SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: August 31, 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The registrant had 22,736,665 shares of Common Stock outstanding as of
September 30, 2005.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
August 31, February 28,
2005 2005
Assets -------- --------
Current assets:
Cash and cash equivalents $ 33,099 $ 31,048
Accounts receivable, less allowance for
doubtful accounts of $386 and $477 at
August 31, 2005 and February 28, 2005,
respectively 25,571 27,027
Inventories, net 21,264 21,465
Deferred income tax assets 4,944 6,118
Prepaid expenses and other current assets 2,358 2,876
-------- --------
Total current assets 87,236 88,534
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 5,490 5,383
Deferred income tax assets, less current portion 4,211 5,285
Goodwill 92,595 92,834
Other intangible assets, net 6,235 4,028
Other assets 550 691
-------- --------
$196,317 $196,755
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,857 $ 2,897
Accounts payable 13,384 18,389
Accrued payroll and employee benefits 2,915 3,652
Other accrued liabilities 4,492 3,127
Deferred revenue 1,256 1,597
-------- --------
Total current liabilities 24,904 29,662
-------- --------
Long-term debt, less current portion 6,250 7,679
Other non-current liabilities 1,116 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; 22,734 and 22,714 shares issued
and outstanding at August 31, 2005 and
February 28, 2005, respectively 227 227
Additional paid-in capital 131,885 131,784
Less common stock held in escrow (2,548) (2,548)
Retained earnings 35,284 29,626
Accumulated other comprehensive loss (801) (801)
-------- --------
Total stockholders' equity 164,047 158,288
-------- --------
$196,317 $196,755
======== ========
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share amounts)
Three Months Ended Six Months Ended
August 31, August 31,
------------------- -------------------
2005 2004 2005 2004
------- ------- ------- -------
Revenues:
Product sales $53,436 $45,094 $95,828 $86,750
Service revenues 4,225 5,733 9,413 9,074
------- ------- ------- -------
Total revenues 57,661 50,827 105,241 95,824
------- ------- ------- -------
Cost of revenues:
Cost of product sales 41,021 36,138 74,009 70,262
Cost of service revenues 3,225 4,365 7,119 6,937
------- ------- ------- -------
Total cost of revenues 44,246 40,503 81,128 77,199
------- ------- ------- -------
Gross profit 13,415 10,324 24,113 18,625
------- ------- ------- -------
Operating expenses:
Research and development 2,360 2,068 4,557 3,875
Selling 1,796 1,732 3,668 2,804
General and administrative 2,607 3,179 5,221 5,624
Amortization of intangibles 529 461 972 721
In-process research and
development write-off 27 - 320 471
------- ------- ------- -------
Total operating expenses 7,319 7,440 14,738 13,495
------- ------- ------- -------
Operating income 6,096 2,884 9,375 5,130
Non-operating income (expense) 26 (75) 69 (139)
------- ------- ------- -------
Income before income taxes 6,122 2,809 9,444 4,991
Income tax provision (2,441) (1,063) (3,786) (1,936)
------- ------- ------- -------
Net income $ 3,681 $ 1,746 $ 5,658 $ 3,055
======= ======= ======= =======
Net income per share:
Basic $ 0.16 $ 0.08 $ 0.25 $ 0.15
Diluted $ 0.16 $ 0.08 $ 0.24 $ 0.14
Shares used in per share
calculations:
Basic 22,490 22,292 22,491 20,524
Diluted 23,314 22,809 23,112 21,224
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
August 31,
---------------------
2005 2004
------- -------
Cash flows from operating activities:
Net income $ 5,658 $ 3,055
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,299 2,075
Write-off of in-process research and development 320 471
Equipment impairment write-down - 201
Increase in equity associated with tax
benefit from exercise of stock options 48 179
Deferred tax assets, net 2,248 1,657
Changes in operating assets and liabilities:
Accounts receivable 1,355 (1,960)
Inventories 1,281 (4,278)
Prepaid expenses and other assets 659 1,537
Accounts payable (5,004) 3,802
Accrued payroll and other accrued liabilities 531 (1,092)
Deferred revenue (314) 116
Other (6) (36)
------- -------
Net cash provided by operating activities 9,075 5,727
------- -------
Cash flows from investing activities:
Capital expenditures (1,060) (1,243)
Proceeds from sale of property and equipment 141 627
Acquisition of Skybility business (4,897) -
Acquisition of Vytek Corporation, net of
cash acquired - (1,727)
------- -------
