UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: May 31, 2006
_________________
[ ] 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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
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 23,339,408 shares of Common Stock outstanding as of
July 11, 2006.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
May 31, February 28,
2006 2006
Assets -------- --------
Current assets:
Cash and cash equivalents $ 30,779 $ 45,783
Accounts receivable, less allowance for
doubtful accounts of $203 at May 31, 2006
and February 28, 2006, respectively 28,498 28,630
Inventories, net 30,557 18,279
Deferred income tax assets 5,132 4,042
Prepaid expenses and other current assets 8,198 2,502
-------- --------
Total current assets 103,164 99,236
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 6,772 5,438
Deferred income tax assets, less current portion 1,891 2,344
Goodwill 84,315 91,386
Other intangible assets, net 21,443 5,304
Other assets 1,205 638
-------- --------
$218,790 $204,346
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 775 $ 2,168
Accounts payable 18,091 12,011
Accrued payroll and employee benefits 8,344 3,608
Other accrued liabilities 5,826 2,763
Deferred revenue 1,799 1,323
-------- --------
Total current liabilities 34,835 21,873
-------- --------
Long-term debt, less current portion 37,253 5,511
Other non-current liabilities 968 853
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; 23,315 and 23,204 shares issued
and outstanding at May 31, 2006 and
February 28, 2006, respectively 233 232
Additional paid-in capital 136,051 135,022
Less common stock held in escrow - (2,532)
Retained earnings 10,137 44,188
Accumulated other comprehensive loss (687) (801)
-------- --------
Total stockholders' equity 145,734 176,109
-------- --------
$218,790 $204,346
======== ========
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
May 31,
------------------
2006 2005
-------- -------
Revenues:
Product sales $ 43,756 $ 42,392
Service revenues 2,557 5,188
-------- --------
Total revenues 46,313 47,580
-------- --------
Cost of revenues:
Cost of product sales 32,967 32,988
Cost of service revenues 2,419 3,894
-------- --------
Total cost of revenues 35,386 36,882
-------- --------
Gross profit 10,927 10,698
-------- --------
Operating expenses:
Research and development 2,565 2,197
Selling 1,771 1,872
General and administrative 2,813 2,614
Amortization of intangibles 401 443
In-process research and development
write-off 6,850 293
Impairment loss 29,848 -
-------- --------
Total operating expenses 44,248 7,419
-------- --------
Operating income (loss) (33,321) 3,279
Non-operating income (expense):
Interest income 533 192
Interest expense (232) (124)
Other, net 660 (25)
-------- --------
961 43
-------- --------
Income (loss) before income taxes (32,360) 3,322
Income tax provision (1,691) (1,345)
-------- --------
Net income (loss) $(34,051) $ 1,977
======== ========
Earnings (loss) per share:
Basic $ (1.47) $ 0.09
Diluted $ (1.47) $ 0.09
Shares used in computing basic and
diluted earnings (loss) per share:
Basic 23,131 22,492
Diluted 23,131 22,910
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
May 31,
---------------------
2006 2005
------- -------
Cash flows from operating activities:
Net income (loss) $(34,051) $ 1,977
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,119 1,080
Stock-based compensation expense 420 -
Excess tax benefit from stock-based
compensation expense (199) -
Write-off of in-process research and development 6,850 293
Goodwill impairment writedown 29,848 -
Deferred tax assets, net 441 818
Changes in operating assets and liabilities:
Accounts receivable 4,639 2,926
Inventories (6,787) (3,988)
Prepaid expenses and other assets (3,374) (895)
Accounts payable 5,027 3,446
Accrued payroll and other accrued liabilities 672 (1,428)
Deferred revenue 87 (123)
Other 31 9
------- -------
Net cash provided by operating activities 4,723 4,115
------- -------
Cash flows from investing activities:
Capital expenditures (798) (373)
Proceeds from sale of property and equipment 17 -
Acquisition of Dataradio, net of
cash acquired (47,999) -
Acquisition of assets of TechnoCom product line (2,478) -
Proceeds from Vytek escrow fund distribution 480 -
Acquisition of assets of Skybility - (4,886)
------- -------
Net cash used in investing activities (50,778) (5,259)
------- -------
Cash flows from financing activities:
Proceeds from debt borrowings 38,000 -
Debt repayments (7,651) (731)
Proceeds from exercise of stock options 389 13
Excess tax benefit from stock-based
compensation expense 199 -
------- -------
Net cash provided by (used in) financing activities 30,937 (718)
------- -------
Effect of exchange rate changes on cash 114 -
------- -------
Net change in cash and cash equivalents (15,004) (1,862)
Cash and cash equivalents at beginning of period 45,783 31,048
------- -------
Cash and cash equivalents at end of period $30,779 $29,186
======= =======
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2006 and 2005
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, private wireless networks, public safety communications and critical
infrastructure and process control applications.
The Company uses a 52-53 week fiscal year ending on the Saturday closest
to February 28, which for fiscal 2006 fell on February 25, 2006. Fiscal
2007, a 53-week year, will end on March 3, 2007. The first quarter of fiscal
year 2007 ended on June 3, 2006 and consisted of 14 weeks of operations. The
first quarter of fiscal year 2006 ended on May 28, 2005 and consisted of 13
weeks of operations. In the accompanying consolidated financial statements,
the 2006 fiscal year end is shown as February 28 and the interim period end
for both years is shown as May 31 for clarity of presentation.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 2006 Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on May 9, 2006.
In the opinion of the Company's management, the accompanying
consolidated financial statements reflect all adjustments necessary to
present fairly the Company's financial position at May 31, 2006 and its
results of operations for the three months ended May 31, 2006 and 2005. 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 - RECENT ACQUISITIONS
Dataradio
---------
On May 26, 2006, the Company completed the acquisition of Dataradio,
Inc. ("Dataradio"), a privately held Canadian company. Under the terms of
the agreement dated May 9, 2006, the Company acquired all capital stock of
Dataradio for a cash payment of Canadian $60.1 million, or U.S. $54,291,000
at the effective Canadian Dollar to U.S. Dollar exchange rate on May 26,
2006. This acquisition provides the Company with the opportunity to expand
its wireless data communications business for public safety and Machine-to-
Machine (M2M) applications. It also furthers the Company's strategic goals
of diversifying its customer base and expanding its product offerings into
higher-margin growth markets.
Canadian $7 million (equivalent to U.S. $6,323,397 at the effective
exchange rate on May 26, 2006) of the purchase price was deposited into an
escrow account. Canadian $3 million will be available as a source for the
payment of indemnification claims and Canadian $4 million will be available
for the payment of any obligation arising out of certain purchase price
adjustments. The remaining amount in the escrow account, if any, after
satisfying indemnification claims and purchase price adjustments, will be
distributed to Dataradio's selling stockholders on the second anniversary of
the closing date. Amounts required to pay claims by the Company that are not
resolved by such second anniversary will be held in the escrow account until
such claims are resolved.
