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: December 1, 2007
_________________
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
__________ ____________
Commission File Number: 0-12182
Exact Name of Registrant as
Specified in Its Charter: CalAmp Corp.
_______________________
DELAWARE 95-3647070
_______________________________ _______________
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification No.
Address of Principal Executive Offices: 1401 N. Rice Avenue
Oxnard, CA 93030
Registrant's Telephone Number: (805) 987-9000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The registrant had 24,837,842 shares of Common Stock outstanding as of
January 4, 2008.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
November 30, February 28,
2007 2007
Assets -------- --------
Current assets:
Cash and cash equivalents $ 5,036 $ 37,537
Accounts receivable, less allowance for
doubtful accounts of $610 and $347 at November
30, 2007 and February 28, 2007, respectively 21,715 38,439
Inventories 27,744 25,729
Deferred income tax assets 7,638 4,637
Prepaid expenses and other current assets 13,166 7,182
-------- --------
Total current assets 75,299 113,524
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 5,461 6,308
Deferred income tax assets, less current portion 9,949 -
Goodwill 35,039 90,001
Other intangible assets, net 25,982 18,643
Other assets 4,288 1,227
-------- --------
$156,018 $229,703
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 32,048 $ 2,944
Accounts payable 10,990 26,186
Accrued payroll and employee benefits 3,207 3,478
Accrued warranty costs 9,551 1,295
Other accrued liabilities 10,601 2,799
Deferred revenue 4,626 1,935
-------- --------
Total current liabilities 71,023 38,637
-------- --------
Long-term debt, less current portion - 31,314
Deferred income tax liabilities - 7,451
Other non-current liabilities 5,469 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; 23,658 and 23,595 shares issued
and outstanding at November 30, 2007 and
February 28, 2007, respectively 236 236
Additional paid-in capital 141,058 139,175
Retained earnings (accumulated deficit) (61,666) 13,000
Accumulated other comprehensive loss (102) (1,160)
-------- --------
Total stockholders' equity 79,526 151,251
-------- --------
$156,018 $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 Nine Months Ended
November 30, November 30,
------------------- -------------------
2007 2006 2007 2006
------- ------- ------- -------
Revenues:
Product sales $ 30,710 $ 59,010 $106,927 $156,502
Service revenues 1,351 93 4,195 187
------- ------- ------- -------
Total revenues 32,061 59,103 111,122 156,689
------- ------- ------- -------
Cost of revenues:
Cost of product sales 21,276 47,031 97,495 121,849
Cost of service revenues 757 31 2,670 55
------- ------- ------- -------
Total cost of revenues 22,033 47,062 100,165 121,904
------- ------- ------- -------
Gross profit 10,028 12,041 10,957 34,785
------- ------- ------- -------
Operating expenses:
Research and development 3,868 3,404 11,982 9,523
Selling 2,577 1,959 7,219 4,683
General and administrative 3,498 2,762 10,157 7,417
Intangible asset amortization 1,558 1,077 4,860 2,386
Write-off of acquired in-process
research and development - - 310 6,850
Impairment loss 65,745 - 65,745 -
------- ------- ------- -------
Total operating expenses 77,246 9,202 100,273 30,859
------- ------- ------- -------
Operating income (loss) (67,218) 2,839 (89,316) 3,926
------- ------- ------- -------
Non-operating income (expense):
Interest income 168 344 457 1,172
Interest expense (655) (600) (1,845) (1,463)
Other, net (135) 120 (324) 882
------- ------- ------- -------
Total non-operating income
(expense) (622) (136) (1,712) 591
------- ------- ------- -------
Income (loss) from continuing
operations before income taxes (67,840) 2,703 (91,028) 4,517
Income tax benefit (provision) 8,909 (1,264) 17,894 (4,789)
------- ------- ------- -------
Income (loss) from continuing
operations (58,931) 1,439 (73,134) (272)
------- ------- ------- -------
Loss from operations of
discontinued segment, net of tax - (543) (597) (31,648)
Loss on sale of discontinued
operations, net of tax - - (935) -
------- ------- ------- -------
Loss on discontinued operations - (543) (1,532) (31,648)
------- ------- ------- -------
Net income (loss) $(58,931) $ 896 $(74,666) $(31,920)
======= ======= ======= =======
Basic and diluted earnings
(loss) per share:
Income (loss) from
continuing operations $ (2.49) $ 0.06 $ (3.10) $ (0.01)
Loss on discontinued
operations - (0.02) (0.06) (1.36)
------- ------- ------- -------
Total basic and diluted
earnings (loss) per share $ (2.49) $ 0.04 $ (3.16) $ (1.37)
======= ======= ======= =======
Shares used in per share
calculations:
Basic 23,640 23,414 23,621 23,290
Diluted 23,640 23,679 23,621 23,290
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
November 30,
---------------------
2007 2006
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(74,666) $(31,920)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 7,469 5,027
Stock-based compensation expense 1,605 1,614
Write-off of in-process research and development 310 6,850
Impairment loss 65,745 29,848
Excess tax benefit from stock-based
compensation expense (64) (392)
Deferred tax assets, net (23,296) 3,555
Loss on sale of discontinued operations,
net of tax 935 -
Gain on sale of investment (331) -
Changes in operating assets and liabilities:
Accounts receivable 17,854 4,410
Inventories (1,531) 2,517
Prepaid expenses and other assets 1,378 (4,122)
Accounts payable (16,128) (404)
Accrued warranty costs 12,465 81
Other accrued liabilities 3,767 (5,375)
Deferred revenue 275 (80)
Other 25 84
------- -------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (4,188) 11,693
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,106) (2,112)
Proceeds from sale of property and equipment 8 16
Proceeds from sale of discontinued operations 4,000 -
Proceeds from sale of investment 1,045 -
Acquisition of Aercept (19,315) -
Acquisition of assets of SmartLink (7,944) -
Cash restricted for repayment of debt (3,340) -
Acquisition of Dataradio, net of cash acquired - (48,047)
Acquisition of assets of TechnoCom product line (703) (2,478)
Proceeds from Vytek escrow fund distribution - 480
------- -------
NET CASH USED IN INVESTING ACTIVITIES (27,355) (52,141)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 38,000
Debt repayments (2,210) (11,416)
Proceeds from exercise of stock options 206 1,130
Excess tax benefit from stock-based
compensation expense 64 392
------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,940) 28,106
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 982 (157)
------- -------
Net change in cash and cash equivalents (32,501) (12,499)
Cash and cash equivalents at beginning of period 37,537 45,783
------- -------
Cash and cash equivalents at end of period $ 5,036 $ 33,284
======= =======
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 2007 and 2006
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
CalAmp Corp. ("CalAmp" or the "Company") is a provider of wireless
communications products that enable anytime/anywhere access to critical
information, data and entertainment content. CalAmp is a supplier of direct
broadcast satellite (DBS) outdoor customer premise equipment to the U.S.
satellite television market. The Company also provides wireless data
communications solutions for the telemetry and asset tracking markets,
private wireless networks, public safety communications, and critical
infrastructure and process control applications.
In March 2007, the Company split the Products Division into two separate
reporting segments: the Satellite Division and the Wireless DataCom
Division. The Satellite Division consists of the Company's DBS business, and
the Wireless DataCom Division consists of the remaining businesses of the
Products Division, including Dataradio, the TechnoCom Mobile Resource
Management (MRM) product line, CalAmp's legacy wireless businesses other than
DBS, and the operations of Aercept and SmartLink that were acquired in the
fiscal 2008 first quarter, as discussed in Note 2.
The Company uses a 52-53 week fiscal year ending on the Saturday closest
to February 28, which for fiscal 2007, a 53-week year, fell on March 3,
2007. Fiscal 2008, a 52-week year, will end on March 1, 2008. The actual
nine month year-to-date periods ended on December 1, 2007, consisting of 39
weeks of operations, and December 2, 2006, consisting of 40 weeks of
operations. The third fiscal quarters ended December 1, 2007 and December 2,
2006 both consisted of 13 weeks of operations. In the accompanying
consolidated financial statements, the 2007 fiscal year end is shown as
February 28 and the interim period end for both years is shown as November 30
for clarity of presentation.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 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 November 30, 2007 and its
results of operations for the nine months ended November 30, 2007 and 2006.
The results of operations for such periods are not necessarily indicative of
results to be expected for the full fiscal year.
All significant intercompany transactions and accounts have been
eliminated in consolidation.
The accompanying consolidated statements of operations for the quarter
and nine months ended November 30, 2006 have been reclassified to present the
Solutions Division as a discontinued operation. See Note 2 - Recent
Acquisitions and Disposition for further discussion.
Note 2 - RECENT ACQUISITIONS AND DISPOSITION
Aercept
-------
On March 16, 2007, the Company acquired Aercept (formerly known as
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. Aercept'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. Aercept, which has
approximately 35 employees, became part of the Company's Wireless DataCom
Division.
The Company has not yet obtained all information required to complete
the purchase price allocation related to this acquisition. The final
allocation will be completed within the current fiscal year. Following is a
preliminary purchase price allocation (in thousands):
Purchase price paid in cash $19,000
Direct costs of acquisition 315
-------
Total cost of acquisition 19,315
Fair value of net assets acquired:
Current assets $ 3,819
Property and equipment 275
Other assets 55
Intangible assets:
Developed/core technology $4,970
Customer lists 1,730
Contracts backlog 530
Covenants not to compete 510
-----
Total intangible assets 7,740
Current liabilities (3,909)
------
Total fair value of net assets acquired 7,980
-------
Goodwill $11,335
=======
The Company paid a premium (i.e., goodwill) over the fair value of the
net tangible and identified intangible assets acquired for the following
reasons:
* Aercept is the market leader for this product and the associated services.
