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: September 1, 2007
_________________
[ ] 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 23,815,342 shares of Common Stock outstanding as of
October 1, 2007.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
August 31, February 28,
2007 2007
Assets -------- --------
Current assets:
Cash and cash equivalents $ 8,370 $ 37,537
Accounts receivable, less allowance for
doubtful accounts of $1,140 and $347 at August
31, 2007 and February 28, 2007, respectively 24,837 38,439
Inventories 26,987 25,729
Deferred income tax assets 1,817 4,637
Prepaid expenses and other current assets 13,124 7,182
-------- --------
Total current assets 75,135 113,524
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 5,952 6,308
Deferred income tax assets, less current portion 6,828 -
Goodwill 100,602 90,001
Other intangible assets, net 27,539 18,643
Other assets 4,550 1,227
-------- --------
$220,606 $229,703
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 32,782 $ 2,944
Accounts payable 14,184 26,186
Accrued payroll and employee benefits 3,194 3,478
Accrued warranty costs 11,449 1,295
Other current liabilities 11,193 2,799
Deferred revenue 5,659 1,935
-------- --------
Total current liabilities 78,461 38,637
-------- --------
Long-term debt, less current portion - 31,314
Deferred income tax liabilities - 7,451
Other non-current liabilities 4,701 1,050
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; 23,635 and 23,595 shares issued
and outstanding at August 31, 2007 and
February 28, 2007, respectively 236 236
Additional paid-in capital 140,423 139,175
Retained earnings (accumulated deficit) (2,735) 13,000
Accumulated other comprehensive loss (480) (1,160)
-------- --------
Total stockholders' equity 137,444 151,251
-------- --------
$220,606 $229,703
======== ========
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 Six Months Ended
August 31, August 31,
------------------- -------------------
2007 2006 2007 2006
------- ------- ------- -------
Revenues:
Product sales $ 31,383 $ 54,538 $ 76,217 $ 97,492
Service revenues 1,285 91 2,844 94
------- ------- ------- -------
Total revenues 32,668 54,629 79,061 97,586
------- ------- ------- -------
Cost of revenues:
Cost of product sales 25,379 41,950 76,219 74,818
Cost of service revenues 974 23 1,913 24
------- ------- ------- -------
Total cost of revenues 26,353 41,973 78,132 74,842
------- ------- ------- -------
Gross profit 6,315 12,656 929 22,744
------- ------- ------- -------
Operating expenses:
Research and development 3,795 3,613 8,114 6,119
Selling 2,373 2,067 4,642 2,724
General and administrative 3,457 2,600 6,659 4,655
Intangible asset amortization 1,558 1,150 3,302 1,309
Write-off of acquired in-process
research and development - - 310 6,850
------- ------- ------- -------
Total operating expenses 11,183 9,430 23,027 21,657
------- ------- ------- -------
Operating income (loss) (4,868) 3,226 (22,098) 1,087
------- ------- ------- -------
Non-operating income (expense):
Interest income 110 297 289 828
Interest expense (567) (636) (1,190) (863)
Other, net (50) 102 (189) 762
------- ------- ------- -------
Total non-operating income
(expense) (507) (237) (1,090) 727
------- ------- ------- -------
Income (loss) from continuing
operations before income taxes (5,375) 2,989 (23,188) 1,814
Income tax benefit (provision) 2,117 (1,291) 8,985 (3,525)
------- ------- ------- -------
Income (loss) from continuing
operations (3,258) 1,698 (14,203) (1,711)
------- ------- ------- -------
Loss from operations of
discontinued segment, net of tax (180) (463) (597) (31,105)
Loss on sale of discontinued
operations, net of tax (935) - (935) -
------- ------- ------- -------
Loss on discontinued operations (1,115) (463) (1,532) (31,105)
------- ------- ------- -------
Net income (loss) $ (4,373) $ 1,235 $(15,735) $(32,816)
======= ======= ======= =======
Basic and diluted earnings
(loss) per share:
Income (loss) from continuing
operations $ (0.14) $ 0.07 $ (0.60) $ (0.07)
Loss on discontinued
operations (0.05) (0.02) (0.07) (1.34)
------- ------- ------- -------
Total basic and diluted
earnings (loss)
per share $ (0.19) $ 0.05 $ (0.67) $ (1.41)
======= ======= ======= =======
Shares used in per share
calculations:
Basic 23,623 23,337 23,612 23,230
Diluted 23,623 23,689 23,612 23,230
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
August 31,
---------------------
2007 2006
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(15,735) $(32,816)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 5,201 3,111
Stock-based compensation expense 1,027 1,073
Write-off of in-process research and development 310 6,850
Impairment loss - 29,848
Excess tax benefit from stock-based
compensation expense (55) (258)
Deferred tax assets, net (14,388) (261)
Loss on sale of discontinued operations,
net of tax 935 -
Gain on sale of investment (331) -
Changes in operating assets and liabilities:
Accounts receivable 14,732 (4,139)
Inventories (774) 1,451
Prepaid expenses and other assets 1,364 (3,517)
Accounts payable (12,934) 3,853
Accrued liabilities 17,238 (5,237)
Deferred revenue 1,308 (47)
Other (2) 58
------- -------
NET CASH USED IN OPERATING ACTIVITIES (2,104) (31)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (920) (1,382)
Proceeds from sale of property and equipment 4 16
Proceeds from sale of discontinued operations 4,000 -
Proceeds from sale of investment 1,045 -
Acquisition of Aircept (19,315) -
Acquisition of assets of SmartLink (7,944) -
Cash restricted for repayment of debt (3,309) -
Acquisition of Dataradio, net of cash acquired - (48,038)
Acquisition of assets of TechnoCom product line - (2,478)
Proceeds from Vytek escrow fund distribution - 480
------- -------
NET CASH USED IN INVESTING ACTIVITIES (26,439) (51,402)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 38,000
Debt repayments (1,476) (7,658)
Proceeds from exercise of stock options 157 533
Excess tax benefit from stock-based
compensation expense 55 258
------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,264) 31,133
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 640 2
------- -------
Net change in cash and cash equivalents (29,167) (20,298)
Cash and cash equivalents at beginning of period 37,537 45,783
------- -------
Cash and cash equivalents at end of period $ 8,370 $ 25,485
======= =======
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 31, 2007 and 2006
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 a 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.
In March 2007, the Company split the Products Division into two separate
reporting segments: the Satellite Division and the Wireless DataCom
Division. The Satellite Division consists of the Company's DBS business, and
the Wireless DataCom Division consists of the remaining businesses of the
Products Division, including Dataradio, the TechnoCom Mobile Resource
Management (MRM) product line, CalAmp's legacy wireless businesses other than
DBS, and the operations of Aircept and SmartLink that were acquired in the
fiscal 2008 first quarter, as discussed in Note 2.
The Company uses a 52-53 week fiscal year ending on the Saturday closest
to February 28, which for fiscal 2007, a 53-week year, fell on March 3,
2007. Fiscal 2008, a 52-week year, will end on March 1, 2008. The actual
six month year-to-date periods ended on September 1, 2007, consisting of 26
weeks of operations, and September 2, 2006, consisting of 27 weeks of
operations. The second fiscal quarters ended September 1, 2007 and September
2, 2006 both consisted of 13 weeks of operations. In the accompanying
consolidated financial statements, the 2007 fiscal year end is shown as
February 28 and the interim period end for both years is shown as August 31
for clarity of presentation.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 2007 Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on May 17, 2007.
In the opinion of the Company's management, the accompanying
consolidated financial statements reflect all adjustments necessary to
present fairly the Company's financial position at August 31, 2007 and its
results of operations for the six months ended August 31, 2007 and 2006. 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.
The accompanying consolidated statements of operations for the quarter
and six months ended August 31, 2006 have been reclassified to present the
Solutions Division as a discontinued operation. See Note 2 - Recent
Acquisitions and Disposition for further discussion.
