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: August 31, 2006
_________________
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
__________ ____________
Commission File Number: 0-12182
Exact Name of Registrant as
Specified in Its Charter: CalAmp Corp.
_______________________
DELAWARE 95-3647070
_______________________________ _______________
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification No.
Address of Principal Executive Offices: 1401 N. Rice Avenue
Oxnard, CA 93030
Registrant's Telephone Number: (805) 987-9000
__________________________________________
Former name, Former Address and Former
Fiscal Year, if Changed since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The registrant had 23,386,891 shares of Common Stock outstanding as of
September 30, 2006.
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,
2006 2006
Assets -------- --------
Current assets:
Cash and cash equivalents $ 25,485 $ 45,783
Accounts receivable, less allowance for
doubtful accounts of $349 and $203 at August 31,
2006 and February 28, 2006, respectively 38,822 28,630
Inventories 21,887 18,279
Deferred income tax assets 4,877 4,042
Prepaid expenses and other current assets 7,705 2,502
-------- --------
Total current assets 98,776 99,236
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 6,583 5,438
Deferred income tax assets, less current portion - 2,344
Goodwill 89,829 91,386
Other intangible assets, net 21,102 5,304
Other assets 1,532 638
-------- --------
$217,822 $204,346
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,521 $ 2,168
Accounts payable 17,077 12,011
Accrued payroll and employee benefits 2,928 3,608
Other accrued liabilities 5,630 2,763
Deferred revenue 1,346 1,323
-------- --------
Total current liabilities 28,502 21,873
-------- --------
Long-term debt, less current portion 36,500 5,511
Deferred income tax liabilities 4,013 -
Other non-current liabilities 1,076 853
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 3,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 40,000 shares
authorized; 23,357 and 23,204 shares issued
and outstanding at August 31, 2006 and
February 28, 2006, respectively 233 232
Additional paid-in capital 136,925 135,022
Less common stock held in escrow - (2,532)
Retained earnings 11,372 44,188
Accumulated other comprehensive loss (799) (801)
-------- --------
Total stockholders' equity 147,731 176,109
-------- --------
$217,822 $204,346
======== ========
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Three Months Ended Six Months Ended
August 31, August 31,
------------------- -------------------
2006 2005 2006 2005
------- ------- ------- -------
Revenues:
Product sales $55,660 $53,436 $ 99,416 $95,828
Service revenues 2,274 4,225 4,831 9,413
------- ------- -------- -------
Total revenues 57,934 57,661 104,247 105,241
------- ------- -------- -------
Cost of revenues:
Cost of product sales 41,973 41,021 74,940 74,009
Cost of service revenues 1,950 3,225 4,369 7,119
------- ------- -------- -------
Total cost of revenues 43,923 44,246 79,309 81,128
------- ------- -------- -------
Gross profit 14,011 13,415 24,938 24,113
------- ------- -------- -------
Operating expenses:
Research and development 3,792 2,360 6,357 4,557
Selling 3,005 1,796 4,776 3,668
General and administrative 3,517 2,607 6,330 5,221
Amortization of intangibles 1,275 529 1,676 972
In-process research and
development write-off - 27 6,850 320
Impairment loss - - 29,848 -
------- ------- -------- -------
Total operating expenses 11,589 7,319 55,837 14,738
------- ------- -------- -------
Operating income (loss) 2,422 6,096 (30,899) 9,375
Non-operating income (expense):
Interest income 295 172 828 364
Interest expense (635) (130) (867) (254)
Other, net 94 (16) 754 (41)
------- ------- -------- -------
(246) 26 715 69
------- ------- -------- -------
Income (loss) before
income taxes 2,176 6,122 (30,184) 9,444
Income tax provision (941) (2,441) (2,632) (3,786)
------- ------- -------- -------
Net income (loss) $ 1,235 $ 3,681 $(32,816) $ 5,658
======= ======= ======== =======
Earnings (loss) per share:
Basic $ 0.05 $ 0.16 $ (1.41) $ 0.25
Diluted $ 0.05 $ 0.16 $ (1.41) $ 0.24
Shares used in per share
calculations:
Basic 23,337 22,490 23,230 22,491
Diluted 23,689 23,314 23,230 23,112
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
August 31,
---------------------
2006 2005
------- -------
Cash flows from operating activities:
Net income (loss) $(32,816) $ 5,658
Adjustments to reconcile net income (loss)to
net cash provided by operating activities:
Depreciation and amortization 3,111 2,299
Stock-based compensation expense 1,073 -
Excess tax benefit from stock-based
compensation expense (258) -
Write-off of in-process research and development 6,850 320
Impairment loss 29,848 -
Deferred tax assets, net (261) 2,248
Changes in operating assets and liabilities:
Accounts receivable (4,139) 1,355
Inventories 1,451 1,281
Prepaid expenses and other assets (3,517) 659
Accounts payable 3,853 (5,004)
Accrued payroll and other accrued liabilities (5,237) 531
Deferred revenue (47) (314)
Other 58 42
------- -------
Net cash provided by operating activities (31) 9,075
------- -------
Cash flows from investing activities:
Capital expenditures (1,382) (1,060)
Proceeds from sale of property and equipment 16 141
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 -
Acquisition of assets of Skybility - (4,897)
------- -------
Net cash used in investing activities (51,402) (5,816)
------- -------
Cash flows from financing activities:
Proceeds from debt borrowings 38,000 -
Debt repayments (7,658) (1,460)
Proceeds from exercise of stock options 533 252
Excess tax benefit from stock-based
compensation expense 258 -
------- -------
Net cash provided by (used in) financing activities 31,133 (1,208)
------- -------
Effect of exchange rate changes on cash 2 -
------- -------
Net change in cash and cash equivalents (20,298) 2,051
Cash and cash equivalents at beginning of period 45,783 31,048
------- -------
Cash and cash equivalents at end of period $25,485 $33,099
======= =======
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 31, 2006 and 2005
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
CalAmp Corp. ("CalAmp" or the "Company") is a provider of wireless
products, engineering services and software that enable anytime/anywhere
access to critical information, data and entertainment content. CalAmp is the
leading supplier of direct broadcast satellite (DBS) outdoor customer premise
equipment to the U.S. satellite television market. The Company also provides
wireless connectivity solutions for the telemetry and asset tracking markets,
private wireless networks, public safety communications and critical
infrastructure and process control applications.
The Company uses a 52-53 week fiscal year ending on the Saturday closest
to February 28, which for fiscal 2006 fell on February 25, 2006. Fiscal 2007,
a 53-week year, will end on March 3, 2007. The actual six month year-to-date
periods ended on September 2, 2006, consisting of 27 weeks of operations, and
August 27, 2005, consisting of 26 weeks of operations. The second fiscal
quarters ended September 2, 2006 and August 27, 2005 both consisted of 13
weeks of operations. In the accompanying consolidated financial statements,
the 2006 fiscal year end is shown as February 28 and the interim period end
for both years is shown as 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 2006 Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on May 9, 2006.
In the opinion of the Company's management, the accompanying consolidated
financial statements reflect all adjustments necessary to present fairly the
Company's financial position at August 31, 2006 and its results of operations
for the three and six months ended August 31, 2006 and 2005. The results of
operations for such periods are not necessarily indicative of results to be
expected for the full fiscal year.
All intercompany transactions and accounts have been eliminated in
consolidation.
Note 2 - RECENT ACQUISITIONS
Dataradio Acquisition
---------------------
On May 26, 2006, the Company completed the acquisition of Dataradio, Inc.
("Dataradio"), a privately held Canadian company. Under the terms of the
acquisition agreement dated May 9, 2006, the Company acquired all capital
stock of Dataradio for a cash payment of Canadian $60.1 million, or U.S.
$54,291,000 at the effective Canadian Dollar (CAD $) to U.S. Dollar exchange
rate on May 26, 2006. This acquisition provides the Company with the
opportunity to expand its wireless data communications business for public
safety and Machine-to-Machine (M2M) applications. It also furthers the
Company's strategic goals of diversifying its customer base and expanding its
product offerings into higher-margin growth markets.
CAD $7 million (equivalent to U.S. $6,323,397 at the effective exchange
rate on May 26, 2006) of the purchase price was deposited into an escrow
account. In October 2006, CAD $4 million was released from escrow to the
selling stockholders of Dataradio. The remaining CAD $3 million held in
escrow is available as a source for the payment of indemnification claims of
the Company. The remaining amount in the escrow account, if any, after
satisfying indemnification claims will be distributed to Dataradio's selling
stockholders on May 26, 2008. Amounts required to pay claims by the Company
that are not resolved by such date will be held in the escrow account until
such claims are resolved.
Dataradio became part of the Company's Products Division. Dataradio's
operations are included in the accompanying fiscal 2007 six month year-to-date
consolidated statement of operations for the 14-week period from May 26, 2006
to August 31, 2006.
Dataradio is currently focused in three primary business lines:
wireless data systems for public safety and first response applications;
wireless data modems for fixed location critical infrastructure and industrial
applications; and design and manufacture of radio frequency modules.
