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: November 30, 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
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 23,557,841 shares of Common Stock outstanding as of
December 31, 2006.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
November 30, February 28,
2006 2006
Assets -------- --------
Current assets:
Cash and cash equivalents $ 33,284 $ 45,783
Accounts receivable, less allowance for
doubtful accounts of $355 and $203 at November
30, 2006 and February 28, 2006, respectively 30,274 28,630
Inventories 20,821 18,279
Deferred income tax assets 4,139 4,042
Prepaid expenses and other current assets 8,443 2,502
-------- --------
Total current assets 96,961 99,236
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 6,571 5,438
Deferred income tax assets, less current portion - 2,344
Goodwill 89,835 91,386
Other intangible assets, net 19,872 5,304
Other assets 1,399 638
-------- --------
$214,638 $204,346
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,215 $ 2,168
Accounts payable 12,820 12,011
Accrued payroll and employee benefits 3,431 3,608
Other accrued liabilities 4,954 2,763
Deferred revenue 1,313 1,323
-------- --------
Total current liabilities 24,733 21,873
-------- --------
Long-term debt, less current portion 32,048 5,511
Deferred income tax liabilities 7,109 -
Other non-current liabilities 1,034 853
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; 23,507 and 23,204 shares issued
and outstanding at November 30, 2006 and
February 28, 2006, respectively 235 232
Additional paid-in capital 138,199 135,022
Less common stock held in escrow - (2,532)
Retained earnings 12,268 44,188
Accumulated other comprehensive loss (988) (801)
-------- --------
Total stockholders' equity 149,714 176,109
-------- --------
$214,638 $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 Nine Months Ended
November 30, November 30,
------------------- -------------------
2006 2005 2006 2005
------- ------- ------- --------
Revenues:
Product sales $59,459 $60,889 $158,875 $156,717
Service revenues 1,633 3,574 6,464 12,987
------- ------- -------- --------
Total revenues 61,092 64,463 165,339 169,704
------- ------- -------- --------
Cost of revenues:
Cost of product sales 47,103 45,299 122,043 119,308
Cost of service revenues 1,287 2,700 5,656 9,819
------- ------- -------- --------
Total cost of revenues 48,390 47,999 127,699 129,127
------- ------- -------- --------
Gross profit 12,702 16,464 37,640 40,577
------- ------- -------- --------
Operating expenses:
Research and development 4,099 2,585 10,456 7,142
Selling 2,614 1,914 7,390 5,582
General and administrative 3,308 2,679 9,638 7,900
Amortization of intangibles 1,229 403 2,905 1,375
In-process research and
development write-off - - 6,850 320
Impairment loss - - 29,848 -
------- ------- -------- --------
Total operating expenses 11,250 7,581 67,087 22,319
------- ------- -------- --------
Operating income (loss) 1,452 8,883 (29,447) 18,258
------- ------- -------- --------
Non-operating income (expense):
Interest income 344 289 1,172 653
Interest expense (602) (127) (1,469) (381)
Other, net 117 - 871 (41)
------- ------- -------- --------
(141) 162 574 231
------- ------- -------- --------
Income (loss) before
income taxes 1,311 9,045 (28,873) 18,489
Income tax provision (415) (3,606) (3,047) (7,392)
------- ------- -------- --------
Net income (loss) $ 896 $ 5,439 $(31,920) $ 11,097
======= ======= ======== ========
Earnings (loss) per share:
Basic $ 0.04 $ 0.24 $ (1.37) $ 0.49
Diluted $ 0.04 $ 0.23 $ (1.37) $ 0.48
Shares used in per share
calculations:
Basic 23,414 22,580 23,290 22,520
Diluted 23,679 23,592 23,290 23,272
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
November 30,
---------------------
2006 2005
------- -------
Cash flows from operating activities:
Net income (loss) $(31,920) $11,097
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 5,027 3,305
Stock-based compensation expense 1,614 -
Stock option income tax benefits - 678
Excess tax benefit from stock-based
compensation expense (392) -
Write-off of in-process research and development 6,850 320
Impairment loss 29,848 -
Deferred tax assets, net 3,555 5,431
Changes in operating assets and liabilities:
Accounts receivable 4,410 (9,238)
Inventories 2,517 2,739
Prepaid expenses and other assets (4,122) 867
Accounts payable (404) (1,668)
Accrued payroll and other accrued liabilities (5,294) 1,088
Deferred revenue (80) (273)
Other 84 16
------- -------
Net cash provided by operating activities 11,693 14,362
------- -------
Cash flows from investing activities:
Capital expenditures (2,112) (1,555)
Proceeds from sale of property and equipment 16 143
Acquisition of Dataradio, net of
cash acquired (48,047) -
Acquisition of assets of TechnoCom product line (2,478) -
Proceeds from Vytek escrow fund distribution 480 -
Acquisition of assets of Skybility - (4,897)
------- -------
Net cash used in investing activities (52,141) (6,309)
------- -------
Cash flows from financing activities:
Proceeds from debt borrowings 38,000 -
Debt repayments (11,416) (2,178)
Proceeds from exercise of stock options 1,130 1,282
Excess tax benefit from stock-based
compensation expense 392 -
------- -------
Net cash provided by (used in) financing activities 28,106 (896)
------- -------
Effect of exchange rate changes on cash (157) -
------- -------
Net change in cash and cash equivalents (12,499) 7,157
Cash and cash equivalents at beginning of period 45,783 31,048
------- -------
Cash and cash equivalents at end of period $33,284 $38,205
======= =======
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 2006 and 2005
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
CalAmp Corp. ("CalAmp" or the "Company") is a provider of wireless
communications products 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
data communications 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 actual nine month year-to-date
periods ended on December 2, 2006, consisting of 40 weeks of operations, and
November 26, 2005, consisting of 39 weeks of operations. The third fiscal
quarters ended December 2, 2006 and November 26, 2005 both 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 November 30 for clarity of presentation.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 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 November 30, 2006 and its results of operations
for the three and nine months ended November 30, 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 significant intercompany transactions and accounts have been
eliminated in consolidation.
