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: June 2, 2007
_________________
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
__________ ____________
Commission File Number: 0-12182
Exact Name of Registrant as
Specified in Its Charter: CalAmp Corp.
_______________________
DELAWARE 95-3647070
_______________________________ _______________
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification No.
Address of Principal Executive Offices: 1401 N. Rice Avenue
Oxnard, CA 93030
Registrant's Telephone Number: (805) 987-9000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The registrant had 23,627,091 shares of Common Stock outstanding as of
July 6, 2007.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
May 31, February 28,
2007 2007
Assets -------- --------
Current assets:
Cash and cash equivalents $ 11,138 $ 37,537
Accounts receivable, less allowance for
doubtful accounts of $1,371 and $347 at May 31,
2007 and February 28, 2007, respectively 25,647 38,439
Inventories 28,311 25,729
Deferred income tax assets 2,087 4,637
Prepaid expenses and other current assets 8,657 7,182
-------- --------
Total current assets 75,840 113,524
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 6,572 6,308
Deferred income tax assets, less current portion 7,331 -
Goodwill 106,283 90,001
Other intangible assets, net 30,225 18,643
Other assets 1,062 1,227
-------- --------
$227,313 $229,703
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 33,519 $ 2,944
Accounts payable 15,742 26,186
Accrued payroll and employee benefits 3,348 3,478
Accrued warranty costs 7,425 1,295
Other current liabilities 11,347 2,799
Deferred revenue 6,324 1,935
-------- --------
Total current liabilities 77,705 38,637
-------- --------
Long-term debt, less current portion - 31,314
Deferred income tax liabilities - 7,451
Other non-current liabilities 8,382 1,050
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 3,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 40,000 shares
authorized; 23,607 and 23,595 shares issued
and outstanding at May 31, 2007 and
February 28, 2007, respectively 236 236
Additional paid-in capital 139,860 139,175
Retained earnings 1,638 13,000
Accumulated other comprehensive loss (508) (1,160)
-------- --------
Total stockholders' equity 141,226 151,251
-------- --------
$227,313 $229,703
======== ========
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Three Months Ended
May 31,
-------------------
2007 2006
------- -------
Revenues:
Product sales $ 45,207 $ 43,756
Service revenues 2,237 2,557
------- -------
Total revenues 47,444 46,313
------- -------
Cost of revenues:
Cost of product sales 50,888 32,967
Cost of service revenues 1,268 2,419
------- -------
Total cost of revenues 52,156 35,386
------- -------
Gross profit (loss) (4,712) 10,927
------- -------
Operating expenses:
Research and development 4,763 2,565
Selling 2,686 1,771
General and administrative 3,557 2,813
Intangible asset amortization 1,897 401
Write-off of acquired in-process
research and development 310 6,850
Impairment loss - 29,848
------- -------
Total operating expenses 13,213 44,248
------- -------
Operating loss (17,925) (33,321)
------- -------
Non-operating income (expense):
Interest income 179 533
Interest expense (623) (232)
Other, net (139) 660
------- -------
Total non-operating income (expense) (583) 961
------- -------
Loss before income taxes (18,508) (32,360)
Income tax benefit (provision) 7,146 (1,691)
------- -------
Net loss $(11,362) $(34,051)
======= =======
Loss per share:
Basic $ (0.48) $ (1.47)
Diluted $ (0.48) $ (1.47)
Shares used in per share
calculations:
Basic 23,600 23,131
Diluted 23,600 23,131
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
May 31,
---------------------
2007 2006
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,362) $(34,051)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,659 1,119
Stock-based compensation expense 486 420
Excess tax benefit from stock-based
compensation expense (49) (199)
Write-off of in-process research and development 310 6,850
Impairment loss - 29,848
Deferred tax assets, net (12,147) 441
Gain on sale of investment (331) -
Changes in operating assets and liabilities:
Accounts receivable 13,918 4,639
Inventories (2,094) (6,787)
Prepaid expenses and other assets 1,361 (3,374)
Accounts payable (11,138) 5,027
Accrued liabilities 17,812 672
Deferred revenue 894 87
Other (2) 31
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 317 4,723
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (516) (798)
Proceeds from sale of property and equipment 4 17
Proceeds from sale of investment 1,045 -
Acquisition of Aircept (19,367) -
Acquisition of assets of SmartLink (7,944) -
Acquisition of Dataradio, net of cash acquired - (47,999)
Acquisition of assets of TechnoCom product line - (2,478)
Proceeds from Vytek escrow fund distribution - 480
------- -------
NET CASH USED IN INVESTING ACTIVITIES (26,778) (50,778)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 38,000
Debt repayments (739) (7,651)
Proceeds from exercise of stock options 141 389
Excess tax benefit from stock-based
compensation expense 49 199
------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (549) 30,937
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 611 114
------- -------
Net change in cash and cash equivalents (26,399) (15,004)
Cash and cash equivalents at beginning of period 37,537 45,783
------- -------
Cash and cash equivalents at end of period $ 11,138 $ 30,779
======= =======
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2007 and 2006
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
CalAmp Corp. ("CalAmp" or the "Company") is a provider of wireless
communications products that enable anytime/anywhere access to critical
information, data and entertainment content. CalAmp is a supplier of direct
broadcast satellite (DBS) outdoor customer premise equipment to the U.S.
satellite television market. The Company also provides wireless data
communications solutions for the telemetry and asset tracking markets,
private wireless networks, public safety communications, and critical
infrastructure and process control applications.
In March 2007, the Company split the Products Division into two separate
operating units: the Satellite Division and the Wireless DataCom Division.
The Satellite Division consists of the Company's DBS business, and the
Wireless DataCom Division consists of the remaining businesses of the
Products Division, including Dataradio, the TechnoCom Mobile Resource
Management (MRM) product line, CalAmp's legacy wireless businesses other than
DBS, and the operations of Aircept and SmartLink that were acquired in the
fiscal 2008 first quarter, as discussed in Note 2.
The Company uses a 52-53 week fiscal year ending on the Saturday closest
to February 28, which for fiscal 2007, a 53-week year, fell on March 3,
2007. Fiscal 2008, a 52-week year, will end on March 1, 2008. The first
quarter of fiscal year 2008 ended on June 2, 2007 and consisted of 13 weeks
of operations. The first quarter of fiscal year 2007 ended on June 3, 2006
and consisted of 14 weeks of operations. In the accompanying consolidated
financial statements, the 2007 fiscal year end is shown as February 28 and
the interim period end for both years is shown as May 31 for clarity of
presentation.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 2007 Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on May 17, 2007.
In the opinion of the Company's management, the accompanying
consolidated financial statements reflect all adjustments necessary to
present fairly the Company's financial position at May 31, 2007 and its
results of operations for the three months ended May 31, 2007 and 2006. The
results of operations for such periods are not necessarily indicative of
results to be expected for the full fiscal year.
All significant intercompany transactions and accounts have been
eliminated in consolidation.
Note 2 - RECENT ACQUISITIONS
Aircept
-------
On March 16, 2007, the Company acquired Aircept, a wireless vehicle
tracking business, from AirIQ Inc., a Canadian company, for cash
consideration of $19 million. The source of funds for the purchase price was
the Company's cash on hand. Aircept's business involves the sale of Global
Positioning Satellite (GPS) and cellular-based wireless asset tracking
products and services to vehicle lenders that specialize in automobile
financing for high credit risk individuals. Aircept, which has approximately
35 employees, became part of the Company's new Wireless DataCom Division.
Aircept had revenues of approximately $15 million and a gross profit margin
of approximately 35% during its calendar 2006 year.
The Company has not yet obtained all information required to complete
the purchase price allocation related to this acquisition. The final
allocation will be completed in fiscal 2008. Following is a preliminary
purchase price allocation (in thousands):
Purchase price paid in cash $19,000
Direct costs of acquisition 367
-------
Total cost of acquisition 19,367
Fair value of net assets acquired:
Current assets $ 3,615
Property and equipment 275
Other assets 55
Intangible assets:
Developed/core technology $4,970
Customer lists 1,730
Contracts backlog 530
Covenants not to compete 510
-----
Total intangible assets 7,740
Current liabilities (3,909)
------
Total fair value of net assets acquired 7,776
-------
Goodwill $11,591
=======
The Company paid a premium (i.e., goodwill) over the fair value of the
net tangible and identified intangible assets acquired for the following
reasons:
* Aircept is the market leader for this product and the associated services.
* Aircept offers an end-to-end solution comprised of hardware, hosted
application software and wireless data services. This brings core
competencies to CalAmp that can be leveraged across other business units.
The goodwill arising from the Aircept acquisition is expected to be
deductible for income tax purposes.
Pro forma financial information on this acquisition has not been provided
because the effects are not material to the Company's consolidated financial
statements.
