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: May 31, 2008
_________________
[ ] 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 25,018,599 shares of Common Stock outstanding as of
June 30, 2008.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
May 31, February 28,
2008 2008
Assets -------- --------
Current assets:
Cash and cash equivalents $ 7,212 $ 6,588
Accounts receivable, less allowance for
doubtful accounts of $1,029 and $1,271 at May
31, 2008 and February 28, 2008, respectively 16,000 20,043
Inventories 25,348 25,097
Deferred income tax assets 5,179 5,306
Prepaid expenses and other current assets 10,167 9,733
-------- --------
Total current assets 63,906 66,767
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 4,638 5,070
Deferred income tax assets, less current portion 15,319 14,802
Goodwill 28,520 28,520
Other intangible assets, net 23,092 24,424
Other assets 3,752 3,458
-------- --------
$139,227 $143,041
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 5,800 $ 5,343
Accounts payable 10,127 10,875
Accrued payroll and employee benefits 3,662 4,218
Accrued warranty costs 4,035 3,818
Other current liabilities 11,211 11,800
Deferred revenue 3,212 4,005
-------- --------
Total current liabilities 38,047 40,059
-------- --------
Long-term debt, less current portion 26,260 27,187
Other non-current liabilities 2,140 2,375
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; 25,030 and 25,041 shares issued
and outstanding at May 31, 2008 and
February 28, 2008, respectively 250 250
Additional paid-in capital 144,253 144,318
Accumulated deficit (71,646) (71,149)
Accumulated other comprehensive income (loss) (77) 1
-------- --------
Total stockholders' equity 72,780 73,420
-------- --------
$139,227 $143,041
======== ========
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Three Months Ended
May 31,
-------------------
2008 2007
-------- --------
Revenues $ 27,901 $ 46,393
Cost of revenues 18,472 51,779
-------- --------
Gross profit (loss) 9,429 (5,386)
-------- --------
Operating expenses:
Research and development 3,200 4,319
Selling 2,272 2,269
General and administrative 3,096 3,202
Intangible asset amortization 1,332 1,744
Write-off of acquired in-process
research and development - 310
-------- --------
Total operating expenses 9,900 11,844
-------- --------
Operating loss (471) (17,230)
Non-operating income (expense):
Interest expense, net (524) (444)
Other income (expense), net 108 (139)
-------- --------
Total non-operating expense (416) (583)
-------- --------
Loss from continuing operations
before income taxes (887) (17,813)
Income tax benefit 390 6,868
-------- --------
Loss from continuing operations (497) (10,945)
Loss from discontinued operations,
net of tax - (417)
-------- --------
Net loss $ (497) $(11,362)
======== ========
Basic and diluted loss per share from:
Continuing operations $ (0.02) $ (0.46)
Discontinued operations - (0.02)
-------- --------
Total basic and diluted loss per share $ (0.02) $ (0.48)
======== ========
Shares used in computing basic and
diluted loss per share:
Basic 24,703 23,600
Diluted 24,703 23,600
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
May 31,
---------------------
2008 2007
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (497) $(11,362)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,972 2,659
Stock-based compensation expense 9 486
Write-off of in-process research and development - 310
Excess tax benefit from stock-based
compensation - (49)
Deferred tax assets, net (390) (12,147)
Gain on sale of investment - (331)
Changes in operating assets and liabilities:
Accounts receivable 4,043 13,918
Inventories (251) (2,094)
Prepaid expenses and other assets (868) 1,361
Accounts payable (748) (11,138)
Other accrued liabilities (662) 17,812
Deferred revenue (793) 894
Other - (2)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,815 317
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (216) (516)
Earnout payments on Technocom acquisition (575) -
Collections on note receivable from
sale of discontinued operations 140 -
Proceeds from sale of property and equipment - 4
Proceeds from sale of investment - 1,045
Acquisition of Aercept - (19,367)
Acquisition of SmartLink - (7,944)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (651) (26,778)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repayments (470) (739)
Proceeds from exercise of stock options - 141
Excess tax benefit from stock-based
compensation expense - 49
------- -------
NET CASH USED IN FINANCING ACTIVITIES (470) (549)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (70) 611
------- -------
Net change in cash and cash equivalents 624 (26,399)
Cash and cash equivalents at beginning of period 6,588 37,537
------- -------
Cash and cash equivalents at end of period $ 7,212 $ 11,138
======= =======
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2008 and 2007
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
CalAmp Corp. ("CalAmp" or the "Company") is a provider of wireless
communications solutions that enable anytime/anywhere access to critical data
and content. CalAmp's Wireless DataCom group services the public safety,
industrial monitoring and controls, and mobile resource management markets.
CalAmp's Satellite business unit supplies outdoor customer premise equipment
to the U.S. Direct Broadcast Satellite (DBS) market.
The remaining operations of the Solutions Division were sold in August
2007. The accompanying consolidated statement of operations for the quarter
ended May 31, 2007 has been reclassified to present the Solutions Division as
a discontinued operation.