Note 2 - RECENT ACQUISITIONS
Dataradio Acquisition
---------------------
On May 26, 2006, the Company completed the acquisition of Dataradio Inc.
("Dataradio"), a privately held Canadian company. Under the terms of the
acquisition 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 (CAD $) 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.
CAD $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. In October 2006, CAD $4 million was released from escrow to the
selling stockholders of Dataradio. The remaining CAD $3 million held in escrow
is available as a source for the payment of indemnification claims of the
Company. The remaining amount in the escrow account, if any, after satisfying
indemnification claims will be distributed to Dataradio's selling stockholders
on May 26, 2008. Amounts required to pay claims by the Company that are not
resolved by such date will be held in the escrow account until such claims are
resolved.
For financial reporting purposes the operations of Dataradio are included
in the Company's Products Division business segment. Dataradio's operations
are included in the accompanying fiscal 2007 nine month year-to-date
consolidated statement of operations for the 27-week period from May 26, 2006
to November 30, 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 is
expected to be completed by the end of the current fiscal year. The
preliminary purchase price allocation is as follows (in thousands):
Purchase price paid in cash $54,291
Direct costs of acquisition 467
------
Total cost of acquisition $54,758
Fair value of net assets acquired:
Current assets $20,115
Property and equipment 1,221
Intangible assets:
Developed/core technology $6,980
Customer relationships 3,750
Contracts backlog 1,480
Tradename 3,880
In-process research and
development ("IPR&D") 6,850
-----
Total intangible assets 22,940
Current liabilities (8,830)
Deferred tax liabilities, net (5,943)
Long-term liabilities (317)
------
Total fair value of net assets acquired 29,186
------
Goodwill $25,572
======
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 provider of radio frequency ("RF") modems and
systems for public safety and private network data applications.
* Dataradio has a 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. IPR&D
consists of next generation products for fixed and mobile wireless
applications. For purposes of valuing IPR&D, it is assumed that: (i) these
products would be introduced in 2007; (ii) annual revenue in 2007 through 2011
would range between $4.2 million and $12.6 million for fixed wireless products,
and between $6.7 million and $13.9 million for mobile wireless products; (iii)
annual revenues from the fixed wireless products and mobile wireless products
are allocated 75% and 80%, respectively, to IPR&D and 25% and 20%,
respectively, to core technology; (iv) the gross margin percentage would range
between 58% and 60% for fixed wireless products, and between 61% and 66% for
mobile wireless products; and (v) the operating margin in years 2007 through
2011 is approximately 26% for fixed wireless products and 32% for mobile
wireless products. The projected after-tax cash flows were then present valued
using a discount rate of 25%.
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 and nine month periods ended November 30, 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
November 30, 2006 November 30, 2005
-------------------- -------------------
As Pro As Pro
reported forma reported forma
-------- -------- -------- -------
Revenue $ 61,092 $ 61,092 $ 64,463 $ 72,288
Net income $ 896 $ 896 $ 5,439 $ 5,346
Net income per share:
Basic $ 0.04 $ 0.04 $ 0.24 $ 0.24
Diluted $ 0.04 $ 0.04 $ 0.23 $ 0.23
Nine Months Ended Nine Months Ended
November 30, 2006 November 30, 2005
-------------------- ------------------
As Pro As Pro
reported forma reported forma
-------- -------- -------- -------
Revenue $165,339 $174,775 $169,704 $193,094
Net income (loss) $(31,920) $(25,041) $ 11,097 $ 10,916
Net income (loss) per share:
Basic $ (1.37) $ (1.08) $ 0.49 $ 0.48
Diluted $ (1.37) $ (1.08) $ 0.48 $ 0.47
The pro forma adjustments for the nine months ended November 30, 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 27 week period from the May 26, 2006 acquisition date to
November 30, 2006. The pro forma adjustments for the nine months ended November
30, 2005 consist of adding Dataradio's results of operations for the nine
months ended October 31, 2005.
The pro forma financial information for both periods presented above
reflects the following:
* Additional amortization expense of approximately $746,000 for the three
months ended November 30, 2005, and $746,000 and $2,238,000 for the nine months
ended November 30, 2006 and 2005, respectively, related to the estimated fair
value of identifiable intangible assets from the preliminary purchase price
allocation; and
* Additional interest expense and amortization of debt issue costs in the total
amount of approximately $494,000 for the three months ended November 30, 2005,
and $494,000 and $1,482,000 for the nine months ended November 30, 2006 and
2005, respectively, 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 recorded 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; and
* A charge for Dataradio employee bonuses and related employer payroll taxes in
the aggregate amount of $5,355,000, 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 Acquisition
----------------------------------
On May 26, 2006, the Company acquired the business and certain assets of
the 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 nine month year-to-date consolidated statement
of operations for the 27 week period from May 26, 2006 to November 30, 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 (the "Earn-out
Payment"). 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. The preliminary purchase price allocation is
as follows (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
Intangible assets:
Developed/core technology 980
Customer relationships 810
Contracts backlog 310
Covenants not to compete 170
-----
Total fair value of net assets acquired 2,560
------
Negative goodwill $ (82)
======
The negative goodwill of $82,000 is included in Other Accrued Liabilities
in the consolidated balance sheet at November 30, 2006. Pro forma information
on this acquisition has not been provided because the effects are not material
to the Company's quarterly and year-to-date consolidated financial statements.