* Aercept 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 Aercept 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
cash consideration of $7.9 million. The source of funds for the purchase
price was the Company's cash on hand. SmartLink provides proprietary
interoperable radio communications platforms and integration services for
public safety and critical infrastructure applications. Based on a software
defined switch, SmartLink's platform provides interoperability without the
need to replace the installed base of land mobile radios. SmartLink became
part of the Company's new Wireless DataCom Division. SmartLink's operations
were integrated into CalAmp's Dataradio facilities in Montreal, Canada and
Atlanta, Georgia.
The Company has not yet obtained all information required to complete
the purchase price allocation related to this acquisition. The final
allocation will be completed within the current fiscal year. Following is a
preliminary purchase price allocation (in thousands):
Purchase price paid in cash $ 7,900
Direct costs of acquisition 44
-------
Total cost of acquisition 7,944
Fair value of net assets acquired:
Current assets $ 717
Property and equipment 208
Intangible assets:
Developed/core technology $3,730
Customer lists 910
Contracts backlog 740
In-process research and
development ("IPR&D") 310
-----
Total intangible assets 5,690
Current liabilities (1,866)
------
Total fair value of net assets acquired 4,749
-------
Goodwill $ 3,195
=======
The Company paid a premium (i.e., goodwill) over the fair value of the
net tangible and identified intangible assets acquired for the following
reasons:
* SmartLink has a competitively positioned unique product for the large
public safety mobile voice communications market.
* SmartLink's public safety mobile voice products and systems are
complementary to Dataradio's public safety mobile data communications
business.
* SmartLink's products have historically had relatively high gross margins.
The $310,000 allocated to IPR&D in the preliminary purchase price
allocation above was charged to expense immediately following the
acquisition.
The goodwill arising from the SmartLink acquisition is expected to be
deductible for income tax purposes.
Pro forma financial information on this acquisition has not been
provided because the effects are not material to the Company's consolidated
financial statements.
Solutions Division
------------------
The Company sold the TelAlert software business of the Solutions
Division to a privately held company on August 9, 2007 for total
consideration of $9.4 million, consisting of $4.0 million in cash, a non-
interest bearing note with a discounted value of $2.3 million and preferred
stock of the acquirer valued at $3.1 million. The note is payable in 18
equal monthly installments of $140,000, which commenced in December 2007.
The Company recognized a pre-tax gain of $2.1 million on the sale of the
TelAlert software business. The income tax expense attributable to the gain
was $3.0 million because at the time of sale there was goodwill of $5.4
million associated with this business that is not deductible for income tax
purposes.
The TelAlert software business was the last remaining business of the
Solutions Division. Operating results for the Solutions Division have been
presented in the accompanying consolidated statements of operations as a
discontinued operation, and are summarized as follows (in thousands):
Three Months Nine Months
Ended Ended
November 30, November 30,
-------------- ---------------
2007 2006 2007 2006
---- ---- ---- ----
Revenues $ - $ 1,990 $ 1,691 $ 8,650
Operating loss $ - $(1,387) $(1,005) $(33,373)
Loss from discontinued
operations, net of tax $ - $ (543) $ (597) $(31,648)
The Solutions Division operating loss in the nine months ended November
30, 2006 includes the goodwill impairment charge of $29,012,000 and
intangible assets impairment charge of $836,000.
Note 3 - INVENTORIES
Inventories include the cost of material, labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in, first-
out method) or market, and consist of the following (in thousands):
November 30, February 28,
2007 2007
------ -------
Raw materials $23,110 $21,256
Work in process 167 505
Finished goods 4,467 3,968
------- -------
$27,744 $25,729
======= =======
Note 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
As further described in Note 1 and Note 13, in March 2007 the Company
split the Products Division into two separate reporting segments: the
Satellite Division and the Wireless DataCom Division. The Products Division
goodwill balance as of February 28, 2007 was allocated to the Satellite
Division and the 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 nine months ended
November 30, 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
Aercept acquisition - 11,335 - 11,335
Goodwill associated with
SmartLink acquisition - 3,195 - 3,195
Goodwill associated with
TechnoCom acquisition - 2,205 - 2,205
Adjustment of goodwill associated with
Dataradio acquisition - (429) - (429)
Goodwill associated with
discontinued operations - - (5,426) (5,426)
Impairment writedown (43,174) (22,571) - (65,745)
Other changes - (97) - (97)
-------- --------- -------- --------
Balance as of November 30, 2007 $ 3,445 $ 31,594 $ - $ 35,039
======== ========= ======== ========
The $2.2 million increase in goodwill associated with the TechnoCom
acquisition represents an earn-out amount payable in cash based on the level
of sales achieved in the first 12 months following the acquisition in May
2006. The Company has made earn-out payments of $703,000 during the nine
months ended November 30, 2007, leaving a balance of $1.6 million that is
included in other accrued liabilities in the consolidated balance sheet at
November 30, 2007. The Company expects to pay the balance owed, including
interest at 7%, during the next 12 months using cash flows generated from
operations.
The Company discontinued the operations of the Solutions Division during
the second quarter ended August 31, 2007, as further described in Note 2.
The annual impairment test of the Solutions Division goodwill was conducted
as of April 30. For the Solutions Division goodwill impairment test
conducted as of April 30, 2007 the Company used a market approach to
calculate the fair value of this business unit, which resulted in the
determination that there was no impairment of the Solutions Division goodwill
as of that date. The Solutions Division goodwill impairment test conducted
as of April 30, 2006 resulted in an impairment of goodwill and other
intangible assets in the aggregate amount of $29,848,000. Such amount is
included in the loss from operations of discontinued segment, net of tax in
the consolidated statement of operations for the nine month period ended
November 30, 2006.
Impairment tests of goodwill associated with the Satellite Division and
Wireless DataCom Division are conducted annually as of December 31 and, in
certain situations, on an interim basis if indicators of impairment arise.
If an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying value, goodwill
would be evaluated for impairment at an interim date between annual testing
dates.
As a result of a product performance issue with a key DBS customer, as
further described in Note 14, the DBS customer substantially reduced its
purchases of the Company's products during the current fiscal year. Revenues
with this customer declined from $86.5 million in the nine months ended
November 30, 2006 to $13.9 million in the nine months ended November 30,
2007. In addition, the Company's market capitalization declined
substantially after the public announcement of the issue with the key DBS
customer and continued to decline through the third quarter ended November
30, 2007 and at that date was significantly lower than the carrying value of
the Company's consolidated net assets. The Company believes that the decline
in its market capitalization during the third quarter was primarily
attributable to the uncertainty surrounding the interruption of its
commercial relationship with this key customer. Although the Company reached
a settlement agreement with this customer on December 14, 2007, the Company's
market capitalization remained significantly below the carrying value of its
consolidated net assets. In light of these factors, the Company engaged an
independent valuation firm to assist the Company with an interim goodwill
impairment analysis as of November 30, 2007.
Phase I of the impairment test conducted as of November 30, 2007
indicated that the carrying value of net assets of the Satellite Division and
the Wireless DataCom Division exceeded the fair values of these reporting
units by $37,744,000 and $22,571,000, respectively. The fair values were
determined using discounted cash flow (DCF) analyses of financial projections
for each reporting unit. The Satellite Division DCF reflected the reduced
revenue from the key DBS customer, the Company's best estimate of forecasted
revenues, profitability and cash flows over the next several years, and a
market-based discount rate reflecting the perceived risk premium in the
market. The Phase II impairment analysis involves a revaluation of all net
assets, both tangible and intangible, and in the case of intangible assets,
both recognized and unrecognized. The Company has conducted a preliminary
Phase II impairment analysis for the Satellite Division, which indicated an
additional impairment loss of $5,430,000 because of the fair values ascribed
to unrecognized intangible assets as of the November 30, 2007 testing date.
In the case of the Wireless DataCom Division, the Phase II analysis is
extensive because this division has numerous intangible assets that have been
recorded in connection with six acquisitions consummated during the past
several years. For this reason, the Wireless DataCom Division Phase II
impairment analysis will not be completed until the fiscal 2008 fourth
quarter. Nonetheless, because a goodwill impairment loss is probable and
reasonably estimable as of the end of the third quarter, the Company is
required to recognize the best estimate of that loss. Accordingly, a charge
of $65,745,000 was recorded in the quarter ended November 30, 2007 for the
estimated goodwill impairment losses for the Satellite and Wireless DataCom
divisions of $43,174,000 and $22,571,000, respectively.
The principal reasons for the impairment of the Satellite Division
goodwill are: (i) the interruption of the commercial relationship with a key
customer that substantially reduced the revenue and operating profitability
of this division; and (ii) the sustained decline in the Company's market
capitalization. With respect to the Wireless DataCom Division, despite the
fact that the revenue and gross profit of this business are higher in the
current three and nine-month periods than the comparable periods of the prior
year, this reporting unit was also determined to be impaired. This is
because in calculating the fair values of the Company's two reporting units
using a DCF method, the independent valuation firm employed a higher cost of
capital in the November 30, 2007 impairment analysis compared to previous
analyses as a result of the valuation firm's current assessment of risk,
which took into consideration the Company's overall liquidity constraints at
the present time.
Other intangible assets are comprised as follows (in thousands):
November 30, 2007 February 28, 2007
------------------------ -------------------------
Amorti- Gross Accum. Gross Accum.
zation Carrying Amorti- Carrying Amorti-
Period Amount zation Net Amount zation Net
----- ------- ------ ------- ------- ------ -------
Developed/core
technology 5-7 yrs. $18,583 $3,938 $14,645 $12,992 $3,816 $ 9,176
Customer lists 5-7 yrs. 8,313 1,972 6,341 6,680 1,848 4,832
Contracts
backlog 1 yr. 3,060 2,651 409 1,790 1,378 412
Covenants not
to compete 4-5 yrs. 1,001 294 707 491 148 343
Tradename N/A 3,880 - 3,880 3,880 - 3,880
------- ------ ------- ------- ------ -------
$34,837 $8,855 $25,982 $25,833 $7,190 $18,643
======= ====== ======= ======= ====== =======
Amortization expense of intangible assets was $1,558,000 and $1,077,000
for the three months ended November 30, 2007 and 2006, respectively, and was
$4,860,000 and $2,386,000, respectively, for the nine month periods then
ended. All intangible asset amortization expense is attributable to the
Wireless DataCom Division.
