UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: August 30, 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, a non-accelerated filer, or a smaller reporting
company.
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] (Do not check
if a smaller reporting company) Smaller reporting company [X]
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 25,192,267 shares of Common Stock outstanding as of
September 30, 2008.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
August 31, February 28,
2008 2008
Assets -------- --------
Current assets:
Cash and cash equivalents $ 4,697 $ 6,588
Accounts receivable, less allowance for
doubtful accounts of $285 and $1,271 at August
31, 2008 and February 28, 2008, respectively 16,612 20,043
Inventories 23,977 25,097
Deferred income tax assets 4,698 5,306
Prepaid expenses and other current assets 10,213 9,733
-------- --------
Total current assets 60,197 66,767
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 4,398 5,070
Deferred income tax assets, less current portion 16,289 14,802
Goodwill 28,224 28,520
Other intangible assets, net 21,852 24,424
Other assets 3,491 3,458
-------- --------
$134,451 $143,041
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 31,030 $ 5,343
Accounts payable 9,708 10,875
Accrued payroll and employee benefits 3,535 4,218
Accrued warranty costs 4,867 3,818
Other current liabilities 10,198 11,800
Deferred revenue 3,085 4,005
-------- --------
Total current liabilities 62,423 40,059
-------- --------
Long-term debt, less current portion - 27,187
Other non-current liabilities 1,090 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; 25,192 and 25,041 shares issued
and outstanding at August 31, 2008 and
February 28, 2008, respectively 252 250
Additional paid-in capital 144,252 144,318
Accumulated deficit (73,144) (71,149)
Accumulated other comprehensive income (loss) (422) 1
-------- --------
Total stockholders' equity 70,938 73,420
-------- --------
$134,451 $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 Six Months Ended
August 31, August 31,
------------------- -------------------
2008 2007 2008 2007
-------- -------- -------- --------
Revenues $ 23,308 $ 32,668 $ 51,209 $ 79,061
Cost of revenues 15,840 26,353 34,312 78,132
-------- -------- -------- --------
Gross profit 7,468 6,315 16,897 929
-------- -------- -------- --------
Operating expenses:
Research and development 3,131 3,795 6,331 8,114
Selling 1,647 2,373 3,919 4,642
General and administrative 3,266 3,457 6,362 6,659
Intangible asset amortization 1,240 1,558 2,572 3,302
Acquired in-process research
and development - - - 310
-------- -------- -------- --------
Total operating expenses 9,284 11,183 19,184 23,027
-------- -------- -------- --------
Operating loss (1,816) (4,868) (2,287) (22,098)
Non-operating income (expense):
Interest expense, net (361) (457) (885) (901)
Other income (expense), net 27 (50) 135 (189)
-------- -------- -------- --------
Total non-operating expense (334) (507) (750) (1,090)
-------- -------- -------- --------
Loss from continuing operations
before income taxes (2,150) (5,375) (3,037) (23,188)
Income tax benefit 652 2,117 1,042 8,985
-------- -------- -------- --------
Loss from continuing operations (1,498) (3,258) (1,995) (14,203)
Loss from discontinued
operations, net of tax - (180) - (597)
Loss on sale of discontinued
operations, net of tax - (935) - (935)
-------- -------- -------- --------
Net loss $ (1,498) $ (4,373) $ (1,995) $(15,735)
======== ======== ======== ========
Basic and diluted loss
per share from:
Continuing operations $ (0.06) $ (0.14) $ (0.08) $ (0.60)
Discontinued operations - (0.05) (0.07)
-------- -------- -------- --------
Total basic and diluted
loss per share $ (0.06) $ (0.19) $ (0.08) $ (0.67)
======== ======== ======== ========
Shares used in computing basic and
diluted loss per share:
Basic 24,737 23,623 24,720 23,612
Diluted 24,737 23,623 24,720 23,612
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
August 31,
---------------------
2008 2007
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,995) $(15,735)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 3,770 5,201
Stock-based compensation expense 361 1,027
Write-off of in-process research and development - 310
Excess tax benefit from stock-based
compensation - (55)
Deferred tax assets, net (1,046) (14,388)
Loss on sale of discontinued operations,
net of tax - 935
Gain on sale of investment - (331)
Changes in operating assets and liabilities:
Accounts receivable 3,431 14,732
Inventories 1,120 (774)
Prepaid expenses and other assets (933) 1,364
Accounts payable (1,167) (12,934)
Other accrued liabilities (1,907) 17,238
Deferred revenue (920) 1,308
Other - (2)
------- -------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 714 (2,104)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (561) (920)