Dataradio became part of the Company's Products Division. Dataradio's
operations are included in the accompanying fiscal 2007 interim consolidated
statement of operations for the one week period from May 26, 2006 to May 31,
2006.
Dataradio is currently focused in three primary business lines:
wireless data systems for public safety and first response applications;
wireless data modems for fixed location critical infrastructure and
industrial applications; and design and manufacture of radio frequency
modules.
The Company has not yet obtained all information required to complete
the purchase price allocation related to this acquisition. The final
allocation will be completed in fiscal 2007. Following is a preliminary
purchase price allocation (in thousands):
Purchase price paid in cash $54,291
Direct costs of acquisition 422
------
Total cost of acquisition $54,713
Fair value of net assets acquired:
Current assets $19,310
Property and equipment 1,252
Intangible assets:
Developed/core technology $6,980
Customer lists 3,750
Contracts backlog 1,480
Covenants not to compete 500
Tradename 3,880
In-process research and
development ("IPR&D") 6,850
-----
Total intangible assets 23,440
Deferred tax assets, net 936
Current liabilities (8,691)
Long-term liabilities (213)
------
Total fair value of net assets acquired 36,034
------
Goodwill $18,679
======
The Company paid a premium (i.e., goodwill) over the fair value of the
net tangible and identified intangible assets acquired) for a number of
reasons, including the following:
* Dataradio is an established data applications provider of radio frequency
(RF) modems and systems for public safety and private networks.
* Dataradio has history of profitable operations.
* The products of Dataradio have high gross margins.
* Dataradio has a diversified customer base.
* CalAmp will have access to Dataradio's engineering resources.
The goodwill arising from the Dataradio acquisition is not deductible
for income tax purposes.
The $6,850,000 allocated to IPR&D in the preliminary purchase price
allocation above was charged to expense following the acquisition.
The following is supplemental pro forma information presented as if the
acquisition of Dataradio had occurred at the beginning of each of the
respective periods. The pro forma financial information is not necessarily
indicative of what the Company's actual results of operations would have been
had Dataradio been included in the Company's consolidated financial
statements for all of the three month periods ended May 31, 2006 and 2005.
In addition, the unaudited pro forma financial information does not attempt
to project the future results of operations of the combined company.
(in thousands, except per share data)
Three Months Ended Three Months Ended
May 31, 2006 May 31, 2005
-------------------- ------------------
As Pro As Pro
reported forma reported forma
-------- -------- -------- -------
Revenue $ 46,313 $ 55,749 $47,580 $55,020
Net income (loss) $(34,051) $(27,190) $ 1,977 $ 1,575
Net income (loss) per share:
Basic $ (1.47) $ (1.18) $ 0.09 $ 0.07
Diluted $ (1.47) $ (1.18) $ 0.09 $ 0.07
The pro forma adjustments for the three months ended May 31, 2006
consist of adding Dataradio's estimated results of operations for the
thirteen weeks ended May 26, 2006, because Dataradio is included in the "As
reported" amounts for the one week period from the May 26 acquisition date to
the end of the 14-week quarter. The pro forma adjustments for the three
months ended May 31, 2005 consist of adding Dataradio's results of operations
for the three months ended April 30, 2005.
The pro forma financial information for both periods presented above
reflects the following:
* Additional amortization expense of approximately $777,000 related to the
estimated fair value of identifiable intangible assets from the preliminary
purchase price allocation.
* Additional interest expense and amortization of debt issue costs in the
total amount of $494,000 related to the incremental new bank borrowings to
fund part of the Dataradio purchase price.
The unaudited pro forma financial information above excludes the
following material, non-recurring charges or credits incurred by CalAmp or
Dataradio in the quarter ended May 31, 2006:
* A charge for IPR&D of $6,850,000 related to the Dataradio acquisition.
* A foreign currency hedging gain of $689,000 realized by CalAmp in
connection with the acquisition of Dataradio.
* A charge for Dataradio employee bonuses and related employer payroll taxes
in the aggregate amount of $5,375,000, recorded as an expense in Dataradio's
pre-acquisition income statement, for incentives paid by Dataradio to its
workforce upon consummating the sale of Dataradio to CalAmp.
TechnoCom Product Line
----------------------
Also, on May 26, 2006, the Company acquired the business and certain
assets of Mobile Resource Management ("MRM") product line from TechnoCom
Corporation ("Technocom"), a privately-held company, pursuant to an Asset
Purchase Agreement dated May 25, 2006 (the "Agreement"). This MRM product
line, which is used to help track fleets of cars and trucks, became part of
the Company's Products Division. The acquisition of the MRM product line 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.
Revenues and cost of sales generated by the MRM product line are
included in the accompanying fiscal 2007 interim consolidated statement of
operations for the one week period from May 26, 2006 to May 31, 2006.
The Company acquired the business of the MRM product line, its
inventory, 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 $2,439,000, of which $250,000 was set aside in an
escrow account to satisfy any claims made by the Company on or before May 26,
2007. The Company also agreed to make an additional future cash payment
equal to the amount of net revenues attributable to the MRM product line
during the 12-month period following the acquisition that exceeds $3,100,000.
In addition, the Company agreed to license certain software from TechnoCom
with a first year cost of approximately $200,000.
The Company has not yet obtained all information required to complete
the purchase price allocation related to this acquisition. The final
allocation will be completed in fiscal 2007. Following is a preliminary
purchase price allocation (in thousands):
Purchase price paid in cash $2,439
Direct costs of acquisition 39
------
Total cost of acquisition 2,478
Fair value of net assets acquired:
Inventories 290
------
Goodwill $ 2,188
======
Note 3 - INVENTORIES
Inventories include the cost of material, labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in, first-
out method) or market, and consist of the following (in thousands):
May 31, February 28,
2006 2006
------ -------
Raw materials $22,400 $14,375
Work in process 603 380
Finished goods 7,554 3,524
------- -------
$30,557 $18,279
======= =======
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, 2006 $ 57,785 $ 33,601 $ 91,386
Distribution of escrow shares
as additional purchase price
for the 2004 Vytek acquisition 1,052 1,000 2,052
Goodwill associated
with Dataradio acquisition 18,679 - 18,679
Goodwill associated with
Technocom product line
acquisition 2,188 - 2,188
Impairment loss - (29,848) (29,848)
Other (142) (142)
-------- --------- --------
Balance as of May 31, 2006 $ 79,704 $ 4,611 $ 84,315
======== ========= ========
Impairment tests of goodwill associated with the Products Division are
conducted annually as of December 31. The annual tests conducted in the last
three fiscal years indicated no impairment of Products Division goodwill.
The initial annual impairment test of the goodwill associated with the
Solutions Division was performed as of April 30, 2005, which indicated that
there was no impairment of Solutions Division goodwill at that date.