The Company has not yet obtained all information required to complete the
purchase price allocation related to this acquisition. The final allocation
will be completed by the end of the current fiscal year. The preliminary
purchase price allocation is as follows (in thousands):
Purchase price paid in cash $54,291
Direct costs of acquisition 458
------
Total cost of acquisition $54,749
Fair value of net assets acquired:
Current assets $20,115
Property and equipment 1,221
Intangible assets:
Developed/core technology $6,980
Customer relationships 3,750
Contracts backlog 1,480
Tradename 3,880
In-process research and
development ("IPR&D") 6,850
-----
Total intangible assets 22,940
Deferred tax liabilities, net (5,943)
Current liabilities (8,830)
Long-term liabilities (317)
------
Total fair value of net assets acquired 29,186
------
Goodwill $25,563
======
The Company paid a premium (i.e., goodwill) over the fair value of the
net tangible and identified intangible assets acquired for a number of
reasons, including the following:
* Dataradio is an established data applications provider of radio frequency
("RF") modems and systems for public safety and private networks.
* Dataradio has a history of profitable operations.
* The products of Dataradio have high gross margins.
* Dataradio has a diversified customer base.
* CalAmp will have access to Dataradio's engineering resources.
The goodwill arising from the Dataradio acquisition is not deductible for
income tax purposes.
The $6,850,000 allocated to IPR&D in the preliminary purchase price
allocation above was charged to expense following the acquisition. IPR&D
consists of next generation products for fixed and mobile wireless
applications. For purposes of valuing IPR&D, it is assumed that: (i) these
products would be introduced in 2007; (ii) annual revenue in 2007 through 2011
would range between $4.2 million and $12.6 million for fixed wireless
products, and between $6.7 million and $13.9 million for mobile wireless
products; (iii) annual revenues from the fixed wireless products and mobile
wireless products are allocated 75% and 80%, respectively, to IPR&D and 25%
and 20%, respectively, to core technology; (iv) the gross margin percentage
would range between 58% and 60% for fixed wireless products, and between 61%
and 66% for mobile wireless products; and (v) the operating margin in years
2007 through 2011 is approximately 26% for fixed wireless products and 32% for
mobile wireless products. The projected after-tax cash flows were then
present valued using a discount rate of 25%.
The following is supplemental pro forma information presented as if the
acquisition of Dataradio had occurred at the beginning of each of the
respective periods. The pro forma financial information is not necessarily
indicative of what the Company's actual results of operations would have been
had Dataradio been included in the Company's consolidated financial statements
for all of the three and six month periods ended August 31, 2006 and 2005. In
addition, the unaudited pro forma financial information does not attempt to
project the future results of operations of the combined company.
(in thousands, except per share data)
Three Months Ended Three Months Ended
August 31, 2006 August 31, 2005
-------------------- ------------------
As Pro As Pro
reported forma reported forma
-------- -------- -------- -------
Revenue $ 57,934 $ 57,934 $ 57,661 $ 65,775
Net income $ 1,235 $ 1,235 $ 3,681 $ 3,975
Net income per share:
Basic $ 0.05 $ 0.05 $ 0.16 $ 0.18
Diluted $ 0.05 $ 0.05 $ 0.16 $ 0.17
Six Months Ended Six Months Ended
August 31, 2006 August 31, 2005
-------------------- ------------------
As Pro As Pro
reported forma reported forma
-------- -------- -------- -------
Revenue $104,247 $113,683 $105,241 $120,807
Net income (loss) $(32,816) $(25,935) $ 5,658 $ 5,570
Net income (loss) per share:
Basic $ (1.41) $ (1.12) $ 0.25 $ 0.25
Diluted $ (1.41) $ (1.12) $ 0.24 $ 0.24
The pro forma adjustments for the six months ended August 31, 2006
consist of adding Dataradio's estimated results of operations for the thirteen
weeks ended May 26, 2006, because Dataradio is included in the "As reported"
amounts for 14 week period from the May 26, 2006 acquisition date to August
31, 2006. The pro forma adjustments for the six months ended August 31, 2005
consist of adding Dataradio's results of operations for the six months ended
July 31, 2005.
The pro forma financial information for both periods presented above
reflects the following:
* Additional amortization expense of approximately $746,000, $746,000,
$1,492,000 for the three months ended August 31, 2005, and six months ended
August 31, 2006 and 2005, respectively, related to the estimated fair value of
identifiable intangible assets from the preliminary purchase price allocation;
and
* Additional interest expense and amortization of debt issue costs in the
total amount of approximately $494,000, $494,000, $988,000 for the three
months ended August 31, 2005, and six months ended August 31, 2006 and 2005,
respectively, related to the incremental new bank borrowings to fund part of
the Dataradio purchase price.
The unaudited pro forma financial information above excludes the
following material, non-recurring charges or credits incurred by CalAmp or
Dataradio in the quarter ended May 31, 2006:
* A charge for IPR&D of $6,850,000 related to the Dataradio acquisition;
* A foreign currency hedging gain of $689,000 realized by CalAmp in connection
with the acquisition of Dataradio; and
* A charge for Dataradio employee bonuses and related employer payroll taxes
in the aggregate amount of $5,355,000, recorded as an expense in Dataradio's
pre-acquisition income statement, for incentives paid by Dataradio to its
workforce upon consummating the sale of Dataradio to CalAmp.
TechnoCom Product Line Acquisition
----------------------------------
On May 26, 2006, the Company acquired the business and certain assets of
the Mobile Resource Management ("MRM") product line from TechnoCom Corporation
("Technocom"), a privately held company, pursuant to an Asset Purchase
Agreement dated May 25, 2006 (the "Agreement"). This MRM product line, which
is used to help track fleets of cars and trucks, became part of the Company's
Products Division. The acquisition of the MRM product line was motivated
primarily by the strategic goals of increasing the Company's presence in
markets that offer higher growth and profit margin potential and diversifying
the Company's business and customer base.
Revenues and cost of sales generated by the MRM product line are included
in the accompanying fiscal 2007 six month year-to-date consolidated statement
of operations for the 14 week period from May 26, 2006 to August 31, 2006.
The Company acquired the business of the MRM product line, its inventory,
intellectual property and other intangible assets. No liabilities were
assumed in the acquisition. Pursuant to the Agreement, the Company made an
initial cash payment of $2,439,000, of which $250,000 was set aside in an
escrow account to satisfy any claims made by the Company on or before May 26,
2007. The Company also agreed to make an additional future cash payment equal
to the amount of net revenues attributable to the MRM product line during the
12-month period following the acquisition that exceeds $3,100,000 (the "Earn-
out Payment"). In addition, the Company agreed to license certain software
from TechnoCom with a first year cost of approximately $200,000.
The Company has not yet obtained all information required to complete the
purchase price allocation related to this acquisition. The final allocation
will be completed in fiscal 2007. The preliminary purchase price allocation
is as follows (in thousands):
Purchase price paid in cash $2,439
Direct costs of acquisition 39
------
Total cost of acquisition 2,478
Fair value of net assets acquired:
Inventories $ 290
Intangible assets:
Developed/core technology 980
Customer relationships 810
Contracts backlog 310
Covenants not to compete 170
-----
Total fair value of net assets acquired 2,560
------
Negative goodwill $ (82)
======
The negative goodwill of $82,000 is included in Other Accrued Liabilities
in the consolidated balance sheet at August 31, 2006. Pro forma information
on this acquisition has not been provided because the effects are not material
to the quarterly and year-to-date financial statements.
Note 3 - INVENTORIES
Inventories include the cost of material, labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in, first-
out method) or market, and consist of the following (in thousands):
August 31, February 28,
2006 2006
------ -------
Raw materials $17,529 $14,375
Work in process 619 380
Finished goods 3,739 3,524
------- -------
$21,887 $18,279
======= =======
Note 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in goodwill of each reporting unit during the six months ended
August 31, 2006 are as follows (in thousands):
Products Solutions Total
-------- --------- ---------
Balance as of February 28, 2006 $ 57,785 $ 33,601 $ 91,386
Distribution of escrow shares
as additional purchase price
for the 2004 Vytek acquisition 1,052 1,000 2,052
Goodwill associated
with Dataradio acquisition 25,563 - 25,563
Impairment writedown - (29,012) (29,012)
Other changes (18) (142) (160)
-------- --------- --------
Balance as of August 31, 2006 $ 84,382 $ 5,447 $ 89,829
======== ========= ========
Impairment tests of goodwill associated with the Products Division are
conducted annually as of December 31. The annual tests conducted in the last
three fiscal years indicated no impairment of Products Division goodwill.
The initial annual impairment test of the goodwill associated with the
Solutions Division was performed as of April 30, 2005, which indicated that
there was no impairment of Solutions Division goodwill at that date.
The annual impairment test of the Solutions Division goodwill as of
April 30, 2006 indicated that there was an impairment of Solutions Division
goodwill at that date. The goodwill impairment test is a two-step process.
Under the first step, the fair value of the Solutions Division was compared
with its carrying value (including goodwill). The fair value of the Solutions
Division using a discounted cash flow approach was $29,848,000 less than its
carrying value, which indicated that a goodwill impairment existed and which
required the Company to perform step two of the impairment test. In the
second step, the implied fair value of the Solutions Division's goodwill was
calculated and then compared to the carrying amount of that goodwill. The
goodwill carrying amount exceeded the implied fair value by $29,012,000 which
was recognized as an impairment loss. The implied goodwill amount was
determined by allocating the fair value of the Solutions Division to all of
the assets and liabilities of the Solutions Division as if the Solutions
Division had been acquired in a business combination as of the date of the
impairment test.