Proceeds from sale of discontinued operations 420 4,000
Earn-out payments on Technocom acquisition (872) -
Proceeds from sale of property and equipment - 4
Proceeds from sale of investment - 1,045
Acquisition of Aercept - (19,315)
Acquisition of SmartLink, net of refunds from
escrow fund 296 (7,944)
Cash restricted for repayment of debt - (3,309)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (717) (26,439)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repayments (1,500) (1,476)
Proceeds from exercise of stock options - 157
Excess tax benefit from stock-based
compensation expense - 55
------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,500) (1,264)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (388) 640
------- -------
Net change in cash and cash equivalents (1,891) (29,167)
Cash and cash equivalents at beginning of period 6,588 37,537
------- -------
Cash and cash equivalents at end of period $ 4,697 $ 8,370
======= =======
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 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 ("MRM")
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 statements of operations for the quarter
and six months ended August 31, 2007 have 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 August 30, 2008 and September 1, 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
August 31 for clarity of presentation.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 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 August 31, 2008 and its results of operations
for the six months ended August 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 costs of materials, labor and manufacturing
overhead. Inventories are stated at the lower of cost (determined on the
first-in, first-out method) or net realizable value, and consist of the
following (in thousands):
August 31, February 28,
2008 2008
------ -------
Raw materials $20,023 $21,908
Work in process 372 325
Finished goods 3,582 2,864
------- -------
$23,977 $25,097
======= =======
Note 3 - GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in goodwill of each reporting unit during the six months ended
August 31, 2008 are as follows (in thousands):
Wireless
Satellite DataCom Total
--------- -------- ---------
Balance as of February 28, 2008 $ 2,255 $ 26,265 $ 28,520
Proceeds from Smartlink escrow
fund distribution, net of expenses - (296) (296)
-------- -------- ---------
Balance as of August 31, 2008 $ 2,255 $ 25,969 $ 28,224
======== ======== =========
Other intangible assets are comprised as follows (in thousands):
August 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 $ 6,424 $12,159 $18,583 $ 4,767 $13,816
Customer lists 5-7 yrs. 8,313 3,057 5,256 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. 1,001 444 557 1,001 344 657
Tradename N/A 3,880 - 3,880 3,880 - 3,880
------- ------ ------- ------- ------ -------
$34,837 $12,985 $21,852 $34,837 $10,413 $24,424
======= ====== ======= ======= ====== =======
Amortization expense of intangible assets was $1,240,000 and $1,558,000
for the three months ended August 31, 2008 and 2007, respectively, and was
$2,572,000 and $3,302,000 for the six month periods then ended. All
intangible asset amortization expense was attributable to the Wireless
DataCom group.
Estimated amortization expense for the fiscal years ending February 28
is as follows:
2009 (remainder) $2,481,000
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):
August 31, February 28,
2008 2008
------ -------
Bank term loan $26,030 $27,530
Subordinated note payable to DBS customer 5,000 5,000
------- -------
Total debt 31,030 32,530
Less portion due within one year (31,030) (5,343)
------- -------
Long-term debt $ - $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"). At the Company's option,
borrowings under the Credit Agreement bear interest at bank's prime rate
("Prime Based Loans") plus a margin ranging from 0.50% to 0.75% (the "Prime
Rate Margin") or LIBOR ("LIBOR Based Loans") plus a margin ranging from 1.25%
to 1.75% (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. At August 31, 2008, the
effective interest rate on the term loan was 4.22% comprised of a one-month
LIBOR rate of 2.47% plus LIBOR Margin of 1.75%.
The Credit Agreement also provides for a working capital line of credit
of $3,375,000. At August 31, 2008, $1,725,000 of the working capital line of
credit was reserved for outstanding irrevocable stand-by letters of credit
and $1,650,000 was available for working capital borrowings. Outstanding
amounts 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 August 31, 2008.
The Company made principal repayments of $1,500,000 during the six
months ended August 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, collections on
a note receivable from the buyer of the TelAlert software business must be
applied to reduce the term loan principal.