SmartLink
---------
On April 4, 2007, the Company acquired the business and substantially
all the assets of SmartLink Radio Networks, a privately-held company, for
$7.9 million cash. The source of funds for the purchase price was the
Company's cash on hand. SmartLink provides proprietary interoperable radio
communications platforms and integration services for public safety and
critical infrastructure applications. Based on a software defined switch,
SmartLink's platform provides interoperability without the need to replace
the installed base of land mobile radios. SmartLink became part of the
Company's new Wireless DataCom Division. CalAmp plans to combine SmartLink's
operations in Connecticut with its Dataradio facilities in Montreal, Canada
and Atlanta, Georgia over the next several months.
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 2008. Following is a preliminary
purchase price allocation (in thousands):
Purchase price paid in cash $ 7,900
Direct costs of acquisition 44
-------
Total cost of acquisition 7,944
Fair value of net assets acquired:
Current assets $ 717
Property and equipment 208
Intangible assets:
Developed/core technology $3,730
Customer lists 910
Contracts backlog 740
In-process research and
development ("IPR&D") 310
-----
Total intangible assets 5,690
Current liabilities (1,866)
------
Total fair value of net assets acquired 4,749
-------
Goodwill $ 3,195
=======
The Company paid a premium (i.e., goodwill) over the fair value of the
net tangible and identified intangible assets acquired for the following
reasons:
* SmartLink has a competitively positioned unique product for the large
public safety mobile voice communications market.
* SmartLink's public safety mobile voice products and systems are
complementary to Dataradio's public safety mobile data communications
business.
* SmartLink's products have high gross margins.
The $310,000 allocated to IPR&D in the preliminary purchase price
allocation above was charged to expense immediately following the
acquisition.
The goodwill arising from the SmartLink acquisition is expected to be
deductible for income tax purposes.
Pro forma financial information on this acquisition has not been
provided because the effects are not material to the Company's consolidated
financial statements.
Note 3 - INVENTORIES
Inventories include the cost of material, labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in, first-
out method) or market, and consist of the following (in thousands):
May 31, February 28,
2007 2007
------ -------
Raw materials $22,511 $21,256
Work in process 225 505
Finished goods 5,575 3,968
------- -------
$28,311 $25,729
======= =======
Note 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
As further described in Note 1 and Note 13, in March 2007 the Company
split the Products Division into two separate operating units: the Satellite
Division and the Wireless DataCom Division. The Products Division goodwill
balance as of February 28, 2007 was allocated to Satellite Division and
Wireless DataCom Division on the basis of the relative fair values of these
two new divisions after specifically allocating the goodwill arising from the
Dataradio acquisition to the Wireless DataCom Division.
Changes in goodwill of each reporting unit during the three months ended
May 31, 2007 are as follows (in thousands):
Wireless
Satellite DataCom Solutions
Division Division Division Total
-------- --------- --------- --------
Balance as of February 28, 2007 $ 46,619 $ 37,956 $ 5,426 $ 90,001
Goodwill associated with
Aircept acquisition - 11,591 - 11,591
Goodwill associated with
SmartLink acquisition - 3,195 - 3,195
Goodwill associated with
TechnoCom acquisition - 2,205 - 2,205
Goodwill associated with
Dataradio acquisition - (609) - (609)
Other changes - (100) - (100)
-------- --------- -------- --------
Balance as of May 31, 2007 $ 46,619 $ 54,238 $ 5,426 $106,283
======== ========= ======== ========
The $2.2 million increase in goodwill associated with the TechnoCom
acquisition represents an earn-out amount payable in cash for this May 2006
acquisition based on the level of sales achieved in the first 12 months
following the acquisition. This amount is included in other accrued
liabilities in the consolidated balance sheet at May 31, 2007.
Impairment tests of goodwill associated with the Satellite Division and
Wireless DataCom Division are conducted annually as of December 31. The
annual impairment test of the Solutions Division goodwill is conducted as of
April 30. The Company used a market approach to calculate the fair value of
the Solutions Division as of April 30, 2007, which resulted in the
determination that there was no impairment of the Solutions Division goodwill
as of that date.
Other intangible assets are comprised as follows (in thousands):
May 31, 2007 February 28, 2007
------------------------ -------------------------
Amorti- Gross Accum. Gross Accum.
zation Carrying Amorti- Carrying Amorti-
Period Amount zation Net Amount zation Net
----- ------- ------ ------- ------- ------ -------
Developed/core
technology 5-7 yrs. $21,932 $4,672 $17,260 $12,992 $3,816 $ 9,176
Customer lists 5-7 yrs. 9,440 2,206 7,234 6,680 1,848 4,832
Contracts
backlog 1 yr. 3,059 2,015 1,044 1,790 1,378 412
Covenants not
to compete 4-5 yrs. 1,001 194 807 491 148 343
Tradename N/A 3,880 - 3,880 3,880 - 3,880
------- ------ ------- ------- ------ -------
$39,312 $9,087 $30,225 $25,833 $7,190 $18,643
======= ====== ======= ======= ====== =======
Amortization expense of intangible assets was $1,897,000 and $451,000
for the three months ended May 31, 2007 and 2006, respectively, and is
reported in the accompanying consolidated statements of operations in
operating expenses except for $50,000 that is included in cost of revenues
for the three months ended May 31, 2006.
Amortization expense by business segment is as follows:
Three Months Ended
May 31,
-------------------
2007 2006
-------- --------
Wireless DataCom Division $ 1,744 $ 160
Solutions Division 153 291
-------- --------
$ 1,897 $ 451
======== ========
Estimated amortization expense for the fiscal years ending February 28
is as follows:
2008 (remainder) $5,132,000
2009 $5,664,000
2010 $5,019,000
2011 $4,438,000
2012 $4,091,000
Thereafter $2,001,000
Note 5 - FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Bank Credit Facility
--------------------
In May 2006, the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of Montreal, as administrative agent, and the other
financial institutions that from time to time may become parties to the
Credit Agreement. The credit facility is comprised of a term loan and a $10
million working capital line of credit.
The Company initially borrowed $35 million under the term loan and a $3
million under the working capital line of credit. Borrowings are secured by
substantially all of the assets of CalAmp Corp. and its domestic
subsidiaries. Of the total proceeds of $38 million, $7 million was used to
pay off the Company's existing loans with U.S. Bank and the remaining $31
million, plus cash on hand of approximately $23 million, was used to fund the
purchase price for the Dataradio acquisition. In the fiscal 2007 third
quarter, the Company repaid in full the $3 million principal balance of the
line of credit. At May 31, 2007, $2,975,000 of the line of credit was
reserved for outstanding irrevocable stand-by letters of credit.
The maturity date of the line of credit is May 26, 2011. The term loan
repayment schedule provides that principal is payable in quarterly
installments on the last day of March, June, September and December in each
year with a final payment of $8,563,000 on May 26, 2011. However, as a
result of the event of default described below, all term loan principal has
been classified as a current liability in the accompanying balance sheet at
May 31, 2007.
At the Company's option, borrowings under the Credit Agreement bear
interest at the Bank of Montreal's prime rate ("Prime Based Loans") plus a
margin ranging from 0% to 0.25% (the "Prime Rate Margin") or LIBOR ("LIBOR
Based Loans") plus a margin ranging from 0.75% to 1.25% (the "LIBOR Margin").
The Prime Rate Margin and the LIBOR Margin vary depending on the Company's
ratio of debt to earnings before interest, taxes, depreciation, amortization
and other noncash charges (the "Leverage Ratio"). Interest is payable on the
last day of the calendar quarter for Prime Based Loans and at the end of the
fixed rate LIBOR period (ranging from 1 to 12 months) in the case of LIBOR
Based Loans. The Credit Agreement also provides that the interest rate on
borrowings will be increased by 2.0% during any period in which an event of
default exists.
The Credit Agreement contains certain financial covenants and ratios
that the Company is required to maintain, including: a total Leverage Ratio
of not more than 2.75; total stockholders' equity of not less than the sum of
(i) $140,887,000, (ii) 50% of net income for each fiscal year (excluding
years with net losses) and (iii) 50% of net cash proceeds from any issuance
of equity; and a fixed charge coverage ratio (earnings before interest,
taxes, depreciation and other noncash charges to fixed charges) of not less
than 1.50.
The Credit Agreement includes customary affirmative and negative
covenants including, without limitation, negative covenants regarding
additional indebtedness, investments, maintenance of the business, liens,
guaranties, transfers and sales of assets, and the payment of dividends and
other restricted payments. The Credit Agreement also contains certain events
of default, including the failure to make timely payments under the Credit
Agreement or other material indebtedness and the failure to adhere to certain
covenants, that would permit the bank to accelerate borrowings under the
Credit Agreement in the event that a default were to occur and not be cured
within applicable grace periods.