In connection with the second step of the Solutions Division goodwill
impairment test, fair value was allocated to tangible net assets and to both
recognized and unrecognized intangible assets as of the test date. The
undiscounted future net cash flows of the recognized intangible assets were
less than their carrying amount, which indicated that the assets are impaired.
Accordingly, the Company recognized an impairment loss of $836,000 related to
these intangible assets. The $29,848,000 impairment loss recognized in the
fiscal 2007 first quarter ended May 31, 2006 is the sum of the $29,012,000
impairment of goodwill and the $836,000 impairment of intangible assets.
Factors that led to the impairment of goodwill and other intangible
assets of the Solutions Division as of April 30, 2006 include the following:
* Throughout fiscal 2006, the quarterly revenue of the Solutions Division had
not been growing, but instead was declining due to the loss of key customers
and management's decision to exit low margin business with certain other
customers in order to reduce operating losses in this division. During fiscal
2006, the Company forecasted that it would be able to replace these customers
with new business to grow revenues and make the Solutions Division profitable.
However, the Solutions Division was unable to book sufficient new business to
reverse the decline in revenue and this situation, along with the continued
sluggish revenue performance in the first quarter of fiscal 2007, led Company
management to conclude that the revenue projection for fiscal 2007 reflected
in the prior year's goodwill impairment test conducted as of April 30, 2005
was not achievable.
* Substantially all of the quarter-to-quarter revenue declines of the
Solutions Division during fiscal 2006 through the first quarter of fiscal 2007
were attributable to its Information Technology ("IT") professional consulting
business. Failure to gain new major customers, the small amount of backlog
and new order pipeline and low margin business led to management's decision to
exit the Solutions Division's IT professional consulting business near the end
of the fiscal 2007 first quarter.
* The cost structure and limited availability of critical engineering
resources of the IT professional consulting business made this unit unable to
compete with large consulting companies that have multiple design centers in
lower cost regions of the United States and foreign technology centers such as
India.
* The Company's financial projections as of April 30, 2006 included the
operations of its software business unit only, because of the decision to exit
the IT professional consulting business. The loss of projected revenues and
operating income from the IT professional consulting business contributed to
the decline in the projected cash flows.
Other intangible assets are comprised as follows (in thousands):
August 31, 2006 February 28, 2006
------------------------ -------------------------
Amorti- Gross Accum. Gross Accum.
zation Carrying Amorti- Carrying Amorti-
Period Amount zation Net Amount zation Net
----- ------ ------ ----- ------ ------ -----
Developed/core
technology 5-7 yrs. $12,992 $2,794 $10,198 $5,032 $1,561 $3,471
Customer
relationships 5-7 yrs. 6,680 1,356 5,324 2,120 601 1,519
Contracts
backlog 1 yr. 1,790 482 1,308 - - -
Covenants not
to compete 4-5 yrs. 491 99 392 321 57 264
Licensing right 2 yrs. 200 200 - 200 150 50
Tradename N/A 3,880 - 3,880 - - -
------- ------ ------- ------ ------ ------
$26,033 $4,931 $21,102 $7,673 $2,369 $5,304
======= ====== ======= ====== ====== ======
Intangible asset amortization expense for the three months ended August
31, 2006 and 2005 was $1,275,000 and $554,000, respectively, and was
$1,726,000 and $1,022,000 for the six month periods then ended. Of these
amounts, amortization included in cost of revenues for the three months ended
August 31, 2006 and 2005 was $-0- and $25,000, respectively, and was $50,000
and $50,000, respectively, for the six month periods then ended. Remaining
amortization expense is included in operating expenses.
Estimated amortization expense for the fiscal years ending February 28 is
as follows:
2007 (remainder) $2,459,000
2008 $3,542,000
2009 $3,130,000
2010 $2,578,000
2011 $1,996,000
Thereafter $3,517,000
Note 5 - FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Bank Credit Facility
On May 26, 2006, the Company and certain direct and indirect subsidiary
guarantors of the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of Montreal, as administrative agent, and the other
financial institutions that from time to time may become parties to the Credit
Agreement. The credit facility is comprised of a term loan and a $10 million
working capital line of credit.
The Company borrowed $35 million under the term loan and $3 million under
the line of credit. Borrowings are secured by substantially all of the
Company's assets. Of the total proceeds of $38 million, $7 million was used
to pay off the Company's existing loans with U.S. Bank National Association
("US Bank") and the remaining $31 million, plus cash on hand of approximately
$23 million, was used to fund the purchase price for the Dataradio acquisition
as described in Note 2. The term loan principal is payable in quarterly
installments on the last day of March, June, September and December in each
year commencing on March 31, 2007 with a final payment of $8,750,000 on May
26, 2011. The maturity date of the line of credit is also May 26, 2011.
Scheduled principal payments by fiscal year are as follows:
Fiscal Year Term Loan Line of Credit
----------- --------- --------------
2008 $ 3,000,000 $ -
2009 5,000,000 -
2010 7,000,000 -
2011 9,000,000 -
2012 11,000,000 3,000,000
---------- ---------
$35,000,000 $3,000,000
=========== ==========
At the Company's option, borrowings under the Credit Agreement bear
interest at bank's prime rate ("Prime Based Loans") plus a margin ranging from
0% to 0.25% (the "Prime Rate Margin") or LIBOR ("LIBOR Based Loans") plus a
margin ranging from 0.75% to 1.25% (the "LIBOR Margin"). The Prime Rate
Margin and the LIBOR Margin vary depending on the Company's ratio of debt to
earnings before interest, taxes, depreciation, amortization and other noncash
charges (the "Leverage Ratio"). Interest is payable on the last day of the
calendar quarter for Prime Based Loans and at the end of the fixed rate LIBOR
period (ranging from 1 to 12 months) in the case of LIBOR Based Loans.
The Credit Agreement contains certain financial covenants and ratios that
the Company is required to maintain, including: a total Leverage Ratio of not
more than 2.75; net worth of not less than the sum of $140,887,000, 50% of net
income for each fiscal year and 50% of net cash proceeds from any issuance of
equity; and a fixed charge coverage ratio (earnings before interest, taxes,
depreciation and other noncash charges to fixed charges) of not less than
1.50.
The Credit Agreement includes customary affirmative and negative
covenants including, without limitation, negative covenants regarding
additional indebtedness, investments, maintenance of the business, liens,
guaranties, transfers and sales of assets, and the payment of dividends and
other restricted payments. The Credit Agreement also contains customary
events of default that would permit the bank to accelerate borrowings under
the Credit Agreement if not cured within applicable grace periods, including,
without limitation, the failure to make timely payments under the Credit
Agreement or other material indebtedness and the failure to adhere to certain
covenants.
The Company's credit agreement with US Bank was terminated except for
$2,875,000 of the line of credit that was reserved for outstanding irrevocable
stand-by letters of credit. These letter of credits are secured by a
restricted cash deposit of $2,875,000 which is included in prepaid expenses
and other current assets in the accompanying consolidated balance sheet at
August 31, 2006.
Other long-term debt
The Company has capital lease obligations of $21,000 at August 31, 2006
which are classified as current at that date.
Contractual cash obligations
The Company's contractual cash obligations as of August 31, 2006 are
summarized as follows (in thousands):
Future Cash Payments Due by Fiscal Year
----------------------------------------------
Contractual 2007 There-
Obligations (remainder) 2008 2009 2010 2011 after Total
--------------- ------ ------ ------ ------ ------ ------ ------
Debt principal $ - $3,000 $5,000 $7,000 $9,000 $14,000 $38,000
Capital leases 15 9 24
Operating leases 1,212 2,234 2,002 1,443 1,426 288 8,605
Purchase
obligations 29,409 669 34 - - - 30,112
------- ------ ------ ------ ------- ------- ------
Total contractual
cash obligations $30,636 $5,912 $7,036 $8,443 $10,426 $14,288 $76,741
======= ====== ====== ====== ======= ======= =======
Purchase obligations consist of obligations under non-cancelable
purchase orders, primarily for inventory purchases of raw materials,
components and subassemblies.
Note 6 - INCOME TAXES
The deferred income tax asset reflects the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and for income tax purposes. A deferred income
tax asset is recognized if realization of such asset is more likely than not,
based upon the weight of available evidence that includes historical operating
performance and the Company's forecast of future operating performance. The
Company evaluates the realizability of its deferred income tax asset on a
quarterly basis, and a valuation allowance is provided, as necessary. During
this evaluation, the Company reviews its forecasts of income in conjunction
with the positive and negative evidence surrounding the realizability of its
deferred income tax asset to determine if a valuation allowance is needed.
Vytek, which was acquired by the Company in April 2004, has tax loss
carryforwards and other tax assets that the Company believes will be
utilizable to some extent in the future, subject to change of ownership
limitations pursuant to Section 382 of the Internal Revenue Code and to the
ability of the combined post-merger company to generate sufficient taxable
income to utilize the benefits before the expiration of the applicable
carryforward periods.
At August 31, 2006, the Company's net deferred income tax asset was
$864,000, which amount is net of a valuation allowance of $1,841,000. This
net deferred tax asset of $864,000 also includes a deferred tax liability of
$5,522,000 arising from the acquisition of Dataradio that is included in
Deferred Income Tax Liabilities in the accompanying consolidated balance sheet
at August 31, 2006.