The Credit Agreement has a termination date of June 30, 2009, at which
time all outstanding borrowings are due and payable. In the event all
outstanding obligations under the Credit 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. The Company
recorded the penalty interest expense of $204,000 during the four month
period from November 2007 to February 2008. Beginning in March 2008, the
Company has been accruing the $500,000 exit fee as interest expense on a
ratable basis over the remainder of the loan agreement term.
The Credit Agreement requires 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
August 31, 2008. 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.
Scheduled principal payments of the bank term loan by fiscal year are
as follows:
Fiscal Year
-----------
2009 (remainder) $ 1,500,000
2010 24,530,000
----------
$26,030,000
===========
The Company has requested an extension of the June 30, 2009 maturity
date, and is currently in discussions with the Banks on this matter.
Notwithstanding the fact that the Company has made all required principal and
interest payments on the term loan when due and the fact that the Company was
in compliance with all loan covenants at August 31, 2008, if the Company is
unable to obtain an extension of the maturity date, and if it cannot
refinance the term loan balance from the proceeds of an asset-based loan
and/or other funding sources by June 30, 2009, the Banks could call the loan
and declare the Company to be in default.
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 DBS units to this customer, the entire $5
million note balance has been classified as a current liability in the
accompanying consolidated balance sheet as of August 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.
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 Financial Accounting Standards Board ("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 in the quarter ended May 31, 2007.
As of August 31, 2008, the Company has unrecognized tax benefits of
$6,419,000 which, if recognized, would impact the effective tax rate on
income from continuing 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 1998 and earlier are not subject to examination by tax
authorities. Certain income tax returns for fiscal years 1999 through 2008
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
income tax return of the Company's Canadian subsidiary for the pre-
acquisition stub period from March 1, 2006 to May 9, 2006 is being examined
by the Canadian federal tax agency. 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 August 31, 2008 and 2007 was $652,000
and $2,117,000, respectively. The income tax benefit applicable to the loss
from continuing operations for the six months ended August 31, 2008 and 2007
was $1,042,000 and $8,985,000, respectively. The effective income tax rate
on the loss from continuing operations was 34% and 39% in the six months
ended August 31, 2008 and 2007, respectively. The effective tax rate in the
six months ended August 31, 2008 was less than the combined U.S. federal and
state statutory rates because no tax benefit was recorded on the pretax loss
generated by the Company's Canadian 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 August 31, 2008 and 2007
were excluded from the computation of diluted earnings per share for the
three and six month periods then ended because the Company reported a loss
from continuing operations in such periods and the effect of inclusion would
be antidilutive (i.e., including such options would result in a lower loss
per share).
Note 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 loss for the three and six months ended August
31, 2008 and 2007 (in thousands):
Three Months Ended Six Months Ended
August 31, August 31,
------------------- -------------------
2008 2007 2008 2007
-------- -------- -------- --------
Net loss $(1,498) $ (4,373) $(1,995) $(15,735)
Foreign currency
translation adjustments (345) 28 (423) 725
Realized gain on
available-for-sale investments - - - (45)
------- -------- ------- --------
Comprehensive loss $(1,843) $ (4,345) $(2,418) $(15,055)
======= ======== ======= ========
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 Six Months Ended
August 31, August 31,
------------------- -------------------
2008 2007 2008 2007
-------- -------- -------- --------
Cost of revenues $ 15 $ 15 $ 23 $ 30
Research and development 46 58 95 111
Selling 16 66 48 125
General and administrative 275 375 195 708
------ ------ ------ ------
$ 352 $ 514 $ 361 $ 974
====== ====== ====== ======
Changes in the Company's outstanding stock options during the six months
ended August 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 560 $ 2.45
Exercised (50) $ 1.75
Forfeited or expired (777) $ 9.05
-----
Outstanding at August 31, 2008 2,115 $ 8.03 6.1 years $ 2
=====
Exercisable at August 31, 2008 1,260 $10.54 4.0 years $ 2
=====
Of the 50,000 stock 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 required amount of employee
withholding taxes.