Net cash used in investing activities (5,816) (2,343)
------- -------
Cash flows from financing activities:
Proceeds from debt borrowings - 2,000
Debt repayments (1,460) (3,557)
Proceeds from exercise of stock options 252 556
------- -------
Net cash used in financing activities (1,208) (1,001)
------- -------
Net change in cash and cash equivalents 2,051 2,383
Cash and cash equivalents at beginning of period 31,048 22,885
------- -------
Cash and cash equivalents at end of period $33,099 $25,268
======= =======
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 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, engineering services and software 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 telemetry and asset tracking
markets, healthcare industry, enterprise-class Wi-Fi 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 August 27, 2005 and August 28, 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
August 31 for clarity of presentation.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 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 August 31, 2005 and its
results of operations for the three and six months ended August 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 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 nineteen week period from
April 18, 2005 to August 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 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
Following is the purchase price allocation (in thousands):
Purchase price paid in cash $4,829
Direct costs of acquisition 68
------
Total cost of acquisition 4,897
Fair value of net assets acquired:
Inventories $1,080
Property and equipment 369
Intangible assets:
Developed/core technology 1,730
Customer lists 1,020
Covenants not to compete 330
Contracts backlog 150
In-process research and development 320
-----
Total fair value of net assets acquired 4,999
------
Negative goodwill $ (102)
======
The $320,000 allocated to in-process research and development in the
purchase price allocation above was charged to expense following the
acquisition in the amounts of $293,000 and $27,000 in the fiscal 2006 first
quarter and second quarter, respectively.
The negative goodwill of $102,000 is classified as a liability at August
31, 2005, pending the determination of the Earn-out Payment amount as
described above.
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
August 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 were to be
released to the selling stockholders of Vytek, in accordance with their pro
rata interests, 15 months after the April 12, 2004 closing date. No further
shares have been released from the escrow account because the Company has
indemnification claims against the escrow account (which the Vytek
Shareholder Representative is disputing) and because the market value of the
remaining escrow shares was less than $2 million at July 12, 2005. 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):
August 31, February 28,
2005 2005
------ ------
Raw materials $17,328 $17,680
Work in process 866 676
Finished goods 3,070 3,109
------- -------
$21,264 $21,465
======= =======
Note 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill associated with each reporting unit is as follows (in
thousands):
Products Solutions Total
-------- --------- ---------
Balance as of February 28, 2005 $ 57,785 $ 35,049 $ 92,834
Removal of goodwill associated
with divested assets - (230) (230)
Other change - (9) (9)
-------- --------- --------
Balance as of August 31, 2005 $ 57,785 $ 34,810 $ 92,595
======== ========= ========
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 both divisions in these
impairment tests.
Other intangible assets are comprised as follows (in thousands):
August 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. $5,079 $1,054 $4,025 $3,349 $ 592 $2,757
Customer lists 5 yrs. 2,147 387 1,760 1,127 199 928
Contracts
backlog 1 yr. 995 995 - 845 748 97
Covenants not
to compete 4.5 yrs. 730 380 350 400 304 96
Licensing right 2 yrs. 200 100 100 200 50 150
------ ------ ------ ------ ------ ------
$9,151 $2,916 $6,235 $5,921 $1,893 $4,028
====== ====== ====== ====== ====== ======
Amortization of intangibles was $1,022,000 and $721,000 for the six
months ended August 31, 2005 and 2004, respectively. Amortization expense
for the six months ended August 31, 2005 is reported in the accompanying
consolidated statement of income in cost of revenues and operating expenses
in the amounts of $50,000 and $972,000, respectively.