Note 3 - INVENTORIES
Inventories include the cost of material, labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in, first-
out method) or market, and consist of the following (in thousands):
November 30, February 28,
2006 2006
------ -------
Raw materials $17,686 $14,375
Work in process 737 380
Finished goods 2,398 3,524
------- -------
$20,821 $18,279
======= =======
Note 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in goodwill of each reporting unit during the nine months ended
November 30, 2006 are as follows (in thousands):
Products Solutions
Division Division 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 25,572 - 25,572
Impairment writedown - (29,012) (29,012)
Other changes - (163) (163)
-------- --------- --------
Balance as of November 30, 2006 $ 84,409 $ 5,426 $ 89,835
======== ========= ========
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 indicated that there was an impairment of Solutions Division
goodwill at that date. 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 was $29,848,000 less than its
carrying value, which indicated that a goodwill impairment existed and which
required the Company to perform step two of the impairment test. In the second
step, the implied fair value of the Solutions Division's goodwill was
calculated and then compared to the carrying amount of that goodwill. The
goodwill carrying amount exceeded the implied fair value by $29,012,000 which
was recognized as an impairment loss. The implied goodwill amount was
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 connection with the second step of the Solutions Division goodwill
impairment test, fair value was allocated to tangible net assets and to both
recognized and unrecognized intangible assets as of the test date. The
undiscounted future net cash flows of the recognized intangible assets were
less than their carrying amount, which indicated that the assets are impaired.
Accordingly, the Company recognized an impairment loss of $836,000 related to
these intangible assets. The $29,848,000 impairment loss recognized in the
fiscal 2007 first quarter ended May 31, 2006 is the sum of the $29,012,000
impairment of goodwill and the $836,000 impairment of intangible assets.
Factors that led to the impairment of goodwill and other intangible
assets of the Solutions Division as of April 30, 2006 include the following:
* Throughout fiscal 2006, the quarterly revenue of the Solutions Division had
not been growing, but instead was 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, led Company
management to conclude that the revenue projection for fiscal 2007 reflected in
the prior year's goodwill impairment test conducted as of April 30, 2005 was
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 near the end of
the fiscal 2007 first quarter.
* 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 included 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):
November 30, 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. $12,992 $3,304 $ 9,688 $5,032 $1,561 $3,471
Customer
relationships 5-7 yrs. 6,680 1,602 5,078 2,120 601 1,519
Contracts
backlog 1 yr. 1,790 931 859 - - -
Covenants not
to compete 4-5 yrs. 491 124 367 321 57 264
Licensing right 2 yrs. 200 200 - 200 150 50
Tradename N/A 3,880 - 3,880 - - -
------- ------ ------- ------ ------ ------
$26,033 $6,161 $19,872 $7,673 $2,369 $5,304
======= ====== ======= ====== ====== ======
Intangible asset amortization expense for the three months ended November
30, 2006 and 2005 was $1,229,000 and $428,000, respectively, and was $2,955,000
and $1,451,000, respectively, for the nine month periods then ended. Of these
amounts, amortization included in cost of revenues for the three months ended
November 30, 2006 and 2005 was $-0- and $25,000, respectively, and was $50,000
and $76,000, respectively, for the nine month periods then ended. Remaining
amortization expense is included in operating expenses.
Estimated amortization expense for the fiscal years ending February 28 is
as follows:
2007 (remainder) $1,229,000
2008 $3,542,000
2009 $3,130,000
2010 $2,578,000
2011 $1,996,000
Thereafter $3,517,000
Note 5 - FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Bank Credit Facility
On May 26, 2006, 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 assets
of CalAmp Corp. and its domestic subsidiaries. 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. In the third quarter ended
November 30, 2006, the Company made a principal repayment of $750,000 on the
term loan and repaid in full the $3,000,000 principal balance of the line of
credit. At November 30, 2006, $1,375,000 of the line of credit was reserved
for outstanding irrevocable stand-by letters of credit.
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 $8,563,000 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
----------- ---------
2008 $ 2,936,000
2009 4,893,000
2010 6,850,000
2011 8,807,000
2012 10,764,000
----------
$34,250,000
===========
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; total stockholders' equity of not less than the sum of (i)
$140,887,000, (ii) 50% of net income for each fiscal year (excluding years with
net losses) and (iii) 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 certain events of
default, including the failure to make timely payments under the Credit
Agreement or other material indebtedness and the failure to adhere to certain
covenants, that would permit the bank to accelerate borrowings under the Credit
Agreement in the event that a default were to occur and not be cured within
applicable grace periods.
The Company's credit agreement with US Bank was terminated except for
$1,000,000 of the line of credit that is reserved for an outstanding
irrevocable stand-by letter of credit. This letter of credit is secured by a
restricted cash deposit of $1,000,000 which is included in prepaid expenses and
other current assets in the accompanying consolidated balance sheet at November
30, 2006.
Other long-term debt
The Company has capital lease obligations of $13,000 at November 30, 2006
which are classified as current at that date.
Contractual cash obligations
The Company's contractual cash obligations as of November 30, 2006 are
summarized as follows (in thousands):
Future Cash Payments Due by Fiscal Year
----------------------------------------------
Contractual 2007 There-
Obligations (remainder) 2008 2009 2010 2011 after Total
--------------- ------ ------ ------ ------ ------ ------ ------
Debt principal $ - $2,936 $4,893 $6,850 $8,807 $10,764 $34,250
Capital leases 6 9 15
Operating leases 607 2,238 2,004 1,451 1,433 288 8,021
Purchase
obligations 25,581 2,374 34 - - - 27,989
------- ------ ------ ------ ------- ------- ------
Total contractual
cash obligations $26,194 $7,557 $6,931 $8,301 $10,240 $11,052 $70,275
======= ====== ====== ====== ======= ======= =======
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 taxes reflect 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 assets 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
assets to determine if a valuation allowance is needed.