Estimated amortization expense for the fiscal years ending February 28
is as follows:
2008 (remainder) $1,558,000
2009 $5,053,000
2010 $4,961,000
2011 $4,438,000
2012 $4,091,000
Thereafter $2,001,000
Note 5 - FINANCING ARRANGEMENTS
Bank Credit Facility
--------------------
In May 2006, the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of Montreal, as administrative agent, and the other
financial institutions that from time to time may become parties to the
Credit Agreement. The credit facility is comprised of a term loan and a $10
million working capital line of credit.
The Company initially borrowed $35 million under the term loan and $3
million under the working capital line of credit. Borrowings are secured by
substantially all of the assets of CalAmp Corp. and its domestic
subsidiaries. Of the total proceeds of $38 million, $7 million was used to
pay off the Company's existing loans with U.S. Bank and the remaining $31
million, plus cash on hand of approximately $23 million, was used to fund the
purchase price for the Dataradio acquisition. In the fiscal 2007 third
quarter, the Company repaid in full the $3 million principal balance of the
working capital line of credit. At November 30, 2007, $2,375,000 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
November 30, 2007.
Borrowings under the Credit Agreement bear interest at the Bank of
Montreal's prime rate ("Prime Based Loans") plus a margin ranging from 0% to
0.25% (the "Prime Rate Margin") or LIBOR ("LIBOR Based Loans") plus a margin
ranging from 0.75% to 1.25% (the "LIBOR Margin"). The Prime Rate Margin and
the LIBOR Margin vary depending on the Company's ratio of debt to earnings
before interest, taxes, depreciation, amortization and other noncash charges
(the "Leverage Ratio"). Interest is payable on the last day of the calendar
quarter for Prime Based Loans and at the end of the fixed rate LIBOR period
(ranging from 1 to 12 months) in the case of LIBOR Based Loans. The Credit
Agreement also provides that the interest rate on borrowings can be increased
by 2.0% during any period in which an event of default exists. The banks
notified the Company that effective November 6, 2007 the banks have applied
this additional 2.0% interest to the loan balance, payable upon demand by the
banks.
The Credit Agreement contains certain financial covenants and ratios
that the Company is required to maintain, including: a total Leverage Ratio
of not more than 2.75; total stockholders' equity of not less than the sum of
(i) $140,887,000, (ii) 50% of net income for each fiscal year (excluding
years with net losses) and (iii) 50% of net cash proceeds from any issuance
of equity; and a fixed charge coverage ratio (earnings before interest,
taxes, depreciation and other noncash charges to fixed charges) of not less
than 1.50.
The Credit Agreement also includes customary affirmative and negative
covenants including, without limitation, negative covenants regarding
additional indebtedness, investments, maintenance of the business, liens,
guaranties, transfers and sales of assets, and the payment of dividends and
other restricted payments. The Credit Agreement also contains certain events
of default, including the failure to make timely payments under the Credit
Agreement or other material indebtedness and the failure to adhere to certain
covenants, that would permit the bank to accelerate borrowings under the
Credit Agreement in the event that a default were to occur and not be cured
within applicable grace periods.
The net loss of $11.4 million in the first quarter of fiscal 2008 caused
an event of default with respect to the financial covenants under the Credit
Agreement that will preclude additional borrowing under the revolving credit
facility until the Company is able to obtain a waiver from its lenders and/or
an amendment of the credit agreement. The Company has notified its lenders
and is in discussions with them to resolve the issue. Because the lenders
have the right to call the loans under the Credit Agreement until such time
that a waiver is obtained, $27.6 million of debt previously classified as a
long-term liability has been reclassified as a current liability in the
accompanying consolidated balance sheet as of November 30, 2007. As a
condition to obtaining the banks' consent to sell the TelAlert software
business, the Company agreed to place $3.3 million of the cash proceeds and
any subsequent proceeds from the collection of the note receivable from the
sale of the TelAlert software business in an escrow account controlled by
Bank of Montreal as collateral for outstanding borrowings under the Credit
Agreement. The restricted cash is included in prepaid expenses and other
current assets in the accompanying consolidated balance sheet at November 30,
2007.
Note 6 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and for income tax purposes. A deferred income
tax asset is recognized if realization of such asset is more likely than not,
based upon the weight of available evidence that includes historical
operating performance and the Company's forecast of future operating
performance. The Company evaluates the realizability of its deferred income
tax assets on a quarterly basis, and a valuation allowance is provided, as
necessary, in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". During this
evaluation, the Company reviews its forecasts of income in conjunction with
the positive and negative evidence surrounding the realizability of its
deferred income tax asset to determine if a valuation allowance is needed.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Income Tax Uncertainties" ("FIN 48"). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial statements
as "more-likely-than-not" to be sustained by the taxing authorities. FIN 48
provides guidance on the de-recognition, measurement and classification of
income tax uncertainties, along with any related interest and penalties.
FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties. The Company adopted
FIN 48 at the beginning of the fiscal 2008 first quarter. As a result of
adopting FIN 48, the Company: (i) increased deferred income tax assets and
income taxes payable by $5.0 million each; and (ii) increased income taxes
receivable and reduced goodwill by $609,000 each. After giving effect to the
adoption of FIN 48, the balance of unrecognized tax benefits totaled
$5.9 million. If and when recognized, $2.1 million of unrecognized tax
benefits would be recorded as a reduction in income tax expense and $3.8
million would be recorded as a reduction in goodwill.
Estimated interest and penalties related to the underpayment of income
taxes are classified as a component of interest expense in the consolidated
statement of operations.
The Company files income tax returns in the U.S. federal jurisdiction,
various states and foreign jurisdictions. Income tax returns filed for
fiscal years 1999 and earlier are not subject to examination by U.S. federal
and state tax authorities. Certain income tax returns for fiscal years 2000
through 2007 remain open to examination by U.S federal and state tax
authorities. The income tax returns filed by the Company's French subsidiary
for fiscal years 2004 through 2007 are currently being examined by the French
tax authorities. The Company believes that it has made adequate provision
for all income tax uncertainties pertaining to these open tax years.
At November 30, 2007, the Company had an aggregate deferred tax asset
balance of $17,587,000. The current portion of the deferred tax asset is
$7,638,000 and the noncurrent portion is $9,949,000.
Income tax expense (benefit) allocated to income (loss) from continuing
operations for the nine months ended November 30, 2007 and 2006 was
$(17,894,000) and $4,789,000, respectively. Income tax expense (benefit)
allocated to income (loss) from discontinued operations for the nine months
ended November 30, 2007 and 2006 was $2,617,000 and $(1,742,000),
respectively. The effective income tax rate on income (loss) from continuing
operations was 20% and 106% in the nine months ended November 30, 2007 and
2006, respectively. Excluding the $45,057,000 portion of the fiscal 2008
goodwill impairment charge that is not deductible for income tax purposes,
the effective income tax rate for the nine months ended November 30, 2007 was
39%. Excluding the fiscal 2007 IPR&D write-off of $6,850,000 that is not
deductible for income tax purposes, the effective income tax rate for the
nine months ended November 30, 2006 was 42%.
Note 7 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution, using the treasury stock method, that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. In computing diluted earnings
per share, the treasury stock method assumes that outstanding options are
exercised and the proceeds are used to purchase common stock at the average
market price during the period. Options will have a dilutive effect under
the treasury stock method only when the Company reports net income and the
average market price of the common stock during the period exceeds the
exercise price of the options.
The weighted average number of common shares outstanding used in the
calculation of basic and diluted earnings per share were the same for all
periods presented, except for the three months ended November 30, 2006
because the Company reported income from continuing operations in the three
months ended November 30, 2006. Stock options outstanding at November 30,
2007 and 2006 were excluded from the computation of diluted earnings per
share for the nine month periods then ended because the Company reported a
loss from continuing operations in such periods and the effect of inclusion
would be antidilutive (i.e., including such options would result in a lower
loss per share).
Note 8 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the total of net income (loss)
and all non-owner changes in equity. The following table details the
components of comprehensive income (loss) for the three and nine months ended
November 30, 2007 and 2006 (in thousands):
Three Months Ended Nine Months Ended
November 30, November 30,
------------------- -------------------
2007 2006 2007 2006
------- ------- ------- -------
Net income (loss) $(58,931) $ 896 $(74,666) $(31,920)
Foreign currency
translation adjustments 378 (189) 1,103 (187)
Reclassification of gain on
investment included in earnings - - (45) -
-------- ------- ------- -------
Comprehensive income (loss) $(58,553) $ 707 $(73,608) $(32,107)
======== ======= ======= =======
Note 9 - STOCK-BASED COMPENSATION
Stock-based compensation expense is included in the following captions
of the consolidated statements of operations (in thousands):
Three Months Ended Nine Months Ended
November 30, November 30,
------------------- -------------------
2007 2006 2007 2006
------- ------- ------- -------
Cost of revenues $ 30 $ 39 $ 72 $ 112
Research and development 50 55 175 166
Selling 107 65 255 191
General and administrative 391 382 1,103 1,145
------ ------ ------ ------
$ 578 $ 541 $ 1,605 $ 1,614
====== ====== ====== ======
Changes in the Company's outstanding stock options during the nine
months ended November 30, 2007 were as follows:
Weighted Aggregate
Number of Weighted Average Intrinsic
Options Average Remaining Value
(000s) Exercise Price Contractual Term (000s)
-------- -------------- ---------------- ---------
Outstanding at February 28, 2007 2,461 $10.33
Granted 355 $ 4.46
Exercised (63) $ 3.29
Forfeited or expired (308) $12.13
-----
Outstanding at November 30, 2007 2,445 $ 9.43 6.5 years $ 64
=====
Exercisable at November 30, 2007 1,506 $10.41 5.2 years $ 64
=====
Changes in the Company's nonvested restricted stock and restricted
stock units during the nine months ended November 30, 2007 were as follows
(in thousands except dollar amounts):
Weighted
Number of Average
Shares Fair Value
-------- ----------
Outstanding at February 28, 2007 20 $ 6.51
Granted 342 4.28
Vested (20) 6.51
Forfeited (8) 4.28
-----
Outstanding at November 30, 2007 334 $ 4.28
=====
As of November 30, 2007, there was $5.7 million of total unrecognized
stock-based compensation cost related to nonvested stock options and
nonvested restricted stock and restricted stock units. That cost is expected
to be recognized as an expense over a weighted-average remaining vesting
period of 2.7 years.