Estimated amortization expense for the fiscal years ending February 28
is as follows:
2006 (remainder) $ 849,000
2007 $1,502,000
2008 $1,464,000
2009 $1,452,000
2010 $ 860,000
Thereafter $ 108,000
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,
2007. At August 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 $6,054,000 at August 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 bank credit
agreement) 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 $53,000 at August 31, 2005,
of which $34,000 was classified as current at that date.
Contractual cash obligations
Following is a summary of the Company's contractual cash obligations as
of August 31, 2005 (in thousands):
Future Cash Payments Due by Fiscal Year
----------------------------------------------
Contractual 2006 There-
Obligations (remainder) 2007 2008 2009 2010 after Total
--------------- ------ ------ ------ ------ ------ ------ ------
Debt principal $ 1,412 $2,139 $4,800 $ 703 $ - $ - $ 9,054
Capital leases 21 31 8 - - - 60
Operating leases 1,019 1,800 1,821 1,872 1,939 1,805 10,256
Purchase
obligations 26,772 24 - - - - 26,796
------- ------ ------ ------ ------ ------ ------
Total contractual
cash obligations $29,224 $3,994 $6,629 $2,575 $1,939 $1,805 $46,166
======= ====== ====== ====== ====== ====== =======
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 August 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 40.1% and 38.8% in the six months
ended August 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 Six months ended
August 31, August 31,
---------------- ----------------
2005 2004 2005 2004
------ ------ ------ ------
Basic weighted average number
of common shares outstanding 22,490 22,292 22,491 20,524
Effect of dilutive securities:
Stock options 598 517 481 700
Shares held in escrow 226 - 140 -
------ ------ ------ ------
Diluted weighted average number
of common shares outstanding 23,314 22,809 23,112 21,224
====== ====== ====== ======
Options and warrants outstanding at August 31, 2005 to purchase
approximately 766,000 shares of common stock at exercise prices of $7.77 and
above were excluded from the computation of diluted earnings per share for
the six 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 estimated impact of these
shares has been included in the diluted weighted average number of common
shares outstanding for the three and six months ended August 31, 2005.
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 six months ended August 31, 2005 and
2004 (in thousands):
Three Months Ended Six Months Ended
August 31, August 31,
---------------- ----------------
2005 2004 2005 2004
------ ------ ------ ------
Net income $3,681 $1,746 $5,658 $3,055
Unrealized holding gain on
available-for-sale investments - - - 21
------ ------ ------ ------
Comprehensive income $3,681 $1,746 $5,658 $3,076
====== ====== ====== ======
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 six months
ended August 31,
-------------------
2005 2004
------ ------
Expected life (years) 5 5
Dividend yield 0% 0%
Interest rates 3.9%-4.1% 2.6%-4.0%
Volatility 88%-95% 131%-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
SFAS 123 to stock-based employee compensation (in thousands except per share
amounts):
Three months ended Six months ended
August 31, August 31,
---------------- ----------------
2005 2004 2005 2004
------ ------ ------ ------
Net income as reported $3,681 $1,746 $ 5,658 $ 3,055
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (365) (596) (570) (1,168)
----- ----- ----- ------
Pro forma net income $3,316 $1,150 $ 5,088 $ 1,887
===== ===== ===== ======
Earnings per share:
Basic -
As reported $ 0.16 $ 0.08 $ 0.25 $ 0.15
Pro forma $ 0.15 $ 0.05 $ 0.23 $ 0.09
Diluted -
As reported $ 0.16 $ 0.08 $ 0.24 $ 0.14
Pro forma $ 0.14 $ 0.05 $ 0.22 $ 0.09
Note 10 - CONCENTRATION OF RISK
Because the Company's principal business involves the sale of products
into a market comprised of 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 and six months ended
August 31, 2005 or 2004, as a percent of consolidated revenue, are as