At November 30, 2006, the Company had an aggregate deferred tax credit
balance of $2,970,000. The current portion of this amount is a deferred tax
asset of $4,139,000 and the noncurrent portion is a deferred tax liability of
$7,109,000. The noncurrent portion of deferred income taxes is comprised
primarily of (i) a deferred tax liability of $5,035,000 at November 30, 2006
that resulted from the purchase price allocation accounting for the intangible
assets of Dataradio and (ii) a deferred tax liability of $2,755,000 related to
goodwill arising from certain acquisitions in prior years that is amortizable
for income tax purposes but not for financial reporting purposes.
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
November 30, 2006, the Company has a deferred tax asset valuation allowance of
$1,841,000 relating to the assets acquired in the Vytek purchase. If in the
future a portion or all of the $1,841,000 valuation allowance at November 30,
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 (10.6%) and 40.0% in the nine months
ended November 30, 2006 and 2005, respectively. Excluding the items that are
not deductible in computing the book-basis income tax provision (goodwill
impairment loss of $29,012,000 and IPR&D write-off of $6,850,000), the
effective income tax rate for the nine months ended November 30, 2006 was
43.6%.
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 calculation of weighted average shares used in the computation of
basic and diluted earnings per share is summarized as follows (in thousands):
Three months ended Nine months ended
November 30, November 30,
---------------- ----------------
2006 2005 2006 2005
------ ------ ------ ------
Basic weighted average number
of common shares outstanding 23,414 22,580 23,290 22,520
Effect of dilutive securities:
Stock options 265 787 - 584
Shares held in escrow - 225 - 168
------ ------ ------ ------
Diluted weighted average number
of common shares outstanding 23,679 23,592 23,290 23,272
====== ====== ====== ======
Options outstanding at November 30, 2006 were excluded from the
computation of diluted earnings per share for the nine months then ended
because the Company reported a year-to-date net loss and the effect of
inclusion would be antidilutive (i.e., including such options would result in a
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 and nine months ended November 30, 2006 and
2005 (in thousands):
Three months ended Nine months ended
November 30, November 30,
---------------- ----------------
2006 2005 2006 2005
------ ------ ------ ------
Net income (loss) $ 896 $5,439 $(31,920) $11,097
Foreign currency translation
adjustment (189) - (187) -
------ ------ ------ ------
Comprehensive income (loss) $ 707 $5,439 $(32,107) $11,097
====== ====== ====== ======
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 their 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 at the beginning of the fiscal 2007 first
quarter ended May 31, 2006.
The Company adopted SFAS No. 123R under the modified prospective
application. Accordingly, periods prior to fiscal 2007 have not been restated.
Under this application, the Company records stock-based compensation expense
for all awards granted on or after the date of adoption of SFAS No. 123R 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 awarded to employees and directors and restricted stock awarded to
directors.
In the financial statements of periods prior to fiscal 2007, 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 benefits of tax
deductions in excess of the compensation cost recognized for those options to
be classified as financing cash flows. As a result of adopting SFAS No. 123R,
$392,000 of such excess tax benefits have been classified as a financing cash
inflow in the accompanying consolidated statement of cash flows for the nine
months ended November 30, 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 income and earnings per
share assuming compensation expense had been recorded in the consolidated
statement of operations during fiscal 2006 using the fair value method
prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation". Amounts
are shown in thousands except per share amounts.
Three months Nine months
ended ended
November 30, November 30,
2005 2005
------ ------
Net income as reported $5,439 $11,097
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (273) (843)
----- ------
Pro forma net income $5,166 $10,254
===== ======
Earnings per share:
Basic -
As reported $ 0.24 $ 0.49
Pro forma $ 0.23 $ 0.46
Diluted -
As reported $ 0.23 $ 0.48
Pro forma $ 0.22 $ 0.44
Stock-based compensation expense for the three and nine months ended
November 30, 2006 was $541,000 and $1,614,000, respectively. Such expense is
included in the following captions of the consolidated statement of operations:
Three months Nine months
ended ended
November 30, November 30,
2006 2006
------ ------
Cost of revenues $ 39 $ 112
Research and development 55 166
Selling 65 191
General and administrative 382 1,145
------ ------
$ 541 $1,614
====== ======
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. 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.
Nine months
ended November 30,
Black-Scholes -------------------
Valuation Assumptions (1) 2006 2005
------------------------- ------ ------
Expected life (years) (2) 6.0 5.0
Expected volatility (3) 69%-81% 84%-95%
Risk-free interest rates (4) 4.6%-5.2% 3.9%-4.3%
Expected dividend yield 0% 0%
(1) Beginning on the date of adoption of SFAS No. 123R, 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 volatility of
the Company's stock price.
(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 nine months
ended November 30, 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 667 12.23
Exercised (273) 4.14
Forfeited or expired (459) 16.16
-----
Outstanding at November 30, 2006 2,558 $10.19
=====
Exercisable at November 30, 2006 1,418 $10.95
=====
The weighted average fair value for the stock options granted during the
nine months ended November 30, 2006 was $8.63. The weighted average remaining
contractual term and the aggregate intrinsic value of options outstanding as of
November 30, 2006 was 6.9 years and $3.2 million, respectively. The weighted
average remaining contractual term and the aggregate intrinsic value of options
exercisable as of November 30, 2006 was 5.3 years and $2.5 million,
respectively. The total intrinsic value for stock options exercised during the
nine months ended November 30, 2006 was $1,185,000. Net cash proceeds from the
exercise of stock options for the nine months ended November 30, 2006 was
$1,130,000 and the associated income tax benefit was $457,000 for that same
time period.
Changes in the shares of the Company's nonvested restricted stock during
the nine months ended November 30, 2006 were as follows (in thousands except
dollar amounts):
Weighted
Number of Average
Shares Fair Value
-------- ----------
Outstanding at February 28, 2006 - $ -
Granted 24 6.51
Vested - -
Forfeited (4) 6.51
-----
Outstanding at November 30, 2006 20 $ 6.51
=====
As of November 30, 2006, there was $6.6 million of total unrecognized
stock-based compensation cost related to nonvested stock options and nonvested
restricted stock. That cost is expected to be recognized over a weighted-
average remaining vesting period of 2.9 years.