Note 2 - RECENT ACQUISITIONS AND DISPOSITION
Aircept
-------
On March 16, 2007, the Company acquired Aircept, a wireless vehicle
tracking business, from AirIQ Inc., a Canadian company, for cash
consideration of $19 million. The source of funds for the purchase price was
the Company's cash on hand. Aircept's business involves the sale of Global
Positioning Satellite (GPS) and cellular-based wireless asset tracking
products and services to vehicle lenders that specialize in automobile
financing for high credit risk individuals. Aircept, which has approximately
35 employees, became part of the Company's new Wireless DataCom
Division. Aircept had revenues of approximately $15 million and a gross
profit margin of approximately 35% during its calendar 2006 year.
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 within the current fiscal year. Following is a
preliminary purchase price allocation (in thousands):
Purchase price paid in cash $19,000
Direct costs of acquisition 315
-------
Total cost of acquisition 19,315
Fair value of net assets acquired:
Current assets $ 3,819
Property and equipment 275
Other assets 55
Intangible assets:
Developed/core technology $4,970
Customer lists 1,730
Contracts backlog 530
Covenants not to compete 510
-----
Total intangible assets 7,740
Current liabilities (3,909)
------
Total fair value of net assets acquired 7,980
-------
Goodwill $11,335
=======
The Company paid a premium (i.e., goodwill) over the fair value of the
net tangible and identified intangible assets acquired for the following
reasons:
* Aircept is the market leader for this product and the associated services.
* Aircept offers an end-to-end solution comprised of hardware, hosted
application software and wireless data services. This brings core
competencies to CalAmp that can be leveraged across other business units.
The goodwill arising from the Aircept acquisition is expected to be
deductible for income tax purposes.
Pro forma financial information on this acquisition has not been provided
because the effects are not material to the Company's consolidated financial
statements.
SmartLink
---------
On April 4, 2007, the Company acquired the business and substantially
all the assets of SmartLink Radio Networks, a privately-held company, for
$7.9 million cash. The source of funds for the purchase price was the
Company's cash on hand. SmartLink provides proprietary interoperable radio
communications platforms and integration services for public safety and
critical infrastructure applications. Based on a software defined switch,
SmartLink's platform provides interoperability without the need to replace
the installed base of land mobile radios. SmartLink became part of the
Company's new Wireless DataCom Division. SmartLink's operations will be
integrated into CalAmp's Dataradio facilities in Montreal, Canada and
Atlanta, Georgia.
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 within the current fiscal year. Following is a
preliminary purchase price allocation (in thousands):
Purchase price paid in cash $ 7,900
Direct costs of acquisition 44
-------
Total cost of acquisition 7,944
Fair value of net assets acquired:
Current assets $ 717
Property and equipment 208
Intangible assets:
Developed/core technology $3,730
Customer lists 910
Contracts backlog 740
In-process research and
development ("IPR&D") 310
-----
Total intangible assets 5,690
Current liabilities (1,866)
------
Total fair value of net assets acquired 4,749
-------
Goodwill $ 3,195
=======
The Company paid a premium (i.e., goodwill) over the fair value of the
net tangible and identified intangible assets acquired for the following
reasons:
* SmartLink has a competitively positioned unique product for the large
public safety mobile voice communications market.
* SmartLink's public safety mobile voice products and systems are
complementary to Dataradio's public safety mobile data communications
business.
* SmartLink's products have historically had relatively high gross margins.
The $310,000 allocated to IPR&D in the preliminary purchase price
allocation above was charged to expense immediately following the
acquisition.
The goodwill arising from the SmartLink acquisition is expected to be
deductible for income tax purposes.
Pro forma financial information on this acquisition has not been
provided because the effects are not material to the Company's consolidated
financial statements.
Solutions Division
------------------
The Company sold the TelAlert software business of the Solutions
Division to a privately held company on August 9, 2007 for total
consideration of $9.4 million, consisting of $4.0 million in cash, a non-
interest bearing note with present value of $2.3 million and preferred stock
of the acquirer valued at $3.1 million. The note is payable in 18 equal
monthly installment of $140,000 commencing on November 9, 2007.
The Company recognized a pre-tax gain of $2.1 million on the sale of the
TelAlert software business. The income tax expense attributable to the gain
was $3.0 million because at the time of sale there was goodwill of $5.4
million associated with this business that is not deductible for income tax
purposes.
The TelAlert software business was the last remaining business of the
Solutions Division. Operating results for the Solutions Division have been
presented in the accompanying consolidated statements of operations as a
discontinued operation, and are summarized as follows (in thousands):
Three Months Six Months
Ended Ended
August 31, August 31,
-------------- ---------------
2007 2006 2007 2006
---- ---- ---- ----
Revenues $ 641 $2,591 $ 1,691 $ 5,947
Operating loss $(310) $ (423) $(1,005) $(31,605)
Loss from discontinued
operations, net of tax $(180) $ (463) $ (597) $(31,105)
The Solutions Division operating loss in the six months ended August 31,
2006 includes the goodwill impairment charge of $29,012,000 and intangible
assets impairment charge of $836,000.
Note 3 - INVENTORIES
Inventories include the cost of material, labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in, first-
out method) or market, and consist of the following (in thousands):
August 31, February 28,
2007 2007
------ -------
Raw materials $21,439 $21,256
Work in process 107 505
Finished goods 5,441 3,968
------- -------
$26,987 $25,729
======= =======
Note 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
As further described in Note 1 and Note 13, in March 2007 the Company
split the Products Division into two separate reporting segments: the
Satellite Division and the Wireless DataCom Division. The Products Division
goodwill balance as of February 28, 2007 was allocated to Satellite Division
and Wireless DataCom Division on the basis of the relative fair values of
these two new divisions after specifically allocating the goodwill arising
from the Dataradio acquisition to the Wireless DataCom Division.
Changes in goodwill of each reporting unit during the six months ended
August 31, 2007 are as follows (in thousands):
Wireless
Satellite DataCom Solutions
Division Division Division Total
-------- --------- --------- --------
Balance as of February 28, 2007 $ 46,619 $ 37,956 $ 5,426 $ 90,001
Goodwill associated with
Aircept acquisition - 11,335 - 11,335
Goodwill associated with
SmartLink acquisition - 3,195 - 3,195
Goodwill associated with
TechnoCom acquisition - 2,205 - 2,205
Adjustment of goodwill associated with
Dataradio acquisition - (609) - (609)
Goodwill associated with
discontinued operations - - (5,426) (5,426)
Other changes - (99) - (99)
-------- --------- -------- --------
Balance as of August 31, 2007 $ 46,619 $ 53,983 $ - $100,602
======== ========= ======== ========
The $2.2 million increase in goodwill associated with the TechnoCom
acquisition represents an earn-out amount payable in cash based on the level
of sales achieved in the first 12 months following the acquisition in May
2006. The Company made an earn-out payment of $300,000 during the six months
ended August 31, 2007, leaving a balance of $1.9 million which is included in
other accrued liabilities in the consolidated balance sheet at August 31,
2007. The Company intends to pay the balance owed during the next 12 months
out of cash flows generated from operations.
Impairment tests of goodwill associated with the Satellite Division and
Wireless DataCom Division are conducted annually as of December 31 and, in
certain situations, on an interim basis if indicators of impairment arise.
If an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying value, goodwill
would be evaluated for impairment between annual tests. Management has
appropriate processes in place to monitor for interim triggering events.
Pursuant to this process, management concluded that there is no impairment of
goodwill in the current quarter. However, subsequent events may occur and
circumstances may change that could result in triggering events and potential
impairment of goodwill of a reporting segment.
The annual impairment test of the Solutions Division goodwill is
conducted as of April 30. The Company used a market approach to calculate
the fair value of the Solutions Division as of April 30, 2007, which resulted
in the determination that there was no impairment of the Solutions Division
goodwill as of that date. The Company discontinued the operations of the
Solutions Division during the second quarter ended August 31, 2007. See Note
2 - Recent Acquisitions and Disposition for further discussion.