The Company uses a 52-53 week fiscal year ending on the Saturday closest
to February 28, which for fiscal 2008 fell on March 1, 2008. The actual
interim periods ended on May 31, 2008 and June 2, 2007. In the accompanying
consolidated financial statements, the 2008 fiscal year end is shown as
February 28 and the interim period end for both years is shown as May 31 for
clarity of presentation.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 2008 Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on May 15, 2008.
In the opinion of the Company's management, the accompanying
consolidated financial statements reflect all adjustments (consisting of
normal recurring adjustments) considered necessary to present fairly the
Company's financial position at May 31, 2008 and its results of operations
for the three months ended May 31, 2008 and 2007. The results of operations
for such periods are not necessarily indicative of results to be expected for
the full fiscal year.
All significant intercompany transactions and accounts have been
eliminated in consolidation.
Note 2 - INVENTORIES
Inventories include the cost of material, labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in, first-
out method) or market, and consist of the following (in thousands):
May 31, February 28,
2008 2008
------ -------
Raw materials $20,260 $21,908
Work in process 337 325
Finished goods 4,751 2,864
------- -------
$25,348 $25,097
======= =======
Note 3 - OTHER INTANGIBLE ASSETS
Other intangible assets are comprised as follows (in thousands):
May 31, 2008 February 28, 2008
------------------------ -------------------------
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 $ 5,596 $12,987 $18,583 $ 4,767 $13,816
Customer lists 5-7 yrs. 8,313 2,695 5,618 8,313 2,334 5,979
Contracts
backlog 1 yr. 3,060 3,060 - 3,060 2,968 92
Covenants not
to compete 4-5 yrs. 1,001 394 607 1,001 344 657
Tradename N/A 3,880 - 3,880 3,880 - 3,880
------- ------ ------- ------- ------ -------
$34,837 $11,745 $23,092 $34,837 $10,413 $24,424
======= ====== ======= ======= ====== =======
Amortization expense of intangible assets was $1,332,000 and $1,744,000
for the three months ended May 31, 2008 and 2007, respectively. All
intangible asset amortization expense is attributable to the Wireless DataCom
group.
Estimated amortization expense for the fiscal years ending February 28
is as follows:
2009 (remainder) $3,721,000
2010 $4,961,000
2011 $4,438,000
2012 $4,091,000
2013 $1,677,000
Thereafter $ 324,000
Note 4 - FINANCING ARRANGEMENTS
Long-term Debt
Long-term debt consists of the following (in thousands):
May 31, February 28,
2008 2008
------ -------
Bank term loan $27,060 $27,530
Subordinated note payable to DBS customer 5,000 5,000
------- -------
Total debt 32,060 32,530
Less portion due within one year (5,800) (5,343)
------- -------
Long-term debt $26,260 $27,187
======= =======
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 (collectively, the "Banks"). In February 2008, the Company
entered into an amendment of the Credit Agreement with the Banks (the
"Amended Agreement"). Pursuant to the Amended Agreement, cash proceeds of
$3.8 million from the August 2007 sale of the Company's TelAlert software
business that had been held in escrow by the Banks were applied to reduce
borrowings under the term loan, resulting in an outstanding principal balance
of $27.5 million at February 28, 2008. The Company made principal repayments
of $470,000 during the quarter ended May 31, 2008. The term loan bears
interest at 4.29% as of May 31, 2008. Term loan principal payments of
$750,000 are due on the last day of each calendar quarter during 2008, and a
principal payment of $1,250,000 is due on March 31, 2009. In addition, any
collections of the scheduled $140,000 per month on a note receivable from the
buyer of the TelAlert software business must be applied to reduce the term
loan principal.
The Amended Agreement has a termination date of June 30, 2009, at which
time all outstanding borrowings under the credit agreement are due and
payable. In the event all outstanding obligations under the Amended
Agreement are not paid in full by December 31, 2008, an exit fee of $500,000
plus penalty interest of $204,000 will be due and payable to the Banks on
June 30, 2009, except that if the Company receives cash of at least
$5,000,000 as a result of issuing equity or subordinated debt by December 31,
2008, then the exit fee and penalty interest will be reduced to $300,000 and
$123,000, respectively.
At May 31, 2008, $2.4 million of the working capital line of credit was
reserved for outstanding irrevocable stand-by letters of credit. The Amended
Agreement also makes available $1 million for borrowings under a working
capital revolving loan. Borrowings under the revolver would bear interest at
Bank of Montreal's prime rate plus 2% or LIBOR plus 3%. There were no
outstanding borrowings on the revolver at May 31, 2008.
Pursuant to the Amended Agreement, the Banks agreed to waive all
financial covenant violations for fiscal 2008. The financial covenants with
which the Company had been noncompliant were eliminated as a result of this
amendment, and were replaced with new covenants that are effective beginning
with the first quarter of fiscal 2009 that require minimum levels of
consolidated earnings before interest, taxes, depreciation and amortization
(EBITDA) and Wireless DataCom group revenues. The Company is in compliance
with these covenants at May 31, 2008.
The Credit Agreement includes customary affirmative and negative
covenants including, without limitation, negative covenants regarding
additional indebtedness, investments, maintenance of the business, liens,
guaranties, transfers and sales of assets, and the payment of dividends and
other restricted payments.