follows:
Three months ended Six months ended
August 31, August 31,
---------------- ----------------
Customer 2005 2004 2005 2004
-------- ------ ------ ------ ------
A 57.5% 33.6% 57.3% 35.1%
B 9.3% 12.8% 11.7% 14.5%
C - 14.5% - 14.2%
Accounts receivable from these customers as a percent of consolidated
net accounts receivable are as follows:
Aug. 31, Feb. 28,
Customer 2005 2005
-------- ------ ------
A 50.7% 49.8%
B 5.6% 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 six months ended August 31, 2005 and 2004 is as follows (in
thousands):
Six months ended
August 31,
-----------------
2005 2004
------ ------
Balance at beginning of period $746 $159
Charged to costs and expenses 74 584
Deductions (170) (254)
---- ----
Balance at end of period $650 $489
==== ====
Note 12 - OTHER FINANCIAL INFORMATION
"Net cash provided by operating activities" in the consolidated
statements of cash flows includes cash payments for interest and income taxes
as follows (in thousands):
Six months ended
August 31,
-------------------
2005 2004
------ ------
Interest paid $ 238 $ 232
Income taxes paid (net
refunds received) $ 214 $ 70
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Six months ended
August 31,
-------------------
2005 2004
------ ------
Fair value of common stock
received as consideration
from the sale of assets $ 190 -
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 and six months ended August 31, 2005
and 2004 is as follows (dollars in thousands):
Three months ended Three months ended
August 31, 2005 August 31, 2004
------------------------------------ ------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Products Solutions Products Solutions
Division Division Corporate Total Division Division Corporate Total
------- ------ ------- ----- ------- ------ ------- -----
Revenues:
Products $52,598 $ 838 $53,436 $43,056 $ 2,038 $45,094
Services - 4,225 4,225 - 5,733 5,733
------ ----- ------ ------ ----- ------
Total $52,598 $ 5,063 $57,661 $43,056 $ 7,771 $50,827
====== ===== ====== ====== ===== ======
Gross profit:
Products $11,724 $ 691 $12,415 $ 8,503 $ 453 $ 8,956
Services - 1,000 1,000 - 1,368 1,368
------ ----- ------ ------ ----- ------
Total $11,724 $ 1,691 $13,415 $ 8,503 $ 1,821 $10,324
====== ===== ====== ====== ===== ======
Gross margin:
Products 22.3% 82.5% 23.2% 19.7% 22.2% 19.9%
Services - 23.7% 23.7% - 23.9% 23.9%
Total 22.3% 33.4% 23.3% 19.7% 23.4% 20.3%
Operating
income
(loss) $ 7,691 $ (513) $(1,082) $ 6,096 $ 6,036 $(2,083) $(1,069) $ 2,884
====== ===== ===== ====== ====== ===== ===== ======
Six months ended Six months ended
August 31, 2005 August 31, 2004
------------------------------------ ------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Products Solutions Products Solutions
Division Division Corporate Total Division Division Corporate Total
------- ------ ------- ----- ------- ------ ------- -----
Revenues:
Products $93,766 $ 2,062 $ 95,828 $83,555 $ 3,195 $86,750
Services - 9,413 9,413 - 9,074 9,074
------ ------ ------- ------ ------ ------
Total $93,766 $11,475 $105,241 $83,555 $12,269 $95,824
====== ====== ======= ====== ====== ======
Gross profit:
Products $20,534 $ 1,285 $ 21,819 $15,769 $ 719 $16,488
Services - 2,294 2,294 - 2,137 2,137
------ ----- ------- ------ ------ ------
Total $20,534 $ 3,579 $ 24,113 $15,769 $ 2,856 $18,625
====== ===== ======= ====== ====== ======
Gross margin:
Products 21.9% 62.3% 22.8% 18.9% 22.5% 19.0%
Services - 24.4% 24.4% - 23.6% 23.6%
Total 21.9% 31.2% 22.9% 18.9% 23.3% 19.4%
Operating
income
(loss) $13,047 $(1,656) $(2,016) $ 9,375 $10,670 $(3,592) $(1,948) $ 5,130
====== ===== ===== ======= ====== ====== ===== ======
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 benefits 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 and New Jersey. The Company also
leases certain manufacturing equipment and office equipment under operating
lease arrangements. A summary of future payments under operating lease
commitments is included in the contractual cash obligations table in Note 5.