Other intangible assets are comprised as follows (in thousands):
August 31, 2007 February 28, 2007
------------------------ -------------------------
Amorti- Gross Accum. Gross Accum.
zation Carrying Amorti- Carrying Amorti-
Period Amount zation Net Amount zation Net
----- ------- ------ ------- ------- ------ -------
Developed/core
technology 5-7 yrs. $18,583 $3,110 $15,473 $12,992 $3,816 $ 9,176
Customer lists 5-7 yrs. 8,313 1,611 6,702 6,680 1,848 4,832
Contracts
backlog 1 yr. 3,060 2,333 727 1,790 1,378 412
Covenants not
to compete 4-5 yrs. 1,001 244 757 491 148 343
Tradename N/A 3,880 - 3,880 3,880 - 3,880
------- ------ ------- ------- ------ -------
$34,837 $7,298 $27,539 $25,833 $7,190 $18,643
======= ====== ======= ======= ====== =======
Amortization expense of intangible assets was $1,558,000 and $1,150,000
for the three months ended August 31, 2007 and 2006, respectively, and was
$3,302,000 and $1,309,000 for the six month periods then ended. All
intangible asset amortization expense is attributable to the Wireless DataCom
Division.
Estimated amortization expense for the fiscal years ending February 28
is as follows:
2008 (remainder) $3,115,000
2009 $5,053,000
2010 $4,961,000
2011 $4,438,000
2012 $4,091,000
Thereafter $2,001,000
Note 5 - FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Bank Credit Facility
--------------------
In May 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 initially borrowed $35 million under the term loan and $3
million under the working capital 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 and the remaining $31
million, plus cash on hand of approximately $23 million, was used to fund the
purchase price for the Dataradio acquisition. In the fiscal 2007 third
quarter, the Company repaid in full the $3 million principal balance of the
working capital line of credit. At August 31, 2007, $2,975,000 of the line
of credit was reserved for outstanding irrevocable stand-by letters of
credit.
The maturity date of the line of credit is May 26, 2011. The term loan
repayment schedule provides that principal is payable in quarterly
installments on the last day of March, June, September and December in each
year with a final payment of $8,563,000 on May 26, 2011. However, as a
result of the event of default described below, all term loan principal has
been classified as a current liability in the accompanying balance sheet at
August 31, 2007.
Borrowings under the Credit Agreement bear interest at the Bank of
Montreal'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 also provides that the interest rate on borrowings can be increased
by 2.0% during any period in which an event of default exists but at the
present time the banks have applied this additional interest only to $734,000
of the loan balance.
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 also 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 net loss of $11.4 million in the first quarter of fiscal 2008 caused
an event of default with respect to the financial covenants under the Credit
Agreement that will preclude additional borrowing under the revolving credit
facility until the Company is able to obtain a waiver from its lenders and/or
an amendment of the credit agreement. The Company has notified its lenders
and is in discussions with them to resolve the issue. Because the lenders
have the right to call the loans under the Credit Agreement until such time
that a waiver is obtained, $28.9 million of debt previously classified as a
long-term liability has been reclassified to current liabilities in the
accompanying consolidated balance sheet as of August 31, 2007. As a
condition to obtaining the banks' consent to sell the TelAlert software
business, the Company placed $3.3 million of the cash proceeds from the sale
of the TelAlert software business in an escrow account controlled by Bank of
Montreal as collateral for outstanding borrowings under the Credit Agreement.
The restricted cash is included in prepaid expenses and other current assets
in the accompanying consolidated balance sheet at August 31, 2007.
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, in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". During this
evaluation, the Company reviews its forecasts of income in conjunction with
the positive and negative evidence surrounding the realizability of its
deferred income tax asset to determine if a valuation allowance is needed.
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 adopted
FIN 48 at the beginning of the fiscal 2008 first quarter. As a result of
adopting FIN 48, the Company: (i) increased deferred income tax assets and
income taxes payable by $5.0 million each; and (ii) increased income taxes
receivable and reduced goodwill by $609,000 each. After giving effect to the
adoption of FIN 48, the balance of unrecognized tax benefits totaled
$5.9 million. If and when recognized, $2.1 million of unrecognized tax
benefits would be recorded as a reduction in income tax expense and $3.8
million would be recorded as a reduction in goodwill.
Estimated interest and penalties related to the underpayment of income
taxes are classified as a component of interest expense in the consolidated
statement of operations.
The Company files income tax returns in the U.S. federal jurisdiction,
various states and foreign jurisdictions. Income tax returns filed for
fiscal years 1999 and earlier are not subject to examination by U.S. federal,
state and foreign tax authorities. Certain income tax returns for fiscal
years 2000 through 2007 remain open to examination by U.S federal, state or
foreign tax authorities. The Company believes that it has made adequate
provision for all income tax uncertainties pertaining to these open tax
years.
At August 31, 2007, the Company had an aggregate deferred tax asset
balance of $8,645,000. The current portion of the deferred tax asset is
$1,817,000 and the noncurrent portion is $6,828,000.
Income tax expense (benefit) allocated to income (loss) from continuing
operations for the six months ended August 31, 2007 and 2006 was $(8,985,000)
and $3,525,000, respectively. Income tax expense (benefit) allocated to
income (loss) from discontinued operations for the six months ended August
31, 2007 and 2006 was $2,617,000 and $(893,000), respectively. The effective
income tax rate on income (loss) from continuing operations was 39% and 194%
in the six months ended August 31, 2007 and 2006, respectively. Excluding
the IPR&D write-off of $6,850,000 that is not deductible for income tax
purposes, the effective income tax rate for the six months ended August 31,
2006 was 41%.
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 net income and the
average market price of the common stock during the period exceeds the
exercise price of the options.
The weighted average number of common shares outstanding used in the
calculation of basic and diluted earnings per share were the same for all
periods presented, except for the three months ended August 31, 2006 because
the Company reported income from continuing operations in the three months
ended August 31, 2006. Stock options outstanding at August 31, 2007 and 2006
were excluded from the computation of diluted earnings per share for the six
month periods then ended because the Company reported a loss from continuing
operations in such periods 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 (LOSS)
Comprehensive income (loss) is defined as the total of net income (loss)
and all non-owner changes in equity. The following table details the
components of comprehensive income (loss) for the three and six months ended
August 31, 2007 and 2006 (in thousands):
Three Months Ended Six Months Ended
August 31, August 31,
------------------- -------------------
2007 2006 2007 2006
------- ------- ------- -------
Net income (loss) $(4,373) $ 1,235 $(15,735) $(32,816)
Foreign currency
translation adjustments 28 (112) 725 -
Reclassification of gain on
investment included in earnings - - (45) 2
------- ------- ------- -------
Comprehensive loss $(4,345) $ 1,123 $(15,055) $(32,814)
======= ======= ======= =======
Note 9 - STOCK-BASED COMPENSATION
Stock-based compensation expense is included in the following captions
of the consolidated statements of operations (in thousands):
Three Months Ended Six Months Ended
August 31, August 31,
------------------- -------------------
2007 2006 2007 2006
------- ------- ------- -------
Cost of revenues $ 21 $ 75 $ 42 $ 105
Research and development 65 117 125 158
Selling 78 62 148 106
General and administrative 377 399 712 704
------ ------ ------ ------
$ 541 $ 653 $ 1,027 $ 1,073
====== ====== ====== ======
Changes in the Company's outstanding stock options during the six
months ended August 31, 2007 were as follows:
Weighted
Number of Weighted Average Aggregate
Options Average Remaining Intrinsic
(000s) Exercise Price Contractual Term Value
-------- -------------- ---------------- ---------
Outstanding at February 28, 2007 2,461 $10.33
Granted 355 $ 4.46
Exercised (40) $ 3.92
Forfeited or expired (308) $12.07
-----
Outstanding at August 31, 2007 2,468 $ 9.37 6.7 years $ 289,000
=====
Exercisable at August 31, 2007 1,522 $10.31 5.3 years $ 289,000
=====
Changes in the Company's nonvested restricted stock and restricted
stock units during the six months ended August 31, 2007 were as follows (in
thousands except dollar amounts):
Weighted
Number of Average
Shares Fair Value
-------- ----------
Outstanding at February 28, 2007 20 $ 6.51
Granted 330 4.28
Vested (20) 6.51
Forfeited (8) 4.28
-----
Outstanding at August 31, 2007 322 $ 4.28
=====
As of August 31, 2007, there was $6.2 million of total unrecognized
stock-based compensation cost related to nonvested stock options and
nonvested restricted stock and restricted stock units. That cost is expected
to be recognized as expense over a weighted-average remaining vesting period
of 2.8 years.
