $ 1,324 $51,749 $44,248 $ - $44,248 Services - 5,317 5,317 - - - ------ ----- ------ ------ ----- ------ Total $50,425 $ 6,641 $57,066 $44,248 $ - $44,248 ====== ===== ====== ====== ===== ====== Gross profit: Products $ 8,737 $ 226 $ 8,963 $ 6,734 $ - $ 6,734 Services - 1,336 1,336 - - - ------ ----- ------ ------ ----- ------ Total $ 8,737 $ 1,562 $10,299 $ 6,734 $ - $ 6,734 ====== ===== ====== ====== ===== ====== Gross margin: Products 17.3% 17.1% 17.3% 15.2% - 15.2% Services - 25.1% 25.1% - - - Total 17.3% 23.5% 18.0% 15.2% - 15.2% Operating income (loss) $ 6,191 $(2,379) $ (947) $ 2,865 $ 4,447 $ - $ (603) $ 3,844 ====== ===== ===== ====== ====== ===== ===== ====== Nine Months Ended Nine Months Ended November 30, 2004: November 30, 2003: ------------------------------------ ------------------------ ------------ Operating Segments Operating Segments ------------------- ------------------- Products Solutions Products Solutions Division Division Corporate Total Division Division Corporate Total ------- ------ ------- ----- ------- ------ -- ----- ----- Revenues: Products $133,980 $ 4,519 $138,499 $87,011 $ - $87,011 Services - 14,391 14,391 - - - ------- ------ ------- ------ ----- ------ Total $133,980 $18,910 $152,890 $87,011 $ - $87,011 ======= ====== ======= ====== ===== ====== Gross profit: Products $ 24,506 $ 945 $ 25,451 $11,240 $ - $11,240 Services - 3,473 3,473 - - - ------- ----- ------- ------ ----- ------ Total $ 24,506 $ 4,418 $ 28,924 $11,240 $ - $11,240 ======= ===== ======= ====== ===== ====== Gross margin: Products 18.3% 20.9% 18.4% 12.9% - 12.9% Services - 24.1% 24.1% - - - Total 18.3% 23.4% 18.9% 12.9% - 12.9% Operating income (loss) $ 16,861 $(5,971) $ (2,895) $ 7,995 $ 4,521 $ - $ (1,525) $ 2,996 ======= ===== ====== ====== ====== ===== ====== ======
Product revenue of the Solutions Division represents primarily hardware that is bundled with software applications. Included in cost of revenue for the Products Division were asset impairment writedowns of $241,000 and $575,000 during the nine months ended November 30, 2004 and 2003, respectively, on plant and equipment that became idled due to increased outsourcing to contract manufacturers. Also included in Product Division cost of revenue were lower of cost or market inventory writedowns of $551,000 and $242,000 in the nine months ended November 30, 2004 and 2003, respectively. As further discussed in Note 15 below, Product Division cost of revenue for the nine months ended November 30, 2004 included a credit of $200,000 resulting from settling a lawsuit for an amount less than the previously established reserve. The Company considers operating income (loss) to be the primary measure of profit or loss of its business segments. The amount shown for each period in the "Corporate" column above for operating income (loss) consists of corporate expenses not allocated to the business segments. Unallocated corporate expenses include salaries and wages for the CEO, CFO and two other corporate staff, and corporate expenses such as audit fees, investor relations, stock listing fees, director and officer liability insurance, and director fees and expenses. Note 14 - COMMITMENTS AND CONTINGENCIES The Company leases its corporate office and manufacturing plant in Ventura County, California under an operating lease that expires June 30, 2011. The lease agreement requires the Company to pay all maintenance, property taxes and insurance premiums associated with the building. In addition, the Company leases office space at several other sites in California and in New Jersey, Virginia, New York, Minnesota and France under non-cancelable operating leases, which expire at various dates through July 2010. Some of the leases require the Company to pay maintenance, utilities and insurance costs and contain renewal options (for periods ranging from two to five years) and escalation clauses. Certain manufacturing equipment and office equipment is also leased under operating lease agreements. A summary of future operating lease commitments is included in the contractual cash obligations table in Note 5. Note 15 - LEGAL MATTERS Wage-related class action lawsuit: On April 21, 2004, the Company was served with a complaint alleging certain violations of the California labor code. Among other charges, the class action complaint alleges that from October 2000 to the present time certain hourly employees did not take their lunch break within the time period prescribed by state law. The Company established a reserve in its financial statements for fiscal year 2004 that was included in Product Division cost of revenue in the consolidated income statement. In September 2004, the Company and the plaintiffs entered into a settlement agreement, which was approved by the court in October 2004. As a result of the settlement agreement, the Company lowered its reserve by $200,000 in the nine months ended November 30, 2004, which reduced Product Division cost of revenue by the same amount. Property lease lawsuit and cross-complaint On May 21, 2004, the Company was served with a lawsuit filed by the owner of a building in Camarillo, California that was formerly used as the Company's corporate offices and principal manufacturing plant under a 15-year lease agreement that expired on February 28, 2004. The lawsuit seeks damages