Scheduled principal payments of the bank term loan by fiscal year are
as follows:
Fiscal Year
-----------
2009 (remainder) $ 2,250,000
2010 24,810,000
----------
$27,060,000
===========
On December 14, 2007, the Company entered into a settlement agreement
with a key DBS customer. Under the terms of the settlement agreement, the
Company issued to the customer a $5.0 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 this customer after the date of the settlement agreement.
Based on expected shipments of DBS units, an amount of $2,300,000 has been
classified as current and $2,700,000 has been classified as non-current in
the accompanying consolidated balance sheet as of May 31, 2008. 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.
Other Non-Current Liabilities
Other non-current liabilities consist of the following (in thousands):
May 31, February 28,
2008 2008
------ -------
Accrued warranty costs $ 1,003 $ 1,051
Deferred rent 814 981
Deferred revenue 323 343
------- -------
$ 2,140 $ 2,375
======= =======
Note 5 - 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 Uncertainty in Income Taxes" (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 of May 31,
2008, the Company has unrecognized tax benefits of $6,352,000 which, if
recognized, would impact the effective tax rate on income from continuing
operations.
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 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 French tax authorities.
Certain income tax returns for fiscal years 2005 through 2007 remain open to
examination by Canada federal and Quebec provincial tax authorities. The
Company believes that it has made adequate provision for all income tax
uncertainties pertaining to these open tax years.
The income tax benefit applicable to the loss from continuing operations
for the three months ended May 31, 2008 and 2007 was $390,000 and $6,868,000,
respectively. The effective income tax rate on the loss from continuing
operations was 44% and 39% in the three months ended May 31, 2008 and 2007,
respectively. The increase in effective tax rate was due to currency
translation effects involving the Company's French subsidiary.
Note 6 - 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 was the same for all
periods presented. Stock options outstanding at May 31, 2008 and 2007 were
excluded from the computation of diluted earnings per share for the three
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 7 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the total of net income (loss)
and all non-owner changes in equity. The following table details the
components of comprehensive income (loss) for the three months ended May 31,
2008 and 2007 (in thousands):
Three Months Ended
May 31,
-------------------
2008 2007
------- -------
Net loss $ (497) $(11,362)
Foreign currency
translation adjustments (78) 697
Realized gain on
available-for-sale investments - (45)
------- -------
Comprehensive loss $ (575) $(10,710)
======= =======
Note 8 - STOCK-BASED COMPENSATION
Stock-based compensation expense is included in the following captions
of the consolidated statements of operations (in thousands):
Three Months Ended
May 31,
-------------------
2008 2007
------- -------
Cost of revenues $ 8 $ 14
Research and development 48 53
Selling 33 60
General and administrative (80) 333
Loss from discontinued operations - 26
------ ------
$ 9 $ 486
====== ======
Changes in the Company's outstanding stock options during the three
months ended May 31, 2008 were as follows:
Weighted Aggregate
Number of Weighted Average Intrinsic
Options Average Remaining Value
(000s) Exercise Price Contractual Term (000s)
-------- -------------- ---------------- ---------
Outstanding at February 28, 2008 2,382 $ 9.54
Granted 300 $ 2.73
Exercised (50) $ 1.75
Forfeited or expired (675) $ 9.25
-----
Outstanding at May 31, 2008 1,957 $ 8.80 6.5 years $ 13
=====
Exercisable at May 31, 2008 1,206 $10.77 5.0 years $ 13
=====
Of the 50,000 options exercised, 39,498 shares underlying such exercised
options were retained by the Company in a net share settlement to cover the
aggregate exercise price and the employee withholding taxes.
Changes in the Company's unvested restricted stock and restricted stock
units during the three months ended May 31, 2008 were as follows (in
thousands except dollar amounts):
Weighted
Average
Number of Fair Value at
Shares Grant Date
-------- ----------
Outstanding at February 28, 2008 534 $ 3.70
Granted 14 2.60
Vested (60) 4.28
Forfeited (18) 4.28
-----
Outstanding at May 31, 2008 470 $ 3.57
=====
Of the 60,000 shares of restricted stock that vested during the period,
21,450 shares were retained by the Company to cover employee withholding
taxes.
As of May 31, 2008, there was $3.8 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 9 - 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 that accounted for 10% or more of consolidated revenues for the
three months ended May 31, 2008 or 2007, as a percent of consolidated
revenues, are as follows:
Three Months Ended
May 31,
-------------------
Customer 2008 2007
------- -------
A 24.3% 22.9%
B 7.7% 17.5%
C 2.5% 25.9%
Accounts receivable from the Customers A and B referred to in the table
above, expressed as a percent of consolidated net accounts receivable, are as
follows:
May 31, February 28,
Customer 2008 2008
------ ------
A 22.1% 26.6%
B 12.7% 9.0%
Accounts receivable from the Customer C referred to in the table above
were less than 10% of consolidated net accounts receivable at May 31, 2008
and February 28, 2008.