Note 10 - CONCENTRATION OF RISK
Because the Company sells into markets dominated by a few large service
providers, a significant percentage of consolidated revenues and consolidated
accounts receivable relate to a small number of customers. Revenues from
customers which accounted for 10% or more of consolidated revenues for the
three and six months ended August 31, 2007 or 2006, as a percent of
consolidated revenues, are as follows:
Three Months Ended Six Months Ended
August 31, August 31,
------------------- -------------------
Customer 2007 2006 2007 2006
------- ------- ------- -------
A 3.1% 50.9% 16.5% 55.2%
B 26.1% 16.1% 24.2% 14.2%
C 13.0% 4.6% 15.6% 5.9%
Accounts receivable from the customers referred to in the table above,
expressed as a percent of consolidated net accounts receivable, are as
follows:
August 31, February 28,
Customer 2007 2007
------ ------
A 9.1% 30.6%
B 16.6% 24.4%
C 18.5% 16.4%
Customers A and B are customers of the Company's Satellite Division.
Customer C is a customer of the Company's Wireless DataCom Division. See
Note 14 for discussion of relationship with a key DBS customer.
Note 11 - PRODUCT WARRANTIES
The Company generally warrants its products against defects over periods
up to three years. 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 Company also adjusts
its liability to include amounts that are estimable and probable based on
known product defects. Activity in the warranty liability for the six months
ended August 31, 2007 and 2006 is as follows (in thousands):
Six months ended
August 31,
-----------------
2007 2006
------- -------
Balance at beginning of period $ 1,295 $ 477
Charged to costs and expenses 14,032 679
Deductions (693) (630)
------- ----
Balance at end of period $14,634 $ 526
======= ======
Warranty expense for the six months ended August 31, 2007 includes a
charge of approximately $13.7 million for the cost of estimated warranty
repairs to correct product performance issues involving a DBS customer, as
further described in Note 14. The warranty reserve at August 31, 2007
includes $14.2 million that is associated with these DBS product performance
issues. The cash impact of the remaining warranty reserve is anticipated to
occur over the next two or more years. At August 31, 2007, $3,185,000 of the
warranty liability that is expected to be paid beyond 12 months is included
in other non-current liabilities in the accompanying consolidated balance
sheet.
Note 12 - OTHER FINANCIAL INFORMATION
"Net cash provided by operating activities" in the consolidated
statements of cash flows includes cash payments for interest and income taxes
as follows (in thousands):
Six months ended
August 31,
-----------------
2007 2006
------- -------
Interest paid $1,143 $ 813
Income taxes paid (net
refunds received) $ (638) $ 600
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Six months ended
August 31,
-----------------
2007 2006
------- -------
Company common stock issued from
escrow fund as additional
purchase consideration for the
2004 Vytek acquisition $ - $ 2,052
Consideration for the sale
of TelAlert software business
of the Solutions Division:
Note receivable $ 2,298 $ -
Fair value of preferred stock $ 3,137 $ -
Note 13 - SEGMENT INFORMATION
As described in Note 1, the Company changed the structure of its
reporting segments at the beginning of the fiscal 2008 first quarter. The
Products Division was split into the Satellite Division and Wireless DataCom
Division. This new structure is consistent with how management evaluates the
performance of its operations. This new structure also provides greater
focus on CalAmp's growing wireless data communications business. The Company
assigned the assets and liabilities of the Products Division to these two new
reporting segments on a specific identification basis, except that goodwill
associated with the Products Division was allocated to these two new segments
by using the relative fair value allocation approach. The fair value of each
reporting segment was determined using the discounted cash flow approach.
This change in reporting segments triggered an impairment test of the
allocated goodwill of the two new segments as of the beginning of the fiscal
2008 first quarter. The results of the impairment test indicated no
impairment of goodwill at that time.
Segment information for the three and six months ended August 31, 2007
and 2006 is as follows (dollars in thousands):
Three months ended Three months ended
August 31, 2007 August 31, 2006
------------------------------------ -------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Satellite Wireless Satellite Wireless
Division DataCom Corporate Total Division DataCom Corporate Total
-------- -------- ------- ----- -------- ------- ------- -----
Revenues $ 9,851 $ 22,817 $ 32,668 $ 38,955 $ 15,674 $ 54,629
Gross profit
(loss) $ (1,835) $ 8,150 $ 6,315 $ 6,123 $ 6,533 $ 12,656
Gross margin (18.6%) 35.7% 19.3% 15.7% 41.7% 23.2%
Operating
income (loss) $ (3,064) $ (500) $(1,304) $ (4,868) $ 4,425 $ 330 $(1,529) $ 3,226
Six months ended Six months ended
August 31, 2007 August 31, 2006
------------------------------------ -------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Satellite Wireless Satellite Wireless
Division DataCom Corporate Total Division DataCom Corporate Total
-------- -------- ------- ----- -------- ------- ------- ------
Revenues $ 32,882 $ 46,179 $ 79,061 $ 73,046 $ 24,540 $ 97,586
Gross profit
(loss) $(15,751) $ 16,680 $ 929 $ 13,047 $ 9,697 $ 22,744
Gross margin (47.9%) 36.1% 1.2% 17.9% 39.5% 23.3%
Operating
income (loss) $(18,295) $ (1,146) $(2,657) $(22,098) $ 9,658 $ (5,760) $(2,811) $ 1,087
The Satellite Division's negative gross profit of $15.8 million and
operating loss of $18.3 million in the six months ended August 31, 2007
includes a $17.8 million charge for estimated expenses to correct a product
performance issue involving a DBS customer, as further described in Note 14.
The Wireless DataCom Division operating loss of $5.8 million in the six
months ended August 31, 2006 includes a charge of $6.9 million to write-off
in-process research and development costs associated with the Dataradio
acquisition. Amortization expense of intangible assets related to the
Wireless DataCom Division was $1.6 million and $1.2 million for the three
months ended August 31, 2007 and 2006, respectively, and was $3.3 million and
$1.3 million for the six month periods then ended.
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 executive officers other
than division presidents, other corporate staff, and corporate expenses such
as audit fees, investor relations, stock listing fees, director and officer
liability insurance, and director fees and expenses.
Note 14 - COMMITMENTS AND CONTINGENCIES
Product Performance Issues with Key DBS Customer
-------------------------------------------------------------------------
During fiscal 2007, the Company received notification from one of its
DBS customers of field performance issues with a DBS product that the Company
began shipping in September 2004. After examining the various component
parts used in the manufacture of these products, it was determined by the
Company that the performance issue was the result of a deterioration of the
printed circuit board (PCB) laminate material used in these products.
During fiscal 2007, the DBS customer returned approximately 250,000
units to the Company for analysis and rework. An additional 560,000 units
have been returned by this customer subsequent to fiscal 2007, and it is
likely that additional units will be returned to the Company in the future.
In addition to returning product, in late May 2007 this DBS customer put on
hold all orders for CalAmp products, including newer generation products,
pending the requalification of all products manufactured by the Company for
this customer.
During the fiscal 2007 fourth quarter, CalAmp increased its accrued
warranty costs by $500,000 for this matter. This amount was predicated on
the customer accepting a planned corrective action procedure that CalAmp had
developed for existing and projected future product returns. Under this
planned corrective action, CalAmp expected that the field performance issue
could be resolved by retuning the circuitry as a lower cost alternative to
replacing certain parts and materials.