The annual impairment test of the Solutions Division goodwill as of
April 30, 2006 is not yet completed. The goodwill impairment test is a two-
step process. Under the first step, the fair value of the Solutions Division
was compared with its carrying value (including goodwill). The fair value of
the Solutions Division using a discounted cash flow approach is $29,848,000
less than its carrying value, which indicates that a goodwill impairment
exists and which requires the Company to perform step two of the impairment
test. The Company has not yet completed step two of the goodwill impairment
test. In step two, the implied fair value of the Solutions Division's
goodwill will be calculated and then compared to the carrying amount of that
goodwill. If the goodwill carrying amount exceeds the implied fair value, an
impairment loss must be recognized equal to that excess. The implied
goodwill amount is determined by allocating the fair value of the Solutions
Division to all of the assets and liabilities of the Solutions Division as if
the Solutions Division had been acquired in a business combination as of the
date of the impairment test. In this step two test, fair value will be
allocated to tangible net assets and to both recognized and unrecognized
intangible assets as of the test date. Hence, if during the period
subsequent to the original acquisition date the Solutions Division has
internally developed intangible assets such as patents, trademarks, customer
lists, etc. for which the costs were expensed as incurred for accounting
purposes, the value of these internally developed assets is taken into
consideration in computing the implied value of goodwill. Because the
Company has not yet obtained all information required to complete the step
two test prior to the issuance of the financial statements for the quarter
ended May 31, 2006 and because a goodwill impairment loss is probable and
reasonably estimable, the Company is required to recognize the best estimate
of the loss in the quarter ended May 31, 2006 in accordance with Statement of
Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies".
The preliminary estimate of the goodwill impairment loss is $29,848,000.
Factors that led to the impairment of goodwill of the Solutions
Division as of April 30, 2006 include the following:
> Throughout fiscal 2006, the quarterly revenue of the Solutions Division
has not been growing, but instead has been declining due to the loss of
key customers and management's decision to exit low margin business with
certain other customers in order to reduce operating losses in this
division. During fiscal 2006, the Company forecasted that it would be
able to replace these customers with new business to grow revenues and
make the Solutions Division profitable. However, the Solutions Division
was unable to book sufficient new business to reverse the decline in
revenue and this situation, along with the continued sluggish revenue
performance in the first quarter of fiscal 2007, have led Company
management to conclude that the revenue projection for fiscal 2007
reflected in the April 30, 2005 goodwill impairment test is not
achievable.
> Substantially all of the quarter-to-quarter revenue declines of the
Solutions Division during fiscal 2006 through the first quarter of fiscal
2007 were attributable to its Information Technology ("IT") professional
consulting business. Failure to gain new major customers, the small
amount of backlog and new order pipeline and low margin business led to
management's decision to exit the Solutions Division's IT professional
consulting business.
> The cost structure and limited availability of critical engineering
resources of the IT professional consulting business made this unit unable
to compete with large consulting companies that have multiple design
centers in lower cost regions of the United States and foreign technology
centers such as India.
> The Company's financial projections as of April 30, 2006 include the
operations of its software business unit only, because of the decision to
exit the IT professional consulting business. The loss of projected
revenues and operating income from the IT professional consulting business
contributed to the decline in the projected cash flows.
Other intangible assets are comprised as follows (in thousands):
May 31, 2006 February 28, 2006
------------------------ -------------------------
Amorti- Gross Accum. Gross Accum.
zation Carrying Amorti- Carrying Amorti-
Period Amount zation Net Amount zation Net
----- ------ ------ ----- ------ ------ -----
Developed/core
technology 5-7 yrs. $12,012 $1,831 $10,181 $5,032 $1,561 $3,471
Customer lists 5-7 yrs. 5,870 715 5,155 2,120 601 1,519
Contracts
backlog 1 yr. 1,480 - 1,480 - - -
Covenants not
to compete 4-5 yrs. 821 74 747 321 57 264
Licensing right 2 yrs. 200 200 - 200 150 50
Tradename N/A 3,880 - 3,880 - - -
------- ------ ------- ------ ------ ------
$24,263 $2,820 $21,443 $7,673 $2,369 $5,304
======= ====== ======= ====== ====== ======
Amortization of intangibles was $451,000 and $469,000 for the three
months ended May 31, 2006 and 2005, respectively. Amortization expense for
the three months ended May 31, 2006 is reported in the accompanying
consolidated statements of operations in cost of revenues and operating
expenses in the amounts of $50,000 and $401,000, respectively. Amortization
expense for the three months ended May 31, 2006 is reported in the
accompanying consolidated statements of operations in cost of revenues and
operating expenses in the amounts of $26,000 and $443,000, respectively.
Estimated amortization expense for the fiscal years ending February 28
is as follows:
2007 (remainder) $3,509,000
2008 $3,514,000
2009 $3,144,000
2010 $2,335,000
2011 $1,629,000
Thereafter $3,432,000
Note 5 - FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Bank Credit Facility
On May 26, 2006, the Company and certain direct and indirect subsidiary
guarantors of the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of Montreal, as administrative agent, and the other
financial institutions that from time to time may become parties to the
Credit Agreement. The credit facility is comprised of a term loan and a $10
million working capital line of credit.
The Company borrowed $35 million under the term loan and $3 million
under the line of credit. Borrowings are secured by substantially all of the
Company's assets. Of the total proceeds of $38 million, $7 million was used
to pay off the Company's existing loans with U.S. Bank National Association
("US Bank") and the remaining $31 million, plus cash on hand of approximately
$23 million, was used to fund the purchase price for the Dataradio
acquisition as described in Note 2. The term loan principal is payable in
quarterly installments on the last day of March, June, September and December
in each year commencing on March 31, 2007 with a final payment of $8,750,000
on May 26, 2011. The maturity date of the line of credit is also May 26,
2011. Scheduled principal payments by fiscal year are as follows:
Fiscal Year Term Loan Line of Credit
----------- --------- --------------
2008 $ 3,000,000 $ -
2009 5,000,000 -
2010 7,000,000 -
2011 9,000,000 -
2012 11,000,000 3,000,000
---------- ---------
$35,000,000 $3,000,000
=========== ==========
At the Company's option, borrowings under the Credit Agreement bear
interest at bank's prime rate ("Prime Based Loans") plus a margin ranging
from 0% to 0.25% (the "Prime Rate Margin") or LIBOR ("LIBOR Based Loans")
plus a margin ranging from 0.75% to 1.25% (the "LIBOR Margin"). The Prime
Rate Margin and the LIBOR Margin vary depending on the Company's ratio of
debt to earnings before interest, taxes, depreciation, amortization and other
noncash charges (the "Leverage Ratio"). Interest is payable on the last day
of the calendar quarter for Prime Based Loans and at the end of the fixed
rate LIBOR period (ranging from 1 to 12 months) in the case of LIBOR Based
Loans.