The net loss of $11.4 million in the first quarter of fiscal 2008, which
is primarily attributable to a $16 million charge discussed in Note 14 below,
has caused an event of default with respect to the financial covenants under
the Credit Agreement that will preclude additional borrowing under the
revolving credit facility thereunder until the Company is able to obtain a
waiver from its lenders and/or an amendment of the credit agreement. The
Company has notified its lenders and is in discussions with them to resolve
the issue. Because the lenders will have the right to call the loan until
such time that a waiver is obtained, $30 million of debt previously
classified as a long-term liability has been reclassified to current
liabilities in the accompanying consolidated balance sheet as of May 31,
2007.
Note 6 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and for income tax purposes. A deferred income
tax asset is recognized if realization of such asset is more likely than not,
based upon the weight of available evidence that includes historical
operating performance and the Company's forecast of future operating
performance. The Company evaluates the realizability of its deferred income
tax asset on a quarterly basis, and a valuation allowance is provided, as
necessary, in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". During this
evaluation, the Company reviews its forecasts of income in conjunction with
the positive and negative evidence surrounding the realizability of its
deferred income tax asset to determine if a valuation allowance is needed.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Income Tax Uncertainties" ("FIN 48"). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial statements
as "more-likely-than-not" to be sustained by the taxing authorities. FIN 48
provides guidance on the de-recognition, measurement and classification of
income tax uncertainties, along with any related interest and penalties.
FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties. The Company adopted
FIN 48 at the beginning of the fiscal 2008 first quarter. As a result of
adopting FIN 48, the Company: (i) increased deferred income tax assets and
income taxes payable by $5.0 million each; and (ii) increased income taxes
receivable and reduced goodwill by $609,000 each. After giving effect to the
adoption of FIN 48, the balance of unrecognized tax benefits totaled $5.9
million. If recognized, $2.1 million of unrecognized tax benefits would be
recorded as a reduction in income tax expense and $3.8 million would be recorded
as a reduction in goodwill.
Estimated interest and penalties related to the underpayment of income
taxes are classified as a component of interest expense in the consolidated
statement of operations. Accrued interest and penalties totaled $35,000 as
of May 31, 2007.
The Company files income tax returns in the U.S. federal jurisdiction,
various states and foreign jurisdictions. Income tax returns filed for
fiscal years 1999 and earlier are no longer subject to examination by U.S.
federal, state and foreign tax authorities. Certain income tax returns for
fiscal years 2000 through 2007 remain open to examination by U.S federal,
state or foreign tax authorities. The Company believes that it has made
adequate provision for all income tax uncertainties pertaining to these open
tax years.
At May 31, 2007, the Company had an aggregate deferred tax asset balance
of $9,418,000. The current portion of the deferred tax asset is $2,087,000
and the noncurrent portion is $7,331,000.
Vytek, which was acquired by the Company in April 2004, has tax loss
carryforwards and other tax assets that the Company believes will be
utilizable to some extent in the future, subject to change of ownership
limitations pursuant to Section 382 of the Internal Revenue Code and to the
ability of the combined post-merger company to generate sufficient taxable
income to utilize the benefits before the expiration of the applicable
carryforward periods. At May 31, 2007, the Company has a deferred tax asset
valuation allowance of $1,841,000 relating to the assets acquired in the
Vytek purchase. If in the future a portion or all of the $1,841,000
valuation allowance 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 Company also has deferred tax assets for Canadian income tax
purposes arising from the acquisition of Dataradio amounting to $3,874,000 at
May 31, 2007, which relate primarily to research and development tax credits
for Canadian federal and Quebec provincial income taxes. Of this total
Canadian deferred tax assets amount, $2,437,000 existed at the time of the
Dataradio acquisition in May 2006 and $1,437,000 arose subsequent to the
acquisition. The Company has provided a 100% valuation allowance against
these Canadian deferred tax assets at May 31, 2007. If in the future a
portion or all of the $3,874,000 valuation allowance for the Canadian
deferred tax assets is no longer deemed to be necessary, reductions of the
valuation allowance up to $2,437,000 will decrease the goodwill balance
associated with the Dataradio acquisition, and reductions of the valuation
allowance in excess of $2,437,000 will reduce the income tax provision.
The effective income tax rate was 38.6% and (5.2%) in the quarters ended
May 31, 2007 and 2006, respectively. Excluding the items that were treated
as not deductible in computing book-basis income tax expense (impairment loss
of $29,848,000 and IPR&D write-off of $6,850,000), the effective income tax
rate for the quarter ended May 31, 2006 was 39.0%.
Note 7 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution, using the treasury stock method, that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. In computing diluted earnings
per share, the treasury stock method assumes that outstanding options are
exercised and the proceeds are used to purchase common stock at the average
market price during the period. Options will have a dilutive effect under
the treasury stock method only when the Company reports net income and the
average market price of the common stock during the period exceeds the
exercise price of the options.
The weighted average number of common shares outstanding used in the
calculation of basic and diluted earnings per share were the same. Options
outstanding at May 31, 2007 and 2006 were excluded from the computation of
diluted earnings per share for the three month periods then ended because the
Company reported a net loss in such periods and the effect of inclusion would
be antidilutive (i.e., including such options would result in a lower loss
per share).
Note 8 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the total of net income (loss)
and all non-owner changes in equity. The following table details the
components of comprehensive income (loss) for the three months ended May 31,
2007 and 2006 (in thousands):
Three Months Ended
May 31,
-------------------
2007 2006
-------- --------
Net loss $(11,362) $(34,051)
Foreign currency translation
adjustments 697 114
Realized gain on
available-for-sale investments (45) -
-------- --------
Comprehensive loss $(10,710) $(33,937)
======== ========
Note 9 - STOCK-BASED COMPENSATION
Stock-based compensation expense for the three months ended May 31, 2007
and 2006 was $486,000 and $420,000, respectively. Such expense is included
in the following captions of the consolidated statement of operations (in
thousands):
Three Months Ended
May 31,
-------------------
2007 2006
------- ------
Cost of revenues $ 20 $ 30
Research and development 60 41
Selling 71 44
General and administrative 335 305
------ ------
$ 486 $ 420
====== ======
Changes in the Company's outstanding stock options during the three
months ended May 31, 2007 were as follows:
Weighted
Number of Weighted Average Aggregate
Options Average Remaining Intrinsic
(000s) Exercise Price Contractual Term Value
-------- -------------- ---------------- ---------
Outstanding at February 28, 2007 2,461 $10.33
Granted 15 $ 8.52
Exercised (32) $ 4.42
Forfeited or expired (151) $ 9.53
-----
Outstanding at May 31, 2007 2,293 $10.45 6.4 years $ 576,000
=====
Exercisable at May 31, 2007 1,603 $10.77 5.5 years $ 576,000
=====
There were no changes in the shares of the Company's nonvested
restricted stock during the three months ended May 31, 2007.
Weighted
Number of Average
Shares Grant-Date
(000s) Fair Value
-------- ----------
Outstanding at February 28, 2007
and May 31, 2007 20 $ 6.51
As of May 31, 2007, there was $4.7 million of total unrecognized stock-
based compensation cost related to nonvested stock options and nonvested
restricted stock. That cost is expected to be recognized over a weighted-
average remaining vesting period of 2.6 years.
Note 10 - CONCENTRATION OF RISK
Because the Company sells into markets dominated by a few large service
providers, a significant percentage of consolidated revenues and consolidated
accounts receivable relate to a small number of customers. Revenues from
customers which accounted for 10% or more of consolidated revenues for the
three months ended May 31, 2007 or 2006, as a percent of consolidated
revenues, are as follows:
Three months ended
May 31,
----------------
Customer 2007 2006
-------- ------ ------
A 25.4% 56.3%
B 22.4% 10.8%
C 17.1% 7.0%
Accounts receivable from the customers referred to in the table above,
expressed as a percent of consolidated net accounts receivable, are as
follows:
May 31, Feb. 28,
2007 2007
------ ------
A 5.0% 30.6%
B 9.1% 24.4%
C 33.8% 16.4%
Customers A and B are customers of the Company's Satellite Division.
Customer C is a customer of the Company's Wireless DataCom Division. See
Note 14 for discussion of relationship with a key DBS customer.
Note 11 - PRODUCT WARRANTIES
The Company generally warrants its products against defects over periods
up to three years. An accrual for estimated future costs relating to
products returned under warranty is recorded as an expense when products are
shipped. At the end of each quarter, the Company adjusts its liability for
warranty claims based on its actual warranty claims experience as a
percentage of sales for the preceding three years. The Company also adjusts
its liability to include amounts that are estimable and probable based on
known product defects. Activity in the warranty liability for the three
months ended May 31, 2007 and 2006 is as follows (in thousands):
Three months ended
May 31,
-----------------
2007 2006
------- ----
Balance at beginning of period $ 1,295 $477
Charged to costs and expenses 13,674 387
Deductions (190) (189)
------- ----
Balance at end of period $14,779 $675
======= ====
Warranty expense for the three months ended May 31, 2007 includes a
charge of approximately $13 million for the cost of estimated warranty
repairs to correct a product performance issue involving a DBS customer, as
further described in Note 14. The cash impact of the warranty costs is
anticipated to occur over the next several years. Of the $14,779,000 accrued
warranty costs at May 31, 2007, $7,354,000 was classified as other non-
current liabilities in the accompanying consolidated balance sheet.