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 69% of
the Company's total revenue for the six months ended August 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 purchase price allocation, Vytek's deferred
tax assets were valued at $8,783,000, net of a valuation allowance of
$1,892,000.
At August 31, 2005 the Company's net deferred income tax asset was
$9,155,000, 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 August 31, 2005 is no longer deemed to be necessary, reductions of the
valuation allowance will decrease the goodwill balance associated with the
Solutions Division. 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. 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. This statement has not had
a material impact on the Company's financial position or results of
operations.
The Company 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 six months ended August 31, 2004
include the operations of Vytek for twenty 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 six months ended August 31, 2005 for nineteen
weeks.
The Company's revenue, gross profit and operating income (loss) by
business segment are as follows:
REVENUE BY SEGMENT
Three months ended August 31, Six months ended August 31,
------------------------------- --------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
% of % of % of % of
Division $000s Total $000s Total $000s Total $000s Total
--------- ------- ----- ------- ----- -------- ----- ------- -----
Products $52,598 91.2% $43,056 84.7% $ 93,766 89.1% $83,555 87.2%
Solutions 5,063 8.8% 7,771 15.3% 11,475 10.9% 12,269 12.8%
------- ----- ------- ----- -------- ----- ------- -----
Total $57,661 100.0% $50,827 100.0% $105,241 100.0% $95,824 100.0%
======= ===== ======= ===== ======== ===== ======= =====
GROSS PROFIT BY SEGMENT
Three months ended August 31, Six months ended August 31,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- -------------- ------------- --------------
% of % of % of % of
Division $000s Total $000s Total $000s Total $000s Total
--------- ------- ----- ------- ----- ------- ----- ------- -----
Products $11,724 87.4% $ 8,503 82.4% $20,534 85.2% $15,769 84.7%
Solutions 1,691 12.6% 1,821 17.6% 3,579 14.8% 2,856 15.3%
------- ----- ------- ----- ------- ----- ------- -----
Total $13,415 100.0% $10,324 100.0% $24,113 100.0% $18,625 100.0%
======= ===== ======= ===== ======= ===== ======= =====
OPERATING INCOME (LOSS) BY SEGMENT
Three months ended August 31, Six months ended August 31,
------------------------------- -------------------------------
2005 2004 2005 2004
---------------- ---------------- --------------- ---------------
% of % of % of % of
Total Total Total Total
Division $000s Revenue $000s Revenue $000s Revenue $000s Revenue
--------- ------- ------- ------- ------- ------- ------- ------- -------
Products $ 7,691 13.3% $ 6,036 11.9% $13,047 12.4% $10,670 11.1%
Solutions (513) (0.9%) (2,083) (4.1%) (1,656) (1.6%) (3,592) (3.7%)
Corporate
expenses (1,082) (1.8%) (1,069) (2.1%) (2,016) (1.9%) (1,948) (2.0%)
------- ------ ------- ------ ------- ------ ------- -----
Total $ 6,096 10.6% $ 2,884 5.7% $ 9,375 8.9% $ 5,130 5.4%
======= ====== ======= ====== ======= ====== ======= =====
Revenue
Products Division revenue increased $9,542,000, or 22%, to $52,598,000
in the three months ended August 31, 2005 from $43,056,000 for the same
period in the previous fiscal year. About $4.2 million or 44% of the
increase is attributable to increased sales of DBS products. Skybility
products accounted for revenue of $2.5 million or 26% of the increase. The
remainder of the increase is attributable to increased sale of other wireless
products, primarily to one customer that generated revenue of $3.6 million in
the three months ended August 31, 2005. On a sequential quarter basis,
Products Division revenue for the most recent four quarters was $50.4
million, $60.9 million, $41.2 million and $52.6 million. Revenues in the
latest quarter increased sequentially by $11.4 million primarily due to
increased demand from our principal DBS customers after they reduced their
ordering activity in the first quarter to adjust their inventory holding
levels.