The Credit Agreement contains certain financial covenants and ratios
that the Company is required to maintain, including: a total Leverage Ratio
of not more than 2.75; net worth of not less than the sum of $140,887,000,
50% of net income for each fiscal year and 50% of net cash proceeds from any
issuance of equity; and a fixed charge coverage ratio (earnings before
interest, taxes, depreciation and other noncash charges to fixed charges) of
not less than 1.50.
The Credit Agreement includes customary affirmative and negative
covenants including, without limitation, negative covenants regarding
additional indebtedness, investments, maintenance of the business, liens,
guaranties, transfers and sales of assets, and the payment of dividends and
other restricted payments. The Credit Agreement also contains customary
events of default that would permit the bank to accelerate borrowings under
the Credit Agreement if not cured within applicable grace periods, including,
without limitation, the failure to make timely payments under the Credit
Agreement or other material indebtedness and the failure to adhere to certain
covenants.
The Company's credit agreement with US Bank was terminated except for
$2,875,000 of the line of credit that was reserved for outstanding
irrevocable stand-by letters of credit. These letter of credits are secured
by a restricted cash deposit of $2,875,000 which is included in prepaid
expenses and other current assets in the accompanying consolidated balance
sheet at May 31, 2006.
Other long-term debt
The Company had capital lease obligations of $28,000 at May 31, 2006, of
which $25,000 was classified as current at that date.
Contractual cash obligations
Following is a summary of the Company's contractual cash obligations as
of May 31, 2006 (in thousands):
Future Cash Payments Due by Fiscal Year
----------------------------------------------
Contractual 2007 There-
Obligations (remainder) 2008 2009 2010 2011 after Total
--------------- ------ ------ ------ ------ ------ ------ ------
Debt principal $ - $3,000 $5,000 $7,000 $9,000 $14,000 $38,000
Capital leases 24 9 33
Operating leases 1,497 1,877 1,506 1,413 1,412 284 7,989
Purchase
obligations 18,992 - - - - - 18,992
------- ------ ------ ------ ------- ------- ------
Total contractual
cash obligations $20,513 $4,886 $6,506 $8,413 $10,412 $14,284 $65,014
======= ====== ====== ====== ======= ======= =======
Purchase obligations consist of obligations under non-cancelable
purchase orders, primarily for inventory purchases of raw materials,
components and subassemblies.
Note 6 - INCOME TAXES
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.
At May 31, 2006 the Company's net deferred income tax asset was
$7,023,000, which amount is net of a valuation allowance of $1,841,000.
If in the future a portion or all of the $1,841,000 valuation allowance
at May 31, 2006 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.
The effective income tax rate was (5.2%) and 40.5% in the three months
ended May 31, 2006 and 2005, respectively. Excluding the goodwill impairment
loss of $29,848,000 and IPR&D write-off of $6,850,000, the effective income
tax rate for the three months ended May 31, 2006 was 39.0%.
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.
Following is a summary of the calculation of weighted average shares
used in the computation of basic and diluted earnings per share (in
thousands):
Three months
ended May 31,
----------------
2006 2005
------ ------
Basic weighted average number
of common shares outstanding 23,131 22,492
Effect of dilutive securities:
Stock options - 365
Shares held in escrow - 53
------ ------
Diluted weighted average number
of common shares outstanding 23,131 22,910
====== ======
Options outstanding at May 31, 2006 were excluded from the computation
of diluted earnings per share for the three months then ended because the
Company reported a net loss in the quarter and the effect of inclusion would
be antidilutive (i.e., including such options would result in lower loss per
share).
Note 8 - COMPREHENSIVE INCOME
Comprehensive income is defined as the total of net income and all non-
owner changes in equity. The following table details the components of
comprehensive income for the three months ended May 31, 2006 and 2005(in
thousands):
Three months
ended May 31,
----------------
2006 2005
------ ------
Net income (loss) $(34,051) $ 1,977
Foreign currency translation
adjustment 114 -
------ ------
Comprehensive income (loss) $(33,937) $ 1,977
====== ======
Note 9 - STOCK-BASED COMPENSATION
The Financial Accounting Standards Board issued SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS No. 123R") which requires companies to
measure all employee stock-based compensation awards using a fair value
method and record such expense in its consolidated financial statements. In
addition, the adoption of SFAS No. 123R required additional accounting and
disclosure related to income tax and cash flow effects resulting from stock-
based compensation. The Company adopted SFAS No. 123R (the "date of
adoption") at the beginning of its first quarter ended May 31, 2006.
The Company adopted SFAS No. 123R under the modified prospective
application. Accordingly, prior period amounts have not been restated. Under
this adoption method, the Company records stock-based compensation expense
for all awards granted on or after the date of adoption and for the portion
of previously granted awards that remained unvested at the date of adoption.
Currently, the Company's stock-based compensation relates to stock options.
Prior to the adoption of SFAS No. 123R, the Company presented all tax
benefits of deductions resulting from the exercise of stock options as
operating cash flows in the consolidated statements of cash flows. SFAS No.
123R requires the cash flows resulting from the tax benefits from tax
deductions in excess of the compensation cost recognized for those options
(excess tax benefits) to be classified as financing cash flows. As a result
of adopting SFAS No. 123R, the $199,000 excess tax benefits have been
classified as a financing cash inflow in the accompanying consolidated
statement of cash flows for the three months ended May 31, 2006.
Prior to the first quarter of fiscal 2007, the Company applied the
provisions of APB No. 25, "Accounting for Stock Issued to Employees," as
permitted under SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of SFAS Statement No. 123."
The following table details the effect on net earnings and earnings per
share "as reported" and as if compensation expense had been recorded in the
first quarter of fiscal 2006, based on the fair value method under SFAS
No. 123, "Accounting for Stock-Based Compensation" ("pro forma" in the table
below).
Three months ended
May 31, 2005
----------------
Net income as reported $1,977
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (205)
-----
Pro forma net income $1,772
=====
Earnings per share:
Basic -
As reported $0.09
Pro forma $0.08
Diluted -
As reported $0.09
Pro forma $0.08
Stock-based compensation expense for the three months ended May 31, 2006
was $420,000 ($260,000 after tax or $0.01 per diluted share).
As of May 31, 2006, there was $9.0 million of total unrecognized stock-
based compensation cost related to non-vested option grants. That cost is
expected to be recognized over a weighted-average period of 3.3 years.
Option grants are issued at market value on the date of grant and
generally become exercisable in four equal annual installments beginning one
year from the date of grant. Option grants expire 10 years after the date of
grant. Option grants are either incentive stock options or non-qualified
stock options. The Company treats an option grant with graded vesting as a
single award for expense attribution purposes and recognizes compensation
cost on a straight-line basis over the requisite service period of the entire
award.
The fair value of the stock options granted was estimated on the date of
the grant using a Black-Scholes option-pricing model that uses the
assumptions noted in the following table.