Changes in the Company's unvested restricted stock and restricted stock
units (RSUs) during the six months ended August 31, 2008 were as follows
(shares in thousands):
Weighted
Average
Number of Fair Value at
Shares Grant Date
-------- ----------
Outstanding at February 28, 2008 534 $ 3.70
Granted 567 2.15
Vested (156) 4.28
Forfeited (28) 4.28
-----
Outstanding at August 31, 2008 917 $ 2.63
=====
Of the 156,000 restricted stock shares and RSUs that vested during the
period, 42,357 shares were retained by the Company to cover the required
amount of employee withholding taxes.
As of August 31, 2008, there was $4.4 million of total unrecognized
stock-based compensation cost related to nonvested stock options, restricted
stock and RSUs. That cost is expected to be recognized as an expense over a
weighted-average remaining vesting period of 3.0 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 and six months ended August 31, 2008 or 2007, as a
percent of consolidated revenues, are as follows:
Three Months Ended Six Months Ended
August 31, August 31,
------------------- -------------------
Customer 2008 2007 2008 2007
------- ------- ------- -------
A 8.5% 3.1% 5.3% 16.5%
B 4.7% 26.1% 15.3% 24.2%
C 7.3% 13.0% 7.5% 15.6%
D 10.3% 6.3% 6.3% 3.5%
Accounts receivable from the customers referred to in the table above,
expressed as a percent of consolidated net accounts receivable, are as
follows:
August 31, February 28,
Customer 2008 2008
------ ------
A 11.0% 5.1%
B 4.2% 26.6%
C 11.0% 9.0%
D 5.8% 4.0%
Customers A and B are customers of the Company's Satellite business
unit. Customers C and D are customers of the Company's Wireless DataCom
group. See Note 13 for a description of a product performance issue and
related matters involving Customer A.
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 accrued warranty costs liability
(current and non-current combined) for the six months ended August 31, 2008
and 2007 is as follows (in thousands):
Six months ended
August 31,
-----------------
2008 2007
------- -------
Balance at beginning of period $ 4,869 $ 1,295
Charged to costs and expenses 488 14,032
Deductions (490) (693)
------- ------
Balance at end of period $ 4,867 $14,634
======= ======
Warranty expense for the six months ended August 31, 2007 includes a
charge of approximately $13.7 million for the cost of estimated warranty
repairs to correct a product performance issue involving a DBS customer, as
further described in Note 13. The warranty reserve at August 31, 2007
includes $14.2 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 year.
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):
Six months ended
August 31,
-----------------
2008 2007
------- -------
Interest paid $ 864 $1,143
Income taxes paid (net
refunds received) $ (740) $ (638)
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Six months ended
August 31,
-----------------
2008 2007
------- -------
Earn-out amount for TechnoCom
acquisition included in goodwill
and other current liabilities $ - $ 1,983
Other Assets in the consolidated balance sheets consist of the
following (in thousands):
August 31, February 28,
2008 2008
------ -------
Investment in preferred stock of
a privately-held company $ 3,137 $ 3,137
Deposits and other 354 321
------- -------
$ 3,491 $ 3,458
======= =======
The preferred stock of the privately held company was received as
partial consideration for the sale of the TelAlert software business in
August 2007. This preferred stock was valued using the Black-Scholes Option
Pricing Model, in which the preferred stock is treated as a series of call
options on the entity's enterprise value.