Note 12 - OTHER FINANCIAL INFORMATION
"Net cash provided by operating activities" in the consolidated
statements of cash flows includes cash payments for interest and income taxes
as follows (in thousands):
Three months ended
May 31,
-------------------
2007 2006
------ ------
Interest paid $ 587 $ 112
Income taxes paid (net
refunds received) $ (26) $ 14
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Three months ended
May 31,
-------------------
2007 2006
------ ------
Company common stock issued from
escrow fund as additional
purchase consideration for the
2004 Vytek acquisition $ - $ 2,052
Note 13 - SEGMENT INFORMATION
As described in Note 1, the Company changed the structure of its
reporting segments at the beginning of the fiscal 2008 first quarter. The
Products Division was split into Satellite Division and Wireless DataCom
Division. This new structure is consistent with how management evaluates the
performance of its operations. This new structure will also provide greater
focus on CalAmp's growing wireless data communications business and provide
its investors with greater visibility. The Company reassigned the assets
and liabilities of the Products Division into two new segments - Satellite
and Wireless DataCom, except for goodwill associated with the Products
Division which was allocated to each new segment by using the relative fair
value allocation approach. The fair value of each segment was determined
using the discounted cash flow approach. This change in reporting segment
triggered an impairment test of the allocated goodwill of the two new
segments as of the beginning of the fiscal 2008 first quarter. The results
of the impairment test indicated no impairment of goodwill at that time.
Segment information for the three months ended May 31, 2007 and 2006 is
as follows (dollars in thousands):
Three months ended May 31, 2007:
Operating Segments
-----------------------------------
Wireless
Satellite DataCom Solutions
Division Division Division Corporate Total
-------- -------- -------- --------- --------
Revenues $ 23,032 $ 23,362 $ 1,050 $ 47,444
Gross profit (loss) $(13,917) $ 8,531 $ 674 $ (4,712)
Gross margin (60.4%) 36.5% 64.2% (9.9%)
Operating loss $(15,231) $ (646) $ (695) $(1,353) $ (17,925)
The Satellite Division negative gross profit of $13,917,000 and
operating loss of $15,231,000 in the three months ended May 31, 2007 include
a $16 million charge for estimated expenses to correct a product performance
issue involving a DBS customer, as further described in Note 14.
Three months ended May 31, 2006:
Operating Segments
-----------------------------------
Wireless
Satellite DataCom Solutions
Division Division Division Corporate Total
-------- -------- -------- --------- --------
Revenues $ 34,091 $ 8,866 $ 3,356 $ 46,313
Gross profit $ 6,924 $ 3,163 $ 840 $ 10,927
Gross margin 20.3% 35.7% 25.0% 23.6%
Operating income (loss) $ 5,233 $(6,090) $(31,182) $(1,282) $ (33,321)
The Wireless DataCom Division operating loss in the three months ended
May 31, 2006 includes a charge of $6,850,000 to write-off in-process research
and development costs associated with the Dataradio acquisition. The
Solutions Division operating loss in the three months ended May 31, 2006
includes an impairment charge of $29,848,000.
The Company considers operating income (loss) to be the primary measure
of profit or loss of its business segments. The amount shown for each period
in the "Corporate" column above for operating income (loss) consists of
corporate expenses not allocated to the business segments. Unallocated
corporate expenses include salaries and benefits of executive officers other
than division presidents, other corporate staff, and corporate expenses such
as audit fees, investor relations, stock listing fees, director and officer
liability insurance, and director fees and expenses.
Note 14 - COMMITMENTS AND CONTINGENCIES
Product Performance Issue with Key DBS Customer
------------------------------------------------
During fiscal 2007, the Company received notification from one of its
DBS customers of a field performance issue with a DBS product that the
Company began shipping in September 2004. After examining the various
component parts used in the manufacture of these products, it was determined
by the Company that the performance issue was the result of a deterioration
of the printed circuit board (PCB) laminate material used in these products.
During fiscal 2007, the DBS customer returned approximately 250,000
units to the Company for analysis and rework. An additional 214,000 units
have been returned by this customer subsequent to fiscal 2007, and it is
likely that additional units will be returned to the Company in the future.
In addition to returning product, in late May 2007 this DBS customer put on
hold all orders for CalAmp products, including newer generation products,
pending the requalification of all products manufactured by the Company for
this customer.
During the fiscal 2007 fourth quarter, CalAmp increased its accrued
warranty costs by $500,000 for this matter. This amount was predicated on
the customer accepting a planned corrective action procedure that CalAmp had
developed for existing and projected future product returns. Under this
planned corrective action, CalAmp expected that the field performance issue
could be resolved by retuning the circuitry as a lower cost alternative to
replacing certain parts and materials.
At a meeting with the DBS customer on July 5, 2007, the customer
expressed concern that the Company's proposed rework approach for the
previous generation products that involved retuning the circuitry would not
adequately resolve the performance issue and that ultimately certain parts,
including the radio frequency board assembly, would need to be replaced.
Consequently, CalAmp now believes that the corrective action plan will be
significantly more extensive than previously contemplated. While it is not
possible to fully quantify the ultimate financial impact on CalAmp of
completely satisfying its customer's requirements pending final resolution of
all issues, CalAmp expects to incur additional expenses of $16 million for
which the Company has taken a charge in its fiscal 2008 first quarter. This
charge represents the Company's best estimate of additional expenses
associated with warranty repairs, inventory modifications and reserving for
materials that are expected to be unusable, and assumes that the customer
accepts the revised corrective procedure that is currently under discussion
and that the quantity of product returns approximates CalAmp's estimate of
the probable return scenario. These additional expenses encompass
activities such as:
* Extending corrective measures to cover all products returned within three
years of initial shipment that utilize the aforementioned laminate;
* Performing substantial corrective measures on older generation products by
replacing the PCB material and components; and
* Reserving for materials that are expected to be unusable.
While the Company believes that $16 million is the best estimate of the
additional expenses necessary to resolve this matter based on the facts and
circumstances of which the Company is currently aware, no assurances can be
given that the final charges will not materially increase from current
estimates.
The $16 million charge is included in cost of revenues for the quarter
ended May 31, 2007. Of this amount, approximately $1.6 million is a
reduction of inventories, approximately $1.3 million is an increase in other
accrued liabilities, and the remainder is an increase in accrued warranty
costs.
The $16 million charge and resulting loss for the quarter has caused an
event of default with respect to the financial covenants under the Company's
bank credit agreement, as discussed further in Note 5.
Other Contingencies
-------------------
A lawsuit was filed against the Company on September 15, 2006 by CN
Capital, the seller of the assets of Skybility which the Company acquired in
April 2005. The lawsuit contends that the Company owes CN Capital
approximately $1.6 million under the earn-out provision of the Skybility
Asset Purchase Agreement dated April 18, 2005. On February 26, 2007, the
Company filed a cross-complaint against CN Capital for breach of contract,
negligent interference with prospective economic advantage, and contract
rescission. The Company believes the lawsuit filed by CN Capital is without
merit and intends to vigorously defend against this action. No loss accrual
has been made in the accompanying financial statements for this matter.
In addition to the foregoing matter, the Company from time to time is a
party, either as plaintiff or defendant, to various legal proceedings and
claims which arise in the ordinary course of business. While the outcome of
these claims cannot be predicted with certainty, management does not believe
that the outcome of any of these legal matters will have a material adverse
effect on the Company's consolidated financial position or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of sales and expenses during the reporting periods.
Areas where significant judgments are made include, but are not limited to:
allowance for doubtful accounts, inventory valuation, product warranties,
deferred income taxes and uncertain tax positions, and the valuation of long-
lived assets and goodwill. Actual results could differ materially from these
estimates.
Allowance for Doubtful Accounts
The Company establishes an allowance for estimated bad debts based upon
a review and evaluation of specific customer accounts identified as known and
expected collection problems, based on historical experience, or due to
insolvency, disputes or other collection issues. As further described in
Note 1 to the accompanying consolidated financial statements, the Company's
customer base is quite concentrated, with three customers accounting for 65%
of the Company's total revenue for the three months ended May 31, 2007 and
48% of the Company's net accounts receivable balance as of May 31, 2007.
Changes in either a key customer's financial position, or the economy as a
whole, could cause actual write-offs to be materially different from the
recorded allowance amount.