Customers A and C are customers of the Company's Satellite business
unit. Customer B is a customer of the Company's Wireless DataCom group. See
Note 13 for a description of a product performance issue and related matters
involving Customer C.
Note 10 - PRODUCT WARRANTIES
The Company generally warrants its products against defects over periods
up to three years. An accrual for estimated future costs relating to
products returned under warranty is recorded as an expense when products are
shipped. At the end of each quarter, the Company adjusts its liability for
warranty claims based on its actual warranty claims experience as a
percentage of sales for the preceding three years. The Company also adjusts
its liability to include amounts that are estimable and probable based on
known product defects. Activity in the warranty liability for the three
months ended May 31, 2008 and 2007 is as follows (in thousands):
Three months ended
May 31,
-----------------
2008 2007
------- -------
Balance at beginning of period $ 4,869 $ 1,295
Charged to costs and expenses 368 13,674
Deductions (199) (190)
------- ------
Balance at end of period $ 5,038 $14,779
======= ======
Warranty expense for the three months ended May 31, 2007 includes a
charge of approximately $13.3 million for the cost of estimated warranty
repairs to correct a product performance issue involving a DBS customer, as
further described in Note 13. The warranty reserve at May 31, 2007 includes
$14.1 million that is associated with this DBS product performance issue. In
the Company's fiscal 2008 fourth quarter, this warranty reserve was reduced
by $8.8 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 May 31, 2008, $1,003,000 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 11 - OTHER FINANCIAL INFORMATION
"Net cash provided by operating activities" in the consolidated
statements of cash flows includes cash payments (receipts) for interest and
income taxes as follows (in thousands):
Three months ended
May 31,
-----------------
2008 2007
------- -------
Interest paid $ 548 $ 587
Income taxes paid (net
refunds received) $ (755) $ (26)
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Three months ended
May 31,
-----------------
2008 2007
------- -------
Earn-out amount for TechnoCom
acquisition included in other
current liabilities $ - $ 2,269
Note 12 - SEGMENT INFORMATION
Segment information for the three months ended May 31, 2008 and 2007 is
as follows (dollars in thousands):
Three months ended
May 31, 2008
-------------------------------------
Business Segments
-------------------
Wireless
Satellite DataCom Corporate Total
-------- -------- ------- -----
Revenues $ 7,641 $ 20,260 $ 27,901
Gross profit $ 733 $ 8,696 $ 9,429
Gross margin 9.6% 42.9% 33.8%
Operating income (loss) $ (332) $ 1,057 $(1,196) $ (471)
Three months ended
May 31, 2007
-------------------------------------
Business Segments
-------------------
Wireless
Satellite DataCom Corporate Total
-------- -------- ------- -----
Revenues $ 23,031 $ 23,362 $ 46,393
Gross profit (loss) $(13,916) $ 8,530 $ (5,386)
Gross margin (60.4%) 36.5% (11.6%)
Operating loss $(15,231) $ (646) $(1,353) $(17,230)
The Satellite segment's negative gross profit of $13.9 million and
operating loss of $15.2 million in the three months ended May 31, 2007
includes a $16.3 million charge for estimated expenses to correct a product
performance issue involving key DBS customer, as further described in Note
13.
The Wireless DataCom segment's operating loss of $646,000 in the three
months ended May 31, 2007 includes a charge of $310,000 to write off in-
process research and development costs associated with the Smartlink
acquisition. Amortization expense of intangible assets related to the
Wireless DataCom segment was $1.3 million and $1.7 million for the three
months ended May 31, 2008 and 2007.
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.
Corporate expenses include stock-based compensation expense of
($208,000) and $265,000 in the three months ended May 31, 2008 and 2007,
respectively. The decrease in stock-based compensation expense is primarily
attributable to the forfeiture of unvested stock options upon the resignation
of the Company's former President and Chief Executive Officer in March 2008.
Note 13 - COMMITMENTS AND CONTINGENCIES
DBS Product Field Performance Issues
------------------------------------
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended February 28, 2008, the Company experienced a product
performance issue affecting certain DBS equipment manufactured by CalAmp for
a certain customer. In addressing this matter, the customer returned product
to the Company for corrective action and in May 2007 put a hold on all orders
for CalAmp equipment pending the requalification of the products. In
December 2007, the Company reached a settlement agreement with the customer
that addressed the financial and rework aspects of the product performance
issue. In January 2008, the customer requalified CalAmp's designs for the
affected products and in late May 2008 the Company resumed product shipments
to this customer.
At May 31, 2008, the Company has aggregate reserves of $8.3 million for
DBS product field performance issues, of which $2.3 million is an inventory
reserve, approximately $1.5 million is a vendor liability reserve included in
other current liabilities, and the remaining $4.5 million is a reserve for
accrued warranty costs.