Prior to the issuance of its financial statements for the fiscal 2008
first quarter, the Company learned that the DBS customer would not accept the
Company's proposed rework approach for the previous generation products that
involved retuning the circuitry. This led the Company to conclude that
certain parts, including the radio frequency board assembly, would need to be
replaced, which is a significantly more costly process. As a result, the
Company recorded a charge of $16.3 million in the quarter ended May 31, 2007
to increase reserves for this matter. These additional reserves encompass
activities such as:
* Extending corrective measures to cover all products returned within three
years of initial shipment that utilize the aforementioned laminate;
* Performing substantial corrective measures on older generation products by
replacing the PCB material and components; and
* Reserving for materials that are expected to be unusable.
The $16.3 million charge in the quarter ended May 31, 2007 and resulting
loss for that quarter caused an event of default with respect to the
financial covenants under the Company's bank credit agreement, as discussed
further in Note 5. During the quarter ended August 31, 2007 the Company
recorded an additional $1.5 million charge related to this matter. The
aggregate charge of $17.8 million is included in cost of revenues for the six
months ended August 31, 2007. Of this amount, approximately $2.6 million is
a reduction of inventories, approximately $1.5 million is an increase in
other accrued liabilities, and the remainder is an increase in accrued
warranty costs. The Company is still in discussions with this customer
working towards resolution of this matter, and expects that it will soon
achieve that resolution and resume making shipments to this customer.
Other Contingencies
-------------------
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. On February 26, 2007, the
Company filed a cross-complaint against CN Capital for breach of contract,
negligent interference with prospective economic advantage, and contract
rescission. The Company believes the lawsuit filed by CN Capital 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.
In addition to the foregoing matter, the Company from time to time is a
party, either as plaintiff or defendant, to various legal proceedings and
claims which arise in the ordinary course of business. While the outcome of
these claims cannot be predicted with certainty, management does not believe
that the outcome of any of these legal matters will have a material adverse
effect on the Company's consolidated financial position or results of
operations.
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 necessarily
limited to: allowance for doubtful accounts, inventory valuation, product
warranties, deferred income taxes and uncertain tax positions, 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 three customers accounting for 56%
of the Company's total revenue for the six months ended August 31, 2007 and
44% of the Company's net accounts receivable balance as of August 31, 2007.
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.
As further described under Results of Operations below, the Company
recorded a charge of $17.8 million for the six months ended August 31, 2007
that represents management's best estimate of additional costs and expenses
associated with warranty repairs, inventory modifications and reserving for
materials that are expected to be unusable to resolve a product performance
issue with a key DBS customer. Of this amount, approximately $2.6 million is
a reduction of inventories, approximately $1.5 million is an increase in
other accrued liabilities, and the remainder is an increase in accrued
warranty costs.
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.
As further described under Results of Operations below, the Company
recorded a charge of $17.8 million for the six months ended August 31, 2007
that represents management's best estimate of additional costs and expenses
associated with warranty repairs, inventory modifications and reserving for
materials that are expected to be unusable to resolve a product performance
issue with a key DBS customer. Of this amount, approximately $13.7 million
represents an increase in the warranty reserve for this matter.
Deferred Income Taxes and Uncertain Tax Positions
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 asset on a quarterly basis, and a valuation allowance is provided, as
necessary, in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". During this
evaluation, the Company reviews its forecasts of income in conjunction with
the positive and negative evidence surrounding the realizability of its
deferred income tax asset to determine if a valuation allowance is needed.
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 adopted
FIN 48 at the beginning of the fiscal 2008 first quarter. As a result of
adopting FIN 48, as of the end of the fiscal 2008 first quarter the Company:
(i) increased deferred income tax assets and income taxes payable by $5.0
million each; and (ii) increased income taxes receivable and reduced goodwill
by $609,000 each.
At August 31, 2007, the Company had an aggregate deferred tax asset
balance of $8,645,000. The current portion of the deferred tax asset is
$1,817,000 and the noncurrent portion is $6,828,000.
Impairment Assessments of Goodwill, Purchased Intangible Assets and
Other Long-Lived Assets
At August 31, 2007, the Company had $100.6 million in goodwill and
$27.5 million in net purchased intangible assets on its balance sheet. 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 makes judgments about the recoverability of purchased
intangible assets and other long-lived assets whenever events or changes in
circumstances indicate that an impairment in the remaining value of the
assets recorded on the balance sheet may exist. The Company tests the
impairment of goodwill annually and, in certain situations, on an interim
basis if indicators of impairment arise. Goodwill of the Satellite Division
and Wireless DataCom Division is tested annually for impairment as of
December 31 each year. If an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying value, goodwill would be evaluated for impairment between annual
tests. Management has appropriate processes in place to monitor for interim
triggering events. Pursuant to this process, management concluded that there
is no impairment of goodwill in the current quarter. However, subsequent
events may occur and circumstances may change that could result in triggering
events and potential impairment of goodwill of a reporting segment.
In order to estimate the fair value of long-lived assets, the Company
typically makes various assumptions about the future prospects for the
business that the asset relates to, considers market factors specific to that
business and estimates future cash flows to be generated by that business.
Based on these assumptions and estimates, the Company determines whether it
needs to record an impairment charge to reduce the value of the asset stated
on the balance sheet to reflect its estimated fair value. Assumptions and
estimates about future values and remaining useful lives are complex and
often subjective. They can be affected by a variety of factors, including
external factors such as industry and economic trends, and internal factors
such as changes in the Company's business strategy and its internal
forecasts. Although management believes the assumptions and estimates that
have been made in the past have been reasonable and appropriate, different
assumptions and estimates could materially impact the Company's reported
financial results. More conservative assumptions of the anticipated future
benefits from these businesses could result in impairment charges, which
would decrease net income and result in lower asset values on the balance
sheet. Conversely, less conservative assumptions could result in smaller or
no impairment charges, higher net income and higher asset values.
As a result of the Solutions Division goodwill impairment test conducted
as of April 30, 2006, the Company recorded impairment charges on goodwill and
other intangible assets of the Solutions Division of $29,012,000 and
$836,000, respectively, in the first quarter of fiscal 2007. The Solutions
Division goodwill impairment test conducted as of April 30, 2007, which
utilized a market-based approach to determine fair value, indicated that no
impairment existed as of that date. The Company sold the TelAlert software
business of the Solutions Division in August 2007 which resulted in the
discontinuance of the operations of the Solutions Division. See Note 2 -
Acquisitions and Disposition for further discussion.
Recent Authoritative Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements." This statement defines fair value, establishes a framework
for using fair value to measure assets and liabilities, and expands
disclosures about fair value measurements. The statement applies whenever
other statements require or permit assets or liabilities to be measured at
fair value. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is currently determining the effect, if any,
this pronouncement will have on its financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities". SFAS No. 159 permits
entities to choose to measure, on an item-by-item basis, specified financial
instruments and certain other items at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are required
to be reported in earnings at each reporting date. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007, the provisions of which
are required to be applied prospectively. The Company is currently
determining the effect, if any, this pronouncement will have on its financial
statements.
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 2007, a 53-week year, fell on March 3,
2007. Fiscal 2008, a 52-week year, will end on March 1, 2008. The actual
six month year-to-date periods ended on September 1, 2007, consisting of 26
weeks of operations, and September 2, 2006, consisting of 27 weeks of
operations. The second fiscal quarters ended September 1, 2007 and September
2, 2006 both consisted of thirteen weeks of operations. In the accompanying
consolidated financial statements, the fiscal 2007 year end is shown as
February 28 and the interim period end for both years is shown as August 31
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 a 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. In connection with the acquisition
of Dataradio, the Company recorded a charge of $6,850,000 to write-off in-
process research and development costs of the acquired business as part of
the 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 in excess of
$3,100,000 during the 12-month period following the acquisition. Pursuant to
this provision, the Company has made earn-out payments of $300,000 and
accrued an additional earn-out payment liability of approximately $1.9
million, which is included in other accrued liabilities in the consolidated
balance sheet as of August 31, 2007. The Company intends to pay the balance
owed during the next 12 months out of cash flows generated from operations.