Inventories
The Company evaluates the carrying value of inventory on a quarterly
basis to determine if the carrying value is recoverable at estimated selling
prices. To the extent that estimated selling prices do not exceed the
associated carrying values, inventory carrying amounts are written down. In
addition, the Company generally treats inventory on hand or committed with
suppliers, which is not expected to be sold within the next 12 months, as
excess and thus appropriate write-downs of the inventory carrying amounts are
established through a charge to cost of sales. Estimated usage in the next
12 months is based on firm demand represented by orders in backlog at the end
of the quarter and management's estimate of sales beyond existing backlog,
giving consideration to customers' forecasted demand, ordering patterns and
product life cycles. Significant reductions in product pricing, or changes
in technology and/or demand may necessitate additional write-downs of
inventory carrying value in the future.
As further described under Results of Operations below, the Company
recorded a charge of $16 million for the quarter ended May 31, 2007 that
represents management's best estimate of additional costs and expenses
associated with warranty repairs, inventory modifications and reserving for
materials that are expected to be unusable to resolve a product performance
issue with a key DBS customer. Of this amount, approximately $1.6 million is
a reduction of inventories, approximately $1.3 million is an increase in
other accrued liabilities, and the remainder is an increase in accrued
warranty costs.
Product Warranties
The Company provides for the estimated cost of product warranties at the
time revenue is recognized. While it engages in extensive product quality
programs and processes, including actively monitoring and evaluating the
quality of its component suppliers, the Company's warranty obligation is
affected by product failure rates and material usage and service delivery
costs incurred in correcting a product failure. Should actual product
failure rates, material usage or service delivery costs differ from
management's estimates, revisions to the estimated warranty liability would
be required.
As further described under Results of Operations below, the Company
recorded a charge of $16 million for the quarter ended May 31, 2007 that
represents management's best estimate of additional costs and expenses
associated with warranty repairs, inventory modifications and reserving for
materials that are expected to be unusable to resolve a product performance
issue with a key DBS customer. Of this amount, approximately $13 million
represents an increase in the warranty reserve for this matter.
Deferred Income Taxes and Uncertain Tax Positions
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and for income tax purposes. A deferred income
tax asset is recognized if realization of such asset is more likely than not,
based upon the weight of available evidence that includes historical
operating performance and the Company's forecast of future operating
performance. The Company evaluates the realizability of its deferred income
tax asset on a quarterly basis, and a valuation allowance is provided, as
necessary, in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". During this
evaluation, the Company reviews its forecasts of income in conjunction with
the positive and negative evidence surrounding the realizability of its
deferred income tax asset to determine if a valuation allowance is needed.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Income Tax Uncertainties" ("FIN 48"). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial statements
as "more-likely-than-not" to be sustained by the taxing authorities. FIN 48
provides guidance on the de-recognition, measurement and classification of
income tax uncertainties, along with any related interest and penalties.
FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties. The Company adopted
FIN 48 at the beginning of the fiscal 2008 first quarter. As a result of
adopting FIN 48, as of the end of the fiscal 2008 first quarter the Company:
(i) increased deferred income tax assets and income taxes payable by $5.0
million each; and (ii) increased income taxes receivable and reduced goodwill
by $609,000 each.
At May 31, 2007, the Company had an aggregate deferred tax asset balance
of $9,418,000. The current portion of the deferred tax asset is $2,087,000
and the noncurrent portion is $7,331,000.
Vytek, which was acquired by the Company in April 2004, has tax loss
carryforwards and other tax assets that the Company believes will be
utilizable to some extent in the future, subject to change of ownership
limitations pursuant to Section 382 of the Internal Revenue Code and to the
ability of the combined post-merger company to generate sufficient taxable
income to utilize the benefits before the expiration of the applicable
carryforward periods. At May 31, 2007, the Company has a deferred tax asset
valuation allowance of $1,841,000 relating to the assets acquired in the
Vytek purchase. If in the future a portion or all of the $1,841,000
valuation allowance 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 Company also has deferred tax assets for Canadian income tax
purposes arising from the acquisition of Dataradio amounting to $3,874,000 at
May 31, 2007, which relate primarily to research and development tax credits
for Canadian federal and Quebec provincial income taxes. Of this total
Canadian deferred tax assets amount, $2,437,000 existed at the time of the
Dataradio acquisition in May 2006 and $1,437,000 arose subsequent to the
acquisition. The Company has provided a 100% valuation allowance against
these Canadian deferred tax assets at May 31, 2007. If in the future a
portion or all of the $3,874,000 valuation allowance for the Canadian
deferred tax assets is no longer deemed to be necessary, reductions of the
valuation allowance up to $2,437,000 will decrease the goodwill balance
associated with the Dataradio acquisition, and reductions of the valuation
allowance in excess of $2,437,000 will reduce the income tax provision.
Impairment Assessments of Goodwill, Purchased Intangible Assets and
Other Long-Lived Assets
At May 31, 2007, the Company had $106.3 million in goodwill and
$30.2 million in net purchased intangible assets on its balance sheet. The
Company believes the estimate of its valuation of long-lived assets and
goodwill is a "critical accounting estimate" because if circumstances arose
that led to a decrease in the valuation it could have a material impact on
the Company's results of operations.
The Company makes judgments about the recoverability of purchased
intangible assets and other long-lived assets whenever events or changes in
circumstances indicate that an impairment in the remaining value of the
assets recorded on the balance sheet may exist. The Company tests the
impairment of goodwill annually or more frequently if indicators of
impairment arise. Goodwill of the Satellite Division and Wireless DataCom
Division is tested for impairment as of December 31 each year. Goodwill of
the Solutions Division is tested annually for impairment on April 30.
In order to estimate the fair value of long-lived assets, the Company
typically makes various assumptions about the future prospects for the
business that the asset relates to, considers market factors specific to that
business and estimates future cash flows to be generated by that business.
Based on these assumptions and estimates, the Company determines whether it
needs to record an impairment charge to reduce the value of the asset stated
on the balance sheet to reflect its estimated fair value. Assumptions and
estimates about future values and remaining useful lives are complex and
often subjective. They can be affected by a variety of factors, including
external factors such as industry and economic trends, and internal factors
such as changes in the Company's business strategy and its internal
forecasts. Although management believes the assumptions and estimates that
have been made in the past have been reasonable and appropriate, different
assumptions and estimates could materially impact the Company's reported
financial results. More conservative assumptions of the anticipated future
benefits from these businesses could result in impairment charges, which
would decrease net income and result in lower asset values on the balance
sheet. Conversely, less conservative assumptions could result in smaller or
no impairment charges, higher net income and higher asset values.
The Solutions Division goodwill impairment test conducted as of April
30, 2007, which utilized a market-based approach to determine fair value,
indicated that no impairment exists as of that date. As a result of the
Solutions Division goodwill impairment test conducted as of April 30, 2006,
the Company recorded impairment charges on goodwill and other intangible
assets of the Solutions Division of $29,012,000 and $836,000, respectively.
Recent Authoritative Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements." This statement defines fair value, establishes a framework
for using fair value to measure assets and liabilities, and expands
disclosures about fair value measurements. The statement applies whenever
other statements require or permit assets or liabilities to be measured at
fair value. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is currently determining the effect, if any,
this pronouncement will have on its financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities". SFAS No. 159 permits
entities to choose to measure, on an item-by-item basis, specified financial
instruments and certain other items at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are required
to be reported in earnings at each reporting date. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007, the provisions of which
are required to be applied prospectively. The Company is currently
determining the effect, if any, this pronouncement will have on its financial
statements.
RESULTS OF OPERATIONS
Basis of presentation:
The Company uses a 52-53 week fiscal year ending on the Saturday closest
to February 28, which for fiscal 2007, a 53-week year, fell on March 3,
2007. Fiscal 2008, a 52-week year, will end on March 1, 2008. The first
quarter of fiscal 2008 ended on June 2, 2007 and consisted of 13 weeks of
operations. The first quarter of fiscal year 2007 ended on June 3, 2006 and
consisted of 14 weeks of operations. In the accompanying consolidated
financial statements, the 2007 fiscal year end is shown as February 28 and
the interim period end for both years is shown as May 31 for clarity of
presentation.
Overview:
CalAmp is a provider of wireless communications products that enable
anytime/anywhere access to critical information, data and entertainment
content. CalAmp is a supplier of direct broadcast satellite (DBS) outdoor
customer premise equipment to the U.S. satellite television market. The
Company also provides wireless data communications solutions for the
telemetry and asset tracking markets, private wireless networks, public
safety communications, and critical infrastructure and process control
applications.
The Company's DBS reception products are sold primarily to the two U.S.
DBS system operators, Echostar Communications Corporation and DirecTV Group
Inc., for incorporation into complete subscription satellite television
systems. The Company sells its other wireless access products directly to
system operators as well as through distributors and system integrators.