Three months
ended May 31,
-------------------
Black-Scholes Valuation Assumptions: (1) 2006 2005
------ ------
Expected life (years) (2) 6 5
Expected volatility (3) 78%-81% 95%
Risk-free interest rates (4) 4.8%-5.0% 3.9%-4.1%
Expected dividend yield 0% 0%
(1) Beginning on the date of adoption, forfeitures are estimated based on
historical experience; prior to the date of adoption, forfeitures were
recorded as they occurred.
(2) The expected life of stock options is estimated based on historical
experience.
(3) The expected volatility is estimated based on historical and current
financial data for the Company.
(4) Based on the U.S. Treasury constant maturity interest rate whose term
is consistent with the expected life of the stock options.
Changes in the Company's outstanding stock options for the three months
ended May 31, 2006 were as follows (in thousands except dollar amounts):
Weighted
Number of Average
Options Exercise Price
-------- --------
Outstanding at February 28, 2006 2,623 $10.09
Granted 513 13.62
Exercised (78) 4.96
Forfeited or expired (160) 16.39
----- ------
Outstanding at May 31, 2006 2,898 $10.51
===== ======
Exercisable at May 31, 2006 1,672 $11.34
===== ======
The weighted average fair value for the stock options granted during the
three months ended May 31, 2006 was $9.64. The weighted average remaining
contractual term and the aggregate intrinsic value of options outstanding as
of May 31, 2006 was 7.1 years and $7.8 million, respectively. The weighted
average remaining contractual term and the aggregate intrinsic value of
options exercisable as of May 31, 2006 was 5.5 years and $5.7 million,
respectively. The total intrinsic value for stock options exercised during
the first three months of fiscal was $545,000. Net cash proceeds from the
exercise of stock options for the first three months of fiscal 2006 was
$389,000 and the associated income tax benefit was $221,000 for that same
time period.
Note 10 - CONCENTRATION OF RISK
Because the Company's principal business involves the sale of products
into a market dominated by two large service providers, a significant
percentage of consolidated revenue and consolidated accounts receivable
relate to a small number of customers. Sales to customers which accounted
for 10% or more of consolidated sales for the three months ended May 31, 2006
or 2005, as a percent of consolidated revenue, are as follows:
Three months
ended May 31,
-----------------
Customer 2006 2005
-------- ------ ------
A 56.3% 57.1%
B 10.8% 14.6%
Accounts receivable from these customers as a percent of consolidated
net accounts receivable are as follows:
May 31, Feb. 28,
2006 2006
------ ------
A 37.6 % 40.1%
B 16.0 % 19.2%
Customers A and B are customers of the Company's Products Division.
Note 11 - PRODUCT WARRANTIES
The Company generally warrants its products against defects over
periods ranging from 3 to 24 months. An accrual for estimated future costs
relating to products returned under warranty is recorded as an expense when
products are shipped. At the end of each quarter, the Company adjusts its
liability for warranty claims based on its actual warranty claims experience
as a percentage of sales for the preceding three years. Activity in the
warranty liability for the three months ended May 31, 2006 and 2005 is as
follows (in thousands):
Three months
ended May 31,
-----------------
2006 2005
------ ------
Balance at beginning of period $477 $746
Charged to costs and expenses 387 46
Deductions (189) (100)
---- ----
Balance at end of period $675 $692
==== ====
Note 12 - OTHER FINANCIAL INFORMATION
"Net cash provided by operating activities" in the consolidated
statements of cash flows includes cash payments for interest and income taxes
as follows (in thousands):
Three months ended
May 31,
-------------------
2006 2005
------ ------
Interest paid $ 112 $ 116
Income taxes paid (net of
refunds received) $ 14 $ 221
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Three months ended
May 31,
-------------------
2006 2005
------ ------
Company common stock issued from
escrow fund as additional
purchase consideration for the
2004 Vytek acquisition $ 2,052 $ -
Note 13 - SEGMENT INFORMATION
Segment information for the three months ended May 31, 2006 and
2005 is as follows (dollars in thousands):
Three months ended May 31, 2006:
Operating Segments
---------------------
Products Solutions
Division Division Corporate Total
------- ------ ------- -----
Revenues:
Products $42,957 $ 799 $ 43,756
Services - 2,557 2,557
------ ------ -------
Total revenues $42,957 $ 3,356 $ 46,313
====== ====== =======
Gross profit:
Products $10,087 $ 702 $ 10,789
Services - 138 138
------ ------ -------
Total gross profit $10,087 $ 840 $ 10,927
====== ====== =======
Gross margin:
Products 23.5% 87.9% 24.7%
Services - 5.4% 5.4%
Total gross margin 23.5% 25.0% 23.6%
Operating income (loss) $ (857) $(31,182) $(1,282) $(33,321)
Three months ended May 31, 2005:
Operating Segments
---------------------
Products Solutions
Division Division Corporate Total
------- ------ ------- -----
Revenues:
Products $41,168 $ 1,224 $42,392
Services - 5,188 5,188
------ ----- ------
Total revenues $41,168 $ 6,412 $47,580
====== ===== ======
Gross profit:
Products $ 8,810 $ 594 $ 9,404
Services - 1,294 1,294
------ ----- ------
Total gross profit $ 8,810 $ 1,888 $10,698
====== ===== ======
Gross margin:
Products 21.4% 48.5% 22.2%
Services - 24.9% 24.9%
Total gross margin 21.4% 29.4% 22.5%
Operating income (loss) $ 5,356 $(1,143) $ (934) $ 3,279
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 of the CEO, CFO and 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. Dataradio, which became part of the Company's Products
Division upon its acquisition in May 2006, leases offices in Montreal,
Minnesota and Atlanta. A summary of future payments under operating lease
commitments is included in the contractual cash obligations table in Note 5.
Note 15 - RELATED PARTY TRANSACTIONS
Dataradio is leasing its offices in Montreal from a lessor that is
controlled by Dataradio's President, who is also an officer of the Company.
The Company believes that the terms of this facility lease are commercially
reasonable and comparable to market terms.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of sales and expenses during the reporting periods.
Areas where significant judgments are made include, but are not limited to:
allowance for doubtful accounts, inventory valuation, product warranties, the
deferred tax asset valuation allowance, and the valuation of long-lived
assets and goodwill. Actual results could differ materially from these
estimates.
Allowance for Doubtful Accounts
The Company establishes an allowance for estimated bad debts based upon
a review and evaluation of specific customer accounts identified as known and
expected collection problems, based on historical experience, due to
insolvency, disputes or other collection issues. As further described in
Note 1 to the accompanying consolidated financial statements, the Company's
customer base is quite concentrated, with two customers accounting for 67% of
the Company's total revenue for the three months ended May 31, 2006 and
approximately 54% of the Company's accounts receivable balance as of May 31,
2006. 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.
At May 31, 2006 the Company's net deferred income tax asset was
$7,023,000, which amount is net of a valuation allowance of $1,841,000.