In March 2007, the Company split the Products Division into two separate
reporting segments: the Satellite Division and the Wireless DataCom
Division. The Satellite Division consists of the Company's DBS business, and
the Wireless DataCom Division consists of the remaining businesses of the
Products Division, including Dataradio, the MRM product line, CalAmp's legacy
wireless businesses other than DBS, and the operations of Aircept and
SmartLink that were acquired in the fiscal 2008 first quarter, as discussed
below. Segment information presented in this Form 10-Q for the six months
ended August 31, 2006 has been reclassified to present information on this
new reporting segment basis. The Solutions Division, for which the
remaining operations were sold in August 2007, is presented as a discontinued
operation in the accompanying consolidated statements of operations.
On March 16, 2007, the Company acquired Aircept, a vehicle tracking
business, from AirIQ Inc., a Canadian company, for cash consideration of $19
million. The source of funds for the purchase price was the Company's cash
on hand. Aircept's business involves the sale of Global Positioning
Satellite (GPS) and cellular-based wireless asset tracking products and
services to vehicle lenders that specialize in automobile financing for high
credit risk individuals. The results of operations of Aircept are included
in the Company's Wireless DataCom reporting segment for the 24-week period
from date of acquisition to the end of the fiscal 2008 second
quarter. During this period Aircept generated revenues of $6.1 million and
gross profit of approximately $1.2 million.
On April 4, 2007, the Company acquired the business and substantially
all the assets of SmartLink Radio Networks, a privately-held company, for
$7.9 million cash. The source of funds for the purchase price was the
Company's cash on hand. SmartLink provides proprietary interoperable radio
communications platforms and integration services for public safety and
critical infrastructure needs. Based on a software defined switch,
SmartLink's platform provides interoperability without the need to replace
the installed base of land mobile radios. SmartLink is currently in the
process of deploying its platform for several important customers including
Solano County, Calif., the U.S. Department of Justice in San Francisco and
Grand Bahama Power Company. Depending on the size and scope of a deployment,
a SmartLink system sale generates revenues in the range of one hundred
thousand dollars to several million dollars. The results of operations of
SmartLink are included in the Company's Wireless DataCom reporting segment
for the 22-week period from date of acquisition to the end of the fiscal 2008
second quarter. During this period SmartLink generated revenues of $492,000
and gross profit of $67,000.
Solutions Division
The Company sold the TelAlert software business of the Solutions
Division to a privately held company on August 9, 2007 for total
consideration of $9.4 million, consisting of $4.0 million in cash, a non-
interest bearing note with present value of $2.3 million and preferred stock
of the acquirer valued at $3.1 million. The note is payable in 18 equal
monthly installment of $140,000 commencing on November 9, 2007.
The Company recognized a pre-tax gain of $2.1 million on the sale of the
TelAlert software business. The income tax expense attributable to the gain
was $3.0 million because at the time of sale there was goodwill of $5.4
million associated with this business that is not deductible for income tax
purposes.
The TelAlert software business was the remaining business of the
Solutions Division. Operating results for the Solution Division have been
presented in the accompanying consolidated statements of operations as a
discontinued operation, as further described in Note 2 to the accompanying
unaudited consolidated financial statements.
Product Performance Issues with Key DBS Customer:
During fiscal 2007, the Company received notification from one of its
DBS customers of a field performance issue with a DBS product that the
Company began shipping in September 2004. After examining the various
component parts used in the manufacture of these products, it was determined
by the Company that the performance issue was the result of a deterioration
of the printed circuit board (PCB) laminate material used in these products.
In March 2007, the Company learned that the DBS customer had awarded its
orders for future requirements of this product beginning June 2007 to other
suppliers. The Company believes that the field performance issue was the
primary reason for the loss of this business. The Company has continued to
work with the customer to mitigate the impact of this performance issue and
to identify and implement a corrective action plan.
From the time the problem was isolated to the PCB laminate material
until March 2007, the Company worked with the supplier of the laminate
material and with the DBS customer to identify a corrective action.
Notwithstanding these efforts, on March 26, 2007 the laminate supplier filed
a Complaint for Declaratory Relief in the State of Massachusetts in which it
claimed that it is not responsible for the field performance issue of these
DBS products.
On May 16, 2007, the Company filed a lawsuit against the PCB laminate
supplier in the U.S. District Court for the Central District of California
for negligence, strict product liability, intentional misrepresentation and
negligent interference with prospective economic advantage, among other
causes of action. CalAmp expects to vigorously pursue all legal options to
recover its damages from that supplier.
During fiscal 2007, the DBS customer returned approximately 250,000
units to the Company for analysis and rework. An additional 560,000 units
have been returned by this customer subsequent to fiscal 2007, and it is
likely that additional units will be returned to the Company in the
future. In addition to returning product, in late May 2007 this DBS customer
put on hold all orders for CalAmp products, including newer generation
products, pending the requalification of all products manufactured by the
Company for this customer.
During the fiscal 2007 fourth quarter, CalAmp increased its accrued
warranty costs by $500,000 for this matter. This amount was predicated on
the customer accepting a planned corrective action procedure for the previous
generation products that CalAmp had developed for existing and projected
future product returns. Under this planned corrective action, CalAmp
expected that the field performance issue could be resolved by retuning the
circuitry as a lower cost alternative to replacing certain parts and
materials.
Prior to the issuance of its financial statements for the fiscal 2008
first quarter, the Company learned that the DBS customer would not accept the
Company's proposed rework approach for the previous generation products that
involved retuning the circuitry. This led the Company to conclude that
certain parts, including the radio frequency board assembly, would need to be
replaced, which is a significantly more costly process. As a result, the
Company recorded a charge of $16.3 million in the quarter ended May 31, 2007
to increase the reserves for this matter. The resulting loss caused an event
of default with respect to the financial covenants under the Company's bank
credit agreement, as discussed further under Liquidity and Capital Resources
below. During the quarter ended August 31, 2007, the Company recorded an
additional $1.5 million charge related to this matter. At August 31, 2007,
the Company has reserves in the aggregate amount of $18.2 million for this
matter, of which $2.5 million represents inventory reserves.
While the Company believes that $17.8 million is the best estimate of
the additional expenses necessary to resolve this matter based on the facts
and circumstances of which the Company is currently aware, no assurances can
be given that the final charges will not materially increase from the current
estimate. The cash impact of these reserves is anticipated to occur over the
next two or more years.
The Company is still in discussions with this customer working towards
resolution of this matter, and expects that it will soon achieve that
resolution and resume making shipments to this customer.
Operating Results by Business Segment:
The Company's revenue, gross profit (loss) and operating income (loss)
by business segment are as follows:
REVENUE BY SEGMENT
Three Months Ended August 31, Six Months Ended August 31,
----------------------------------- ---------------------------------
2007 2006 2007 2006
--------------- --------------- -------------- --------------
% of % of % of % of
Division $000s Total $000s Total $000s Total $000s Total
----------- ------- ----- ------ ----- ------- ----- ------ -----
Satellite $ 9,851 30.2% $38,955 71.3% $32,882 41.6% $73,046 74.9%
Wireless DataCom 22,817 69.8% 15,674 28.7% 46,179 58.4% 24,540 25.1%
------ ----- ------ ----- ------ ----- ------ -----
Total $32,668 100.0% $54,629 100.0% $79,061 100.0% $97,586 100.0%
====== ===== ====== ===== ====== ===== ====== =====
GROSS PROFIT (LOSS) BY SEGMENT
Three Months Ended August 31, Six Months Ended August 31,
----------------------------------- ---------------------------------
2007 2006 2007 2006
--------------- --------------- ---------------- --------------
% of % of % of % of
Division $000s Total $000s Total $000s Total $000s Total
----------- ------- ----- ------ ----- ------- ------- ------ -----
Satellite $(1,835) (29.1%) $ 6,123 48.4% $(15,751) (1,695.5%) $13,047 57.4%
Wireless DataCom 8,150 129.1% 6,533 51.6% 16,680 1,795.5% 9,697 42.6%
------ ----- ------ ----- ------ ------- ------ -----
Total $ 6,315 100.0% $12,656 100.0% $ 929 100.0% $22,744 100.0%
====== ===== ====== ===== ====== ======= ====== =====
OPERATING INCOME (LOSS) BY SEGMENT
Three Months Ended August 31, Six Months Ended August 31,
----------------------------------- ---------------------------------
2007 2006 2007 2006
--------------- --------------- -------------- --------------
% of % of % of % of
Division $000s Total $000s Total $000s Total $000s Total
----------- ------- ----- ------ ----- ------- ----- ------ -----
Satellite $(3,064) 62.9% $ 4,425 137.2% $(18,295) 82.8% $ 9,658 888.5%
Wireless DataCom (500) 10.3% 330 10.2% (1,146) 5.2% (5,760) (529.9%)
Corporate
Expenses (1,304) 26.8% (1,529) (47.4%) (2,657) 12.0% (2,811) (258.6%)
------ ----- ------ ----- ------ ----- ------ -----
Total $(4,868) 100.0% $ 3,226 100.0% $(22,098) 100.0% 1,087 100.0%
====== ===== ====== ===== ====== ===== ====== =====
The Satellite Division operating loss in the six months ended August 31,
2007 includes a $17.8 million charge for estimated expenses to correct a
product performance issue involving a key DBS customer.