Note 10 - CONCENTRATION OF RISK
Because the Company's principal business, DBS outdoor customer premise
equipment, 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 and nine months ended November 30, 2006 or 2005, as a percent of
consolidated revenue, are as follows:
Three months ended Nine months ended
November 30, November 30,
---------------- ----------------
Customer 2006 2005 2006 2005
-------- ------ ------ ------ ------
A 53.4% 56.6% 52.3% 57.0%
B 17.3% 12.6% 14.7% 12.0%
Accounts receivable from these customers as a percent of consolidated
net accounts receivable are as follows:
Nov. 30, Feb. 28,
2006 2006
------ ------
A 46.3% 40.1%
B 10.2% 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. The warranty liability is included in
Other Accrued Liabilities in the accompanying consolidated balance sheets.
Activity in the warranty liability for the nine months ended November 30, 2006
and 2005 is as follows (in thousands):
Nine months ended
November 30,
-----------------
2006 2005
------ ------
Balance at beginning of period $477 $746
Charged to costs and expenses 936 401
Deductions (852) (336)
---- ----
Balance at end of period $561 $811
==== ====
Note 12 - OTHER FINANCIAL INFORMATION
"Net cash provided by operating activities" in the consolidated
statements of cash flows includes cash payments for interest and income taxes
as follows (in thousands):
Nine months ended
November 30,
-------------------
2006 2005
------ ------
Interest paid $1,383 $ 362
Income taxes paid (net
refunds received) $ 153 $ 644
Following is the supplemental schedule of non-cash investing and financing
activities (in thousands):
Nine months ended
November 30,
-------------------
2006 2005
------ ------
Company common stock issued from
escrow fund as additional
purchase consideration for the
2004 Vytek acquisition $ 2,052 $ -
Fair value of common stock
received as consideration
from the sale of assets - $ 190
Sale of common stock held in escrow
to pay for the legal fees of the
Vytek Stockholder Representative - $ 16
Note 13 - SEGMENT INFORMATION
Segment information for the three and nine months ended November 30, 2006
and 2005 is as follows (dollars in thousands):
Three months ended Three months ended
November 30, 2006 November 30, 2005
------------------------------------ ------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Products Solutions Products Solutions
Division Division Corporate Total Division Division Corporate Total
------- ------ ------- ----- ------- ------ ------- -----
Revenues:
Products $59,013 $ 446 $59,459 $59,565 $ 1,324 $60,889
Services 471 1,162 1,633 - 3,574 3,574
------ ----- ------ ------ ----- ------
Total $59,484 $ 1,608 $61,092 $59,565 $ 4,898 $64,463
====== ===== ====== ====== ===== ======
Gross profit:
Products $11,983 $ 373 $12,356 $14,441 $ 1,149 $15,590
Services - 346 346 - 874 874
------ ----- ------ ------ ----- ------
Total $11,983 $ 719 $12,702 $14,441 $ 2,023 $16,464
====== ===== ====== ====== ===== ======
Gross margin:
Products 20.3% 83.6% 20.8% 24.2% 86.8% 25.6%
Services - % 29.8% 21.2% - 24.5% 24.5%
Total 20.1% 44.7% 20.8% 24.2% 41.3% 25.5%
Operating
income
(loss) $ 3,819 $ (779) $(1,588) $ 1,452 $10,406 $ (373) $(1,150) $ 8,883
====== ===== ===== ====== ====== ===== ===== ======
Nine months ended Nine months ended
November 30, 2006 November 30, 2005
------------------------------------ ------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Products Solutions Products Solutions
Division Division Corporate Total Division Division Corporate Total
------- ------ ------- ----- ------- ------ ------- -----
Revenues:
Products $156,516 $ 2,359 $158,875 $153,331 $ 3,386 $156,717
Services 1,268 5,196 6,464 - 12,987 12,987
------- ------- ------- ------- ------ -------
Total $157,784 $ 7,555 $165,339 $153,331 $ 16,373 $169,704
======= ======= ======= ======= ====== =======
Gross profit:
Products $ 34,661 $ 2,171 $ 36,832 $ 34,975 $ 2,434 $ 37,409
Services 53 755 808 - 3,168 3,168
------- ------ ------- ------- ------ -------
Total $ 34,714 $ 2,926 $ 37,640 $ 34,975 $ 5,602 $ 40,577
======= ====== ======= ======= ====== =======
Gross margin:
Products 22.1% 92.0% 23.2% 22.8% 71.9% 23.9%
Services 4.2% 14.5% 12.5% - 24.4% 24.4%
Total 22.0% 38.7% 22.8% 22.8% 34.2% 23.9%
Operating
income
(loss) $ 7,336 $(32,384) $(4,399) $(29,447) $ 23,453 $(2,029) $(3,166) $ 18,258
======= ====== ===== ======= ======= ====== ===== =======
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 board of director
fees and expenses.
Note 14 - COMMITMENTS AND CONTINGENCIES
The Company leases a building in Oxnard, California that houses its
corporate office and its principal manufacturing plant under an operating lease
that expires June 30, 2011. The lease agreement requires the Company to pay
all maintenance, property taxes and insurance premiums associated with the
building. In addition, the Company leases facilities in San Diego, Oakland,
Atlanta, Minnesota (two locations), Montreal and a small office in France. 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.
A lawsuit was filed against the Company on September 15, 2006 by CN
Capital, the seller of the assets of Skybility which the Company acquired in
April 2005. The lawsuit contends that the Company owes CN Capital
approximately $1.6 million under the earn-out provision of the Skybility Asset
Purchase Agreement dated April 18, 2005. The Company believes the lawsuit is
without merit and intends to vigorously defend against this action. No loss
accrual has been made in the accompanying financial statements for this matter.