If in the future a portion or all of the $1,841,000 valuation allowance
at August 31, 2006 is no longer deemed to be necessary, reductions of the
valuation allowance will decrease the goodwill balance associated with the
Solutions Division. Conversely, if in the future the Company were to change
its realization probability assessment to less than 50%, the Company would
provide an additional valuation allowance for all or a portion of the net
deferred income tax asset, which would increase the income tax provision.
The effective income tax rate was (8.7%) and 40.1% in the six months
ended August 31, 2006 and 2005, respectively. Excluding the goodwill and
intangible assets impairment loss of $29,848,000 and IPR&D write-off of
$6,850,000, the effective income tax rate for the six months ended August 31,
2006 was 40.4%.
Note 7 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution, using the treasury stock method, that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. In computing diluted earnings per
share, the treasury stock method assumes that outstanding options are
exercised and the proceeds are used to purchase common stock at the average
market price during the period. Options will have a dilutive effect under the
treasury stock method only when the Company reports income and the average
market price of the common stock during the period exceeds the exercise price
of the options.
The calculation of weighted average shares used in the computation of
basic and diluted earnings per share is summarized as follows (in thousands):
Three months ended Six months ended
August 31, August 31,
---------------- ----------------
2006 2005 2006 2005
------ ------ ------ ------
Basic weighted average number
of common shares outstanding 23,337 22,490 23,230 22,491
Effect of dilutive securities:
Stock options 352 598 - 481
Shares held in escrow - 226 - 140
------ ------ ------ ------
Diluted weighted average number
of common shares outstanding 23,689 23,314 23,230 23,112
====== ====== ====== ======
Options outstanding at August 31, 2006 were excluded from the computation
of diluted earnings per share for the six months then ended because the
Company reported a year-to-date net loss and the effect of inclusion would be
antidilutive (i.e., including such options would result in a lower loss per
share).
Note 8 - COMPREHENSIVE INCOME
Comprehensive income is defined as the total of net income and all non-
owner changes in equity. The following table details the components of
comprehensive income for the three and six months ended August 31, 2006 and
2005 (in thousands):
Three Months Ended Six Months Ended
August 31, August 31,
---------------- ----------------
2006 2005 2006 2005
------ ------ ------ ------
Net income (loss) $1,235 $3,681 $(32,816) $5,658
Foreign currency translation
adjustment (112) - 2 -
------ ------ ------ ------
Comprehensive income (loss) $1,123 $3,681 $(32,814) $5,658
====== ====== ====== ======
Note 9 - STOCK-BASED COMPENSATION
The Financial Accounting Standards Board issued SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS No. 123R") which requires companies to
measure all employee stock-based compensation awards using a fair value method
and record such expense in its consolidated financial statements. In
addition, the adoption of SFAS No. 123R required additional accounting and
disclosure related to income tax and cash flow effects resulting from stock-
based compensation. The Company adopted SFAS No. 123R (the "date of
adoption") at the beginning of the fiscal 2007 first quarter ended May 31,
2006.
The Company adopted SFAS No. 123R under the modified prospective
application. Accordingly, prior period amounts have not been restated. Under
this application, the Company records stock-based compensation expense for all
awards granted on or after the date of adoption and for the portion of
previously granted awards that remained unvested at the date of adoption.
Currently, the Company's stock-based compensation relates to stock options
awarded to employees and directors and restricted stock awarded to directors.
Prior to the adoption of SFAS No. 123R, the Company presented all tax
benefits of deductions resulting from the exercise of stock options as
operating cash flows in the consolidated statements of cash flows. SFAS No.
123R requires the cash flows resulting from the tax benefits from tax
deductions in excess of the compensation cost recognized for those options
(excess tax benefits) to be classified as financing cash flows. As a result
of adopting SFAS No. 123R, the $258,000 excess tax benefits have been
classified as a financing cash inflow in the accompanying consolidated
statement of cash flows for the six months ended August 31, 2006.
Prior to the first quarter of fiscal 2007, the Company applied the
provisions of APB No. 25, "Accounting for Stock Issued to Employees," as
permitted under SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of SFAS Statement No. 123."
The following table details the effect on net income and earnings per
share "as reported" as if compensation expense had been recorded in the
consolidated statement of operations during fiscal 2006 using the fair value
method prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation".
Three months Six months
ended ended
August 31, August 31,
2005 2005
------ ------
Net income as reported $3,681 $5,658
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (365) (570)
----- ------
Pro forma net income $3,316 $5,088
===== =====
Earnings per share:
Basic -
As reported $ 0.16 $ 0.25
Pro forma $ 0.15 $ 0.23
Diluted -
As reported $ 0.16 $ 0.24
Pro forma $ 0.14 $ 0.22
Stock-based compensation expense for the three and six months ended
August 31, 2006 was $653,000 and $1,073,000, respectively. Such expense is
included in the following captions of the consolidated statement of
operations:
Three months Six months
ended ended
August 31, August 31,
2006 2006
------ ------
Cost of revenues $ 75 $ 105
Research and development 117 158
Selling 62 106
General and administrative 399 704
------ ------
$ 653 $1,073
====== ======
Option grants are issued at market value on the date of grant and
generally become exercisable in four equal annual installments beginning one
year from the date of grant. Option grants expire 10 years after the date of
grant. Option grants are either incentive stock options or non-qualified
stock options. The Company treats an option grant with graded vesting as a
single award for expense attribution purposes and recognizes compensation cost
on a straight-line basis over the requisite service period of the entire
award.
The fair value of the stock options granted was estimated on the date of
the grant using a Black-Scholes option-pricing model that uses the assumptions
noted in the following table.
Six months
ended August 31,
Black-Scholes -------------------
Valuation Assumptions (1) 2006 2005
------------------------- ------ ------
Expected life (years) (2) 6 5
Expected volatility (3) 75%-81% 88%-95%
Risk-free interest rates (4) 4.8%-5.2% 3.9%-4.1%
Expected dividend yield 0% 0%
(1) Beginning on the date of adoption of SFAS No. 123R, forfeitures are
estimated based on historical experience; prior to the date of adoption,
forfeitures were recorded as they occurred.
(2) The expected life of stock options is estimated based on historical
experience.
(3) The expected volatility is estimated based on historical and current
financial data for the Company.
(4) Based on the U.S. Treasury constant maturity interest rate whose term
is consistent with the expected life of the stock options.
Changes in the Company's outstanding stock options for the six months
ended August 31, 2006 were as follows (in thousands except dollar amounts):
Weighted
Number of Average
Options Exercise Price
-------- --------
Outstanding at February 28, 2006 2,623 $10.09
Granted 654 12.33
Exercised (120) 4.43
Forfeited or expired (379) 16.84
-----
Outstanding at August 31, 2006 2,778 $ 9.94
=====
Exercisable at August 31, 2006 1,584 $10.48
=====
The weighted average fair value for the stock options granted during the
six months ended August 31, 2006 was $8.71. The weighted average remaining
contractual term and the aggregate intrinsic value of options outstanding as
of August 31, 2006 was 7.0 years and $2.6 million, respectively. The weighted
average remaining contractual term and the aggregate intrinsic value of
options exercisable as of August 31, 2006 was 5.4 years and $2.2 million,
respectively. The total intrinsic value for stock options exercised during
the six months ended August 31, 2006 was $732,000. Net cash proceeds from the
exercise of stock options for the six months ended August 31, 2006 was
$533,000 and the associated income tax benefit was $298,000 for that same time
period.
Changes in the shares of the Company's nonvested restricted stock during
the six months ended August 31, 2006 were as follows (in thousands except
dollar amounts):
Weighted
Number of Average
Shares Fair Value
-------- ----------
Outstanding at February 28, 2006 - $ -
Granted 24 6.51
Vested - -
Forfeited - -
-----
Outstanding at August 31, 2006 24 $ 6.51
=====
As of August 31, 2006, there was $7.5 million of total unrecognized
stock-based compensation cost related to nonvested stock options and nonvested
restricted stock. That cost is expected to be recognized over a weighted-
average period of 3.2 years.
Note 10 - CONCENTRATION OF RISK
Because the Company's principal business involves the sale of products
into a market dominated by two large service providers, a significant
percentage of consolidated revenue and consolidated accounts receivable relate
to a small number of customers. Sales to customers which accounted for 10% or
more of consolidated sales for the three and six months ended August 31, 2006
or 2005, as a percent of consolidated revenue, are as follows:
Three months ended Six months ended
August 31, August 31,
---------------- ----------------
Customer 2006 2005 2006 2005
-------- ------ ------ ------ ------
A 48.0% 57.5% 51.7% 57.3%
B 15.2% 9.3% 13.2% 11.7%
Accounts receivable from these customers as a percent of consolidated
net accounts receivable are as follows:
Aug. 31, Feb. 28,
2006 2006
------ ------
A 53.7% 40.1%
B 7.1% 19.2%
Customers A and B are customers of the Company's Products Division.