On May 26, 2006 the Company acquired privately held Dataradio Inc., a
leading supplier of proprietary advanced wireless data systems, products, and
solutions for public safety, critical infrastructure and industrial control
applications, for a cash payment of Canadian $60.1 million, or U.S. $54.3
million at the effective exchange rate. In connection with the acquisition
of Dataradio, the Company recorded a charge of $6,850,000 to write-off in-
process research and development costs of the acquired business as part of
the purchase price allocation.
Also on May 26, 2006, the Company acquired the mobile-resource
management (MRM) product line from privately held TechnoCom Corporation for
$2.4 million in cash and an earn-out payment equal to revenues in excess of
$3,100,000 during the 12-month period following the acquisition. Pursuant to
this provision, at May 31, 2007, the Company accrued an earn-out payment of
approximately $2.2 million which is included in other accrued liabilities in
the consolidated balance sheet at that date.
In March 2007, the Company split the Products Division into two separate
operating units: the Satellite Division and the Wireless DataCom Division.
The Satellite Division consists of the Company's DBS business, and the
Wireless DataCom Division consists of the remaining businesses of the
Products Division, including Dataradio, the MRM product line, CalAmp's legacy
wireless businesses other than DBS, and the operations of Aircept and
SmartLink that were acquired in the fiscal 2008 first quarter, as discussed
below. Effective March 1, 2007, the beginning of the fiscal 2008 first
quarter, the Company uses these two new divisions, and the existing Solutions
Division, which is comprised of an urgent messaging software business, as its
reporting segments. Segment information presented in this Form 10-Q for the
first quarter of fiscal 2007 has been reclassified to present information on
this new reporting segment basis.
On March 16, 2007, the Company acquired Aircept, a vehicle tracking
business, from AirIQ Inc., a Canadian company, for cash consideration of $19
million. The source of funds for the purchase price was the Company's cash
on hand. Aircept's business involves the sale of Global Positioning
Satellite (GPS) and cellular-based wireless asset tracking products and
services to vehicle lenders that specialize in automobile financing for high
credit risk individuals. The results of operations of Aircept are included
in the Company's Wireless DataCom reporting segment for the 11-week period
from date of acquisition to the end of the fiscal 2008 first quarter. During
this period Aircept generated revenues of $2.9 million and gross profit of
approximately $700,000.
On April 4, 2007, the Company acquired the business and substantially
all the assets of SmartLink Radio Networks, a privately-held company, for
$7.9 million cash. The source of funds for the purchase price was the
Company's cash on hand. SmartLink provides proprietary interoperable radio
communications platforms and integration services for public safety and
critical infrastructure needs. Based on a software defined switch,
SmartLink's platform provides interoperability without the need to replace
the installed base of land mobile radios. SmartLink is currently in the
process of deploying its platform for several important customers including
Solano County, Calif., the U.S. Department of Justice in San Francisco and
Grand Bahama Power Company. Depending on the size and scope of a deployment,
a SmartLink system sale generates revenues in the range of one hundred
thousand dollars to several million dollars. The results of operations of
SmartLink are included in the Company's Wireless DataCom reporting segment
for the eight and one-half week period from date of acquisition to the end of
the fiscal 2008 first quarter. During this period SmartLink generated
revenues of $263,000 and gross profit of $56,000.
Product Performance Issue with Key DBS Customer:
During fiscal 2007, the Company received notification from one of its
DBS customers of a field performance issue with a DBS product that the
Company began shipping in September 2004. After examining the various
component parts used in the manufacture of these products, it was determined
by the Company that the performance issue was the result of a deterioration
of the printed circuit board (PCB) laminate material used in these products.
In March 2007, the Company learned that the DBS customer had awarded its
orders for future requirements of this product beginning June 2007 to other
suppliers. The Company believes that the field performance issue was the
primary reason for the loss of this business. The Company has continued to
work with the customer to mitigate the impact of this performance issue and
to identify and implement a corrective action plan.
From the time the problem was isolated to the PCB laminate material
until March 2007, the Company worked with the supplier of the laminate
material and with the DBS customer to identify a corrective action.
Notwithstanding these efforts, on March 26, 2007 the laminate supplier filed
a Complaint for Declaratory Relief in the State of Massachusetts in which it
claimed that it is not responsible for the field performance issue of these
DBS products.
On May 16, 2007, the Company filed a lawsuit against the PCB laminate
supplier in the U.S. District Court for the Central District of California
for negligence, strict product liability, intentional misrepresentation and
negligent interference with prospective economic advantage, among other
causes of action. CalAmp expects to vigorously pursue all legal options to
recover its damages from that supplier.
During fiscal 2007, the DBS customer returned approximately 250,000
units to the Company for analysis and rework. An additional 214,000 units
have been returned by this customer subsequent to fiscal 2007, and it is
likely that additional units will be returned to the Company in the future.
In addition to returning product, in late May 2007 this DBS customer put on
hold all orders for CalAmp products, including newer generation products,
pending the requalification of all products manufactured by the Company for
this customer.
During the fiscal 2007 fourth quarter, CalAmp increased its accrued
warranty costs by $500,000 for this matter. This amount was predicated on
the customer accepting a planned corrective action procedure for the previous
generation products that CalAmp had developed for existing and projected
future product returns. Under this planned corrective action, CalAmp
expected that the field performance issue could be resolved by retuning the
circuitry as a lower cost alternative to replacing certain parts and
materials.
As a result of a meeting with the DBS customer on July 5, 2007, CalAmp
anticipates that the customer will soon requalify the latest generation
product that supports expanded HDTV content delivery. Also at this meeting
the customer expressed concern that the Company's proposed rework approach
for the previous generation products that involved retuning the circuitry
would not adequately resolve the performance issue and that ultimately
certain parts, including the radio frequency board assembly, would need to be
replaced. Consequently, CalAmp now believes that the corrective action plan
for previous generation products will be significantly more extensive than
previously contemplated. While it is not possible to fully quantify the
ultimate financial impact on CalAmp of completely satisfying its customer's
requirements pending final resolution of all issues, CalAmp expects to incur
additional expenses of $16 million for which the Company has taken a charge
in its fiscal 2008 first quarter. This charge represents the Company's best
estimate of additional expenses associated with warranty repairs, inventory
modifications and reserving for materials that are expected to be unusable,
and assumes that the customer accepts the revised corrective procedure for
the previous generation products that are currently under discussion and that
the quantity of product returns approximates CalAmp's estimate of the probable
return scenario. While the Company believes that $16 million is the
best estimate of the additional expenses necessary to resolve this matter
based on the facts and circumstances of which the Company is currently aware,
no assurances can be given that the final charges will not materially
increase from the current estimate. The cash impact of this charge is
anticipated to occur over the next several years.
As discussed above, in March 2007 the Company was notified by this
customer that its future orders for a previous generation product had been
awarded to other suppliers, and in late May 2007 the customer placed all
orders on hold, including orders for the newest generation product. As a
result, the Company believes that this matter will adversely affect its sales
volume with this DBS customer for fiscal 2008 and possibly beyond.
The $16 million charge and resulting loss for the quarter has caused an
event of default with respect to the financial covenants under the Company's
bank credit agreement, as discussed further under Liquidity and Capital
Resources below.
Operating Results by Business Segment:
The Company's revenue, gross profit (loss) and operating income (loss)
by business segment are as follows:
REVENUE BY SEGMENT
Three months ended May 31,
------------------------------------
2007 2006
--------------- ---------------
% of % of
Segment $000s Total $000s Total
----------- ------- ----- ------ -----
Satellite Division $23,032 48.6% $34,091 73.6%
Wireless DataCom Division 23,362 49.2% 8,866 19.1%
Solutions Division 1,050 2.2% 3,356 7.3%
------ ----- ------ -----
Total $47,444 100.0% $46,313 100.0%
====== ===== ====== =====
GROSS PROFIT (LOSS) BY SEGMENT
Three months ended May 31,
--------------------------------------
2007 2006
----------------- ----------------
% of % of
Segment $000s Total $000s Total
----------- --------- ------ ------- ------
Satellite Division $(13,917) 295.4% $ 6,924 63.4%
Wireless DataCom Division 8,531 (181.1%) 3,163 28.9%
Solutions Division 674 (14.3%) 840 7.7%
-------- ------ ------- -----
Total $ (4,712) 100.0% $10,927 100.0%
========= ====== ======= ======
OPERATING INCOME (LOSS) BY SEGMENT
Three months ended May 31,
---------------------------------------
2007 2006
------------------ ------------------
% of % of
Segment $000s Sales $000s Sales
----------- --------- ------- --------- -------
Satellite Division $(15,231) (32.1%) $ 5,233 11.3%
Wireless DataCom Division (646) (1.4%) (6,090) (13.1%)
Solutions Division (695) (1.5%) (31,182) (67.3%)
Corporate expenses (1,353) (2.8%) (1,282) (2.8%)
--------- ------- --------- ------
Total $(17,925) (37.8%) $(33,321) (71.9%)
========= ====== ======== ======
The Satellite Division operating loss in the three months ended May 31,
2007 includes a $16 million charge for estimated expenses to correct a
product performance issue involving a key DBS customer. The Wireless DataCom
Division operating loss in the three months ended May 31, 2006 includes a
charge of $6,850,000 to write-off in-process research and development costs
associated with the Dataradio acquisition. The Solutions Division operating
loss in the three months ended May 31, 2006 includes an impairment charge of
$29,848,000. See Note 4 for details of amortization expense by business
segment.