While the Company believes that its reserves of $8.3 million as of May
31, 2008 will be adequate to cover total future product rework costs and
associated vendor liabilities and inventory obsolescence, 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 $10.3 million and
outstanding purchase commitments of $8.9 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
-------------------
In May 2007, a patent infringement suit was filed against the Company in
the U.S. District Court for the Eastern District of Texas. The lawsuit
contended that the Company infringed on four patents and sought injunctive
and monetary relief. The Company asserted counterclaims in August 2007,
through which the Company denied infringement of any valid claim of the
plaintiff and sought a declaration to that effect. The Court ordered the
dismissal of claims related to three patents. Recently, in a reexamination
proceeding filed with the United States Patent and Trademarks Office (USPTO),
the USPTO issued a non-final office action rejecting the remaining claim.
The plaintiff has a limited time to respond to the USPTO on the office
action. In light of this development, the case has been stayed by the Court
for at least approximately six months and most likely until the USPTO either
finally rejects the claim or affirms its validity over the prior art
submitted in the reexamination. The Company continues to believe the
lawsuit is without merit and intends to vigorously defend against this action
if and when court proceedings resume. No loss accrual has been made in the
accompanying financial statements for this matter.
A lawsuit was filed against the Company on September 15, 2006 by CN
Capital, the seller of the assets of Skybility that the Company acquired in
April 2005. The lawsuit contended that the Company owed CN Capital
approximately $1.6 million under the earn-out provision of the Skybility
Asset Purchase Agreement dated April 18, 2005. In July 2008, the Company
entered into an agreement with CN Capital to settle this litigation. Under
this settlement agreement the Company will pay cash and other consideration
to CN Capital with a total value of $132,000. This amount has been accrued
in the Company's financial statements at May 31, 2008.
On March 26, 2007, Rogers Corporation filed a complaint for declaratory
relief in the United States District Court in Massachusetts. Rogers
Corporation manufactures and supplies printed circuit laminate to sub-
contractors of the Company that is incorporated into the Company's DBS
products. On May 16, 2007, the Company filed a complaint against Rogers
Corporation in the United States District Court in California for product
liability issues related to the aforementioned laminate material and
subsequent damages incurred by the Company as a result of lost business and
the cost of product repair work associated with one of CalAmp's DBS
customers. The Company believes that Rogers' complaint was filed in
anticipation of the Company's complaint. While the Company believes that its
case against Rogers Corporation is meritorious, it is not possible to predict
the outcome of the matter at this time.
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 9 to the accompanying consolidated financial statements, the Company's
customer base is concentrated, with three customers accounting for 35% of the
Company's total revenue for the three months ended May 31, 2008 and two
customers accounting for 35% of the Company's net accounts receivable balance
as of May 31, 2008. 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 13 to the accompanying unaudited
consolidated financial statements, at May 31, 2008 the Company had an
inventory reserve of $2.3 million that was established during fiscal 2008 in
connection with a product performance issue involving a key DBS customer.
Also as described in Note 13, the Company had on-hand inventory of $10.3
million and outstanding purchase commitments of $8.9 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 13 to the accompanying unaudited
consolidated financial statements, at May 31, 2008 the Company had a $4.5
million reserve for accrued warranty costs in connection with a product
performance issue involving a key DBS customer. While the Company believes
that this $4.5 million warranty reserve will be adequate to cover total
future product rework costs for this issue, 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 Uncertainty in Income Taxes" (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 of May 31,
2008, the Company has unrecognized tax benefits of $6,352,000 which, if
recognized, would impact the effective tax rate on income from continuing
operations.
At May 31, 2008, the Company had an aggregate deferred tax asset balance
of $20,498,000. The current portion of the deferred tax asset is $5,179,000
and the noncurrent portion is $15,319,000.
Impairment Assessments of Goodwill, Purchased Intangible Assets and
Other Long-Lived Assets
At May 31, 2008, the Company had $28.5 million in goodwill and
$23.1 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 non-goodwill
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 and
Wireless DataCom business segments 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 also make estimates and judgments about the adequacy of
reserves established for the product performance issue with a key DBS
customer as described above. These assumptions and estimates are necessarily
subjective and reflect management's best estimates based on the information
available at the time such estimates are made. 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.
Stock-Based Compensation Expense
The Financial Accounting Standards Board issued SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS 123R"), which requires companies to
measure all employee stock-based compensation awards using a fair value
method and record such expense in their financial statements. The Company
adopted SFAS 123R at the beginning of fiscal 2007. Accordingly, the Company
measures stock-based compensation expense at the grant date, based on the
fair value of the award, and recognizes the expense over the employee's
requisite service (vesting) period using the straight-line method. The
measurement of stock-based compensation expense is based on several criteria
including, but not limited to, the valuation model used and associated input
factors, such as expected term of the award, stock price volatility, risk
free interest rate and forfeiture rate. Certain of these inputs are
subjective to some degree and are determined based in part on management's
judgment. The amount of stock-based compensation recognized during a period
is based on the value of the portion of the awards that are ultimately
expected to vest. SFAS 123R requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The term "forfeitures" is distinct
from "cancellations" or "expirations" and represents only the unvested
portion of the surrendered equity awards. Ultimately, the Company recognizes
the actual expense over the vesting period only for the shares that vest.
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 2008 fell on March 1, 2008. The actual
interim periods ended on May 31, 2008 and June 2, 2007. In the accompanying
consolidated financial statements, the 2008 fiscal year end is shown as
February 28 and the interim period end for both years is shown as May 31 for
clarity of presentation.