Note 11 - PRODUCT WARRANTIES
The Company generally warrants its products against defects over periods
ranging from 3 to 24 months. An accrual for estimated future costs relating
to products returned under warranty is recorded as an expense when products
are shipped. At the end of each quarter, the Company adjusts its liability
for warranty claims based on its actual warranty claims experience as a
percentage of sales for the preceding three years. The warranty liability is
included in Other Accrued Liabilities in the accompanying consolidated balance
sheets. Activity in the warranty liability for the six months ended August
31, 2006 and 2005 is as follows (in thousands):
Six months ended
August 31,
-----------------
2006 2005
------ ------
Balance at beginning of period $477 $746
Charged to costs and expenses 679 74
Deductions (630) (170)
---- ----
Balance at end of period $526 $650
==== ====
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,
-------------------
2006 2005
------ ------
Interest paid $ 813 $ 238
Income taxes paid (net
refunds received) $ 600 $ 214
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Six months ended
August 31,
-------------------
2006 2005
------ ------
Company common stock issued from
escrow fund as additional
purchase consideration for the
2004 Vytek acquisition $ 2,052 $ -
Fair value of common stock
received as consideration
from the sale of assets - $ 190
Note 13 - SEGMENT INFORMATION
Segment information for the three and six months ended August 31, 2006
and 2005 is as follows (dollars in thousands):
Three months ended Three months ended
August 31, 2006 August 31, 2005
------------------------------------ ------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Products Solutions Products Solutions
Division Division Corporate Total Division Division Corporate Total
------- ------ ------- ----- ------- ------ ------- -----
Revenues:
Products $54,546 $ 1,114 $55,660 $52,598 $ 838 $53,436
Services 797 1,477 2,274 - 4,225 4,225
------ ----- ------ ------ ----- ------
Total $55,343 $ 2,591 $57,934 $52,598 $ 5,063 $57,661
====== ===== ====== ====== ===== ======
Gross profit:
Products $12,591 $ 1,096 $13,687 $11,724 $ 691 $12,415
Services 53 271 324 - 1,000 1,000
------ ----- ------ ------ ----- ------
Total $12,644 $ 1,367 $14,011 $11,724 $ 1,691 $13,415
====== ===== ====== ====== ===== ======
Gross margin:
Products 23.1% 98.4% 24.6% 22.3% 82.5% 23.2%
Services 6.6% 18.3% 14.2% - 23.7% 23.7%
Total 22.8% 52.8% 24.2% 22.3% 33.4% 23.3%
Operating
income
(loss) $ 4,374 $ (423) $(1,529) $ 2,422 $ 7,691 $ (513) $(1,082) $ 6,096
====== ===== ===== ====== ====== ===== ===== ======
Six months ended Six months ended
August 31, 2006 August 31, 2005
------------------------------------ ------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Products Solutions Products Solutions
Division Division Corporate Total Division Division Corporate Total
------- ------ ------- ----- ------- ------ ------- -----
Revenues:
Products $97,503 $ 1,913 $ 99,416 $93,766 $ 2,062 $ 95,828
Services 797 4,034 4,831 - 9,413 9,413
------ ------- ------- ------ ------ -------
Total $98,300 $ 5,947 $104,247 $93,766 $ 11,475 $105,241
====== ======= ======= ====== ====== =======
Gross profit:
Products $22,678 $ 1,798 $ 24,476 $20,534 $ 1,285 $ 21,819
Services 53 409 462 - 2,294 2,294
------ ------ ------- ------ ------ -------
Total $22,731 $ 2,207 $ 24,938 $20,534 $ 3,579 $ 24,113
====== ====== ======= ====== ====== =======
Gross margin:
Products 23.3% 94.0% 24.6% 21.9% 62.3% 22.8%
Services 6.6% 10.1% 9.6% - 24.4% 24.4%
Total 23.1% 37.1% 23.9% 21.9% 31.2% 22.9%
Operating
income
(loss) $ 3,517 $(31,605) $(2,811) $(30,899) $13,047 $(1,656) $(2,016) $ 9,375
====== ====== ===== ======= ====== ====== ===== =======
The Company considers operating income (loss) to be the primary measure
of profit or loss of its business segments. The amount shown for each period
in the "Corporate" column above for operating income (loss) consists of
corporate expenses not allocated to the business segments. Unallocated
corporate expenses include salaries and benefits of the CEO, CFO and other
corporate staff, and corporate expenses such as audit fees, investor
relations, stock listing fees, director and officer liability insurance, and
board of director fees and expenses.
Note 14 - COMMITMENTS AND CONTINGENCIES
The Company leases the building that houses its corporate office,
Products Division offices and manufacturing plant in Oxnard, California under
an operating lease that expires June 30, 2011. The lease agreement requires
the Company to pay all maintenance, property taxes and insurance premiums
associated with the building. In addition, the Company's Products Division
leases small facilities in Minnesota and France. The Company's Solutions
Division leases offices in California. The Company also leases certain
manufacturing equipment and office equipment under operating lease
arrangements. Dataradio, which became part of the Company's Products Division
upon its acquisition in May 2006, leases offices in Montreal, Minnesota and
Atlanta. A summary of future payments under operating lease commitments is
included in the contractual cash obligations table in Note 5.
A lawsuit was filed against the Company on September 15, 2006 by CN
Capital, the seller of the assets of Skybility which the Company acquired in
April 2005. The lawsuit contends that the Company owes CN Capital
approximately $1.6 million under the earn-out provision of the Skybility Asset
Purchase Agreement dated April 18, 2005. The Company believes the lawsuit is
without merit and intends to vigorously defend against this action. No loss
accrual has been made in the accompanying financial statements for this
matter.
Note 15 - RELATED PARTY TRANSACTIONS
Dataradio is leasing its offices in Montreal from a lessor that is
controlled by Dataradio's President, who is also an officer of the Company.
The Company believes that the terms of this facility lease are commercially
reasonable and comparable to market terms.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of sales and expenses during the reporting periods.
Areas where significant judgments are made include, but are not limited to:
allowance for doubtful accounts, inventory valuation, product warranties, the
deferred tax asset valuation allowance, and the valuation of long-lived assets
and goodwill. Actual results could differ materially from these estimates.
Allowance for Doubtful Accounts
The Company establishes an allowance for estimated bad debts based upon a
review and evaluation of specific customer accounts identified as known and
expected collection problems, based on historical experience, or due to
insolvency, disputes or other collection issues. As further described in Note
1 to the accompanying consolidated financial statements, the Company's
customer base is quite concentrated, with two customers accounting for 65% of
the Company's total revenue for the six months ended August 31, 2006 and 61%
of the Company's accounts receivable balance as of August 31, 2006. Changes
in either a key customer's financial position, or the economy as a whole,
could cause actual write-offs to be materially different from the recorded
allowance amount.
Inventories
The Company evaluates the carrying value of inventory on a quarterly
basis to determine if the carrying value is recoverable at estimated selling
prices. To the extent that estimated selling prices do not exceed the
associated carrying values, inventory carrying amounts are written down. In
addition, the Company generally treats inventory on hand or committed with
suppliers, which is not expected to be sold within the next 12 months, as
excess and thus appropriate write-downs of the inventory carrying amounts are
established through a charge to cost of sales. Estimated usage in the next 12
months is based on firm demand represented by orders in backlog at the end of
the quarter and management's estimate of sales beyond existing backlog, giving
consideration to customers' forecasted demand, ordering patterns and product
life cycles. Significant reductions in product pricing, or changes in
technology and/or demand may necessitate additional write-downs of inventory
carrying value in the future.
Product Warranties
The Company provides for the estimated cost of product warranties at the
time revenue is recognized. While it engages in extensive product quality
programs and processes, including actively monitoring and evaluating the
quality of its component suppliers, the Company's warranty obligation is
affected by product failure rates and material usage and service delivery
costs incurred in correcting a product failure. Should actual product failure
rates, material usage or service delivery costs differ from management's
estimates, revisions to the estimated warranty liability would be required.
Deferred Income Tax Asset Valuation Allowance
The deferred income tax asset reflects the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and for income tax purposes. A deferred income
tax asset is recognized if realization of such asset is more likely than not,
based upon the weight of available evidence that includes historical operating
performance and the Company's forecast of future operating performance. The
Company evaluates the realizability of its deferred income tax asset on a
quarterly basis, and a valuation allowance is provided, as necessary. During
this evaluation, the Company reviews its forecasts of income in conjunction
with the positive and negative evidence surrounding the realizability of its
deferred income tax asset to determine if a valuation allowance is needed.
Vytek, which was acquired by the Company in April 2004, has tax loss
carryforwards and other tax assets that the Company believes will be
utilizable to some extent in the future, subject to change of ownership
limitations pursuant to Section 382 of the Internal Revenue Code and to the
ability of the combined post-merger company to generate sufficient taxable
income to utilize the benefits before the expiration of the applicable
carryforward periods.
At August 31, 2006 the Company's net deferred income tax asset was
$864,000, which amount is net of a valuation allowance of $1,841,000. This net
deferred tax asset of $864,000 also includes a deferred tax liability of
$5,522,000 arising from the acquisition of Dataradio that is included in
Deferred Income Tax Liabilities in the accompanying consolidated balance sheet
at August 31, 2006.
The valuation allowance relates to the tax assets acquired in the Vytek
purchase. If in the future a portion or all of the $1,841,000 valuation
allowance is no longer deemed to be necessary, reductions of the valuation
allowance will decrease the goodwill balance associated with the Vytek
acquisition. Conversely, if in the future the Company were to change its
realization probability assessment to less than 50%, the Company would provide
an additional valuation allowance for all or a portion of the net deferred
income tax asset, which would increase the income tax provision.
Valuation of Long-lived Assets and Goodwill
The Company believes the estimate of its valuation of long-lived assets
and goodwill is a "critical accounting estimate" because if circumstances
arose that led to a decrease in the valuation it could have a material impact
on the Company's results of operations.