For the six months ended August 31, 2005, Products Division revenue
increased $10,211,000, or 12%, over the same period of the prior year.
Skybility products accounted for revenue of $3.8 million or 37% of the
increase. About $1.8 million of the increase is attributable to increased
sales of DBS products. The remainder of the increase is attributable to
increased sale of other wireless products, primarily to one customer that
generated revenue of $4.6 million in the six months ended August 31, 2005.
Revenue of the Solutions Division decreased $2,708,000, or 35%, to
$5,063,000 in the three months ended August 31, 2005 from $7,771,000 for the
same period in the previous fiscal year. For the six months ended August 31,
2005, Solutions Division revenue decreased $794,000, or 6%, over the same
period of the prior year. The revenue decrease is primarily the result of
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 $3,221,000, or 38%, which is
primarily attributable to the gross margin improvement from 19.7% in the
three months ended August 31, 2004 to 22.3% in the latest quarter. The gross
margin improvement was mainly due to increased sales of higher-margin
products.
For the six months ended August 31, 2005, Products Division gross profit
increased $4,765,000, or 30%, from the same period of last year, and gross
margin improved from 18.9% to 21.9%, primarily for the reason explained in
the preceding paragraph.
Solutions Division gross profit decreased $130,000, or 7%, and gross
margin improved from 23.4% in the three months ended August 31, 2004 to 33.4%
in the latest quarter. For the six months ended August 31, 2005, Solutions
Division gross profit increased $723,000, or 25%, from the same period of
last year, and gross margin improved from 23.3% to 31.2%. The Company has
been taking actions 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 $292,000 to
$2,360,000 in the latest quarter from $2,068,000 in the second quarter of
last year. The increase is primarily attributable to Skybility R&D expenses
of $558,000, partially offset by $392,000 in reduced R&D spending in the
Solutions Division. For the six month year-to-date periods, R&D expenses
increased $682,000 from $3,875,000 last year to $4,557,000 this year. About
half of the increase is attributable to Skybility R&D expenses of $770,000,
partially offset by $442,000 in reduced R&D spending in the Solutions
Division. The remaining increase is due to higher R&D expenses in the
Products Division in areas such as salaries and related benefits.
Consolidated selling expenses increased to $1,796,000 in the latest
quarter from $1,732,000 in the second quarter of last year. Although the
expenses were relatively unchanged between these two periods, the Products
Division incurred increased selling expenses of $443,000 and Solutions
Division lowered its selling expenses by $379,000 compared to last year. For
the six month year-to-date periods, selling expenses increased $864,000 from
$2,804,000 last year to $3,668,000 this year. The Products Division and
Solutions Division spent higher than last year by $509,000 and $355,000,
respectively. The higher expenses of the Products Division is due to the
inclusion of Skybility selling expenses of $322,000. The Solutions Division
selling expenses last year covered the 20-week period ended August 31, 2004,
compared to the 26-week period this year.