Overview:
CalAmp Corp. is a provider of wireless communications solutions that
enable anytime/anywhere access to critical data and content. CalAmp's
Wireless DataCom group services the public safety, industrial monitoring and
controls, and mobile resource management markets. CalAmp's Satellite
business unit supplies outdoor customer premise equipment to the U.S. DBS
market.
Wireless DataCom
The Wireless DataCom group services the public safety, industrial
monitoring and controls, and mobile resource management markets with wireless
solutions that extend communications networks to field applications, thereby
enabling coordination of emergency response teams, increasing productivity
and optimizing workflow for the mobile workforce, improving management
controls over valuable remote assets, and enabling novel applications in a
connected world. The Wireless DataCom group is comprised of the Company's
legacy wireless businesses other than DBS and businesses acquired during the
last two years.
Satellite
The Company's DBS reception products are sold primarily to the two U.S.
DBS system operators, Echostar and DirecTV, for incorporation into complete
subscription satellite television systems. Prior to fiscal 2008, the
Company's overall revenue consisted principally of sales of satellite
television outdoor reception equipment for the U.S. DBS industry. As the
result of a DBS product performance issue, one of the Company's DBS customers
substantially reduced its purchases of the Company's products in fiscal 2008
and the first quarter of fiscal 2009. During the remainder of fiscal 2009
the Company expects sales volume with this customer to ramp up. However, the
Company also expects that sales to the other key DBS customer in fiscal 2009
will be significantly less than sales to this customer in fiscal 2008.
Consequently, Satellite revenue for fiscal 2009 as a whole is expected to be
significantly below levels of the past several 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 May 31,
-----------------------------------
2008 2007
--------------- ---------------
% of % of
Segment $000s Total $000s Total
----------- ------- ----- ------ -----
Satellite $ 7,641 27.4% $23,031 49.6%
Wireless DataCom 20,260 72.6% 23,362 50.4%
------ ----- ------ -----
Total $27,901 100.0% $46,393 100.0%
====== ===== ====== =====
GROSS PROFIT (LOSS) BY SEGMENT
Three Months Ended May 31,
-----------------------------------
2008 2007
--------------- ---------------
% of % of
Segment $000s Total $000s Total
----------- ------- ----- ------ -----
Satellite $ 733 7.8% $(13,916) (258.4%)
Wireless DataCom 8,696 92.2% 8,530 158.4%
------ ----- ------ -----
Total $ 9,429 100.0% $ (5,386) 100.0%
====== ===== ====== =====
OPERATING INCOME (LOSS) BY SEGMENT
Three Months Ended May 31,
-----------------------------------
2008 2007
--------------- ---------------
% of % of
Segment $000s Sales $000s Sales
----------- -------- ----- ------ -----
Satellite $ (332) (1.2%) $(15,231) (32.8%)
Wireless DataCom 1,057 3.8% (646) (1.4%)
Corporate
Expenses (1,196) (4.3%) (1,353) (2.9%)
------- ----- ------ -----
Total $ (471) (1.7%) $(17,230) (37.1%)
======= ===== ====== =====
The Satellite segment's negative gross profit of $13.9 million and
operating loss of $15.2 million in the three months ended May 31, 2007
includes a $16.3 million charge for estimated expenses to correct a product
performance issue involving a key DBS customer.
Revenue
Satellite revenue declined $15.4 million, or 67%, to $7.6 million in the
three months ended May 31, 2008 from $23.0 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 in
late May 2007, including orders for newer generation products, pending a
requalification of all products manufactured by CalAmp for this customer, as
discussed above. Revenues from this customer in the three months ended May
31, 2008 were $11.3 million lower than the same period last year. The
Company reached a settlement agreement with this customer on December 14,
2007. In January 2008, the customer requalified CalAmp's designs for the
affected products and in late May 2008 the Company resumed product shipments
to this customer. The remaining decline in revenue was due to reduction of
orders from the Company's other principal DBS customer. The Company expects
that the level of revenue from the Satellite business unit will decline
compared to historical levels as a result of pricing and competition in the
market.
Wireless DataCom revenue decreased by $3.1 million, or 13%, to $20.3
million in the first quarter of fiscal 2009 compared to the fiscal 2008 first
quarter. The decrease was due primarily to a decline in sales of radio
modules to a key Wireless DataCom customer due to the demand volatility for
that customer's radio products, partially offset by the sale of patent rights
which contributed $1.5 million to Wireless DataCom revenue for the three
months ended May 31, 2008.
Gross Profit (Loss) and Gross Margins
Satellite gross profit was $733,000 in the fiscal 2009 first quarter
compared with a gross loss of $13.9 million in the first quarter of last
year. Satellite's negative gross profit of $13.9 million in the three months
ended May 31, 2007 includes a $16.3 million charge for estimated expenses to
correct a product performance issue involving a key DBS customer, as further
described in Note 13 to the accompanying unaudited consolidated financial
statements. Gross profit in the latest quarter was benefited by $587,000
associated with the sale of Satellite products for which the inventory cost
had been fully reserved in the prior fiscal year. If this product cost had
not been reserved in the prior year, Satellite gross margin in the latest
quarter would have been 1.9%.