The Company accounts for long-lived assets other than goodwill in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment and Disposal of Long Lived
Assets" ("SFAS No. 144"). SFAS No. 144 classifies long-lived assets as
either: (1) to be held and used; (2) to be disposed of by other than sale; or
(3) to be disposed of by sale. This standard introduces a probability-
weighted cash flow estimation approach to address situations where alternative
courses of action to recover the carrying amount of a long-lived asset are
under consideration or a range is estimated for the amount of possible future
cash flows. SFAS No. 144 requires, among other things, that an entity review
its long-lived assets and certain related intangibles for impairment whenever
changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable.
Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets",
goodwill is tested for impairment on an annual basis, or more frequently as
impairment indicators arise. The test for impairment involves the use of
estimates related to the fair values of the business operations with which
goodwill is associated and is usually based on projected cash flows or a
market value approach.
As further described in Note 4 to the accompanying consolidated financial
statements, the Company tested its Solutions Division goodwill for impairment
as of April 30, 2006, which indicated that there was an impairment as of that
date. As a result of this test, the Company recorded impairment losses on
goodwill and other intangible assets of $29,012,000 and $836,000,
respectively, in the six months ended August 31, 2006.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Income Tax Uncertainties" ("FIN 48"). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial statements
as "more-likely-than-not" to be sustained by the taxing authorities. FIN 48
provides guidance on the de-recognition, measurement and classification of
income tax uncertainties, along with any related interest and penalties.
FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties. The Company will be
required to adopt FIN 48 at the beginning of its fiscal year 2008. The
differences between the amounts recognized in the consolidated balance sheet
prior to the adoption of FIN 48 and the amounts reported after adoption will
be accounted for as a cumulative-effect adjustment recorded to the beginning
balance of retained earnings. The Company is still evaluating the impact, if
any, of adopting the provisions of FIN 48 on its financial position and
results of operations.
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 108, "Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements", which provides interpretive guidance on the
consideration of the effects of prior year misstatements in quantifying
current year misstatements for the purpose of a materiality assessment. The
Company will be required to adopt SAB No. 108 at the beginning of its fiscal
year 2008. The Company is currently assessing the impact, if any, the
adoption of SAB No. 108 will have on its financial position and results of
operations.
RESULTS OF OPERATIONS
Basis of presentation:
The Company uses a 52-53 week fiscal year ending on the Saturday closest
to February 28, which for fiscal 2006 fell on February 25, 2006. Fiscal 2007,
a 53-week year, will end on March 3, 2007. The actual six month year-to-date
periods ended on September 2, 2006, consisting of 27 weeks of operations, and
August 27, 2005, consisting of 26 weeks of operations. The second fiscal
quarters ended September 2, 2006 and August 27, 2005 both consisted of 13
weeks of operations. In the accompanying consolidated financial statements,
the 2006 fiscal year end is shown as February 28 and the interim period end
for both years is shown as August 31 for clarity of presentation.
Overview:
CalAmp is a provider of wireless products, engineering services and
software that enable anytime/anywhere access to critical information, data and
entertainment content. CalAmp is the leading supplier of direct broadcast
satellite (DBS) outdoor customer premise equipment to the U.S. satellite
television market. The Company also provides wireless connectivity solutions
for the telemetry and asset tracking markets, private wireless networks,
public safety communications, and critical infrastructure and process control
applications.
The Company's DBS reception products are sold primarily to the two U.S.
DBS system operators, Echostar Communications Corporation and DirecTV Group
Inc., for incorporation into complete subscription satellite television
systems. The Company sells its other wireless access products directly to
system operators as well as through distributors and system integrators.
On May 26, 2006 the Company acquired privately held Dataradio, Inc., a
leading supplier of proprietary advanced wireless data systems, products, and
solutions for public safety, critical infrastructure and industrial control
applications, for a cash payment of Canadian $60.1 million, or U.S. $54.3
million at the effective exchange rate. Dataradio has a diversified customer
base with no single customer accounting for more than 4% of total revenue.
Dataradio has approximately 175 employees in facilities located in Montreal,
Minnesota and Georgia. The Dataradio acquisition expands CalAmp's wireless
data communications business while furthering the Company's strategic goals of
diversifying its customer base and expanding its product offerings into
higher-margin growth markets. Dataradio's results of operations are included
in CalAmp's results of operations for the six months ended August 31, 2006 for
a 14 week period, during which Dataradio generated revenue of $7.5 million and
gross profit of $4.0 million. In connection with the acquisition of Dataradio
the Company recorded a charge of $6,850,000 to write-off in-process research
and development of the acquired business pursuant to the preliminary purchase
price allocation.
Also on May 26, 2006, the Company acquired the mobile-resource management
(MRM) product line from privately held TechnoCom Corporation for $2.4 million
in cash and an earn-out payment equal to revenues exceeding $3,100,000 during
the 12-month period following the acquisition. This product line, which is
used to help track fleets of cars and trucks, generated approximately $4
million in revenue in the 12-month period ended April 30, 2006. Sales of the
MRM product line are included in CalAmp's results of operations for the six
months ended August 31, 2006 for a 14 week period, during which this product
line contributed sales of $1.1 million and gross profit of $0.5 million.
The Vytek acquisition in April 2004 gave rise to goodwill of
approximately $72 million. In accordance with the applicable accounting
rules, the goodwill of $72 million was apportioned between CalAmp's Solutions
Division and Products Division because both divisions were expected to benefit
from the acquisition. The apportionment analysis resulted in allocating $37
million of the goodwill to the Products Division and the remaining $35 million
to the Solutions Division.
As a result of the latest annual impairment test of the Solutions Division
goodwill conducted as of April 30, 2006, the Company determined that there was
an impairment of goodwill, and accordingly, an impairment charge was recorded
in the amount of $29,012,000 in the six months ended August 31, 2006. In
addition, the Company recorded an $836,000 impairment charge related to the
other intangible assets arising from the Vytek acquisition. The impairment
charges reflect the declining revenues associated with the Solutions
Division's information technology professional consulting business, due
primarily to the inability of the Solutions Division to generate new recurring
revenue streams to grow the business.
At the consolidated level, the Company's revenue consists principally of
sales of satellite television outdoor reception equipment for the U.S. DBS
industry, which accounted for 70% and 77% of consolidated revenue in the six
months ended August 31, 2006 and 2005, respectively. The DBS system operators
have approximately 27% share of the total subscription television market in
the U.S. In calendar 2005, the size of the U.S. DBS market was estimated by
industry analysts to have grown by 9% from 24.8 million subscribers to
approximately 27.1 million subscribers at December 31, 2005.
The demand for the Company's products has been affected in the past, and
may continue to be affected in the future, by various factors, including, but
not limited to, the following:
* the timing, rescheduling or cancellation of orders from one of
CalAmp's key customers in CalAmp's satellite products business and the
Company's ability, as well as the ability of its customers, to manage
inventory;
* the rate of growth in the overall subscriber base in the U.S. DBS
Market;
* the economic and market conditions in wireless communications
markets;
* CalAmp's ability to specify, develop or acquire, complete, introduce,
market and transition to volume production of new products and
technologies in a timely manner;
* the rate at which CalAmp's present and future customers and end-users
adopt the Company's products and technologies in its target markets; and
* the qualification, availability and pricing of competing products and
technologies and the resulting effects on sales and pricing of the
Company's products.
For these and other reasons, the Company's net revenue in the first half
of fiscal year 2007 may not necessarily be indicative of future periods'
revenue amounts. From time to time, the Company's key customers significantly
reduce their product orders, or may place significantly larger orders, either
of which can cause the Company's quarterly revenues to fluctuate
significantly. The Company expects these fluctuations to continue in the
future.
The Company's revenue, gross profit and operating income (loss) by
business segment are as follows:
REVENUE BY SEGMENT
Three months ended August 31, Six months ended August 31,
------------------------------- --------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
% of % of % of % of
Division $000s Total $000s Total $000s Total $000s Total
--------- ------- ----- ------- ----- -------- ----- -------- -----
Products $55,343 95.5% $52,598 91.2% $ 98,300 94.3% $ 93,766 89.1%
Solutions 2,591 4.5% 5,063 8.8% 5,947 5.7% 11,475 10.9%
------- ----- ------- ----- -------- ----- -------- -----
Total $57,934 100.0% $57,661 100.0% $104,247 100.0% $105,241 100.0%
======= ===== ======= ===== ======== ===== ======== =====
GROSS PROFIT BY SEGMENT
Three months ended August 31, Six months ended August 31,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- -------------- ------------- --------------
% of % of % of % of
Division $000s Total $000s Total $000s Total $000s Total
--------- ------- ----- ------- ----- ------- ----- ------- -----
Products $12,644 90.2% $11,724 87.4% $22,731 91.2% $20,534 85.2%
Solutions 1,367 9.8% 1,691 12.6% 2,207 8.8% 3,579 14.8%
------- ----- ------- ----- ------- ----- ------- -----
Total $14,011 100.0% $13,415 100.0% $24,938 100.0% $24,113 100.0%
======= ===== ======= ===== ======= ===== ======= =====
OPERATING INCOME (LOSS) BY SEGMENT
Three months ended August 31, Six months ended August 31,
-------------------------------- --------------------------------
2006 2005 2006 2005
---------------- --------------- --------------- ---------------
% of % of % of % of
Total Total Total Total
Division $000s Revenue $000s Revenue $000s Revenue $000s Revenue
--------- ------- ------- ------- ------- ------- ------- ------- -------
Products $ 4,374 7.5% $ 7,691 13.3% $ 3,517 3.4% $13,047 12.4%
Solutions (423) (0.7%) (513) (0.9%) (31,605) (30.3%) (1,656) (1.6%)
Corporate
expenses (1,529) (2.6%) (1,082) (1.8%) (2,811) (2.7%) (2,016) (1.9%)
------- ------ ------- ------ ------- ------ ------- -----
Total $ 2,422 4.2% $ 6,096 10.6% $(30,899) (29.6%) $ 9,375 8.9%
======= ====== ======= ====== ======= ====== ======= =====
The Products Division operating loss in the six months ended August 31,
2006 includes a charge of $6,850,000 to write-off in-process research and
development costs associated with the Dataradio acquisition. The Solutions
Division operating loss in the six months ended August 31, 2006 includes the
goodwill impairment charge of $29,012,000 and intangible assets impairment
charge of $836,000 as discussed above.