Consolidated general and administrative expenses decreased $572,000 to
$2,607,000 in the latest quarter from $3,179,000 last year. The decrease is
attributable to a reduction of $762,000 in G&A of the Solutions Division,
partially offset by an increase in Products Division G&A of $190,000 mainly
from higher salaries and related benefits. For the six month year-to-date
periods, general and administrative expenses decreased $403,000 from
$5,624,000 last year to $5,221,000 this year. The decrease is attributable
to a reduction of Solutions Division G&A of $724,000, partially offset by an
increase in Products Division G&A of $321,000 mainly from higher salaries and
related benefits.
Amortization expense of intangible assets in the three months ended
August 31, 2005 and 2004 was $529,000 and $461,000, respectively, and in the
six months ended August 31, 2005 and 2004 was $972,000 and $721,000,
respectively. These increases were primarily attributable to amortization
expense related to the intangible assets arising from the acquisition of
Skybility.
The in-process research and development ("IPR&D") write-off decreased by
$151,000 to $320,000 in the six months ended August 31, 2005 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 Skybility acquisition.
Operating Income
Operating income was $6,096,000 and $2,884,000 in the three months ended
August 31, 2005 and 2004, respectively, and in the six months ended August
31, 2005 and 2004 was $9,375,000 and $5,130,000, respectively. These
results were driven by improved gross margins in both the Products and
Solutions Divisions. The Products Division's higher gross profit, as
discussed above under the headings "Revenue" and "Gross Profit and Gross
Margins", partially offset by the Products Division's higher operating
expenses, contributed to the increase in operating income. The Solutions
Division also showed an improvement in its operating results in the latest
quarter, reducing its operating loss by about 75% compared to the same period
last year and by about 55% compared to the first quarter of fiscal 2006,
which is a result of the Company focusing its efforts on higher margin
business and changing the division's cost structure. 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 40.1% and 38.8% in the six months
ended August 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 $33,099,000 at August 31, 2005, and its $10
million working capital line of credit with a bank. During the first six
months of fiscal 2006, cash and cash equivalents increased by $2,051,000.
This increase consisted of cash provided by operating activities of
$9,075,000 and proceeds from stock option exercises of $252,000, partially
offset by cash used for the Skybility acquisition of $4,897,000, net cash
used for capital expenditures of $919,000 and debt repayments of $1,460,000.
At August 31, 2005 the Company had a $10 million working capital line of
credit with a commercial bank that matures on August 3, 2007. 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
August 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 $6,054,000 at August 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 August 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.
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 August 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
August 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 income.
A portion of the Company's operations consists of an investment in a
foreign subsidiary. As a result, the consolidated financial results have
been and could continue to be affected by changes in foreign currency
exchange rates. However, the Company believes that it does not have material
foreign currency exchange rate risk since a significant portion of the
Company's sales are to U.S. markets, or to international markets where its
sales are denominated in U.S. dollars, and material purchases from foreign
suppliers are typically also denominated in U.S. dollars. Additionally, the
functional currency of the Company's foreign subsidiary is the U.S. dollar.
It is the Company's policy not to enter into derivative financial
instruments for speculative purposes. Furthermore, the Company generally
does not enter into foreign currency forward exchange contracts. There are
no foreign currency forward exchange contracts outstanding at August 31,
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2005 Annual Meeting of Stockholders held on August 2, 2005, seven
directors stood for reelection to a one year term expiring at the fiscal 2006
Annual Meeting. All seven of the director nominees were reelected.
Following is a summary of the results of the director voting:
Votes
Against or
Votes For Withheld Unvoted
-------- ------- -------
Richard Gold 19,931,647 1,756,538 1,032,308
Arthur Hausman 19,845,233 1,842,952 1,032,308
A.J. "Bert" Moyer 19,934,593 1,753,592 1,032,308
James E. Ousley 19,928,488 1,759,697 1,032,308
Frank Perna 20,092,136 1,596,049 1,032,308
Thomas Ringer 19,779,760 1,908,425 1,032,308
Fred Sturm 20,096,561 1,591,624 1,032,308
ITEM 6. EXHIBITS
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.
October 6, 2005 /s/ Richard K. Vitelle
------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)