for facility repairs that are allegedly required in the range of $520,000 to $700,000. The Company believes the lawsuit is without merit and intends to defend itself vigorously against all allegations. On May 27, 2004, the Company filed a cross-complaint, seeking payment by the building owner of approximately $180,000 in deposits and other amounts which the Company believes it is owed. The Company believes that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Areas where significant judgments are made include, but are not limited to: allowance for doubtful accounts, inventory valuation, product warranties, the deferred tax asset valuation allowance, and the valuation of long-lived assets and goodwill. Actual results could differ materially from these estimates. Allowance for Doubtful Accounts The Company establishes an allowance for estimated bad debts based upon a review and evaluation of specific customer accounts identified as known and expected collection problems, based on historical experience, due to insolvency, disputes or other collection issues. As further described in Note 10 to the accompanying consolidated financial statements, the Company's customer base is quite concentrated, with three customers accounting for approximately 66% of the Company's total revenue for the nine months ended November 30, 2004. Changes in either a key customer's financial position, or the economy as a whole, could cause actual write-offs to be materially different from the recorded allowance amount. Inventories The Company evaluates the carrying value of inventory on a quarterly basis to determine if the carrying value is recoverable at estimated selling prices. To the extent that estimated selling prices do not exceed the associated carrying values, inventory carrying amounts are written down. In addition, the Company generally treats inventory on hand or committed with suppliers, which is not expected to be sold within the next 12 months, as excess and thus appropriate writedowns of the inventory carrying amounts are established through a charge to cost of product sales. Estimated usage in the next 12 months is based on firm demand represented by orders in backlog at the end of the quarter and management's estimate of sales beyond existing backlog, giving consideration to customers' forecasted demand, ordering patterns and product life cycles. Significant reductions in product pricing, or changes in technology and/or demand may necessitate additional writedowns of inventory carrying value in the future. Product Warranties The Company provides for the estimated cost of product warranties at the time revenue is recognized. While it engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company's warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from management's estimates, revisions to the estimated warranty liability would be required. Deferred Income Tax Asset Valuation Allowance The deferred income tax asset reflects the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and for income tax purposes. A deferred income tax asset is recognized if realization of such asset is more likely than not, based upon the weight of available evidence that includes historical operating performance and the Company's forecast of future operating performance. The Company evaluates the realizability of its deferred income tax asset on a quarterly basis, and a valuation allowance is provided, as necessary. During this evaluation, the Company reviews its forecasts of income in conjunction with the positive and negative evidence surrounding the realizability of its deferred income tax asset to determine if a valuation allowance is needed. At November 30, 2004 the Company's net deferred income tax asset was $4,154,000, which amount is net of a valuation allowance of $630,000. If in the future a portion or all of the $630,000 valuation allowance is no longer deemed to be necessary, reductions of the valuation allowance will reduce the income tax provision. Conversely, if in the future the Company were to change its realization probability assessment to less than 50%, the Company will provide an additional valuation allowance for all or a portion of the net deferred income tax asset, which will increase the income tax provision. Vytek, which was acquired by the Company in April 2004, has tax loss carryforwards and other tax assets that the Company believes will be utilizable to some extent in the future, subject to change of ownership limitations pursuant to Section 382 of the Internal Revenue Code and to the ability of the combined post-merger company to generate sufficient taxable income to utilize the benefits before the expiration of the applicable carryforward periods. In the preliminary purchase price allocation described in Note 2 herein, no value has been assigned to Vytek's deferred tax assets, pending completion by the Company of its analysis of the estimated future realizability of these tax assets. Once this analysis is completed, to the extent value is allocated to Vytek's deferred tax assets in an updated purchase price allocation, there will be a corresponding reduction in the value ascribed to goodwill. Valuation of Long-lived Assets and Goodwill The Company accounts for long-lived assets other than goodwill in accordance with the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment and Disposal of Long Lived Assets" ("FAS 144"), which supersedes Statement of Financial Accounting Standards No. 121 and certain sections of Accounting Principles Board Opinion No. 30 specific to discontinued operations. FAS 144 classifies long-lived assets as either: (1) to be held and used; (2) to be disposed of by other than sale; or (3) to be disposed of by sale. This standard introduces a probability-weighted cash flow estimation approach to address situations where alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated for the amount of possible future cash flows. The Company has adopted this statement, which has not had a material impact on its financial position or results of operations. FAS 144 requires, among other things, that an entity review its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. During the nine months ended November 30, 2004 and 2003, the Company recorded asset impairment writedowns of $241,000 and $575,000, respectively, on plant and equipment of the Products Division which became idled due to increased outsourcing to contract manufacturers. The Company also adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", in March 2002. As a result, goodwill is no longer amortized, but instead is tested for impairment on an annual basis, or more frequently as impairment indicators arise. The test for impairment involves the use of estimates related to the fair values of the business operations with which goodwill is associated and is usually based on projected cash flows or a market value approach. The Company believes the estimate of its valuation of long-lived assets and goodwill is a "critical accounting estimate" because if circumstances arose that led to a decrease in the valuation it could have a material impact on the Company's results of operations. Impact of Recently Issued Accounting Standards In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). FAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal". In addition, it requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted. The Company plans to adopt FAS 151 at the beginning of its fiscal 2006. The Company believes that FAS 151, when adopted, will not have a significant impact on its financial position or results of operations. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("FAS 123R"). FAS 123R requires companies to recognize in the income statement the grant- date fair value of stock options and other equity-based compensation issued to employees. FAS 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Company will be required to adopt FAS 123R in the third quarter of its fiscal 2006 (the quarter ending November 30, 2005). The Company believes that the adoption of FAS 123R could have a material impact on the amount of earnings it reports in fiscal 2006. The Company has not yet determined the specific impact that adoption of this standard will have on its financial position or results of operations. RESULTS OF OPERATIONS Effective with the acquisition of Vytek on April 12, 2004, the Company realigned its operations into a divisional structure. The legacy operations of CalAmp, previously segregated into the Satellite and Wireless Access business units, have been combined and now operate as the Products Division. The operations of Vytek, which are principally service oriented, comprise the Company's Solutions Division. The operations of Vytek's products manufacturing subsidiary Vytek Products, Inc. have been combined with the Company's Products division effective at the April 12, 2004 acquisition date. The Company's revenue and gross profit by segment are as follows: SALES BY SEGMENT Three Months Ended November 30, Nine Months Ended November 30, ------------------------------- ------------------------------- 2004 2003 2004 2003 -------------- -------------- ------------- -------------- Segment % of % of % of % of (Division) $000s Total $000s Total $000s Total $000s Total --------- ------- ----- ------- ----- ------- ----- ------- ----- Products $50,425 88.4% $44,248 100.0% $133,980 87.6% $87,011 100.0% Solutions 6,641 11.6% - - 18,910 12.4% - - ------- ----- ------- ----- -------- ----- ------- ----- Total $57,066 100.0% $44,248 100.0% $152,890 100.0% $87,011 100.0% ======= ===== ======= ===== ======== ===== ======= ===== GROSS PROFIT BY SEGMENT Three Months Ended November 30, Nine Months Ended November 30, ------------------------------- ------------------------------- 2004 2003 2004 2003 -------------- -------------- ------------- -------------- Segment % of % of % of % of (Division) $000s Total $000s Total $000s Total $000s Total --------- ------- ----- ------- ----- ------- ----- ------- ----- Products $ 8,737 84.8% $ 6,734 100.0% $24,506 84.7% $11,240 100.0% Solutions 1,562 15.2% - - 4,418 15.3% - - ------- ----- ------- ----- ------- ----- ------- ----- Total $10,299 100.0% $ 6,734 100.0% $28,924 100.0% $11,240 100.0% ======= ===== ======= ===== ======= ===== ======= ===== OPERATING INCOME (LOSS) BY SEGMENT Three Months Ended November 30, Nine Months Ended November 30, ------------------------------- ------------------------------- 2004 2003 2004 2003 -------------- -------------- ------------- -------------- Segment % of % of % of % of (Division) $000s Sales $000s Sales $000s Sales $000s Sales --------- ------- ----- ------- ----- ------- ----- ------- ----- Products $ 6,191 10.8% $ 4,447 10.1% $16,861 11.0% $ 4,521 5.2% Solutions (2,379) (4.2%) - - (5,971) (3.9%) - - Corporate expenses (947) (1.6) (603) (1.4%) (2,895) (1.9%) (1,525) (1.8%) ------- ------- ------- ------- Total $ 2,865 5.0 $ 3,844 8.7% $ 7,995 5.2% $ 2,996 3.4% ======= ======= ======= ======= Revenue Products Division revenue increased $6,177,000, or 14%, in the three months ended November 30, 2004 compared to the same period of the prior year. This increase resulted primarily from increased unit sales of the Company's primary product line, consisting of low noise block feed downconverter/amplifier units ("LNBFs") used for satellite television reception. For the nine months ended November 30, 2004, Products Division revenue increased $46,969,000, or 54%, over the same period of the prior year, primarily from increased unit sales of LNBFs. Products division revenue rebounded strongly beginning in the second quarter of last fiscal year. The Solutions Division revenue represents the operations of Vytek which was acquired effective April 12, 2004. Gross Profit and Gross Margins Products Division gross profit increased by $2,003,000, or 30%, in the latest quarter compared to the prior year, and gross margin improved from 15.2% in last year's third quarter to 17.3% in the latest quarter. Approximately one-half of the gross profit increase is attributable to the $6,177,000 increase in revenue in the latest quarter, and the remainder of the gross profit increase is attributable to the improvement in the gross margin percentage. For the nine months ended November 30, 2004, Products Division gross profit increased $13,266,000, or 118%, and gross margin improved from 12.9% to 18.3%. The increased gross profit is attributable principally to the revenue increase of $47 million in the latest nine month period over the comparable period of the prior year. The gross margin improvement in the current year is due mainly to the fact that gross margin during the nine month period of last year was adversely affected by manufacturing inefficiencies caused by the need to rapidly reduce production capability in the first quarter of last year in response to significant order cutbacks by key customers for the Company's satellite products. Gross margin of the Solutions Division in the three and nine month periods ended November 30, 2004 was 23.5% and 23.4%, respectively. See also Note 13 to the accompanying unaudited consolidated financial statements for additional operating data by business segment. Operating Expenses Consolidated research and development ("R&D") expense increased by $977,000 to $2,315,000 in the latest quarter from $1,338,000 last year. This increase in R&D expense was primarily due to the inclusion of Vytek's operations for the quarter, which accounted for $585,000 or 60% of the increase. The remaining increase is primarily attributable to increased salaries and temporary labor expense ($234,000). For the nine month periods, R&D expense increased $2,254,000 from $3,936,000 last year to $6,190,000 this year. The inclusion of Vytek's operations for the 33-week period from the April 12, 2004 acquisition date to November 30, 2004 accounted for $1,606,000 or 71% of the increase in R&D expense. The remaining increase is attributable to increased salaries and temporary labor expense ($303,000), increased incentive compensation expense ($115,000), and increased workers compensation insurance expense ($143,000). Consolidated sales and marketing expenses increased by $1,220,000 and $2,981,000 in the three- and nine-month periods ended November 30, 2004 compared to last year. Substantially all of these increases are attributable to the inclusion of Vytek's operations in the current year. Consolidated general and administrative expense increased from $899,000 in the third quarter of last year to $2,786,000 for the same quarter this year. Of this $1,887,000 increase, $1,598,000 is attributable to the inclusion of Vytek's operations in the latest quarter. The remaining increase is primarily due to higher accounting and auditing expense in the latest quarter ($144,000) associated with the requirements of Section 404 of the Sarbanes-Oxley Act, higher salaries and wages expense ($96,000), and higher legal expense ($56,000). For the nine month periods, general and administrative expense increased from $2,560,000 last year to $8,410,000 this year. The $5,850,000 increase is primarily explained by the inclusion of Vytek's operations in the current year, which accounted for $4,377,000 of the increase. The remaining increase is attributable primarily to increased auditing and accounting fees ($449,000), increased incentive compensation expense ($269,000), increased legal expense ($213,000), increased salaries and wages expense ($144,000) increased recruiting fees ($69,000), and the fact that the gain on sales of property and equipment, which is netted against G&A expense, was $145,000 less in the current nine-month period compared to last year. Amortization expense of intangible assets in the three months ended November 30, 2004 and 2003 was $486,000 and $26,000, respectively, and in the nine months ended November 30, 2004 and 2003 was $1,207,000 and $78,000, respectively. These increases in the latest three and nine month