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, or 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 nine months ended November 30, 2006 and 57% of
the Company's accounts receivable balance as of November 30, 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 Valuation Allowance
Deferred income taxes reflect 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 assets 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
assets to determine if a valuation allowance is needed.
At November 30, 2006, the Company had an aggregate deferred tax credit
balance of $2,970,000. The current portion of this amount is a deferred tax
asset of $4,139,000 and the noncurrent portion is a deferred tax liability of
$7,109,000. The noncurrent portion of deferred income taxes is comprised
primarily of (i) a deferred tax liability of $5,035,000 at November 30, 2006
that resulted from the purchase price allocation accounting for the intangible
assets of Dataradio and (ii) a deferred tax liability of $2,755,000 related to
goodwill arising from certain acquisitions in prior years that is amortizable
for income tax purposes but not for financial reporting purposes.
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
November 30, 2006, the Company has a deferred tax asset valuation allowance of
$1,841,000 relating to the assets acquired in the Vytek purchase. If in the
future a portion or all of the $1,841,000 valuation allowance at November 30,
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.
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"). 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. As a result of this test, the Company recorded impairment losses on
goodwill and other intangible assets of $29,012,000 and $836,000, respectively,
in the nine months ended November 30, 2006.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Income Tax Uncertainties" ("FIN 48"). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial statements as
"more-likely-than-not" to be sustained by the taxing authorities. FIN 48
provides guidance on the de-recognition, measurement and classification of
income tax uncertainties, along with any related interest and penalties.
FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties. The Company will be
required to adopt FIN 48 at the beginning of its fiscal year 2008. The
differences between the amounts recognized in the consolidated balance sheet
prior to the adoption of FIN 48 and the amounts reported after adoption will be
accounted for as a cumulative-effect adjustment recorded to the beginning
balance of retained earnings. The Company is still evaluating the impact, if
any, of adopting the provisions of FIN 48 on its financial position and results
of operations.
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements", which provides interpretive guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. The Company
will be required to adopt SAB No. 108 at the beginning of its fiscal year 2008.
The Company is currently assessing the impact, if any, the adoption of
SAB No. 108 will have on its financial position and results of operations.
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 actual nine month year-to-date
periods ended on December 2, 2006, consisting of 40 weeks of operations, and
November 26, 2005, consisting of 39 weeks of operations. The third fiscal
quarters ended December 2, 2006 and November 26, 2005 both 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 November 30 for clarity of presentation.
Overview:
CalAmp is a provider of wireless communications products 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 data communications 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.
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 10% of Dataradio's 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. Dataradio's results of operations are
included in CalAmp's results of operations for the nine months ended November
30, 2006 for a 27 week period, during which Dataradio generated revenue of
$14.9 million and gross profit of $7.5 million. 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 results of operations for the nine
months ended November 30, 2006 for a 27 week period, during which this product
line contributed sales of $2.2 million and gross profit of $0.9 million.
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 impairment of goodwill, and accordingly, an
impairment charge was recorded in the amount of $29,012,000 in the nine months
ended November 30, 2006. In addition, the Company recorded an $836,000
impairment charge related to the other intangible assets arising from the Vytek
acquisition. The impairment charges reflect 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 71% and 78% of consolidated revenue in the nine
months ended November 30, 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 customer orders in the
Company's DBS 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 wireless communications
markets;
* the Company'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 the Company'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 interim nine
month period of fiscal year 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 November 30, Nine months ended November 30,
------------------------------- --------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
% of % of % of % of
Division $000s Total $000s Total $000s Total $000s Total
--------- ------- ----- ------- ----- -------- ----- -------- -----
Products $59,484 97.4% $59,565 92.4% $157,784 95.4% $153,331 90.4%
Solutions 1,608 2.6% 4,898 7.6% 7,555 4.6% 16,373 9.6%
------- ----- ------- ----- -------- ----- -------- -----
Total $61,092 100.0% $64,463 100.0% $165,339 100.0% $169,704 100.0%
======= ===== ======= ===== ======== ===== ======== =====
GROSS PROFIT BY SEGMENT
Three months ended November 30, Nine months ended November 30,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- -------------- ------------- --------------
% of % of % of % of
Division $000s Total $000s Total $000s Total $000s Total
--------- ------- ----- ------- ----- ------- ----- ------- -----
Products $11,983 94.3% $14,441 87.7% $34,714 92.2% $34,975 86.2%
Solutions 719 5.7% 2,023 12.3% 2,926 7.8% 5,602 13.8%
------- ----- ------- ----- ------- ----- ------- -----
Total $12,702 100.0% $16,464 100.0% $37,640 100.0% $40,577 100.0%
======= ===== ======= ===== ======= ===== ======= =====
OPERATING INCOME (LOSS) BY SEGMENT
Three months ended November 30, Nine months ended November 30,
-------------------------------- --------------------------------
2006 2005 2006 2005
---------------- --------------- --------------- ---------------
% of % of % of % of
Total Total Total Total
Division $000s Revenue $000s Revenue $000s Revenue $000s Revenue
--------- ------- ------- ------- ------- ------- ------- ------- -------
Products $ 3,819 6.3% $10,406 16.1% $ 7,336 4.4% $23,453 13.8%
Solutions (779) (1.3%) (373) (0.6%) (32,384) (19.5%) (2,029) (1.2%)
Corporate
expenses (1,588) (2.6%) (1,150) (1.7%) (4,399) (2.7%) (3,166) (1.8%)
------- ------ ------- ------ ------- ------ ------- -----
Total $ 1,452 2.4% $ 8,883 13.8% $(29,447) (17.8%) $18,258 10.8%
======= ====== ======= ====== ======= ====== ======= =====
The Products Division operating loss in the nine months ended November 30,
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 nine months ended November 30, 2006 includes the
goodwill impairment charge of $29,012,000 and intangible assets impairment
charge of $836,000 as discussed above.