Revenue
Products Division revenue increased $2,745,000, or 5%, to $55,343,000 in
the three months ended August 31, 2006 from $52,598,000 for the same period in
the previous fiscal year. The increase was primarily due to the inclusion in
the latest quarter of Dataradio and the TechnoCom MRM product line which
contributed revenues of $6,793,000 and $917,000, respectively. Revenues from
sale of DBS products in the latest quarter declined by $5,800,000 from the
second quarter of last year, while sales of other wireless products and
services increased by $835,000 year-over-year.
For the six months ended August 31, 2006, Products Division revenue
increased $4,534,000, or 5%, to $98,300,000 from $93,766,000 over the same
period of the prior year. The recently acquired Dataradio and the TechnoCom
MRM product line contributed revenues of $7,514,000 and $1,134,000,
respectively, for the 14 week period from date of acquisition to August 31,
2006. Revenues from the sale of DBS products declined by $8,307,000, while
sales of other wireless products and services increased by $4,193,000 year-
over-year.
Revenue of the Solutions Division decreased 49% from $5,063,000 in the
quarter ended August 31, 2005 to $2,591,000 in the quarter ended August 31,
2006. For the six months ended August 31, 2006, Solutions Division revenue
decreased $5,528,000, or 48%, over the same period of the prior year. These
revenue decreases are primarily the result of the loss of key customers in the
Solutions Division's information technology professional consulting business
which led to management's decision to exit this business at the end of first
quarter of fiscal 2007.
Gross Profit and Gross Margins
Products Division gross profit increased $920,000, or 8% in the second
quarter of fiscal 2007 over the same period of the prior year. This increase
is the net result of a gross profit contribution of $3.9 million from
Dataradio and the TechnoCom product line, both of which were acquired during
the fiscal 2007 first quarter, and a decrease of $3.0 million in the gross
profit of the Products Division excluding the operating results of Dataradio
and the TechnoCom product line (hereinafter referred to as the "Pre-existing
Products Division") compared to the second quarter of last year. For the six
months ended August 31, 2006, Products Division gross profit increased
$2,197,000, or 11%, from the same period of last year. The gross profit
increase in the latest six month period compared to the prior year is the net
result of the gross profit contribution of Dataradio and the TechnoCom product
line of $4.4 million for the 14 week period from the date of acquisition to
August 31, 2006, and a decrease of $2.2 million in the gross profit of the
Pre-existing Products Division compared to the first six months of last year.
The Products Division gross margin in the three months ended August 31,
2006 and 2005 was 22.8% and 22.3%, respectively. In the three months ended
August 31, 2006, Dataradio and the TechnoCom product line generated an
aggregate gross margin of 51% and the Pre-existing Products Division generated
a gross margin of 18.4%. The decline in gross margin of the Pre-existing
Products Division is primarily due to a change in mix of DBS products with
lower sales in the latest quarter of products that have higher average selling
prices and higher margins, and higher airfreight shipment costs for incoming
materials.
Solutions Division gross profit decreased 19% from $1,691,000 in the
second quarter of last year to $1,367,000 in the latest quarter. For the six
months ended August 31, 2006, Solutions Division gross profit decreased
$1,372,000, or 38%, from the same period of last year. The decline in gross
profit is primarily attributable to the decline in Solutions Division revenue.
The Solutions Division gross margin in the three months ended August 31,
2006 and 2005 was 52.8% and 33.3%, respectively. This improvement is
primarily due to revenue mix favoring high margin software products.
See also Note 13 to the accompanying unaudited consolidated financial
statements for additional operating data by business segment.
Operating Expenses
Consolidated research and development expense ("R&D") increased by
$1,432,000 to $3,792,000 in the second quarter of fiscal 2007 from $2,360,000
last year. The increase is mainly attributable to the inclusion of Dataradio's
operations for the second quarter of fiscal 2007. For the six month year-to-
date periods, R&D expense increased $1,800,000 from $4,557,000 last year to
$6,357,000 this year. Dataradio's R&D expense accounted for $1.6 million of
the increase.
Consolidated selling expenses increased to $3,005,000 in the second
quarter this year from $1,796,000 last year. For the six month year-to-date
periods, selling expenses increased $1,108,000 from $3,668,000 last year to
$4,776,000 this year. Dataradio's selling expenses accounted for most of the
increases. Dataradio's selling expenses for the three and six months ended
August 31, 2006 were $1.4 million and $1.5 million, respectively. Dataradio's
operations are included for 14 weeks of the Company's six month period ended
August 31, 2006.
Consolidated general and administrative expenses ("G&A") increased by 35%
from $2,607,000 in the second quarter of last year to $3,517,000 in the second
quarter of this year. Stock-based compensation expense included in G&A
accounted for $399,000 of the increase and Dataradio's G&A expenses accounted
for $435,000 of the increase. For the six month year-to-date periods, G&A
expenses increased $1,109,000 from $5,221,000 last year to $6,330,000 this
year. Stock-based compensation expense included in G&A accounted for $704,000
of the increase and Dataradio's G&A expenses accounted for $489,000 of the
increase.
Amortization of intangibles increased from $529,000 in the second quarter
of last year to $1,275,000 in the second quarter of this year. For the six
month year-to-date periods, amortization increased $704,000 from $972,000 last
year to $1,676,000 this year. The increases were primarily attributable to
amortization expense on identifiable intangible assets from the acquisitions
of Dataradio and the TechnoCom product line.
The IPR&D write-off increased to $6,850,000 in the six months ended
August 31, 2006 from $320,000 last year. Last year's IPR&D write-off was
related to the acquisition of Skybility and this year's IPR&D write-off was
related to the acquisition of Dataradio.
The impairment loss totaling $29,848,000 recorded in the six months ended
August 31, 2006 was the result of the annual goodwill impairment test for the
Solutions Division, as discussed above in the "Overview" section.
Operating Income (Loss)
Operating income in the three months ended August 31, 2006 was
$2,422,000, compared to operating income of $6,096,000 in the three months
ended August 31, 2005. This decrease in operating income is primarily
attributable to the decline in gross profit of the Pre-existing Products
Division from 22.3% in the second quarter of last year to 18.4% in the latest
quarter. Also contributing to the operating income decrease was higher
intangible asset amortization expense of $746,000 in the latest quarter
compared to the prior year, and stock-based compensation expense of $653,000
in the latest quarter as a result of adopting SFAS No. 123R at the beginning
of the current year.
The operating loss in the six months ended August 31, 2006 was
$30,899,000, compared to operating income of $9,375,000 in the six months
ended August 31, 2005. The operating loss is attributable to the $6,850,000
write-off of IPR&D associated with the Dataradio acquisition and the Solutions
Division's goodwill and intangible assets impairment losses totaling
$29,848,000.
Non-Operating Income (Expense), Net
Non-operating expense in the three months ended August 31, 2006 was
$246,000, compared to non-operating income of $26,000 in the three months
ended August 31, 2005. The decrease in nonoperating income was due to higher
interest expense resulting from the new bank borrowing as described in Note 5
to the accompanying unaudited consolidated financial statements.
Non-operating income in the six months ended August 31, 2006 was
$715,000, compared to non-operating income of $69,000 in the six months ended
August 31, 2005. This increase is primarily attributable to a gain of
$689,000 realized on foreign currency hedging activities in connection with
the acquisition of Dataradio, for which the purchase price was denominated in
Canadian dollars.
Income Tax Provision
The effective income tax rate was (8.7%) and 40.1% in the six months
ended August 31, 2006 and 2005, respectively. The effective tax rate this
year is negative because the $6,850,000 IPR&D write-off and the $29,848,000
impairment loss are not deductible for income taxes. The income tax provision
of $2,632,000 in the six months ended August 31, 2006 represents an effective
income tax rate of 40.4% on pretax income excluding these non-deductible
charges.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $25,485,000 at August 31, 2006, and its $10
million working capital line of credit with a bank, as further described
below. During the six months ended August 31, 2006, cash and cash equivalents
decreased by $20.3 million. This decrease is comprised primarily of cash used
for the Dataradio and TechnoCom product line acquisitions of $50.5 million net
of cash acquired, partially offset by proceeds from new bank borrowings of
$30.3 million (net of debt repayments). The cash generated by operating
activities of $28,000 in the six months ended August 31, 2006 was net of the
payment of $5.4 million of accrued incentives paid by Dataradio to its
workforce shortly after the acquisition by CalAmp. These incentives were
accrued as an expense in Dataradio's pre-acquisition income statement.