Wireless DataCom gross profit increased 2% to $8.7 million in the fiscal
2009 first quarter compared to the first quarter of last year. Wireless
DataCom's gross margin increased from 36.5% in the first quarter of fiscal
2008 to 42.9% in the first quarter of fiscal 2009 due to the $1.5 million
patent sale. Excluding the patent sale, Wireless DataCom's gross margin was
38.4% in the first quarter of fiscal 2009, compared to 36.5% in the first
quarter of last year.
See also Note 12 to the accompanying unaudited consolidated financial
statements for additional operating data by business segment.
Operating Expenses
Consolidated research and development ("R&D") expense decreased by $1.1
million to $3.2 million in the first quarter of fiscal 2009 from $4.3 million
last year, primarily due to personnel reductions in the MRM business of the
Wireless DataCom group.
Consolidated selling expenses were $2,272,000 in the first quarter of
2009 compared to $2,269,000 in the first quarter of last year.
Consolidated general and administrative expenses ("G&A") decreased by
$106,000 to $3,096,000 in the first quarter of this year compared to the
prior year. G&A includes stock-based compensation expense of ($80,000) and
$333,000 in the three months ended May 31, 2008 and 2007, respectively. The
$413,000 reduction in stock-based compensation expense included in G&A is
attributable to the forfeiture of unvested stock options upon the resignation
of the Company's former President and Chief Executive Officer in March 2008.
Partially offsetting the decrease in stock-based compensation expense is an
increase in legal expense of $469,000, including $132,000 for the settlement
of the CN Capital litigation.
Amortization of intangibles decreased from $1,744,000 in the first
quarter of last year to $1,332,000 in the first quarter of this year. The
decrease was primarily attributable to the contracts backlog intangible
assets arising from the acquisitions of Dataradio and the Technocom MRM
product line that became fully amortized during the first quarter of fiscal
2008.
The in-process research and development ("IPR&D") write-off of $310,000
for the three months ended May 31, 2007 was related to the acquisition of
SmartLink in April 2007.
Operating Loss
The operating loss in the first quarter of this year was $471,000,
compared to an operating loss of $17,230,000 in the first quarter of last
year. The operating loss in the first quarter of last year is primarily
attributable to the $16.3 million charge for estimated expenses to correct a
product performance issue with a key DBS customer.
Non-operating Expense, Net
Non-operating expense decreased $167,000 in total from the first quarter
of last year to the first quarter of this year. This change was primarily
due to the fact that there was a foreign exchange gain of $107,000 this year
compared to a foreign exchange loss of $469,000 last year. This effect was
partially offset by lower interest income of $64,000 in the latest quarter
and the fact that there was a gain of $331,000 last year from the sale of an
investment.
Income Tax Provision
The income tax benefit applicable to the loss from continuing operations
for the three months ended May 31, 2008 and 2007 was $390,000 and $6,868,000,
respectively. The effective income tax rate on the loss from continuing
operations was 44% and 39% in the three months ended May 31, 2008 and 2007,
respectively. The increase in effective tax rate was due to currency
translation effects involving the Company's French subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $7,212,000 at May 31, 2008. During the three
months ended May 31, 2008, cash and cash equivalents increased by $624,000.
This increase is comprised of cash provided by operating activities of
$1,815,000 and collections on note receivable from sale of discontinued
operations of $140,000, partially offset by capital expenditures of $216,000,
earn-out payments of $575,000 for the TechnoCom acquisition, debt repayments
of $470,000, and the effect of exchange rate changes on cash of $70,000.
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 (collectively, the "Banks"). In February 2008, the Company
entered into an amendment of the Credit Agreement with the Banks (the
"Amended Agreement"). Pursuant to the Amended Agreement, cash proceeds of
$3.8 million from the August 2007 sale of the Company's TelAlert software
business that had been held in escrow by the Banks were applied to reduce
borrowings under the term loan, resulting in an outstanding principal balance
of $27.5 million at February 28, 2008. The Company made principal repayments
of $470,000 during the quarter ended May 31, 2008. The term loan bears
interest at 4.29% as of May 31, 2008. Term loan principal payments of
$750,000 are due on the last day of each calendar quarter during 2008, and a
principal payment of $1,250,000 is due on March 31, 2009. In addition, any
collections of the scheduled $140,000 per month on a note receivable from the
buyer of the TelAlert software business must be applied to reduce the term
loan principal.
The Amended Agreement has a termination date of June 30, 2009, at which
time all outstanding borrowings under the credit agreement are due and
payable. In the event all outstanding obligations under the Amended
Agreement are not paid in full by December 31, 2008, an exit fee of $500,000
plus penalty interest of $204,000 will be due and payable to the Banks on
June 30, 2009, except that if the Company receives cash of at least
$5,000,000 as a result of issuing equity or subordinated debt by December 31,
2008, then the exit fee and penalty interest will be reduced to $300,000 and
$123,000, respectively.