Note 10 - CONCENTRATION OF RISK
Because the Company sells into markets dominated by a few large service
providers, a significant percentage of consolidated revenues and consolidated
accounts receivable relate to a small number of customers. Revenues from
customers which accounted for 10% or more of consolidated revenues for the
three and nine months ended November 30, 2007 and 2006, as a percent of
consolidated revenues, are as follows:
Three Months Ended Nine Months Ended
November 30, November 30,
------------------- -------------------
Customer 2007 2006 2007 2006
------- ------- ------- -------
A 2.5% 55.2% 12.5% 55.2%
B 22.5% 17.8% 23.7% 15.5%
C 16.1% 3.0% 15.8% 4.9%
Accounts receivable from the customers referred to in the table above,
expressed as a percent of consolidated net accounts receivable, are as
follows:
November 30, February 28,
Customer 2007 2007
------ ------
A 13.8% 30.6%
B 7.9% 24.4%
C 23.7% 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 a description of a product performance issue and related matters
involving Customer A.
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 nine
months ended November 30, 2007 and 2006 is as follows (in thousands):
Nine months ended
November 30,
-----------------
2007 2006
------- -------
Balance at beginning of period $ 1,295 $ 477
Charged to costs and expenses 13,393 936
Deductions (928) (852)
------- ----
Balance at end of period $13,760 $ 561
======= ======
Warranty expense for the nine months ended November 30, 2007 includes a
charge of approximately $12.9 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 warranty reserve at November 30, 2007
includes $13.4 million that is associated with this DBS product performance
issue. In the Company's fiscal fourth quarter, this warranty reserve was
reduced by $8.8 million to $4.6 million as the result of a settlement
agreement that was entered into with this customer on December 14, 2007.
The cash impact of the warranty reserve is anticipated to occur over the
next two or more years. At November 30, 2007, $4,209,000 of the warranty
liability that is expected to be paid beyond 12 months is included in other
non-current liabilities in the accompanying consolidated balance sheet.
Note 12 - OTHER FINANCIAL INFORMATION
"Net cash provided by operating activities" in the consolidated
statements of cash flows includes cash payments for interest and income taxes
as follows (in thousands):
Nine months ended
November 30,
-----------------
2007 2006
------- -------
Interest paid $1,751 $1,383
Income taxes paid (net
refunds received) $ (620) $ 153
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Nine months ended
November 30,
-----------------
2007 2006
------- -------
Company common stock issued from
escrow fund as additional
purchase consideration for the
2004 Vytek acquisition $ - $ 2,052
Non-cash consideration from the
sale of the Solutions Division's
TelAlert software business:
Note receivable $ 2,298 $ -
Fair value of preferred stock $ 3,137 $ -
Earn-out amount for TechnoCom
acquisition included in other
accrued liabilities $ 1,567 $ -
Note 13 - SEGMENT INFORMATION
As described in Note 1, the Company changed the structure of its
reporting segments at the beginning of the fiscal 2008 first quarter. The
Products Division was split into the Satellite Division and Wireless DataCom
Division. This new structure is consistent with how management evaluates the
performance of its operations. This new structure also provides greater
focus on CalAmp's growing wireless data communications business. The Company
assigned the assets and liabilities of the Products Division to these two new
reporting segments on a specific identification basis, except that goodwill
associated with the Products Division was allocated to these two new segments
by using the relative fair value allocation approach. The fair value of each
reporting segment was determined using the discounted cash flow approach.
This change in reporting segments triggered an impairment test of the
allocated goodwill of the two new segments as of the beginning of the fiscal
2008 first quarter. The results of the impairment test indicated no
impairment of goodwill at that time.
Segment information for the three and nine months ended November 30,
2007 and 2006 is as follows (dollars in thousands):
Three months ended Three months ended
November 30, 2007 November 30, 2006
------------------------------------ -------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Satellite Wireless Satellite Wireless
Division DataCom Corporate Total Division DataCom Corporate Total
-------- -------- ------- ----- -------- ------- ------- -----
Revenues $ 8,353 $ 23,708 $ 32,061 $ 45,045 $ 14,058 $ 59,103
Gross profit
(loss) $ 221 $ 9,807 $ 10,028 $ 6,514 $ 5,527 $ 12,041
Gross margin 2.6% 41.4% 31.3% 14.5% 39.3% 20.4%
Operating
income (loss) $(44,061) $(21,842) $(1,315) $(67,218) $ 5,154 $ (727) $(1,588)$ 2,839
Nine months ended Nine months ended
November 30, 2007 November 30, 2006
------------------------------------ -------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Satellite Wireless Satellite Wireless
Division DataCom Corporate Total Division DataCom Corporate Total
-------- -------- ------- ----- -------- ------- ------- ------
Revenues $ 41,235 $ 69,887 $111,122 $118,091 $ 38,598 $156,689
Gross profit
(loss) $(15,530) $ 26,487 $ 10,957 $ 19,561 $ 15,224 $ 34,785
Gross margin (37.7%) 37.9% 9.9% 16.6% 39.4% 22.2%
Operating
income (loss) $(62,356) $(22,988) $(3,972) $(89,316) $ 14,812 $ (6,487) $(4,399)$ 3,926
The Satellite Division's negative gross profit of $15.5 million and
operating loss of $62.4 million in the nine months ended November 30, 2007
includes a $17.9 million charge for estimated expenses to correct a product
performance issue involving key DBS customer, as further described in Note
14. The operating loss of $62.4 million for that period also includes a
goodwill impairment charge of $43.2 million.
The Wireless DataCom Division operating loss of $23.0 million in the
nine months ended November 30, 2007 includes a goodwill impairment charge of
$22.6 million. The Wireless DataCom Division operating loss of $6.5 million
in the nine months ended November 30, 2006 includes a charge of $6.9 million
to write off in-process research and development costs associated with the
Dataradio acquisition. Amortization expense of intangible assets related to
the Wireless DataCom Division was $1.6 million and $1.1 million for the three
months ended November 30, 2007 and 2006, respectively, and was $4.9 million
and $2.4 million for the respective nine month periods then ended.
The Company considers operating income (loss) to be the primary measure
of profit or loss of its business segments. The amount shown for each period
in the "Corporate" column above for operating income (loss) consists of
corporate expenses not allocated to the business segments. Unallocated
corporate expenses include salaries and benefits of executive officers other
than division presidents, other corporate staff, and corporate expenses such
as audit fees, investor relations, stock listing fees, director and officer
liability insurance, and director fees and expenses.
Note 14 - COMMITMENTS AND CONTINGENCIES
Product Performance Issues with Key DBS Customer
-------------------------------------------------------------------------
During fiscal 2007, the Company received notification from one of its
DBS customers of field performance issues with a DBS product that the Company
began shipping in September 2004. After examining the various component
parts used in the manufacture of these products, it was determined by the
Company that the performance issue was the result of a deterioration of the
printed circuit board (PCB) laminate material used in these products.
During fiscal 2007, the DBS customer returned approximately 250,000
units to the Company for analysis and rework. An additional 790,000 units
have been returned by this customer subsequent to fiscal 2007, and it is
expected that additional units will be returned to the Company in the future.
In addition to returning product, in 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 fiscal 2007 fourth quarter, CalAmp increased its accrued warranty
costs by $500,000 for this matter. This amount was predicated on the
customer accepting a planned corrective action procedure that CalAmp had
developed for existing and projected future product returns. Under this
planned corrective action, CalAmp expected that the field performance issue
could be resolved by retuning the circuitry as a lower cost alternative to
replacing certain parts and materials.
Prior to the issuance of its financial statements for the fiscal 2008
first quarter, the Company learned that the DBS customer would not accept the
Company's proposed rework approach for the previous generation products that
involved retuning the circuitry. This led the Company to conclude that
certain parts, including the radio frequency board assembly, would need to be
replaced, which is a significantly more costly process. As a result, the
Company recorded a charge of $16.3 million in the quarter ended May 31, 2007
to increase reserves for this matter. These additional reserves encompass
activities such as:
* Extending corrective measures to cover all products returned within three
years of initial shipment that utilize the aforementioned laminate;
* Performing substantial corrective measures on older generation products by
replacing the PCB material and components; and
* Reserving for materials that are expected to be unusable.
The $16.3 million charge in the quarter ended May 31, 2007 and resulting
loss for that quarter caused an event of default with respect to the
financial covenants under the Company's bank credit agreement, as discussed
further in Note 5. During the quarters ended August 31, 2007 and November
30, 2007, the Company recorded an additional charge of $1.5 million and $0.1
million, respectively related to this matter. Total fiscal 2008 charges
related to this matter of $17.9 million are included in cost of revenues in
the accompanying consolidated statements of operations for nine months ended
November 30, 2007. At November 30, 2007 the Company has aggregate reserves
of $18.1 million for this matter, of which $2.6 million is an inventory
reserve, approximately $2.1 million is a vendor liability reserve included in
other accrued liabilities, and the remaining $13.4 million is a reserve for
accrued warranty costs.