The Wireless DataCom Division operating loss in the six months ended May
31, 2006 includes a charge of $6.9 million to write-off in-process research
and development costs associated with the Dataradio acquisition.
Amortization expense of intangible assets related to the Wireless DataCom
Division was $1.6 million and $1.2 million for the three months ended August
31, 2007 and 2006, respectively, and was $3.3 million and $1.3 million for
the six month periods then ended.
Revenue
Satellite Division revenue declined $29.1 million, or 75%, to $9.9
million in the three months ended August 31, 2007 from $39.0 million for the
same period in the previous fiscal year. This decline was primarily
attributable to the action taken by a key DBS customer to put on hold all
orders with the Company, including orders for newer generation products,
pending a requalification of all products manufactured by CalAmp for this
customer, as discussed above. Revenues from this customer in the three
months ended August 31, 2007 were $26.8 million lower than the same period
last year.
For the six months ended August 31, 2007, Satellite Division revenue
decreased $40.1 million, or 55%, to $32.9 million from $73.0 million over the
same period of the prior year due to the same reason discussed in the
preceding paragraph. Revenues from the customer that put its orders on hold
were $40.9 million lower in the six months ended August 31, 2007 than the
same period last year.
Wireless DataCom Division revenue increased by $7.1 million, or 46%, to
$22.8 million in the second quarter of fiscal 2008 compared to the fiscal
2007 second quarter due to: (i) a $3.6 million increase in sales of the MRM
product line; and (ii) the acquisition of Aircept in March 2007 and
SmartLink in April 2007 that contributed revenues of $3.2 million and
$229,000, respectively, to the fiscal 2008 second quarter.
For the six months ended August 31, 2007, Wireless DataCom revenue
increased $21.7 million, or 88%, to $46.2 million over the same period of the
prior year. This increase in revenue is due to: (i) a $6.6 million increase
in sales of radio modules to a Wireless DataCom customer in support of that
customer's contract with the U.S. Department of Defense; (ii) the
acquisition of Aircept in March 2007 that contributed MRM product line
revenues of $6.1 million to the six months ended August 31, 2007; and the
fact that the operations of Dataradio and the Technocom MRM product line are
included for all 26 weeks of the fiscal 2008 first half and only 14 weeks of
the fiscal 2007 first half.
Gross Profit (Loss) and Gross Margins
The Satellite Division had negative gross profit of $(1.8) million in
the fiscal 2008 second quarter compared with a gross profit of $6.1 million
in second quarter of last year. The decline in gross profit is primarily
attributable to the $29.1 million decline in revenue in the latest quarter
compared to the second quarter of last year and the $1.5 million additional
charge for estimated expenses to correct a product performance issue with a
key DBS customer
The Satellite Division had negative gross profit of $(15.8) million for
the six months ended August 31, 2007 compared with a gross profit of $13.0
for the same period last year. The decline in gross profit is primarily
attributable to the $17.8 million charge for estimated expenses to correct a
product performance issue with a key DBS customer and the $40.1 million
decline in revenue in the latest six month period compared to the prior year.
Gross profit of the Wireless DataCom Division increased 25% to $8.2
million in the latest quarter compared to the second quarter of last year,
which is commensurate with the 46% revenue increase of this division.
Wireless DataCom's gross margin decreased from 41.7% in the second quarter of
fiscal 2007 to 35.7% in the second quarter of fiscal 2008 due to a change in
product mix. Approximately half of the decrease in gross margin is
attributable to lower margin on Aircept revenue, compared to the rest of the
Wireless DataCom businesses. Aircept was acquired in March 2007, and hence
was not included in fiscal 2007 operating results.
Wireless DataCom Division gross profit increased 72% to $16.7 million
for the six months ended August 31, 2007, compared to $9.7 million for the
same period of the prior year, which is commensurate with the 88% revenue
increase of this division. Wireless DataCom's gross margin decreased from
39.5% for the six month period ended August 31, 2006 to 36.1% for the same
period of the current year due to a change in product mix, with more than
half of the decrease in gross margin attributable to lower margin on Aircept
revenue.
See also Note 13 to the accompanying unaudited consolidated financial
statements for additional operating data by business segment.
Operating Expenses
Consolidated research and development ("R&D") expense increased by
$182,000 to $3,795,000 in the second quarter of fiscal 2008 from $3,613,000
last year. For the six month year-to-date periods, R&D expense increased
$1,995,000 from $6,119,000 last year to $8,114,000 this year. Dataradio's
R&D expense accounted for $2.4 million of the increase, offset by a reduction
in R&D expense related to the Company's DBS and MRM product lines. Dataradio
was included for only 14 weeks of the fiscal 2007 first half compared to all
26 weeks of the fiscal 2008 first half.
Consolidated selling expenses increased by $306,000 to $2,373,000 in the
second quarter this year from $2,067,000 last year. This increase is
primarily due to the inclusion of Aircept selling expenses in fiscal 2008.
As noted above, Aircept was acquired in March 2007. For the six month year-
to-date periods, selling expenses increased $1,918,000 from $2,724,000 last
year to $4,642,000 this year. The selling expenses of Dataradio and Aircept
accounted for $1.1 million and $0.5 million of the increase, respectively.
Consolidated general and administrative expenses ("G&A") increased by
$857,000 to $3,457,000 in the second quarter of this year compared to the
prior year. This increase is primarily due to the inclusion of Aircept G&A
for the fiscal 2008 second quarter. Consolidated G&A increased by $2,004,000
for the six months ended August 31, 2007, which increase is primarily due to
the acquisitions of Dataradio in May 2006, Aircept in March 2007 and
SmartLink in April 2007, which collectively accounted for increased G&A of
$1.9 million in the six months ended August 31, 2007 compared to the same
period of last year.
Amortization of intangibles increased from $1,150,000 in the second
quarter of last year to $1,558,000 in the second quarter of this year. The
increase was primarily attributable to the acquisitions of Aircept and
SmartLink.
The in-process research and development ("IPR&D") write-off declined
from $6,850,000 for the six months ended August 31, 2006 to $310,000 in the
2008 fiscal year period. Last year's IPR&D write-off was related to the
acquisition of Dataradio, while this year's IPR&D write-off was related to
the acquisition of SmartLink.
Operating Loss
The operating loss in the second quarter of this year was ($4,868,000),
compared to operating income of $3,226,000 in the second quarter of last
year. The operating loss in the second quarter of this year is primarily
attributable to the decline in revenues from a key DBS customer and the $1.5
million charge for estimated expenses to correct a product performance issue
with that customer.
The operating loss in the six months ended August 31, 2007 was
($22,098,000), compared to operating income of $1,087,000 in the six months
ended August 31, 2006. The operating loss in the current period is
attributable to the $17.8 million charge for the DBS product performance
issue noted above and the decline in revenues from a key DBS customer.