Revenue
Satellite Division revenue declined $11.1 million, or 32%, to
$23,032,000 in the three months ended May 31, 2007 from $34,091,000 for the
same period in the previous fiscal year. This decline was primarily
attributable to the action taken by a key DBS customer to put on hold all
orders with the Company, including orders for newer generation products,
pending a requalification of all products manufactured by CalAmp for this
customer, as discussed above. Revenues from this customer in the three
months ended May 31, 2007 were $14 million lower than the same period last
year.
Wireless DataCom Division revenue increased by $14.5 million, or 163%,
to $23,362,000 in the first quarter of fiscal 2008 compared to the fiscal
2007 first quarter due to: (i) a $4.8 million increase in sales of radio
modules to a Wireless DataCom customer in support of that customer's contract
with the U.S. Department of Defense; (ii) a revenue increase of $7.3 million
as a result of including Dataradio for the entire first quarter of fiscal
2008 compared to a one week period in the first quarter of fiscal 2007; and
(iii) the acquisition of Aircept in March 2007 and SmartLink in April 2007
that contributed revenues of $2.9 million and $263,000, respectively, to the
fiscal 2008 first quarter.
Revenue of the Solutions Division declined 69% to $1,050,000 in the
quarter ended May 31, 2007 compared to the same period of the prior year
because of the phase-out of various Solutions Division businesses after the
first quarter of fiscal 2007.
Gross Profit (Loss) and Gross Margins
The Satellite Division negative gross profit of ($13,917,000) in the
fiscal 2008 first quarter, which is $20.8 million less than the first quarter
of last year, is primarily attributable to the $16 million charge for
estimated expenses to correct a product performance issue with a key DBS
customer. The remainder of the decline in Satellite Division gross profit is
mainly due to the $11 million decline in revenue in the latest quarter
compared to the first quarter of last year.
Gross profit of the Wireless DataCom Division increased 170% to
$8,531,000 in the latest quarter compared to the first quarter of last year,
which is commensurate with the 163% revenue increase of this division.
Wireless DataCom's gross margin increased slightly from 35.7% in the first
quarter of fiscal 2007 to 36.5% in the first quarter of fiscal 2008.
Solutions Division gross profit declined from $840,000 in the first
quarter of last year to $674,000 in the latest quarter because of the nearly
70% decline in revenue. Gross margin improved from 25% last year to 64% this
year because revenue in the latest quarter is comprised substantially of
TelAlert urgent messaging software, which in the past had the highest gross
margin performance of all of the Solutions Division's lines of business.
See also Note 13 to the accompanying unaudited consolidated financial
statements for additional operating data by business segment.
Operating Expenses
Consolidated research and development expense increased by $2,198,000 to
$4,763,000 in the first quarter of fiscal 2008 from $2,565,000 last year.
Dataradio, which was included for only one week of the fiscal 2007 first
quarter, accounted for most of this increase.
Consolidated selling expenses increased by $915,000 to $2,686,000 in the
first quarter this year from $1,771,000 last year. This increase is
primarily due to the inclusion of Dataradio's selling expenses. As noted
above, Dataradio was included for only one week in the fiscal 2007 first
quarter.
Consolidated general and administrative expenses ("G&A") increased by
$744,000 to $3,557,000 in the first quarter of this year compared to the
prior year. The acquisitions of Dataradio in May 2006, Aircept in March 2007
and SmartLink in April 2007 accounted for increased G&A of $1 million, while
downsizing of the Solutions Division resulted in lowering G&A for this
business segment by approximately $400,000 in the latest quarter compared to
the first quarter of last year.
Amortization of intangibles increased from $401,000 in the first quarter
of last year to $1,897,000 in the first quarter of this year. The increase
was primarily attributable to the acquisitions of Dataradio, the TechnoCom
MRM product line, Aircept and SmartLink.
The in-process research and development ("IPR&D") write-off declined
from $6,850,000 in the first quarter of last year to $310,000 in the latest
quarter. This difference is because last year's IPR&D write-off was related
to the acquisition of Dataradio and this year's IPR&D write-off was related
to the acquisition of SmartLink.
The impairment loss of $29,848,000 recorded in the first quarter of last
year was the result of the annual goodwill impairment test for the Solutions
Division. There was no impairment charge in the first quarter of fiscal
2008.
Operating Loss
The operating loss in the first quarter of this year was $17,925,000,
compared to an operating loss of $33,321,000 in the first quarter of last
year. The operating loss last year is attributable primarily to the
$29,848,000 impairment charge and the IPR&D write-off of $6,850,000. The
operating loss in the first quarter of this year is primarily attributable to
the $16 million charge for estimated expenses to correct a product
performance issue with a key DBS customer.
Non-Operating Income (Expense), Net
Non-operating income (expense) changed by $1.5 million in total from the
first quarter of last year to the first quarter of this year due to: (i) an
increase in net interest expense of $745,000 because of lower invested cash
and higher debt in fiscal 2008; and (ii) a gain of $689,000 last year on
currency hedging activities in connection with the Dataradio acquisition, for
which the purchase price was denominated in Canadian dollars.
Income Tax Provision
The effective income tax rate was 38.6% and (5.2%) in the quarters ended
May 31, 2007 and 2006, respectively. Excluding the items that are not
deductible in computing book-basis income tax expense (the total impairment
loss of $29,848,000 and the IPR&D write-off of $6,850,000), the effective
income tax rate for the first quarter of last year was 39.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $11,138,000 at May 31, 2007. During the
quarter ended May 31, 2007, cash and cash equivalents decreased by $26.4
million. This decrease is comprised primarily of cash used for the Aircept
and SmartLink acquisitions of $27.3 million, capital expenditures of $0.5
million and debt repayments of $0.7 million, partially offset by net cash
provided by operating activities of $1.4 million and the effect of exchange
rate changes on cash of $0.6 million.
In May 2006, the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of Montreal, as administrative agent, and the other
financial institutions that from time to time may become parties to the
Credit Agreement. The credit facility is comprised of a term loan and a $10
million working capital line of credit.
The Company initially borrowed $35 million under the term loan and $3
million under the working capital line of credit. Borrowings are secured by
substantially all of the assets of CalAmp Corp. and its domestic
subsidiaries. Of the total proceeds of $38 million, $7 million was used to
pay off the Company's existing loans with U.S. Bank and the remaining $31
million, plus cash on hand of approximately $23 million, was used to fund the
purchase price for the Dataradio. In the fiscal 2007 third quarter, the
Company repaid in full the $3 million principal balance of the line of
credit. At May 31, 2007, $2,975,000 of the line of credit was reserved for
outstanding irrevocable stand-by letters of credit.
The maturity date of the line of credit is May 26, 2011. The term loan
repayment schedule provides that principal is payable in quarterly
installments on the last day of March, June, September and December in each
year with a final payment of $8,563,000 on May 26, 2011. However, as a
result of the event of default described below, all term loan principal has
been classified as a current liability in the accompanying balance sheet at
May 31, 2007.
At the Company's option, borrowings under the Credit Agreement bear
interest at the Bank of Montreal's prime rate ("Prime Based Loans") plus a
margin ranging from 0% to 0.25% (the "Prime Rate Margin") or LIBOR ("LIBOR
Based Loans") plus a margin ranging from 0.75% to 1.25% (the "LIBOR Margin").
The Prime Rate Margin and the LIBOR Margin vary depending on the Company's
ratio of debt to earnings before interest, taxes, depreciation, amortization
and other noncash charges (the "Leverage Ratio"). Interest is payable on the
last day of the calendar quarter for Prime Based Loans and at the end of the
fixed rate LIBOR period (ranging from 1 to 12 months) in the case of LIBOR
Based Loans. The Credit Agreement also provides that the interest rate on
borrowings will be increased by 2.0% during any period in which an event of
default exists.
The Credit Agreement contains certain financial covenants and ratios
that the Company is required to maintain, including: a total Leverage Ratio
of not more than 2.75; total stockholders' equity of not less than the sum of
(i) $140,887,000, (ii) 50% of net income for each fiscal year (excluding
years with net losses) and (iii) 50% of net cash proceeds from any issuance
of equity; and a fixed charge coverage ratio (earnings before interest,
taxes, depreciation and other noncash charges to fixed charges) of not less
than 1.50.