periods compared to the prior year are attributable to the intangible assets arising from the acquisition of Vytek in April 2004. Operating Income Operating income was $7,995,000 and $2,996,000 during the nine months ended November 30, 2004 and 2003, respectively. The increased profitability is attributable to the improvement in the satellite products portion of the Company's Products Division, as discussed above under the headings "Revenue" and "Gross Profit and Gross Margins". Operating income of $7,995,000 in the latest nine month period is comprised of operating income of the Products Division of $16,861,000, operating loss of the Solutions Division of $5,971,000, and unallocated corporate expenses of $2,895,000. The Company has taken recent steps to reduce the losses of the Solutions Division by strengthening the sales and marketing organization, by reducing overhead costs, and by making a leadership change. Management is closely monitoring the performance of this business unit with the objective of achieving profitable results for the Solutions Division as soon as possible. Income Tax Provision The effective income tax rate was 38.4% and 2.2% in the nine months ended November 30, 2004 and 2003, respectively. The increase in effective tax rate is attributable primarily to the fact that during the fiscal year ended February 28, 2004 reductions of the deferred tax asset valuation allowance caused a reduction in the overall effective income tax rate. In the nine months ended November 30, 2004, there was no reduction in the valuation allowance. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are its cash and cash equivalents, which amounted to $26,528,000 at November 30, 2004, and its working capital line of credit with a bank. During the nine months ended November 30, 2004, cash and cash equivalents increased by $3,643,000. Net cash provided by operating activities during the nine months ended November 30, 2004 was $8,102,000, comprised of $11,477,000 (net income of $4,842,000 and adjustment for non-cash items of $6,635,000) reduced by changes in the components of working capital of $3,375,000. Components of operating working capital increased by $3,375,000 during the nine months ended November 30, 2004, comprised of an increase of $4,900,000 in accounts receivable, an increase of $3,434,000 in inventories, a decrease of $2,641,000 in prepaid expenses and other assets, an increase of $4,136,000 in accounts payable, a decrease of $2,175,000 in accrued payroll and other accrued liabilities, and an increase in deferred revenue of $357,000. The increase in cash from operating activities was offset by spending in investing activities of $2,862,000 primarily as a result of $1,727,000 in cash used in the acquisition of Vytek in April 2004, and $1,597,000 in cash used in financing activities primarily for repayments of borrowings on a line of credit. The Company has a $10 million working capital line of credit with a commercial bank. Borrowings under this line of credit bear interest at LIBOR plus 1.75% or the bank's prime rate, and are secured by substantially all of the Company's assets. The maturity date of the line of credit is August 3, 2006. At November 30, 2004, there were outstanding borrowings of $3,000,000 on the line of credit and $3,179,000 was reserved under the line for issued letters of credit. The Company also has two bank term loans which had an aggregate outstanding principal balance of $8,171,000 at November 30, 2004, of which $2,823,000 is classified as current at that date. The bank credit agreement which encompasses the line of credit and the two term loans contains a subjective acceleration clause which enables the bank to call the loans in the event of a material adverse change (as defined) in the Company's business. Based on the Company's history of profitable operations and positive operating cash flow over the past several years, and based on the Company's internal financial forecasts for the next several quarters, the Company does not believe it is probable that the bank will assert the material adverse change clause in the next 12 months. At the time it was acquired by the Company on April 12, 2004, Vytek had $2 million outstanding on a line of credit with another commercial bank. Shortly after the acquisition was consummated, the Company borrowed $2 million on its bank line of credit and paid off Vytek's bank line of credit. Vytek's bank line of credit was then terminated. See Note 5 to the accompanying consolidated financial statements for a summary of the Company's contractual cash obligations as of November 30, 2004. The Company believes that inflation and foreign currency exchange rates have not had a material effect on its operations. The Company believes that fiscal 2005 will not be impacted significantly by foreign exchange since a significant portion of the Company's sales are to U.S. markets, or to international markets where its sales are denominated in U.S. dollars. The Company believes that cash flow from operations, together with amounts available under its working capital line of credit, are sufficient to support operations, fund capital expenditures and discharge contractual cash obligations over the next twelve months. FORWARD LOOKING STATEMENTS Forward looking statements in this Form 10-Q which include, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions, projections and other information regarding future performance, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "may" "could", "plans", "believes," "anticipates," "expects," and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect the Company's current views with respect to future events and financial performance and are subject to certain risks and uncertainties, including, without limitation, product demand, market growth, new competition, competitive pricing and continued pricing declines in the DBS market, supplier constraints, manufacturing yields, the ability to manage cost increases in inventory materials including raw steel, timing and market acceptance of new product introductions, new technologies, the ability to successfully integrate the acquisition of Vytek Corporation that was completed on April 12, 2004, and other risks and uncertainties that are set forth under the heading "Risk Factors" in the Company's registration statements on Form S-4 (number 333- 112851) and Form S-3 (number 333-119858) as filed with the Securities and Exchange Commission on February 13, 2004 and October 20, 2004, respectively. Such risks and uncertainties could cause actual results to differ materially from historical results or those anticipated. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments include cash equivalents, accounts receivable, accounts payable and bank term loans payable. At November 30, 2004, the carrying values of cash equivalents, accounts receivable and accounts payable approximate fair values given the short maturity of these instruments. The carrying value of bank term loans payable approximates fair value since the interest rates on these loans approximate the interest rates which are currently available to the Company for the issuance of debt with similar provisions and maturities. Based on the amount of bank debt outstanding at November 30, 2004, a change in interest rates of one percent would result in an annual impact of approximately $100,000, net of tax, on the Company's consolidated statement of operations. A portion of the Company's operations consists of an investment in a foreign subsidiary. As a result, the consolidated financial results have been and could continue to be affected by changes in foreign currency exchange rates. However, the Company believes that it does not have material foreign currency exchange rate risk since a significant portion of the Company's sales are to U.S. markets, or to international markets where its sales are denominated in U.S. dollars, and material purchases from foreign suppliers are typically also denominated in U.S. dollars. Additionally, the functional currency of the Company's foreign subsidiary is the U.S. dollar. It is the Company's policy not to enter into derivative financial instruments for speculative purposes. Furthermore, the Company generally does not enter into foreign currency forward exchange contracts. There are no foreign currency forward exchange contracts outstanding at November 30, 2004. ITEM 4. CONTROLS AND PROCEDURES The Company's principal executive officer and principal financial officer have concluded, based on their evaluation of disclosure controls and procedures (as defined in Regulations 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report, that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed in reports that are filed or submitted under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities Exchange Commission. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date that the evaluation was carried out. Additionally, no significant deficiencies or material weaknesses in such internal controls requiring corrective actions were identified. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 15 to the accompanying consolidated financial statements for a description of pending legal proceedings. ITEM 5. OTHER INFORMATION (a) CalAmp Corp. and U.S. Bank National Association entered into an Amendment Agreement Number Five to Loan and Security Agreement ("Amendment No. 5") dated as of November 23, 2004. Amendment No. 5, attached as Exhibit 10.1 to this report, provides for, among other items, a one year extension of the maturity date of the working capital line of credit to August 3, 2006, lowering of the LIBOR-based interest rate by 0.25%, and deletion of the "excess cash flow recapture" requirement. ITEM 6. EXHIBITS Exhibit 10.1 - Amendment Agreement Number Five to Loan and Security Agreement dated November 23, 2004, by and Between CalAmp Corp. and U.S. Bank National Association (1) Exhibit 10.2 - Employment Letter Agreement between CalAmp Corp. and Steven A. L'Heureux effective December 13, 2004(1) Exhibit 10.3 - Separation Agreement between CalAmp Corp. and Tracy Trent effective December 13, 2004(1) Exhibit 31.1 - Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1) Exhibit 31.2 - Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1) Exhibit 32 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) (1) Filed herewith. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. January 11, 2005 /s/ Richard K. Vitelle ------------------------------ --------------------------------- Date Richard K. Vitelle Vice President Finance & CFO (Principal Financial Officer and Chief Accounting Officer)