On December 14, 2007, the Company entered into a settlement agreement
with this customer. Under the terms of the settlement agreement, CalAmp
agreed to rework certain DBS products previously returned to the Company or
to be returned over a 15-month period and will provide extended warranty
periods for workmanship (18 months) and product failures due to the issue
with the PCB laminate material (36 months). In addition, as part of the
settlement:
* The Company issued to the customer one million shares of CalAmp
common stock.
* The Company issued to the customer a fully vested warrant to
purchase an additional 350,000 shares of common stock at $3.72
per share, exercisable for three years.
* The customer agreed to restrictions on 500,000 shares of the
common stock issued in connection with the settlement and the
warrant shares that limit sales to 285,000 shares in any one year
period following the settlement date. The customer also agreed to
vote all of its CalAmp shares (including the warrant shares)
either with the recommendation of the Company's Board of Directors
or in the same proportion as all other outstanding shares.
* The Company issued to the customer a $5 million non-interest bearing
promissory note that is payable at a rate of $5.00 per unit on the
first one million DBS units purchased by EchoStar after the date
of the settlement agreement. The promissory note, which is
subordinated to the outstanding indebtedness under CalAmp's bank
credit facility, will be accelerated if the Company becomes
insolvent, files for bankruptcy, or undergoes a change of control.
* The Company granted piggyback registration rights to the customer
to include its CalAmp shares in certain offerings by the Company.
* The customer agreed to pay $1.3 million of $2.3 million in
outstanding accounts receivable due to the Company, with the
remaining $1 million of receivables canceled by the Company as
additional consideration for the settlement.
* The parties agreed to immediately release each other from claims
related to certain products manufactured with the defective PCB
laminate material, and to release claims related to other newer
products upon the later of: (i) the 15-month anniversary of the
settlement agreement; and (ii) the date that the Company has
shipped a total of 400,000 reworked products; provided that if
this delayed release date has not occurred within two years of the
original settlement date, such claims will not be released. In
addition, each party has agreed not to initiate any proceeding
with respect to the delayed release claims prior to the earlier of
the delayed release date and the second anniversary of the
settlement, subject to certain acceleration events based on the
Company's performance under the settlement agreement.
In the fourth quarter of fiscal 2008, the Company recorded the
subordinated note payable of $5,000,000, the issuance of one million shares
of common stock valued at $2,560,000 (the fair value of the shares as of the
settlement date of December 14, 2007), the common stock purchase warrants
valued at $252,000 and the reduction of accounts receivable of $1,000,000. A
corresponding reduction of $8,812,000 was made in the reserve for accrued
warranty costs to reflect this settlement consideration given by the Company.
While the Company believes that its established reserves as of November
30, 2007 of $18.1 million (or $9.3 million after giving effect to the
reduction of $8.8 million in the reserve for accrued warranty costs upon
issuance of the settlement agreement consideration) will be adequate to cover
total future product rework costs under this settlement agreement, no
assurances can be given that the ultimate costs will not materially differ
from the current estimate.
The Company has on-hand inventory of approximately $9.9 million and
outstanding purchase commitments of $8.6 million for materials that are
specific to the products that the Company manufactures for this customer,
which amounts are not currently reserved for because the Company believes
these materials can be used in the ordinary course of business as future
shipments of products are made to this customer. Nonetheless, changes in the
forecasted product demand from this customer could require that the inventory
reserve and/or the reserve for vendor commitment liabilities be increased to
cover some portion of these amounts.
Other Contingencies
-------------------
A lawsuit was filed against the Company on September 15, 2006 by CN
Capital, the seller of the assets of Skybility which the Company acquired in
April 2005. The lawsuit contends that the Company owes CN Capital
approximately $1.6 million under the earn-out provision of the Skybility
Asset Purchase Agreement dated April 18, 2005. On February 26, 2007, the
Company filed a cross-complaint against CN Capital for breach of contract,
negligent interference with prospective economic advantage, and contract
rescission. The Company believes the lawsuit filed by CN Capital is without
merit and intends to vigorously defend against this action. No loss accrual
has been made in the accompanying financial statements for this matter.
In addition to the foregoing matter, the Company from time to time is a
party, either as plaintiff or defendant, to various legal proceedings and
claims which arise in the ordinary course of business. While the outcome of
these claims cannot be predicted with certainty, management does not believe
that the outcome of any of these legal matters will have a material adverse
effect on the Company's consolidated financial position or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of sales and expenses during the reporting periods.
Areas where significant judgments are made include, but are not necessarily
limited to: allowance for doubtful accounts, inventory valuation, product
warranties, deferred income taxes and uncertain tax positions, and the
valuation of long-lived assets and goodwill. Actual results could differ
materially from these estimates.
Allowance for Doubtful Accounts
The Company establishes an allowance for estimated bad debts based upon
a review and evaluation of specific customer accounts identified as known and
expected collection problems, based on historical experience, or due to
insolvency, disputes or other collection issues. As further described in
Note 10 to the accompanying consolidated financial statements, the Company's
customer base is quite concentrated, with three customers accounting for 52%
of the Company's total revenue for the nine months ended November 30, 2007
and 45% of the Company's net accounts receivable balance as of November 30,
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 in Note 14 to the accompanying unaudited
consolidated financial statements, at November 30, 2007 the Company had an
inventory reserve of $2.6 million that was established during fiscal 2008 in
connection with a product performance issue involving a key DBS customer.
Also as described in Note 14, the Company had on-hand inventory of $9.9
million and outstanding purchase commitments of $8.6 million for materials
that are specific to the products that the Company manufactures for this
customer. These amounts are not currently reserved for because the Company
believes these materials can be used in the ordinary course of business as
future shipments of products are made to this customer. Nonetheless, changes
in the forecasted product demand from this customer could require that the
inventory reserve and/or the reserve for vendor commitment liabilities be
increased to cover some portion of these amounts.
Product Warranties
The Company initially 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 in Note 14 to the accompanying unaudited
consolidated financial statements, at November 30, 2007 the Company had a
$13.4 million reserve for accrued warranty costs in connection with a product
performance issue involving a key DBS customer. In the Company's fiscal
fourth quarter, this warranty reserve was reduced by $8.8 million to $4.6
million as the result of a settlement agreement that was entered into with
this customer on December 14, 2007. While the Company believes that this
$4.6 million warranty reserve will be adequate to cover total future product
rework costs under this settlement agreement, no assurances can be given that
the ultimate costs will not materially differ from the current estimate.
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 evidences 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 November 30, 2007, the Company had an aggregate deferred tax asset
balance of $17,587,000. The current portion of the deferred tax asset is
$7,638,000 and the noncurrent portion is $9,949,000.
Impairment Assessments of Goodwill, Purchased Intangible Assets and
Other Long-Lived Assets
At November 30, 2007, the Company had $35 million in goodwill and
$26 million in other 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 other intangible
assets and other long-lived assets whenever events or changes in
circumstances indicate that an impairment in the remaining value of the
assets recorded on the balance sheet may exist. The Company tests the
impairment of goodwill annually and, in certain situations, on an interim
basis if indicators of impairment arise. Goodwill of the Satellite Division
and Wireless DataCom Division is tested annually for impairment as of
December 31 each year. If an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying value, goodwill would be evaluated for impairment between annual
tests. Management has appropriate processes in place to monitor for interim
triggering events.
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.
The Company must make estimates and judgments about the period of time it
will take to re-qualify the products at issue with its key DBS customer and
the adequacy of reserves for the associated product performance issue. These
assumptions and estimates are necessarily subjective and based on
management's best estimates based on limited information. Based on these
assumptions and estimates, the Company determines whether it needs to record
an impairment charge to reduce the value of the asset stated on the balance
sheet to reflect its estimated fair value. Assumptions and estimates about
future values and remaining useful lives are complex and often subjective.
They can be affected by a variety of factors, including external factors such
as industry and economic trends, and internal factors such as changes in the
Company's business strategy and its internal forecasts. Although management
believes the assumptions and estimates that have been made in the past have
been reasonable and appropriate, different assumptions and estimates could
materially impact the Company's reported financial results. More
conservative assumptions of the anticipated future benefits from these
businesses could result in impairment charges, which would decrease net
income and result in lower asset values on the balance sheet. Conversely,
less conservative assumptions could result in smaller or no impairment
charges, higher net income and higher asset values.
As a result of the Solutions Division goodwill impairment test conducted
as of April 30, 2006, the Company recorded an impairment charge of $29.9
million in the first quarter of fiscal 2007. The Solutions Division goodwill
impairment test conducted as of April 30, 2007, which utilized a market-based
approach to determine fair value, indicated that no impairment existed as of
that date. The Company sold the TelAlert software business of the Solutions
Division in August 2007 which resulted in the discontinuation of the
operations of the Solutions Division. See Note 2 - Acquisitions and
Disposition for further discussion.
Impairment tests of goodwill associated with the Satellite Division and
Wireless DataCom Division are conducted annually as of December 31 and, in
certain situations, on an interim basis if indicators of impairment arise.
If an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying value, goodwill
would be evaluated for impairment at an interim date between annual testing
dates.
As a result of a product performance issue with a key DBS customer, as
further described in Note 14, the DBS customer substantially reduced its
purchases of the Company's products during the current fiscal year. Revenues
with this customer declined from $86.5 million in the nine months ended
November 30, 2006 to $13.9 million in the nine months ended November 30,
2007. In addition, the Company's market capitalization declined
substantially after the public announcement of the issue with the key DBS
customer and continued to decline through the third quarter ended November
30, 2007 and at that date was significantly lower than the carrying value of
the Company's consolidated net assets. The Company believes that the decline
in its market capitalization during the third quarter was primarily
attributable to the uncertainty surrounding the interruption of its
commercial relationship with this key customer. Although the Company reached
a settlement agreement with this customer on December 14, 2007, the Company's
market capitalization remained significantly below the carrying value of its
consolidated net assets. In light of these factors, the Company engaged an
independent valuation firm to assist the Company with an interim goodwill
impairment analysis as of November 30, 2007.