On May 26, 2006, the Company and certain direct and indirect subsidiary
guarantors of the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of Montreal, as administrative agent, and the other
financial institutions that from time to time may become parties to the Credit
Agreement. The credit facility is comprised of a term loan and a $10 million
working capital line of credit. The Company borrowed $35 million under the
term loan and $3 million under the line of credit. Borrowings are secured by
substantially all of the Company's assets. Of the total proceeds of $38
million, $7 million was used to pay off the Company's existing loans with U.S.
Bank National Association ("US Bank") and the remaining $31 million, plus cash
on hand of approximately $23 million, was used to fund the purchase price for
the Dataradio acquisition. The term loan principal is payable in quarterly
installments on the last day of March, June, September and December in each
year commencing on March 31, 2007 with a final payment of $8,750,000 on May
26, 2011. The maturity date of the line of credit is also May 26, 2011.
At the Company's option, borrowings under the Credit Agreement bear
interest at bank's prime rate ("Prime Based Loans") plus a margin ranging from
0% to 0.25% (the "Prime Rate Margin") or LIBOR ("LIBOR Based Loans") plus a
margin ranging from 0.75% to 1.25% (the "LIBOR Margin"). The Prime Rate
Margin and the LIBOR Margin vary depending on the Company's ratio of debt to
earnings before interest, taxes, depreciation, amortization and other noncash
charges (the "Leverage Ratio"). Interest is payable on the last day of the
calendar quarter for Prime Based Loans and at the end of the fixed rate LIBOR
period (ranging from 1 to 12 months) in the case of LIBOR Based Loans.
The Credit Agreement contains certain financial covenants and ratios that
the Company is required to maintain, including: a total Leverage Ratio of not
more than 2.75; net worth of not less than the sum of $140,887,000, 50% of net
income for each fiscal year and 50% of net cash proceeds from any issuance of
equity; and a fixed charge coverage ratio (earnings before interest, taxes,
depreciation and other noncash charges to fixed charges) of not less than
1.50.
The Credit Agreement includes customary affirmative and negative
covenants including, without limitation, negative covenants regarding
additional indebtedness, investments, maintenance of the business, liens,
guaranties, transfers and sales of assets, and the payment of dividends and
other restricted payments. The Credit Agreement also contains customary
events of default that would permit the administrative agent to accelerate
borrowings under the Agreement if not cured within applicable grace periods,
including, without limitation, the failure to make timely payments under the
Agreement or other material indebtedness and the failure to follow certain
covenants.
The Company's credit agreement with US Bank was terminated except for
$2,875,000 of the line of credit that was reserved for outstanding irrevocable
stand-by letters of credit. These letter of credits are secured by restricted
cash deposit of $2,875,000 which is included in prepaid expenses and other
current assets in the accompanying consolidated balance sheet at August 31,
2006.
See Note 5 to the accompanying consolidated financial statements for a
summary of the Company's contractual cash obligations as of August 31, 2006.
The Company believes that inflation and foreign currency exchange rates
have not had a material effect on its operations. Although the acquisition of
Dataradio will increase the Company's exposure to changes in foreign currency
exchange rates, the Company believes that fiscal 2007 will not be impacted
significantly by foreign exchange since a significant portion of the Company's
sales will continue to be to U.S. markets, or to international markets where
its sales are denominated in U.S. dollars.
The Company believes that cash flow from operations, together with
amounts available under its working capital line of credit, are sufficient to
support operations, fund capital expenditures and discharge contractual cash
obligations over the next 12 months.
FORWARD LOOKING STATEMENTS
Forward looking statements in this Form 10-Q which include, without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, projections and other information
regarding future performance, are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The words "may",
`will", "could", "plans", "intends", "seeks", "believes", "anticipates",
"expects", "estimates", "judgment", "goal", and variations of these words and
similar expressions, are intended to identify forward-looking statements.
These forward-looking statements reflect the Company's current views with
respect to future events and financial performance and are subject to certain
risks and uncertainties, including, without limitation, product demand, market
growth, new competition, competitive pricing and continued pricing declines in
the DBS market, supplier constraints, manufacturing yields, the ability to
manage cost increases in inventory materials including timing and market
acceptance of new product introductions, the Company's ability to harness new
technologies in a competitively advantageous manner, the Company's ability to
eliminate operating losses in its Solutions Division and make this business
segment profitable, the Company's success at integrating its acquired
businesses, and other risks and uncertainties that are set forth under the
"Risk Factors" in Part I, Item 1A of the Annual Report on Form 10-K for the
year ended February 28, 2006. Such risks and uncertainties could cause actual
results to differ materially from historical results or those anticipated.
Although the Company believes the expectations reflected in such forward-
looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be attained. The Company undertakes no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. At
August 31, 2006, the Company's term debt and credit facility with its bank are
subject to variable interest rates. The Company monitors its debt and
interest bearing cash equivalents to mitigate the risk of interest rate
fluctuations. A fluctuation of one percent in interest rates related to the
Company's outstanding variable rate debt would not have a material impact on
the Company's consolidated statement of operations.
The Company has market risk arising from changes in foreign currency
exchange rates related to Dataradio's operations in Canada. A 10% adverse
change in the foreign currency exchange rate would not have a significant
impact on the Company's results of operations or financial position. The
Company does not manage its foreign currency exchange rate risk through the
use of derivative instruments except for the forward currency exchange
contracts that were entered into and closed in May 2006 in connection with the
acquisition of Dataradio, which resulted in a gain of $689,000 during the six
months ended August 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's principal executive officer and principal financial
officer have concluded, based on their evaluation of disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, the Exchange Act) as of the end of the period covered by
this Report, that the Company's disclosure controls and procedures are
effective to ensure that the information required to be disclosed in reports
that are filed or submitted under the Exchange Act is accumulated and
communicated to management, including the principal executive officer and
principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure and that such information is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities Exchange Commission.
Internal Control Over Financial Reporting
There has been no change in the Company's internal control over
financial reporting that occurred during the Company's most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A lawsuit was filed against the Company on September 15, 2006 by CN
Capital, the seller of the assets of Skybility which the Company acquired in
April 2005. The lawsuit contends that the Company owes CN Capital
approximately $1.6 million under the earn-out provision of the Skybility Asset
Purchase Agreement dated April 18, 2005. The Company believes the lawsuit is
without merit and intends to vigorously defend against this action.
Item 1A. Risk Factors
In addition to the other information set forth in this report, the reader
is referred to the factors discussed in Part I, "Item 1A. Risk Factors" in the
Company's Annual Report on Form 10-K for the year ended February 28, 2006,
which could materially affect the Company's business, financial condition or
future results. The risks described in the Company's Annual Report on Form
10-K are not the only risks facing the Company. Additional risks and
uncertainties not currently known to management or that are currently deemed
to be immaterial also may materially adversely affect the Company's business,
financial condition and/or operating results. Additional risks resulting from
the Company's acquisition of Dataradio are as follows:
Governmental Regulation
Dataradio's products are subject to certain mandatory regulatory
approvals in the United States, Canada and other countries in which it
operates. In the United States, the Federal Communications Commission ("FCC")
regulates many aspects of communication devices including radiation
electromagnetic energy, biological safety and rules for devices to be
connected to the telephone network. In Canada, similar regulations are
administered by Industry Canada. Although Dataradio has obtained necessary
FCC and Industry Canada approvals for all products it currently sells, there
can be no assurance that such approvals can be obtained for future products on
a timely basis, or at all. In addition, such regulatory requirements may
change or the Company may not in the future be able to obtain all necessary
approvals from countries other than Canada or the United States in which it
currently sells its products or in which it may sell its products in the
future.
The FCC and Industry Canada may be slow in adopting new regulations
allowing private wireless networks to deliver higher data rates in licensed
frequency bands for public safety applications. This could adversely affect
demand for private networks as traditional private network users may opt for
public network connections for all or part of their wireless communication
needs. This could have a material adverse effect on the Company's business,
results of operations and financial condition since the private network
segment of the wireless data communications industry is the only segment in
which the Company currently operates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2006 Annual Meeting of Stockholders held on July 26, 2006, seven
directors stood for reelection to a one year term expiring at the fiscal 2006
Annual Meeting. All seven of the director nominees were reelected. The
results of the election of directors are summarized as follows:
Votes
Against or
Votes For Withheld Unvoted
---------- ---------- ---------
Richard Gold 21,144,533 620,500 1,727,641
Arthur Hausman 21,139,000 626,033 1,727,641
A.J. "Bert" Moyer 20,499,928 1,265,105 1,727,641
Thomas Pardun 21,326,709 438,324 1,727,641
Frank Perna, Jr. 21,092,454 672,579 1,727,641
Thomas Ringer 21,222,908 542,125 1,727,641
Fred Sturm 21,161,113 603,920 1,727,641
As previously disclosed, director Thomas Ringer, 75, retired from the
Board of Directors on September 21, 2006, after serving on the Board for more
than 10 years.
ITEM 6. EXHIBITS
Exhibit 31.1 - Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 31.2 - Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
(1) Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
October 12, 2006 /s/ Richard K. Vitelle
------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)