The Credit Agreement includes customary affirmative and negative
covenants including, without limitation, negative covenants regarding
additional indebtedness, investments, maintenance of the business, liens,
guaranties, transfers and sales of assets, and the payment of dividends and
other restricted payments. The Credit Agreement also contains certain events
of default, including the failure to make timely payments under the Credit
Agreement or other material indebtedness and the failure to adhere to certain
covenants, that would permit the bank to accelerate borrowings under the
Credit Agreement in the event that a default were to occur and not be cured
within applicable grace periods.
As discussed above, during the fiscal 2008 first quarter the Company
recorded a charge of $16 million for warranty repairs and other costs to
resolve a product performance issue with a key DBS customer. The cash impact
of this $16 million charge is anticipated to occur over the next several
years. The net loss of $11.4 million in the first quarter of fiscal 2008,
which is primarily attributable to the $16 million charge, has caused an
event of default with respect to the financial covenants under the Credit
Agreement that will preclude additional borrowing under the revolving credit
facility thereunder until the Company is able to obtain a waiver from its
lenders and/or an amendment of the Credit Agreement. The Company has
notified its lenders and is in discussions with them to resolve the issue.
In the near term the Company believes that it has sufficient liquidity such
that the restriction on borrowing under the revolving credit facility will
not adversely affect its operations. However, if the lenders are unwilling
to agree to a waiver or an amendment or exercise their rights to accelerate
borrowings outstanding under the credit agreement, the inability to borrow
under the revolving credit facility and/or the acceleration of such
indebtedness would materially adversely affect the Company's financial
position and operations, including its ability to fund its currently
anticipated working capital and capital expenditure needs. Furthermore,
because the lenders will have the right to call the loan until such time that
a waiver is obtained, $30 million of debt previously classified as a long-
term liability has been reclassified to current liabilities in the
accompanying consolidated balance sheet as of May 31, 2007. The lenders have
not provided the Company with the written notice that would be required to
accelerate the loan, and the Company believes that it will be able to obtain a
waiver or amendment and avoid an acceleration of the bank loan. Nonetheless,
no assurance can be given that the Company will be successful in obtaining a
waiver or amendment, or that it will be able to avoid an acceleration of the
bank loan.
The Company believes that inflation and foreign currency exchange rates
have not had a material effect on its operations. Although the acquisition
of Dataradio has increased the Company's exposure to changes in foreign
currency exchange rates, the Company believes that fiscal 2008 will not be
impacted significantly by foreign exchange since a significant portion of the
Company's sales will continue to be to U.S. markets, or to international
markets where its sales are denominated in U.S. dollars.
FORWARD LOOKING STATEMENTS
Forward looking statements in this Form 10-Q which include, without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, projections and other information
regarding future performance, are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The words "may",
"will", "could", "plans", "intends", "seeks", "believes", "anticipates",
"expects", "estimates", "judgment", "goal", and variations of these words and
similar expressions, are intended to identify forward-looking statements.
These forward-looking statements reflect the Company's current views with
respect to future events and financial performance and are subject to certain
risks and uncertainties, including, without limitation, product demand,
market growth, new competition, competitive pricing and continued pricing
declines in the DBS market, supplier constraints, manufacturing yields, the
ability to manage cost increases in inventory materials including timing and
market acceptance of new product introductions, the Company's ability to
harness new technologies in a competitively advantageous manner, the
Company's success at integrating its acquired businesses, the Company's
success in obtaining a waiver from the lenders under its Credit Agreement of
the event of default under the Credit Agreement, the Company's ability to
successfully requalify with respect to the sale of newer generation products
to one of its key DBS customers, the risk that the ultimate cost of resolving
a product performance issue with a key DBS customer may exceed the amount of
reserves established for that purpose, and other risks and uncertainties that
are set forth under the "Risk Factors" in Part I, Item 1A of the Annual
Report on Form 10-K for the year ended February 28, 2007 as filed with the
Securities and Exchange Commission on May 17, 2007. Such risks and
uncertainties could cause actual results to differ materially from historical
results or those anticipated. Although the Company believes the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, it can give no assurance that its expectations will be attained.
The Company undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. At
May 31, 2007, the Company's term debt and credit facility with its bank are
subject to variable interest rates. The Company monitors its debt and
interest bearing cash equivalents to mitigate the risk of interest rate
fluctuations. A fluctuation of one percent in interest rates related to the
Company's outstanding variable rate debt would not have a material impact on
the Company's consolidated statement of operations.
The Company has market risk arising from changes in foreign currency
exchange rates related to Dataradio's operations in Canada. A 10% adverse
change in the foreign currency exchange rate would not have a significant
impact on the Company's results of operations or financial position. The
Company does not manage its foreign currency exchange rate risk through the
use of derivative instruments except for the forward currency exchange
contracts that were entered into and closed in May 2006 in connection with
the acquisition of Dataradio, which resulted in a gain of $689,000 in that
month.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's principal executive officer and principal financial
officer have concluded, based on their evaluation of disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, (the "Exchange Act")) as of the end of the period
covered by this Report, that the Company's disclosure controls and procedures
are effective to ensure that the information required to be disclosed in
reports that are filed or submitted under the Exchange Act is accumulated and
communicated to management, including the principal executive officer and
principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure and that such information is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities Exchange Commission.
Internal Control Over Financial Reporting
There has been no change in the Company's internal control over
financial reporting that occurred during the Company's most recently
completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A lawsuit was filed against the Company on September 15, 2006 by
CN Capital, the seller of the assets of Skybility which the Company acquired
in April 2005. The lawsuit contends that the Company owes CN Capital
approximately $1.6 million under the earn-out provision of the Skybility
Asset Purchase Agreement dated April 18, 2005. On February 26, 2007, the
Company filed a cross-complaint against CN Capital for breach of contract,
negligent interference with prospective economic advantage, and contract
rescission. The Company believes the lawsuit filed by CN Capital is without
merit and intends to vigorously defend against this action. No loss accrual
has been made in the accompanying financial statements for this matter.
Item 1A. Risk Factors
The reader is referred to the factors discussed in Part I, "Item 1A.
Risk Factors" in the Company's Annual Report on Form 10-K for the year ended
February 28, 2007, which could materially affect the Company's business,
financial condition or future results. The risks described in the Company's
Annual Report on Form 10-K are not the only risks facing the Company. As a
result of the recent developments discussed in Item 2 of Part I under
"Product Performance Issue with Key DBS Customer", there are additional
risks, namely the Company's success in obtaining a waiver from the lenders
under its Credit Agreement of the event of default under the Credit
Agreement, the Company's ability to successfully requalify with respect to
the sale of newer generation products to one of its key DBS customers and the
risk that the ultimate cost of resolving a product performance issue with a
key DBS customer may exceed the amount of reserves established for that
purpose. Additional risks and uncertainties not currently known to
management or that are currently deemed to be immaterial also may materially
adversely affect the Company's business, financial condition and/or operating
results.
ITEM 5. OTHER INFORMATION
On July 2, 2007, the Company entered into employment agreements with
Michael Burdiek, President of the Company's Wireless DataCom Division, and
Garo Sarkissian, Vice President of Corporate Development (each an "Officer"
and collectively the "Officers"). The key terms of these employment
agreements are as follows:
* The base salaries of Messrs. Burdiek and Sarkissian of $240,000 and
$200,000, respectively, will be reviewed by and be subject to adjustment at
the sole discretion of the Board of Directors during the term of the
agreements.
* The Officers will be eligible to participate in the Company's employee
bonus program and employee equity award program.
* If the Officer's employment is terminated by the Company for "Cause" (as
defined), then the Officer is not entitled to severance pay. If the
Officer's employment is terminated by the Company without Cause, or following
a "change in control" (as defined) of the Company the Officer's employment is
terminated or the Officer resigns for "good reason" (as defined), then he is
entitled to severance in the form of continuation of payments of base salary
and employee benefits coverage for 12 months.
* The initial term of the employment agreement of each Officer ends on May
30, 2008, and unless either the Company or the Officer provides notice of
non-renewal at least 30 days before the end of the employment agreement term,
the agreement will be automatically extended for a one-year period ending on
May 30, 2009, with such procedure to be followed in each successive year.
ITEM 6. EXHIBITS
Exhibit 10.1 - Employment Agreement between the Company and
Michael Burdiek dated July 2, 2007 (1)
Exhibit 10.2 - Employment Agreement between the Company and
Garo Sarkissian dated July 2, 2007 (1)
Exhibit 31.1 - Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 31.2 - Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
(1) Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
July 17, 2007 /s/ Richard K. Vitelle
------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)