Revenue
Products Division revenue decreased $81,000, or 0.1%, to $59,484,000 in
the three months ended November 30, 2006 from $59,565,000 for the same period
in the previous fiscal year. Revenues from sale of satellite products in the
latest quarter declined by $6,171,000, or 12%, from the third quarter of last
year, and sales of other wireless products and services also decreased by
$2,398,000 year-over-year. These decreases were partially offset by the
inclusion in the latest quarter of Dataradio and the TechnoCom MRM product line
which contributed revenues of $7,373,000 and $1,115,000, respectively.
For the nine months ended November 30, 2006, Products Division revenue
increased $4,453,000, or 3%, to $157,784,000 from $153,331,000 in the same
period of the prior year. The recently acquired operations of Dataradio and
the TechnoCom MRM product line contributed revenues of $14,886,000 and
$2,249,000, respectively, for the 27 week period from date of acquisition to
November 30, 2006. Revenues from the sale of satellite products declined by
$14,478,000, or 11%, while sales of other wireless products and services
increased by $1,796,000 year-over-year.
Revenue of the Solutions Division decreased 67% from $4,898,000 in the
quarter ended November 30, 2005 to $1,608,000 in the quarter ended November 30,
2006. For the nine months ended November 30, 2006, Solutions Division revenue
decreased $8,818,000, or 54%, from the same period of the prior year. These
revenue decreases are primarily the result of the loss of key customers in the
Solutions Division's information technology professional consulting business
which led to management's decision to exit this business at the end of first
quarter of fiscal 2007. Revenue of the Solutions Division for the nine months
ended November 30, 2006 is less than 10% of the Company's consolidated revenue.
Gross Profit and Gross Margins
Products Division gross profit decreased $2,458,000, or 17%, in the third
quarter of fiscal 2007 from the same period of the prior year. This decrease
is the net result of a decrease of $6.4 million in the gross profit of the
Products Division excluding the operating results of Dataradio and the
TechnoCom product line (hereinafter referred to as the "Pre-existing Products
Division") and the gross profit contribution of $3.9 million from Dataradio and
the TechnoCom product line, both of which were acquired during the fiscal 2007
first quarter. For the nine months ended November 30, 2006, Products Division
gross profit decreased $261,000, or 0.7%, from the same period of last year.
The gross profit decrease in the latest nine month period compared to the prior
year is the net result of a decrease of $8.6 million in the gross profit of the
Pre-existing Products Division and the gross profit contribution of Dataradio
and the TechnoCom product line of $8.3 million for the 27 week period from the
date of acquisition to November 30, 2006.
The Products Division gross margin in the three months ended November 30,
2006 and 2005 was 20.1% and 24.2%, respectively. In the three months ended
November 30, 2006, Dataradio and the TechnoCom product line generated an
aggregate gross margin of 46% and the Pre-existing Products Division generated
a gross margin of 16%. The decline in gross margin of the Pre-existing
Products Division is primarily the result of higher freight costs and lower
margins on final shipments of end-of-life DBS products. The freight cost for
incoming materials was about $2 million higher in the third quarter compared to
the same quarter of last year. The Company made the decision to incur higher
freight costs to expedite incoming materials in response to supply chain
disruptions and demand volatility in order to meet customer requirements. The
Company expects that the higher level of freight costs will persist through
much of the fourth quarter until the supply pipeline for new DBS products has
been filled.
Solutions Division gross profit decreased 64% from $2,023,000 in the third
quarter of last year to $719,000 in the latest quarter. For the nine months
ended November 30, 2006, Solutions Division gross profit decreased $2,676,000,
or 48%, from the same period of last year. The decline in gross profit is
primarily attributable to the decline in Solutions Division revenue.
The Solutions Division gross margin in the three months ended November 30,
2006 and 2005 was 44.7% and 41.3%, respectively. This increase is primarily
due to a change in revenue mix.
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 ("R&D") increased by
$1,514,000 to $4,099,000 in the third quarter of fiscal 2007 from $2,585,000
last year. For the nine month year-to-date periods, R&D expense increased
$3,314,000 from $7,142,000 last year to $10,456,000 this year. Dataradio's R&D
expense accounted for most of these increases.
Consolidated selling expenses increased by $700,000 to $2,614,000 in the
third quarter this year from $1,914,000 last year. For the nine month year-to-
date periods, selling expenses increased by $1,808,000 from $5,582,000 last
year to $7,390,000 this year. These increases are primarily due to the
inclusion of Dataradio's selling expenses, partially offset by reduced selling
expenses of the Solutions Division. The Solutions Division's selling expenses
for the three and nine months ended November 30, 2006 were lower than last year
by $600,000 and $800,000, respectively. Dataradio's selling expenses for the
three and nine months ended November 30, 2006 were $1.4 million and $2.9
million, respectively. Dataradio's operations are included for 27 weeks of the
Company's nine month period ended November 30, 2006.
Consolidated general and administrative expenses ("G&A") increased by 23%
from $2,679,000 in the third quarter of last year to $3,308,000 in the third
quarter of this year. Stock-based compensation expense included in G&A
accounted for $382,000 of the increase and Dataradio's G&A expenses accounted
for $483,000 of the increase. For the nine month year-to-date periods, G&A
expenses increased $1,738,000 from $7,900,000 last year to $9,638,000 this
year. Stock-based compensation expense included in G&A accounted for
$1,145,000 of the increase and Dataradio's G&A expenses accounted for $972,000
of the increase.
Amortization of intangibles increased from $403,000 in the third quarter
of last year to $1,229,000 in the third quarter of this year. For the nine
month year-to-date periods, amortization increased $1,530,000 from $1,375,000
last year to $2,905,000 this year. The increases were primarily attributable
to amortization expense on identifiable intangible assets from the acquisitions
of Dataradio and the TechnoCom product line.