The valuation allowance at February 28, 2006 relates to the tax assets
acquired in the Vytek purchase. If in the future a portion or all of the
$1,841,000 valuation allowance is no longer deemed to be necessary,
reductions of the valuation allowance will decrease the goodwill balance
associated with the Vytek acquisition. Conversely, if in the future the
Company were to change its realization probability assessment to less than
50%, the Company would provide an additional valuation allowance for all or a
portion of the net deferred income tax asset, which would increase the income
tax provision.
Valuation of Long-lived Assets and Goodwill
The Company 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.
The Company accounts for long-lived assets other than goodwill in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment and Disposal of Long Lived
Assets" ("SFAS No. 144"), which supersedes SFAS No. 121 and certain sections
of Accounting Principles Board Opinion No. 30 specific to discontinued
operations. SFAS No. 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. SFAS No. 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.
Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets",
goodwill is tested for impairment on an annual basis, or more frequently as
impairment indicators arise. The test for impairment involves the use of
estimates related to the fair values of the business operations with which
goodwill is associated and is usually based on projected cash flows or a
market value approach.
As further described in Note 4 to the accompanying consolidated
financial statements, the Company tested its Solutions Division goodwill for
impairment as of April 30, 2006, which indicated that there was an impairment
as of that date. The Company recorded an impairment loss of $29,848,000 in
the quarter ended May 31, 2006 which is the Company's estimate of the
goodwill impairment.
RESULTS OF OPERATIONS
Basis of presentation:
The Company uses a 52-53 week fiscal year ending on the Saturday closest
to February 28, which for fiscal 2006 fell on February 25, 2006. Fiscal
2007, a 53-week year, will end on March 3, 2007. The first quarter of fiscal
year 2007 ended on June 3, 2006 and consisted of 14 weeks of operations. The
first quarter of fiscal year 2006 ended on May 28, 2005 and consisted of 13
weeks of operations. The first quarter period end for both years is shown
herein as May 31 for clarity of presentation.
Overview:
CalAmp 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, private wireless
networks, public safety communications, and critical infrastructure and
process control applications.
The Company's DBS reception products are sold primarily to the two U.S.
DBS system operators, Echostar Communications Corporation and DirecTV Group
Inc., for incorporation into complete subscription satellite television
systems. The Company sells its other wireless access products directly to
system operators as well as through distributors and system integrators.
In April 2004, the Company completed the acquisition of Vytek
Corporation ("Vytek"), a privately held company. The acquisition of Vytek
was motivated primarily by the strategic goal of increasing the Company's
presence in markets which offer higher growth and profit margin potential,
and diversifying the Company's business and customer base. Concurrent with
the acquisition of Vytek, the Company realigned its operations into a
divisional structure. The legacy operations of CalAmp, previously segregated
into the Satellite and Wireless Access business units, were combined together
with Vytek's products manufacturing business to form the new Products
Division. The operations of Vytek, which are principally service oriented,
comprise the Company's Solutions Division.
In April 2005, the Company acquired the business and certain assets of
Skybility, a privately held company located in Carlsbad, California.
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 operates as the Machine-to-
Machine (M2M) product line of the Company's Products Division, and was
included in the Company's results of operations for the quarter ended May 31,
2005 for a six week period.
On May 26, 2006 the Company acquired privately held Dataradio, Inc., a
leading supplier of proprietary advanced wireless data systems, products, and
solutions for public safety, critical infrastructure and industrial control
applications, for a cash payment of Canadian $60.1 million, or U.S. $54.3
million at the effective exchange rate. Dataradio has a diversified customer
base with no single customer accounting for more than 4% of total revenue.
Dataradio has approximately 175 employees in facilities located in Montreal,
Minnesota and Georgia. The Dataradio acquisition expands CalAmp's wireless
data communications business while furthering the Company's strategic goals
of diversifying its customer base and expanding its product offerings into
higher-margin growth markets. For the unaudited 12-month period ended April
30, 2006, Dataradio had revenues of approximately U.S. $32 million and
generated gross margins in excess of 50%. Dataradio's results of operations
are included in CalAmp's fiscal 2007 first quarter financial statements for a
one week period, during which Dataradio generated revenue of $721,000 and
gross profit of $469,000. In connection with the acquisition of Dataradio
the Company recorded a charge of $6,850,000 to write-off in-process research
and development of the acquired business pursuant to the preliminary purchase
price allocation.
Also on May 26, 2006, the Company acquired the mobile-resource
management (MRM) product line from privately held TechnoCom Corporation. for
$2.4 million in cash and an earn-out payment equal to revenues exceeding
$3,100,000 during the 12-month period following the acquisition. This
product line, which is used to help track fleets of cars and trucks,
generated approximately $4 million in revenue in the 12-month period ended
April 30, 2006. Sales of the MRM product line are included in CalAmp's
fiscal 2007 first quarter financial statements for a one week period, during
which this product line contributed sales of $87,000 and gross profit of
$37,000.
The Vytek acquisition in April 2004 gave rise to goodwill of
approximately $72 million. In accordance with the applicable accounting
rules, the goodwill of $72 million was apportioned between CalAmp's Solutions
Division and Products Division because both divisions were expected to
benefit from the acquisition. The apportionment analysis resulted in
allocating $37 million of the goodwill to the Products Division and the
remaining $35 million to the Solutions Division.
As a result of the latest annual impairment test of the Solutions Division
goodwill conducted as of April 30, 2006, the Company determined that there
was an estimated impairment of goodwill of $29,848,000, and accordingly an
impairment charge was recorded in this amount in the fiscal 2007 first
quarter. The impairment charge reflects the declining revenues associated
with the Solutions Division's information technology professional consulting
business, due primarily to the inability of the Solutions Division to
generate new recurring revenue streams to grow the business.
At the consolidated level, the Company's revenue consists principally of
sales of satellite television outdoor reception equipment for the U.S. DBS
industry, which accounted for 73% and 77% of consolidated revenue in the
quarters ended May 31, 2006 and 2005, respectively. The DBS system operators
have approximately 27% share of the total subscription television market in
the U.S. In calendar 2005, the size of the U.S. DBS market was estimated by
industry analysts to have grown by 9% from 24.8 million subscribers to
approximately 27.1 million subscribers at December 31, 2005.
The demand for the Company's products has been affected in the past, and
may continue to be affected in the future, by various factors, including, but
not limited to, the following:
* the timing, rescheduling or cancellation of orders from one of
CalAmp's key customers in CalAmp's satellite products business and the
Company's ability, as well as the ability of its customers, to manage
inventory;
* the rate of growth in the overall subscriber base in the U.S. DBS
Market;
* the economic and market conditions in the wireless communications
markets;
* CalAmp's ability to specify, develop or acquire, complete, introduce,
market and transition to volume production of new products and
technologies in a timely manner;
* the rate at which CalAmp's present and future customers and end-users
adopt the Company's products and technologies in its target markets; and
* the qualification, availability and pricing of competing products and
technologies and the resulting effects on sales and pricing of the
Company's products.