Phase I of the impairment test conducted as of November 30, 2007
indicated that the carrying value of net assets of the Satellite Division and
the Wireless DataCom Division exceeded the fair values of these reporting
units by $37,744,000 and $22,571,000, respectively. The fair values were
determined using discounted cash flow (DCF) analyses of financial projections
for each reporting unit. The Satellite Division DCF reflected the reduced
revenue from the key DBS customer, the Company's best estimate of forecasted
revenues, profitability and cash flows over the next several years, and a
market-based discount rate reflecting the perceived risk premium in the
market. The Phase II impairment analysis involves a revaluation of all net
assets, both tangible and intangible, and in the case of intangible assets,
both recognized and unrecognized. The Company has conducted a preliminary
Phase II impairment analysis for the Satellite Division, which indicated an
additional impairment loss of $5,430,000 because of the fair values ascribed
to unrecognized intangible assets as of the November 30, 2007 testing date.
In the case of the Wireless DataCom Division, the Phase II analysis is
extensive because this division has numerous intangible assets that have been
recorded in connection with six acquisitions consummated during the past
several years. For this reason, the Wireless DataCom Division Phase II
impairment analysis will not be completed until the fiscal 2008 fourth
quarter. Nonetheless, because a goodwill impairment loss is probable and
reasonably estimable as of the end of the third quarter, the Company is
required to recognize the best estimate of that loss. Accordingly, a charge
of $65,745,000 was recorded in the quarter ended November 30, 2007 for the
estimated goodwill impairment losses for the Satellite and Wireless DataCom
divisions of $43,174,000 and $22,571,000, respectively.
The principal reasons for the impairment of the Satellite Division
goodwill are: (i) the interruption of the commercial relationship with a key
customer that substantially reduced the revenue and operating profitability
of this division; and (ii) the sustained decline in the Company's market
capitalization. With respect to the Wireless DataCom Division, despite the
fact that the revenue and gross profit of this business are higher in the
current three and nine-month periods than the comparable periods of the prior
year, this reporting unit was also determined to be impaired. This is
because in calculating the fair values of the Company's two reporting units
using a DCF method, the independent valuation firm employed a higher cost of
capital in the November 30, 2007 impairment analysis compared to previous
analyses as a result of the valuation firm's current assessment of risk,
which took into consideration the Company's overall liquidity constraints at
the present time.
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.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations". SFAS 141(R) establishes principles and requirements for how
an acquirer in a business combination recognizes and measures the assets
acquired, liabilities assumed, and any noncontrolling interest in the
acquiree. This statement applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the Company's
fiscal year 2009.
RESULTS OF OPERATIONS
Basis of presentation:
The Company uses a 52-53 week fiscal year ending on the Saturday closest
to February 28, which for fiscal 2007, a 53-week year, fell on March 3,
2007. Fiscal 2008, a 52-week year, will end on March 1, 2008. The actual
nine month year-to-date periods ended on December 1, 2007, consisting of 39
weeks of operations, and December 2, 2006, consisting of 40 weeks of
operations. The third fiscal quarters ended December 1, 2007 and December 2,
2006 both consisted of 13 weeks of operations. In the accompanying
consolidated financial statements, the 2007 fiscal year end is shown as
February 28 and the interim period end for both years is shown as November 30
for clarity of presentation.
Overview:
CalAmp is a provider of wireless communications products that enable
anytime/anywhere access to critical information, data and entertainment
content. CalAmp is a supplier of direct broadcast satellite (DBS) outdoor
customer premise equipment to the U.S. satellite television market. The
Company also provides wireless data communications solutions for the
telemetry and asset tracking markets, private wireless networks, public
safety communications, and critical infrastructure and process control
applications.
The Company's DBS reception products are sold primarily to the two U.S.
DBS system operators, Echostar Communications Corporation and DirecTV Group
Inc., for incorporation into complete subscription satellite television
systems. The Company sells its other wireless access products directly to
system operators as well as through distributors and system integrators.
On May 26, 2006, the Company acquired privately held Dataradio Inc., a
leading supplier of proprietary advanced wireless data systems, products, and
solutions for public safety, critical infrastructure and industrial control
applications, for a cash payment of Canadian $60.1 million, or U.S. $54.3
million at the effective exchange rate. In connection with the acquisition
of Dataradio, the Company recorded a charge of $6,850,000 to write off in-
process research and development costs of the acquired business as part of
the purchase price allocation.
Also on May 26, 2006, the Company acquired the mobile-resource
management (MRM) product line from privately held TechnoCom Corporation for
$2.4 million in cash and an earn-out payment equal to revenues in excess of
$3,100,000 during the 12-month period following the acquisition. Pursuant to
this provision, the Company has made earn-out payments of $703,000 during the
nine months ended November 30, 2007, leaving a balance of $1.6 million which
is included in other accrued liabilities in the consolidated balance sheet at
November 30, 2007. The Company expects to pay the balance owed, including
interest at 7%, during the next 12 months using cash flows generated from
operations.
In March 2007, the Company split the Products Division into two separate
reporting segments: the Satellite Division and the Wireless DataCom
Division. The Satellite Division consists of the Company's DBS business, and
the Wireless DataCom Division consists of the remaining businesses of the
Products Division, including Dataradio, the MRM product line, CalAmp's legacy
wireless businesses other than DBS, and the operations of Aercept and
SmartLink that were acquired in the fiscal 2008 first quarter, as discussed
below. Segment information presented in this Form 10-Q for the nine months
ended November 30, 2006 has been reclassified to present information on this
new reporting segment basis. The Solutions Division, the remaining
operations of which were sold in August 2007, is presented as a discontinued
operation in the accompanying consolidated statements of operations.
On March 16, 2007, the Company acquired Aercept, 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. Aercept'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 Aercept are included
in the Company's Wireless DataCom reporting segment for the 37-week period
from the date of acquisition to the end of the fiscal 2008 third quarter.
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 more than one million dollars. The results of operations
of SmartLink are included in the Company's Wireless DataCom reporting segment
for the 35-week period from date of acquisition to the end of the fiscal 2008
third quarter. During this period SmartLink generated revenues of $1.4
million and gross profit of $382,000.
Solutions Division
The Company sold the TelAlert software business of the Solutions
Division to a privately held company on August 9, 2007 for total
consideration of $9.4 million, consisting of $4.0 million in cash, a non-
interest bearing note with present value of $2.3 million and preferred stock
of the acquirer valued at $3.1 million. The note is payable in 18 equal
monthly installments of $140,000, which commenced December 9, 2007.
The Company recognized a pre-tax gain of $2.1 million on the sale of the
TelAlert software business. The income tax expense attributable to the gain
was $3.0 million because at the time of sale there was goodwill of $5.4
million associated with this business that is not deductible for income tax
purposes.
The TelAlert software business was the remaining business of the
Solutions Division. Operating results for the Solution Division have been
presented in the accompanying consolidated statements of operations as a
discontinued operation, as further described in Note 2 to the accompanying
unaudited consolidated financial statements.
Product Performance 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.
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 790,000 units
have been returned by this customer subsequent to fiscal 2007, and it is
expected that additional units will be returned to the Company in the
future. In addition to returning product, in 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 reserve for
accrued warranty costs by $500,000 for this matter. This amount was
predicated on the customer accepting a planned corrective action procedure
for the previous generation products that CalAmp had developed for existing
and projected future product returns. Under this planned corrective action,
CalAmp expected that the field performance issue could be resolved by
retuning the circuitry as a lower cost alternative to replacing certain parts
and materials.
Prior to the issuance of its financial statements for the fiscal 2008
first quarter, the Company learned that the DBS customer would not accept the
Company's proposed rework approach for the previous generation products that
involved retuning the circuitry. This led the Company to conclude that
certain parts, including the radio frequency board assembly, would need to be
replaced, which is a significantly more costly process. As a result, the
Company recorded a charge of $16.3 million in the quarter ended May 31, 2007
to increase the reserves for this matter. The resulting loss caused an event
of default with respect to the financial covenants under the Company's bank
credit agreement, as discussed further under Liquidity and Capital Resources
below. During the quarters ended August 31, 2007 and November 30, 2007, the
Company recorded additional charges of $1.5 million and $0.1 million,
respectively, related to this matter. Total charges related to this matter
of $17.9 million for the nine months ended November 30, 2007 are included in
cost of revenues in the accompanying consolidated statements of operations.
At November 30, 2007, the Company had reserves in the aggregate amount of
$18.1 million for this matter. The Company reached a settlement agreement
with this customer on December 14, 2007 as further described in Note 14 to
the accompanying unaudited consolidated financial statements. While the
CalAmp believes that its established reserves as of November 30, 2007 will be
adequate to cover the total costs of this settlement agreement, including
future product rework costs, no assurances can be given that the ultimate
expenses will not materially increase from the current estimate. The cash
impact of these reserves is anticipated to occur over the next two or more
years.