Non-Operating Income (Expense), Net
Non-operating expense in the second quarter of this year was $507,000,
compared to $237,000 in the second quarter of last year. The change was due
to: (i) an increase in net interest expense of $118,000 because of lower
invested cash and higher debt in fiscal 2008; and (ii) the $159,000 swing in
foreign currency from a $103,000 gain in the second quarter of last year to a
$56,000 foreign currency loss in the second quarter of this year due to the
weakening of the US dollar relative to the Canadian dollar.
Non-operating expense was $(1,090,000) in the six months ended August
31, 2007, compared to non-operating income of $727,000 in the six months
ended August 31, 2006. The change was due to (i) an increase in net interest
expense of $866,000 because of lower invested cash and higher debt in fiscal
2008; (ii) $520,000 in foreign currency loss in the current year compared to
a $73,000 gain last year; (iii) a gain of $689,000 last year on currency
hedging activities in connection with the Dataradio acquisition, for which
the purchase price was denominated in Canadian dollars; and (iv) a non-
operating gain of $330,000 on the sale of an investment that was recorded in
the six months ended August 31, 2007.
Income Tax Provision
The income tax expense (benefit) on income (loss) from continuing
operations for the six months ended August 31, 2007 and 2006 was $(8,985,000)
and $3,525,000, respectively. Income tax expense (benefit) on income (loss)
from discontinued operations for the six months ended August 31, 2007 and
2006 was $2,617,000 and $(893,000), respectively. The effective income tax
rate was 39% and 194% in the six months ended August 31, 2007 and 2006,
respectively. Excluding the IPR&D write-off of $6,850,000 that is not
deductible for income tax purposes, the effective income tax rate for the six
months ended August 31, 2006 was 41%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $8,370,000 at August 31, 2007. During the six
months ended August 31, 2007, cash and cash equivalents decreased by $29.2
million. This decrease is comprised primarily of cash used by operating
activities of $2.1 million, the Aircept and SmartLink acquisitions of $27.3
million, capital expenditures of $0.9 million, cash restricted for repayment
of debt of $3.3 million, and debt repayments of $1.5 million, partially
offset by proceeds from the sale of discontinued operations of $4.0 million,
proceeds from the sale of investment of $1.0 million, proceeds from the
exercise of stock options of $0.2 million and the effect of exchange rate
changes on cash of $0.6 million.
In May 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 initially borrowed $35 million under the term loan and $3
million under the working capital 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 and the remaining $31
million, plus cash on hand of approximately $23 million, was used to fund the
purchase price for Dataradio. In the fiscal 2007 third quarter, the Company
repaid in full the $3 million principal balance of the line of credit. At
August 31, 2007, $2,975,000 of the line of credit was reserved for
outstanding irrevocable stand-by letters of credit.
The maturity date of the line of credit is May 26, 2011. The term loan
repayment schedule provides that principal is payable in quarterly
installments on the last day of March, June, September and December in each
year with a final payment of $8,563,000 on May 26, 2011. However, as a
result of the event of default described below, all term loan principal has
been classified as a current liability in the accompanying balance sheet at
August 31, 2007.
Borrowings under the Credit Agreement bear interest at the Bank of
Montreal'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 also provides that the interest rate on borrowings can be increased
by 2.0% during any period in which an event of default exists but at the
present time the banks have applied this additional interest only to $734,000
of the loan balance.
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 also 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.
As discussed above, during the six months ended August 31, 2007 the
Company recorded a charge of $17.8 million for warranty repairs and other
costs to resolve a product performance issue with a key DBS customer. The
net loss of $11.4 million in the first quarter of fiscal 2008, which was
primarily attributable to the $16.3 million charge in the fiscal 2008 first
quarter, caused an event of default with respect to the financial covenants
under the Credit Agreement that will preclude additional borrowing under the
revolving credit facility until the Company is able to obtain a waiver from
its lenders and/or an amendment of the Credit Agreement. The Company has
notified its lenders and is in discussions with them to resolve the issue.
In the next 12 months the Company believes that it has sufficient liquidity
such that the restriction on borrowing under the revolving credit facility
will not adversely affect its operations. However, if the lenders are
unwilling to agree to a waiver or an amendment or exercise their rights to
accelerate borrowings outstanding under the Credit Agreement, the inability
to borrow under the revolving credit facility and/or the acceleration of such
indebtedness would materially adversely affect the Company's financial
position and operations, including its ability to fund its currently
anticipated working capital and capital expenditure needs. Furthermore,
because the lenders will have the right to call the loans under the Credit
Agreement until such time that a waiver is obtained, $28.9 million of debt
previously classified as a long-term liability has been reclassified to
current liabilities in the accompanying consolidated balance sheet as of
August 31, 2007. The lenders have not provided the Company with the written
notice that would be required to accelerate the loans under the Credit
Agreement, and the Company believes that it will be able to obtain a waiver
or amendment and avoid an acceleration of such loans. Nonetheless, no
assurance can be given that the Company will be successful in obtaining a
waiver or amendment, or that it will be able to avoid an acceleration of such
loans.
As discussed under "Product Performance Issues with Key DBS Customer"
above, at August 31, 2007 the Company had aggregate reserves in the amount of
$18.2 million for warranty obligations, vendor purchase commitments and
inventory reserves. While the Company believes that $18.2 million is the
best estimate of the reserves necessary to resolve this matter based on the
facts and circumstances of which the Company is currently aware, no
assurances can be given that the final charges will not materially increase
from the current estimate. The cash impact of these reserves is anticipated
to occur over the next two or more years.
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 2008 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.
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, the Company's
success in obtaining a waiver from the lenders under its Credit Agreement of
the event of default under the Credit Agreement, the Company's ability to
successfully requalify with respect to the sale of newer generation products
to one of its key DBS customers, the risk that the ultimate cost of resolving
a product performance issue with a key DBS customer may exceed the amount of
reserves established for that purpose, 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, 2007 as filed with the
Securities and Exchange Commission on May 17, 2007. 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
August 31, 2007, 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. On February 26, 2007, the
Company filed a cross-complaint against CN Capital for breach of contract,
negligent interference with prospective economic advantage, and contract
rescission. The Company believes the lawsuit filed by CN Capital 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.
Item 1A. Risk Factors
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, 2007, 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. As a
result of the recent developments discussed in Item 2 of Part I under
"Product Performance Issues with Key DBS Customer", there are additional
risks, namely the Company's success in obtaining a waiver from the lenders
under its Credit Agreement of the event of default under the Credit
Agreement, the Company's ability to successfully requalify with respect to
the sale of newer generation products to one of its key DBS customers and the
risk that the ultimate cost of resolving product performance issues with a
key DBS customer may exceed the amount of reserves established for that
purpose. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2007 Annual Meeting of Stockholders held on August 1, 2007, six
directors stood for reelection to a one year term expiring at the fiscal 2008
Annual Meeting. All six of the director nominees were reelected. The
results of the election of directors are summarized as follows:
Votes
Against or
Votes For Withheld Unvoted
---------- ---------- ---------
Richard Gold 19,013,934 2,052,869 2,560,087
Arthur Hausman 19,017,021 2,049,782 2,560,087
A.J. "Bert" Moyer 18,926,300 2,140,503 2,560,087
Thomas Pardun 19,047,445 2,019,358 2,560,087
Frank Perna, Jr. 19,043,624 2,023,179 2,560,087
Fred Sturm 18,969,012 2,097,791 2,560,087
ITEM 5. OTHER INFORMATION
On August 9, 2007, the Company entered into the Second Amendment and
Consent to Credit Agreement with Bank of Montreal ("BMO"), in which BMO
consented to the sale of the Company's TelAlert software business and also
made amendments to the Credit Agreement dated May 26, 2006. The amendments
include the requirement that the Company deposit the net cash proceeds from
the sale of the TelAlert software business into an escrow account under the
control of BMO as additional collateral for outstanding bank borrowings.
ITEM 6. EXHIBITS
Exhibit 10.1 - Second Amendment and Consent to Credit Agreement
dated August 9, 2007 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.
October 11, 2007 /s/ Richard K. Vitelle
------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)