For these and other reasons, the Company's net revenue in the first
quarter of fiscal 2007 may not necessarily be indicative of future periods'
revenue amounts. From time to time, the Company's key customers
significantly reduce their product orders, or may place significantly larger
orders, either of which can cause the Company's quarterly revenues to
fluctuate significantly. The Company expects these fluctuations to continue
in the future.
The Company's revenue, gross profit and operating income (loss) by
business segment are as follows:
REVENUE BY SEGMENT
Three months ended May 31,
------------------------------------
2006 2005
--------------- ---------------
% of % of
Segment $000s Total $000s Total
----------- ------- ----- ------ -----
Products Division $42,957 92.8% $41,168 86.5%
Solutions Division 3,356 7.2% 6,412 13.5%
------ ----- ------ -----
Total $46,313 100.0% $47,580 100.0%
====== ===== ====== =====
GROSS PROFIT BY SEGMENT
Three months ended May 31,
-----------------------------------
2006 2005
-------------- ---------------
% of % of
Segment $000s Total $000s Total
----------- ------ ----- ------ -----
Products Division $10,087 92.3% $ 8,810 82.4%
Solutions Division 840 7.7% 1,888 17.6%
------ ----- ------ -----
Total $10,927 100.0% $10,698 100.0%
====== ===== ====== =====
OPERATING INCOME (LOSS) BY SEGMENT
Three months ended May 31,
-----------------------------------
2006 2005
-------------- --------------
% of % of
Segment $000s Sales $000s Sales
----------- ------ ----- ------ -----
Products Division $ (857) (1.9%) $5,356 11.3%
Solutions Division (31,182) (67.3%) (1,143) (2.4%)
Corporate expenses (1,282) (2.8%) (934) (2.0%)
------ ----- ----- -----
Total $(33,321) (71.9%) $3,279 6.9%
====== ===== ===== =====
The Products Division operating loss in the three months ended May 31,
2006 includes a charge of $6,850,000 to write-off in-process research and
development costs associated with the Dataradio acquisition. The Solutions
Division operating loss in the three months ended May 31, 2006 includes the
goodwill impairment charge of $29,848,000 discussed above.
Revenue
Products Division revenue increased $1,789,000, or 4%, to $42,957,000 in
the three months ended May 31, 2006 from $41,168,000 for the same period in
the previous fiscal year. The increase is primarily due to the fact that the
fiscal 2007 first quarter contains 14 weeks compared to 13 weeks in the first
quarter of last year. Also contributing to the increase was the inclusion in
the latest quarter of Dataradio and the TechnoCom MRM product line for a one
week period, which contributed revenues of $721,000 and $87,000,
respectively. Revenues from sale of DBS products in the latest quarter
declined by $2,620,000 from the first quarter of last year, while sales of
other wireless products increased by $3,470,000 year-over-year.
Revenue of the Solutions Division decreased 48% from $6,412,000 in the
quarter ended May 31, 2005 to $3,356,000 in the quarter ended May 31, 2006
primarily as a result of the loss of key customers in the Solutions
Division's information technology professional consulting business and the
inability to book sufficient new recurring business to offset these customer
losses.
Gross Profit and Gross Margins
Products Division gross profit increased $1,277,000, or 14.5%.
Approximately half of this increase is attributable to the fact that the
latest quarter included one additional week of operations (14 weeks in the
first quarter of fiscal 2007 compared to 13 weeks in the first quarter of
fiscal 2006). The remainder of the increase is mainly due to the change in
the mix of products sold, with increased sales of higher margin wireless
products during the latest quarter compared to the prior year.
Solutions Division gross profit decreased 56% from $1,888,000 in the
first quarter of last year to $840,000 in the latest quarter, and gross
margin declined from 29.4% last year to 25.0% in the latest quarter. The
decline in gross profit and gross margin is primarily attributable to the 48%
decline in Solutions Division revenue.
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 $368,000 to
$2,565,000 in the latest quarter from $2,197,000 last year. Nearly half of
the increase was attributable to inclusion of one additional week in the
latest quarter versus the first quarter of last year as a result of fiscal
2007 being a 53 week year. Most of the remaining increase in research and
development expense is attributable to the inclusion of Dataradio's
operations for a one week period in the latest quarter.
Consolidated selling expenses decreased to $1,771,000 in the latest
quarter from $1,872,000 last year. The decline is due primarily to lower
sales commissions in the Solutions Division due to the 48% revenue decline in
this division.
Consolidated general and administrative expenses increased by 8% from
$2,614,000 in the first quarter of last year to $2,813,000 in the latest
quarter. The increase was primarily attributable to the inclusion of one
additional week in the latest quarter compared to the first quarter of last
year.
Amortization of intangibles declined from $443,000 in the first quarter
of last year to $401,000 in the latest quarter. The decrease was primarily
attributable to certain intangible assets that have become fully amortized.
The IPR&D write-off increased from $293,000 in the first quarter of last
year to $6,850,000 in the latest quarter. Last year's IPR&D write-off was
related to the acquisition of Skybility and this year's IPR&D write-off was
related to the acquisition of Dataradio.
An impairment loss of $29,848,000 was recorded in the latest quarter as
a result of the annual goodwill impairment test for the Solutions Division,
as discussed above in the "Overview" section.
Operating Income (Loss)
The operating loss in the three months ended May 31, 2006 was
$33,321,000, compared to operating income of $3,279,000 in the three months
ended May 31, 2005. The operating loss in the latest quarter is attributable
to the $6,850,000 write-off of IPR&D associated with the Dataradio
acquisition and the $29,848,000 Solutions Division goodwill impairment
charge.
Non-Operating Income (Expense), Net
Non-operating income increased from $43,000 in the first quarter of last
year to $961,000 in the latest quarter. This increase is primarily
attributable to a gain of $689,000 realized on foreign currency hedging
activities in connection with the acquisition of Dataradio, for which the
purchase price was denominated in Canadian dollars.
Income Tax Provision
The effective income tax rate was (5.2%) and 40.5% in the three months
ended May 31, 2006 and 2005, respectively. The effective tax rate in the
latest quarter is negative because the $6,850,000 IPR&D write-off and the
$29,848,000 goodwill impairment charge are not deductible for income taxes.
The income tax provision of $1,691,000 in the latest quarter represents an
effective income tax rate of approximately 39% on pretax income excluding
these non-deductible charges.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $30,779,000 at May 31, 2006, and its $10
million working capital line of credit with a bank, as further described
below. During the first quarter of fiscal 2007, cash and cash equivalents
decreased by $15.0 million. This decrease is comprised primarily of cash
used for the Dataradio and TechnoCom product line acquisitions of $50.5
million net of cash acquired, partially offset by proceeds from new bank
borrowings of $30.3 million (net of repayments) and cash generated by
operating activities of $4.7 million.