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 November 30, Nine Months Ended November 30,
----------------------------------- ----------------------------------
2007 2006 2007 2006
--------------- --------------- --------------- --------------
% of % of % of % of
Division $000s Total $000s Total $000s Total $000s Total
----------- ------- ----- ------ ----- ------- ----- ------ -----
Satellite $ 8,353 26.1% $45,045 76.2% $ 41,235 37.1% $118,091 75.4%
Wireless DataCom 23,708 73.9% 14,058 23.8% 69,887 62.9% 38,598 24.6%
------ ----- ------ ----- ------- ----- ------- -----
Total $32,061 100.0% $59,103 100.0% $111,122 100.0% $156,689 100.0%
====== ===== ====== ===== ======= ===== ======= =====
GROSS PROFIT (LOSS) BY SEGMENT
Three Months Ended November 30, Nine Months Ended November 30,
----------------------------------- ---------------------------------
2007 2006 2007 2006
--------------- --------------- ---------------- --------------
% of % of % of % of
Division $000s Total $000s Total $000s Total $000s Total
----------- ------- ----- ------ ----- ------- ------- ------ -----
Satellite $ 221 2.2% $ 6,514 54.1% $(15,530) (141.7%) $19,561 56.2%
Wireless DataCom 9,807 97.8% 5,527 45.9% 26,487 241.7% 15,224 43.8%
------ ----- ------ ----- ------ ------- ------ -----
Total $10,028 100.0% $12,041 100.0% $ 10,957 100.0% $34,785 100.0%
====== ===== ====== ===== ====== ======= ====== =====
OPERATING INCOME (LOSS) BY SEGMENT
Three Months Ended November 30, Nine Months Ended November 30,
------------------------------------ ---------------------------------
2007 2006 2007 2006
---------------- --------------- -------------- --------------
% of % of % of % of
Division $000s Total $000s Total $000s Total $000s Total
----------- -------- ----- ------ ----- ------- ----- ------ -----
Satellite $(44,061) 65.5% $ 5,154 181.5% $(62,356) 69.8% $14,812 377.3%
Wireless DataCom (21,842) 32.5% (727) (25.6%) (22,988) 25.7% (6,487) (165.2%)
Corporate
Expenses (1,315) 2.0% (1,588) (55.9%) (3,972) 4.5% (4,399) (112.1%)
------- ----- ------ ----- ------ ----- ------ -----
Total $(67,218) 100.0% $ 2,839 100.0% $(89,316) 100.0% $ 3,926 100.0%
======= ===== ====== ===== ====== ===== ====== =====
The Satellite Division's negative gross profit of $15.5 million and
operating loss of $62.4 million in the nine months ended November 30, 2007
includes a $17.9 million charge for estimated expenses to correct a product
performance issue involving key DBS customer, as further described in Note 14
to the accompanying unaudited consolidated financial statements. The
operating loss of $62.4 million for that period also includes a goodwill
impairment charge of $43.2 million.
The Wireless DataCom Division operating loss of $23.0 million in the
nine months ended November 30, 2007 includes a goodwill impairment charge of
$22.6 million. The Wireless DataCom Division operating loss of $6.5 million
in the nine months ended November 30, 2006 includes a charge of $6.9 million
to write off in-process research and development costs associated with the
Dataradio acquisition.
Revenue
Satellite Division revenue declined $36.7 million, or 82%, to $8.3
million in the three months ended November 30, 2007 from $45.0 million for
the same period in the previous fiscal year. This decline was primarily
attributable to the action taken by a key DBS customer to put on hold all
orders with the Company, including orders for newer generation products,
pending a requalification of all products manufactured by CalAmp for this
customer, as discussed above. Revenues from this customer in the three
months ended November 30, 2007 were $31.8 million lower than the same period
last year.
For the nine months ended November 30, 2007, Satellite Division revenue
decreased $76.9 million, or 65%, to $41.2 million from $118.1 million over
the same period of the prior year due to the same reason discussed in the
preceding paragraph. Revenues from the customer that put its orders on hold
were $72.6 million lower in the nine months ended November 30, 2007 than the
same period last year. The Company reached a settlement agreement with this
customer on December 14, 2007 as further described in Note 14. The Company
is working with this customer to re-qualify its products and it expects
increasing revenues throughout fiscal 2009.
Wireless DataCom Division revenue increased by $9.7 million, or 69%, to
$23.7 million in the third quarter of fiscal 2008 compared to the fiscal 2007
third quarter due to: (i) a $2.5 million increase in sales of the Company's
legacy wireless product line (other than DBS); and (ii) the acquisition of
Aercept in March 2007 and SmartLink in April 2007 that contributed revenues
of $3.4 million and $910,000, respectively, to the fiscal 2008 third quarter.
For the nine months ended November 30, 2007, Wireless DataCom revenue
increased $31.3 million, or 81%, to $69.9 million over the same period of the
prior year. This increase in revenue is due to: (i) a $9.9 million increase
in sales of radio modules to a Wireless DataCom customer in support of that
customer's contract with the U.S. Department of Defense; (ii) the
acquisition of Aercept in March 2007, which contributed revenue of $9.5
million in the nine months ended November 30, 2007; and the fact that the
operations of Dataradio and the Technocom MRM product line are included for
all 39 weeks of the fiscal 2008 period and only 27 weeks of the fiscal 2007
period.
Gross Profit (Loss) and Gross Margins
The Satellite Division had gross profit of $221,000 in the fiscal 2008
third quarter compared with a gross profit of $6.5 million in the third
quarter of last year. The decline in gross profit is primarily attributable
to the $36.7 million decline in revenue in the latest quarter compared to the
third quarter of last year.
The Satellite Division had negative gross profit of $(15.5) million for
the nine months ended November 30, 2007 compared with a gross profit of $19.6
for the same period last year. The decline in gross profit is primarily
attributable to the $17.9 million charge for estimated expenses to correct a
product performance issue with a key DBS customer and the $76.9 million
decline in revenue in the latest nine month period compared to the prior
year.
Gross profit of the Wireless DataCom Division increased 77% to $9.8
million in the latest quarter compared to the third quarter of last year,
which is commensurate with the 69% revenue increase of this division.
Wireless DataCom's gross margin increased from 39.3% in the third quarter of
fiscal 2007 to 41.4% in the third quarter of fiscal 2008 due to a change in
product mix.
Wireless DataCom Division gross profit increased 74% to $26.5 million
for the nine months ended November 30, 2007, compared to $15.2 million for
the same period of the prior year, which is commensurate with the 81% revenue
increase of this division. Wireless DataCom's gross margin decreased from
39.4% for the nine month period ended November 30, 2006 to 37.9% for the same
period of the current year due to a change in product mix, primarily from
lower margin on Aercept revenue.
See also Note 13 to the accompanying unaudited consolidated financial
statements for additional operating data by business segment.
Operating Expenses
Consolidated research and development ("R&D") expense increased by
$464,000 to $3,868,000 in the third quarter of fiscal 2008 from $3,404,000
last year, primarily from higher R&D expenses of Dataradio. For the nine
month year-to-date periods, R&D expense increased $2,459,000 from $9,523,000
last year to $11,982,000 this year. Dataradio's R&D expense accounted for
$2.9 million of the increase, offset by a reduction in R&D expense related to
the Company's Satellite Division and MRM business of the Wireless DataCom
Division. Dataradio was included for for all 39 weeks of the fiscal 2008
period and only 27 weeks of the fiscal 2007 period.
Consolidated selling expenses increased by $618,000 to $2,577,000 in the
third quarter this year from $1,959,000 last year. This increase is
primarily due to the inclusion of Aercept selling expenses in fiscal 2008.
As noted above, Aercept was acquired in March 2007. For the nine month year-
to-date periods, selling expenses increased $2,536,000 from $4,683,000 last
year to $7,219,000 this year. The selling expenses of Dataradio and Aercept
accounted for $1.3 million and $0.9 million of the increase, respectively.
Consolidated general and administrative expenses ("G&A") increased by
$736,000 to $3,498,000 in the third quarter of this year compared to the
prior year. This increase is primarily due to the inclusion of Aercept G&A
for the fiscal 2008 third quarter. Consolidated G&A increased by $2,740,000
for the nine months ended November 30, 2007, which increase is primarily due
to the acquisitions of Dataradio in May 2006, Aercept in March 2007 and
SmartLink in April 2007, which collectively accounted for increased G&A of
$2.7 million in the nine months ended November 30, 2007 compared to the same
period of last year.
Amortization of intangibles increased from $1,077,000 in the third
quarter of last year to $1,558,000 in the third quarter of this year. The
increase was primarily attributable to the acquisitions of Aercept and
SmartLink.
The in-process research and development ("IPR&D") write-off declined
from $6,850,000 for the nine months ended November 30, 2006 to $310,000 in
the 2008 fiscal year period. Last year's IPR&D write-off was related to the
acquisition of Dataradio, while this year's IPR&D write-off was related to
the acquisition of SmartLink.
Operating Loss
The operating loss in the third quarter of this year was ($67,218,000),
compared to operating income of $2,839,000 in the third quarter of last year.
The operating loss in the third quarter of this year is primarily
attributable to the impairment charge of $65.7 million and the decline in
revenues from a key DBS customer.
The operating loss in the nine months ended November 30, 2007 was
($89,316,000), compared to operating income of $3,926,000 million in the nine
months ended November 30, 2006. The operating loss in the current period is
attributable to the impairment charge of $65.7 million, the $17.9 million
charge for the DBS product performance issue noted above, and the decline in
revenues from a key DBS customer.
Non-Operating Income (Expense), Net
Non-operating expense in the third quarter of this year was $622,000,
compared to $136,000 in the third quarter of last year. The change was due
to: (i) an increase in net interest expense of $231,000 because of lower
invested cash and higher debt in fiscal 2008; and (ii) the $254,000 swing in
foreign currency from a $119,000 gain in the third quarter of last year to a
$135,000 foreign currency loss in the third quarter of this year due to the
weakening of the US dollar relative to the Canadian dollar.
Non-operating expense was $(1,712,000) in the nine months ended November
30, 2007, compared to non-operating income of $591,000 in the nine months
ended November 30, 2006. The change was due to (i) an increase in net
interest expense of $1,097,000 because of lower invested cash and higher debt
in fiscal 2008; (ii) $655,000 in foreign currency loss in the current year
compared to a $192,000 gain last year; (iii) a gain of $689,000 last year on
currency hedging activities in connection with the Dataradio acquisition, for
which the purchase price was denominated in Canadian dollars; and (iv) a non-
operating gain of $330,000 on the sale of an investment that was recorded in
the nine months ended November 30, 2007.