The IPR&D write-off increased to $6,850,000 in the nine months ended
November 30, 2006 from $320,000 last year. 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.
The impairment loss totaling $29,848,000 recorded in the nine months ended
November 30, 2006 was the result of the annual goodwill impairment test for the
Solutions Division, as discussed above in the "Overview" section.
Operating Income (Loss)
Operating income in the three months ended November 30, 2006 was
$1,452,000, compared to operating income of $8,883,000 in the three months
ended November 30, 2005. This decrease in operating income is primarily
attributable to the decline in gross profit of the Pre-existing Products
Division from 24% in the third quarter of last year to 16% in the latest
quarter. Also contributing to the operating income decrease was higher
intangible asset amortization expense of $826,000 in the latest quarter
compared to the prior year, and stock-based compensation expense of $541,000 in
the latest quarter as a result of adopting SFAS No. 123R at the beginning of
the current year.
The operating loss in the nine months ended November 30, 2006 was
$29,447,000, compared to operating income of $18,258,000 in the nine months
ended November 30, 2005. The operating loss is attributable to the $6,850,000
write-off of IPR&D associated with the Dataradio acquisition and the Solutions
Division's goodwill and intangible assets impairment losses totaling
$29,848,000.
Non-Operating Income (Expense), Net
Non-operating expense in the three months ended November 30, 2006 was
$141,000, compared to non-operating income of $162,000 in the three months
ended November 30, 2005. The decrease in nonoperating income was due to higher
interest expense resulting from the new bank borrowing as described in Note 5
to the accompanying unaudited consolidated financial statements.
Non-operating income in the nine months ended November 30, 2006 was
$574,000, compared to non-operating income of $231,000 in the nine months ended
November 30, 2005. 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. Interest income was $519,000 higher in the latest quarter
compared to the same period last year due to higher average cash balances and
higher interest rates this year. These increases in non-operating income were
partially offset by higher interest expense of $1,088,000 due to higher
interest expense resulting from the new bank borrowing as described in Note 5
to the accompanying unaudited consolidated financial statements.
Income Tax Provision
The effective income tax rate was (10.6%) and 40.0% in the nine months
ended November 30, 2006 and 2005, respectively. Excluding the items that are
not deductible in computing book-basis income tax expense (goodwill impairment
loss of $29,012,000 and IPR&D write-off of $6,850,000), the effective income
tax rate for the nine months ended November 30, 2006 was 43.6%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $33,284,000 at November 30, 2006, and its $10
million working capital line of credit with a bank, as further described below.
During the nine months ended November 30, 2006, cash and cash equivalents
decreased by $12.5 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
$26.6 million (net of debt repayments). The cash generated by operating
activities of $11.7 million in the nine months ended November 30, 2006 was net
of a payment of $5.4 million of accrued incentives paid by Dataradio to its
workforce shortly after the acquisition by CalAmp. These incentives were
accrued as an expense in Dataradio's pre-acquisition income statement.
On May 26, 2006, 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 assets
of CalAmp Corp. and its domestic subsidiaries. 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. In the third quarter ended
November 30, 2006, the Company made a principal repayment of $750,000 on the
term loan and repaid in full the $3,000,000 principal balance of the line of
credit. At November 30, 2006, $1,375,000 of the line of credit was reserved
for outstanding irrevocable stand-by letters of credit. 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 $8,563,000 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; total stockholders' equity of not less than the sum of (i)
$140,887,000, (ii) 50% of net income for each fiscal year (excluding years with
net losses) and (iii) 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 certain events of
default, including the failure to make timely payments under the Credit
Agreement or other material indebtedness and the failure to adhere to certain
covenants, that would permit the bank to accelerate borrowings under the Credit
Agreement in the event that a default were to occur and not be cured within
applicable grace periods.
The Company's credit agreement with US Bank was terminated except for
$1,000,000 of the line of credit that is reserved for an outstanding
irrevocable stand-by letter of credit. This letter of credit is secured by a
restricted cash deposit of $1,000,000 which is included in prepaid expenses and
other current assets in the accompanying consolidated balance sheet at November
30, 2006.
See Note 5 to the accompanying consolidated financial statements for a
summary of the Company's contractual cash obligations as of November 30, 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 has increased 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 12 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 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
November 30, 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 manage its foreign currency exchange rate risk through the use
of derivative instruments except for the forward currency exchange contracts
that were entered into and closed in May 2006 in connection with the
acquisition of Dataradio, which resulted in a gain of $689,000 in that month.
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, the Exchange Act) as of the end of the period covered by this Report,
that the Company's disclosure controls and procedures are effective to ensure
that the information required to be disclosed in reports that are filed or
submitted under the Exchange Act is accumulated and communicated to
management, including the principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure and that such information is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities Exchange Commission.
Internal Control Over Financial Reporting
There has been no change in the Company's internal control over financial
reporting that occurred during the Company's most recently completed fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A lawsuit was filed against the Company on September 15, 2006 by CN
Capital, the seller of the assets of Skybility which the Company acquired in
April 2005. The lawsuit contends that the Company owes CN Capital
approximately $1.6 million under the earn-out provision of the Skybility Asset
Purchase Agreement dated April 18, 2005. The Company believes the lawsuit is
without merit and intends to vigorously defend against this action.
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 Dataradio's products are
used in private networks but not public networks.
ITEM 6. EXHIBITS
Exhibit 10.1 - First Amendment entered into as of December 18,
2006 to Credit Agreement dated May 26, 2006
between CalAmp Corp. and Bank of Montreal (1)
Exhibit 31.1 - Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 31.2 - Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
(1) Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
January 11, 2007 /s/ Richard K. Vitelle
------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)