At May 31, 2008, $2.4 million of the working capital line of credit was
reserved for outstanding irrevocable stand-by letters of credit. The Amended
Agreement also makes available $1 million for borrowings under a working
capital revolving loan. Borrowings under the revolver would bear interest at
Bank of Montreal's prime rate plus 2% or LIBOR plus 3%. There were no
outstanding borrowings on the revolver at May 31, 2008.
Pursuant to the Amended Agreement, the Banks agreed to waive all
financial covenant violations for fiscal 2008. The financial covenants with
which the Company had been noncompliant were eliminated as a result of this
amendment, and were replaced with new covenants that are effective beginning
with the first quarter of fiscal 2009 that require minimum levels of
consolidated earnings before interest, taxes, depreciation and amortization
(EBITDA) and Wireless DataCom group revenues. The Company is in compliance
with these covenants at May 31, 2008.
The Credit Agreement includes customary affirmative and negative
covenants including, without limitation, negative covenants regarding
additional indebtedness, investments, maintenance of the business, liens,
guaranties, transfers and sales of assets, and the payment of dividends and
other restricted payments.
Scheduled principal payments of the bank term loan by fiscal year are
as follows:
Fiscal Year
-----------
2009 (remainder) $ 2,250,000
2010 24,810,000
----------
$27,060,000
===========
On December 14, 2007, the Company entered into a settlement agreement
with a key DBS customer. Under the terms of the settlement agreement, 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 this customer after the date of the settlement agreement.
Based on expected shipments of the DBS units, an amount of $2,300,000 has
been classified as current and $2,700,000 has been classified as non-current
in the accompanying consolidated balance sheet as of May 31, 2008. 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.
As further described in Note 13 to the accompanying unaudited
consolidated financial statements, at May 31, 2008 the Company had a $4.5
million reserve for accrued warranty costs in connection with the
aforementioned DBS product performance issue. Also as described in Note 13,
at May 31, 2008 the Company has a $1.5 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.
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 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, 2008 as filed with the Securities and Exchange Commission on May 15,
2008. 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
Foreign Currency Risk
The Company operates internationally, giving rise to exposure to market
risks from changes in foreign exchange rates. The Company's Canadian
subsidiary uses the Canadian dollar, the local currency, as its functional
currency. A cumulative foreign currency translation gain of $724,000 related
to the Company's Canadian subsidiary is included in accumulated other
comprehensive income (loss) in the stockholders' equity section of the
consolidated balance sheet at May 31, 2008. Such amount is offset by a
foreign currency translation loss of $801,000 related to the Company's French
subsidiary that dates back to 2002 when the Company changed the functional
currency of this subsidiary from the Euro to the U.S. Dollar.
Debt Risk
The Company has variable-rate bank debt. A fluctuation of one percent
in interest rate would have an annual impact of approximately $160,000 net of
tax on the Company's consolidated statement of operations.
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
In May 2007, a patent infringement suit was filed against the Company in
the U.S. District Court for the Eastern District of Texas. The lawsuit
contended that the Company infringed on four patents and sought injunctive
and monetary relief. The Company asserted counterclaims in August 2007,
through which the Company denied infringement of any valid claim of the
plaintiff and sought a declaration to that effect. The Court ordered the
dismissal of claims related to three patents. Recently, in a reexamination
proceeding filed with the United States Patent and Trademarks Office (USPTO),
the USPTO issued a non-final office action rejecting the remaining claim.
The plaintiff has a limited time to respond to the USPTO on the office
action. In light of this development, the case has been stayed by the Court
for at least approximately six months and most likely until the USPTO either
finally rejects the claim or affirms its validity over the prior art
submitted in the reexamination. The Company continues to believe the
lawsuit is without merit and intends to vigorously defend against this action
if and when court proceedings resume. No loss accrual has been made in the
accompanying financial statements for this matter.
A lawsuit was filed against the Company on September 15, 2006 by CN
Capital, the seller of the assets of Skybility that the Company acquired in
April 2005. The lawsuit contended that the Company owed CN Capital
approximately $1.6 million under the earn-out provision of the Skybility
Asset Purchase Agreement dated April 18, 2005. In July 2008, the Company
entered into an agreement with CN Capital to settle this litigation. Under
this settlement agreement the Company will pay cash and other consideration
to CN Capital with a total value of $132,000. This amount has been accrued
in the Company's financial statements at May 31, 2008.
ITEM 1A. Risk Factors
The reader is referred to the factors discussed in Part I, "Item 1A.
Risk Factors" in the Company's Annual Report on Form 10-K for the year ended
February 28, 2008, that could materially affect the Company's business,
financial condition or future results. The risks described in the Company's
Annual Report on Form 10-K are not the only risks facing the Company.
Additional risks and uncertainties not currently known to management or that
are currently deemed to be immaterial also may materially adversely affect
the Company's business, financial condition and/or operating results.
ITEM 6. EXHIBITS
Exhibit 31.1 - Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 31.2 - Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
(1) Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
July 10, 2008 /s/ Richard K. Vitelle
------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)