Income Tax Provision
Income tax expense (benefit) allocated to income (loss) from continuing
operations for the nine months ended November 30, 2007 and 2006 was
$(17,894,000) and $4,789,000, respectively. Income tax expense (benefit)
allocated to income (loss) from discontinued operations for the nine months
ended November 30, 2007 and 2006 was $2,617,000 and $(1,742,000),
respectively. The effective income tax rate on income (loss) from continuing
operations was 20% and 106% in the nine months ended November 30, 2007 and
2006, respectively. Excluding the $45,057,000 portion of the fiscal 2008
goodwill impairment charge that is not deductible for income tax purposes,
the effective income tax rate for the nine months ended November 30, 2007 was
39%. Excluding the fiscal 2007 IPR&D write-off of $6,850,000 that is not
deductible for income tax purposes, the effective income tax rate for the
nine months ended November 30, 2006 was 42%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $5,036,000 at November 30, 2007. During the
nine months ended November 30, 2007, cash and cash equivalents decreased by
$32.5 million. This decrease is comprised primarily of cash used by
operating activities of $4.2 million, the Aercept and SmartLink acquisitions
of $27.3 million, partial payment of $0.7 million as earn-out consideration
for the TechnoCom acquisition, capital expenditures of $1.1 million, cash
restricted for repayment of debt of $3.3 million, and debt repayments of $2.2
million, partially offset by proceeds from the sale of discontinued
operations of $4.0 million, proceeds from the sale of investment of $1.0
million, proceeds from the exercise of stock options of $0.2 million and the
effect of exchange rate changes on cash of $0.9 million.
In May 2006, the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of Montreal, as administrative agent, and the other
financial institutions that from time to time may become parties to the
Credit Agreement. The credit facility is comprised of a term loan and a $10
million working capital line of credit.
The Company initially borrowed $35 million under the term loan and $3
million under the working capital line of credit. Borrowings are secured by
substantially all of the assets of CalAmp Corp. and its domestic
subsidiaries. Of the total proceeds of $38 million, $7 million was used to
pay off the Company's existing loans with U.S. Bank and the remaining $31
million, plus cash on hand of approximately $23 million, was used to fund the
purchase price for Dataradio. During fiscal 2007, the Company repaid in full
the $3 million principal balance of the line of credit. At November 30,
2007, $2,375,000 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
November 30, 2007.
Borrowings under the Credit Agreement bear interest at the Bank of
Montreal's prime rate ("Prime Based Loans") plus a margin ranging from 0% to
0.25% (the "Prime Rate Margin") or LIBOR ("LIBOR Based Loans") plus a margin
ranging from 0.75% to 1.25% (the "LIBOR Margin"). The Prime Rate Margin and
the LIBOR Margin vary depending on the Company's ratio of debt to earnings
before interest, taxes, depreciation, amortization and other noncash charges
(the "Leverage Ratio"). Interest is payable on the last day of the calendar
quarter for Prime Based Loans and at the end of the fixed rate LIBOR period
(ranging from 1 to 12 months) in the case of LIBOR Based Loans. The Credit
Agreement also provides that the interest rate on borrowings can be increased
by 2.0% during any period in which an event of default exists. The banks
notified the Company that effective November 6, 2007 the banks have applied
this additional 2.0% interest to the loan balance, payable upon demand by the
banks.
The Credit Agreement contains certain financial covenants and ratios
that the Company is required to maintain, including: a total Leverage Ratio
of not more than 2.75; total stockholders' equity of not less than the sum of
(i) $140,887,000, (ii) 50% of net income for each fiscal year (excluding
years with net losses) and (iii) 50% of net cash proceeds from any issuance
of equity; and a fixed charge coverage ratio (earnings before interest,
taxes, depreciation and other noncash charges to fixed charges) of not less
than 1.50.
The Credit Agreement also includes customary affirmative and negative
covenants including, without limitation, negative covenants regarding
additional indebtedness, investments, maintenance of the business, liens,
guaranties, transfers and sales of assets, and the payment of dividends and
other restricted payments. The Credit Agreement also contains certain events
of default, including the failure to make timely payments under the Credit
Agreement or other material indebtedness and the failure to adhere to certain
covenants, that would permit the bank to accelerate borrowings under the
Credit Agreement in the event that a default were to occur and not be cured
within applicable grace periods.
As discussed under "Product Performance Issue with Key DBS Customer"
above, during the nine months ended November 30, 2007 the Company recorded a
charge of $17.9 million for warranty repairs and other costs to resolve a
product performance issue with a key DBS customer. The net loss of $11.4
million in the first quarter of fiscal 2008, which was primarily attributable
to the $16.3 million charge recorded in that quarter for this product
performance issue, caused an event of default with respect to the financial
covenants under the Credit Agreement that will preclude additional borrowing
under the revolving credit facility until the Company is able to obtain a
waiver from its lenders and/or an amendment of the Credit Agreement. The
Company has notified its lenders and is in discussions with them to resolve
the issue. The Company believes that it has sufficient liquidity in the next
12 months 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 repayments of the outstanding loan amount under the Credit
Agreement, the inability of the Company to borrow under the revolving credit
facility and/or the acceleration of such indebtedness would materially
adversely affect the Company's financial position and operations, including
its ability to fund its currently anticipated working capital and capital
expenditure needs. Furthermore, because the lenders will have the right to
call the loans under the Credit Agreement until such time that a waiver is
obtained, $27.6 million of debt previously classified as a long-term
liability has been reclassified as a current liability in the accompanying
consolidated balance sheet as of November 30, 2007. The lenders have not
provided the Company with the written notice that would be required to
accelerate the loans under the Credit Agreement, and the Company believes
that it will be able to obtain a waiver or amendment and avoid an
acceleration of such loans. Nonetheless, no assurance can be given that the
Company will be successful in obtaining a waiver or amendment, or that it
will be able to avoid an acceleration of such loans.
As further described in Note 14 to the accompanying unaudited
consolidated financial statements, at November 30, 2007 the Company had a
$13.4 million reserve for accrued warranty costs in connection with a product
performance issue involving a key DBS customer. This warranty reserve was
reduced by $8.8 million to $4.6 million as the result of a settlement
agreement that was entered into with this customer on December 14, 2007.
Also as described in Note 14, at November 30, 2007 the Company has a $2.1
million reserve for vendor commitment liabilities related to this product
performance issue. While the Company believes that these reserves will be
adequate to cover total future product rework costs under this settlement
agreement and vendor commitment liabilities for materials not expected to be
utilizable in the future, no assurances can be given that the ultimate costs
will not materially increase from the current estimates. The cash impact of
these reserves is anticipated to occur over the next two or more years.
The Company believes that inflation and foreign currency exchange rates
have not had a material effect on its operations. Although the acquisition
of Dataradio has increased the Company's exposure to changes in foreign
currency exchange rates, the Company believes that fiscal 2008 will not be
impacted significantly by foreign exchange since a significant portion of the
Company's sales will continue to be to U.S. markets, or to international
markets where its sales are denominated in U.S. dollars.
FORWARD LOOKING STATEMENTS
Forward looking statements in this Form 10-Q which include, without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, projections and other information
regarding future performance, are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The words "may",
"will", "could", "plans", "intends", "seeks", "believes", "anticipates",
"expects", "estimates", "judgment", "goal", and variations of these words and
similar expressions, are intended to identify forward-looking statements.
These forward-looking statements reflect the Company's current views with
respect to future events and financial performance and are subject to certain
risks and uncertainties, including, without limitation, product demand,
market growth, new competition, competitive pricing and continued pricing
declines in the DBS market, supplier constraints, manufacturing yields, the
ability to manage cost increases in inventory materials including timing and
market acceptance of new product introductions, the Company's ability to
harness new technologies in a competitively advantageous manner, the
Company's success at integrating its acquired businesses, the Company's
ability to obtain an amendment of its Credit Agreement to eliminate the event
of default under the Credit Agreement, the Company's ability to successfully
re-qualify certain newer generation products and resume selling these
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
November 30, 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 Company has on-hand inventory of approximately $9.9 million and
outstanding purchase commitments of $8.6 million for materials that are
specific to the products that the Company manufactures for a key DBS customer
with which the Company experienced a product performance issue. These amounts
are not urrently reserved for because the Company believes these materials can
be used in the ordinary course of business as future shipments of products are
made to this customer. Nonetheless, changes in the forecasted product demand
from this customer or the introduction of new products by this customer that do
not utilize these materials could require that the inventory reserve and/or the
reserve for vendor commitment liabilities be increased to cover some portion of
these amounts.
In addition, 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 re-qualify certain newer
generation products and resume selling these products to one of its key DBS
customers and the risk that the ultimate cost of resolving product
performance issues with a key DBS customer may exceed the amount of reserves
established for that purpose. Additional risks and uncertainties not
currently known to management or that are currently deemed to be immaterial
also may materially adversely affect the Company's business, financial
condition and/or operating results.
ITEM 5. OTHER INFORMATION
On December 1, 2007, the Company entered into the Third Amendment and
Consent to Credit Agreement with Bank of Montreal ("BMO"), in which BMO
consented to the Company's issuance of a $5,000,000 non-interest bearing
subordinated note and the forgiveness of $1,000,000 of accounts receivable in
connection with the settlement agreement with Echostar Technologies
Corporation.
ITEM 6. EXHIBITS
Exhibit 10.1 - Third Amendment and Consent to Credit Agreement
dated December 1, 2007 between CalAmp Corp. and
Bank of Montreal (1)
Exhibit 31.1 - Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 31.2 - Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
(1) Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
January 15, 2008 /s/ Richard K. Vitelle
------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)