On May 26, 2006, the Company and certain direct and indirect subsidiary
guarantors of the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of Montreal, as administrative agent, and the other
financial institutions that from time to time may become parties to the
Credit Agreement. The credit facility is comprised of a term loan and a $10
million working capital line of credit. The Company borrowed $35 million
under the term loan and $3 million under the line of credit. Borrowings are
secured by substantially all of the Company's assets. Of the total proceeds
of $38 million, $7 million was used to pay off the Company's existing loans
with U.S. Bank National Association ("US Bank") and the remaining $31
million, plus cash on hand of approximately $23 million, was used to fund the
purchase price for the Dataradio acquisition. The term loan principal is
payable in quarterly installments on the last day of March, June, September
and December in each year commencing on March 31, 2007 with a final payment
of $8,750,000 on May 26, 2011. The maturity date of the line of credit is
also May 26, 2011.
At the Company's option, borrowings under the Credit Agreement bear
interest at bank's prime rate ("Prime Based Loans") plus a margin ranging
from 0% to 0.25% (the "Prime Rate Margin") or LIBOR ("LIBOR Based Loans")
plus a margin ranging from 0.75% to 1.25% (the "LIBOR Margin"). The Prime
Rate Margin and the LIBOR Margin vary depending on the Company's ratio of
debt to earnings before interest, taxes, depreciation, amortization and other
noncash charges (the "Leverage Ratio"). Interest is payable on the last day
of the calendar quarter for Prime Based Loans and at the end of the fixed
rate LIBOR period (ranging from 1 to 12 months) in the case of LIBOR Based
Loans.
The Credit Agreement contains certain financial covenants and ratios
that the Company is required to maintain, including: a total Leverage Ratio
of not more than 2.75; net worth of not less than the sum of $140,887,000,
50% of net income for each fiscal year and 50% of net cash proceeds from any
issuance of equity; and a fixed charge coverage ratio (earnings before
interest, taxes, depreciation and other noncash charges to fixed charges) of
not less than 1.50.
The Credit Agreement includes customary affirmative and negative
covenants including, without limitation, negative covenants regarding
additional indebtedness, investments, maintenance of the business, liens,
guaranties, transfers and sales of assets, and the payment of dividends and
other restricted payments. The Credit Agreement also contains customary
events of default that would permit the administrative agent to accelerate
borrowings under the Agreement if not cured within applicable grace periods,
including, without limitation, the failure to make timely payments under the
Agreement or other material indebtedness and the failure to follow certain
covenants.
The Company's credit agreement with US Bank was terminated except for
$2,875,000 of the line of credit that was reserved for outstanding
irrevocable stand-by letters of credit. These letter of credits are secured
by restricted cash deposit of $2,875,000 which is included in prepaid
expenses and other current assets in the accompanying consolidated balance
sheet at May 31, 2006.
See Note 5 to the accompanying consolidated financial statements for a
summary of the Company's contractual cash obligations as of May 31, 2006.
The Company believes that inflation and foreign currency exchange rates
have not had a material effect on its operations. Although the acquisition
of Dataradio will increase the Company's exposure to changes in foreign
currency exchange rates, the Company believes that fiscal 2007 will not be
impacted significantly by foreign exchange since a significant portion of the
Company's sales will continue to be 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",
`will", "could", "plans", "intends", "seeks", "believes", "anticipates",
"expects", "estimates", "judgment", "goal", and variations of these words and
similar expressions, are intended to identify forward-looking statements.
These forward-looking statements reflect the Company's current views with
respect to future events and financial performance and are subject to certain
risks and uncertainties, including, without limitation, product demand,
market growth, new competition, competitive pricing and continued pricing
declines in the DBS market, supplier constraints, manufacturing yields, the
ability to manage cost increases in inventory materials including timing and
market acceptance of new product introductions, the Company's ability to
harness new technologies in a competitively advantageous manner, the
Company's ability to eliminate operating losses in its Solutions Division and
make this business segment profitable, the Company's success at integrating
its acquired businesses, and other risks and uncertainties that are set forth
under the "Risk Factors" in Part I, Item 1A of the Annual Report on Form 10-K
for the year ended February 28, 2006. 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 primary market risk exposure is interest rate risk. At
February 28, 2006, the Company's term debt and credit facility with its bank
are subject to variable interest rates. The Company monitors its debt and
interest bearing cash equivalents to mitigate the risk of interest rate
fluctuations. A fluctuation of one percent in interest rates related to the
Company's outstanding variable rate debt would not have a material impact on
the Company's consolidated statement of operations.
The Company has market risk arising from changes in foreign currency
exchange rates related to Dataradio's operations in Canada. A 10% adverse
change in the foreign currency exchange rate would not have a significant
impact on the Company's results of operations or financial position. The
Company does not currently manage its foreign currency exchange rate risk
through the use of derivative instruments except for the forward currency
exchange contracts entered into in connection with the acquisition of
Dataradio which resulted in a gain of $689,000 that was recorded in the
statement of operations in the first quarter of fiscal 2007.
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 1A. Risk Factors
In addition to the other information set forth in this report, the
reader is referred to the factors discussed in Part I, "Item 1A. Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended
February 28, 2006, which could materially affect the Company's business,
financial condition or future results. The risks described in the Company's
Annual Report on Form 10-K are not the only risks facing the Company.
Additional risks and uncertainties not currently known to management or that
are currently deemed to be immaterial also may materially adversely affect
the Company's business, financial condition and/or operating results.
Additional risks resulting from the Company's acquisition of Dataradio are as
follows:
Governmental Regulation
Dataradio's products are subject to certain mandatory regulatory
approvals in the United States, Canada and other countries in which it
operates. In the United States, the Federal Communications Commission
("FCC") regulates many aspects of communication devices including radiation
electromagnetic energy, biological safety and rules for devices to be
connected to the telephone network. In Canada, similar regulations are
administered by Industry Canada. Although Dataradio has obtained necessary
FCC and Industry Canada approvals for all products it currently sells, there
can be no assurance that such approvals can be obtained for future products
on a timely basis, or at all. In addition, such regulatory requirements may
change or the Company may not in the future be able to obtain all necessary
approvals from countries other than Canada or the United States in which it
currently sells its products or in which it may sell its products in the
future.
The FCC and Industry Canada may be slow in adopting new regulations
allowing private wireless networks to deliver higher data rates in licensed
frequency bands for public safety applications. This could adversely affect
demand for private networks as traditional private network users may opt for
public network connections for all or part of their wireless communication
needs. This could have a material adverse effect on the Company's business,
results of operations and financial condition since the private network
segment of the wireless data communications industry is the only segment in
which the Company currently operates.
ITEM 6. EXHIBITS
Exhibit 10.1 - Amendment Agreement Number Seven to Loan and
Security Agreement dated May 25, 2006 by and
between CalAmp Corp. and U.S. Bank National
Association (1)
Exhibit 31.1 - Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 31.2 - Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
(1) Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
July 13, 2006 /s/ Richard K. Vitelle
------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)