Other non-current liabilities in the consolidated balance sheets
consist of the following (in thousands):
August 31, February 28,
2008 2008
------ -------
Accrued warranty costs (non-current portion) $ - $ 1,051
Deferred rent 775 981
Deferred revenue 315 343
------- -------
$ 1,090 $ 2,375
======= =======
Note 12 - SEGMENT INFORMATION
Segment information for the three and six months ended August 31, 2008
and 2007 is as follows (dollars in thousands):
Three months ended Three months ended
August 31, 2008 August 31, 2007
------------------------------------ -------------------------------------
Business Segments Business Segments
------------------- -------------------
Wireless Wireless
Satellite DataCom Corporate Total Satellite DataCom Corporate Total
-------- -------- ------- ----- -------- ------- ------- -----
Revenues $ 3,176 $ 20,132 $ 23,308 $ 9,851 $ 22,817 $ 32,668
Gross profit
(loss) $ (81) $ 7,549 $ 7,468 $ (1,835) $ 8,150 $ 6,315
Gross margin (2.6%) 37.5% 32.0% (18.6%) 35.7% 19.3%
Operating
income (loss) $ (1,324) $ 916 $(1,408) $ (1,816) $ (3,064) $ (500) $(1,304)$ (4,868)
Six months ended Six months ended
August 31, 2008 August 31, 2007
------------------------------------ -------------------------------------
Business Segments Business Segments
------------------- -------------------
Wireless Wireless
Satellite DataCom Corporate Total Satellite DataCom Corporate Total
-------- -------- ------- ----- -------- ------- ------- ------
Revenues $ 10,817 $ 40,392 $ 51,209 $ 32,882 $ 46,179 $ 79,061
Gross profit
(loss) $ 652 $ 16,245 $ 16,897 $(15,751) $ 16,680 $ 929
Gross margin 6.0% 40.2% 33.0% (47.9%) 36.1% 1.2%
Operating
income (loss) $ (1,656) $ 1,973 $(2,604) $ (2,287) $(18,295) $ (1,146) $(2,657)$(22,098)
The Satellite segment's negative gross profit of $15.8 million and
operating loss of $18.3 million in the six months ended August 31, 2007
includes a $17.8 million charge for estimated expenses to correct a product
performance issue involving a DBS customer, as further described in Note 13.
The Wireless DataCom segment's operating loss of $1,146,000 in the six
months ended August 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 $2.6 million and $3.3 million for the six months
ended August 31, 2008 and 2007, respectively.
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 certain executive
officers, 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 $228,000
and $300,000 in the three months ended August 31, 2008 and 2007,
respectively, and $20,000 and $565,000 in the six months ended August 31,
2008 and 2007, respectively. The decrease in stock-based compensation
expense in the latest six month period 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 quarterly filings for fiscal
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 August 31, 2008, the Company has aggregate reserves of $7.5 million
for DBS product field performance issues, of which $1.7 million is an
inventory reserve, approximately $1.5 million is a vendor liability reserve
included in other current liabilities, and the remaining $4.3 million is a
reserve for accrued warranty costs.
While the Company believes that its reserves of $7.5 million as of
August 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 $9.2 million and
outstanding purchase commitments of $8.7 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. In August 2007, the Company denied the plaintiff's
claims and asserted counterclaims. The District Court subsequently ordered
the dismissal of claims related to three patents and in June 2008, the United
States Patent and Trademarks Office (USPTO) issued a preliminary office
action rejecting the plaintiff's claim involving the remaining patent in the
lawsuit. In August 2008, the plaintiff filed a response to the USPTO's
preliminary office action requesting reconsideration in light of the
amendments to the claim and remarks contained in the response. In light of
USPTO's office action, the case has been stayed by the District Court until
the USPTO comes to a final decision in the reexamination proceeding. 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.
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 four customers accounting for 35% of the
Company's total revenue for the six months ended August 31, 2008 and two
customers accounting for 22% of the Company's net accounts receivable balance
as of August 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 August 31, 2008 the Company had an
inventory reserve of $1.7 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 $9.2
million and outstanding purchase commitments of $8.7 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 August 31, 2008 the Company had a $4.3
million reserve for accrued warranty costs in connection with a product
performance issue involving a key DBS customer. While the Company believes
that this $4.3 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 in the quarter ended May 31, 2007. At August 31, 2008, the Company
had unrecognized tax benefits of $6,419,000 which, if recognized, would
impact the effective tax rate on income from continuing operations.
At August 31, 2008, the Company had an aggregate deferred tax asset
balance of $20,987,000. The current portion of the deferred tax asset is
$4,698,000 and the noncurrent portion is $16,289,000.
Impairment Assessments of Goodwill, Purchased Intangible Assets and
Other Long-Lived Assets
At August 31, 2008, the Company had $28.2 million in goodwill and
$21.9 million in other intangible assets on its consolidated 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.
Investment in Preferred Stock of Private Company
An investment in preferred stock of a privately held company with a
carrying value of $3.1 million is included in non-current Other Assets in the
consolidated balance sheets and is accounted for under the cost method of
accounting because the Company does not have the ability to exercise
significant influence over the issuer's operations. The ascribed cost of
this preferred stock, which was received as partial consideration for the
sale of the TelAlert software business in August 2007, was determined using
the Black-Scholes Option Pricing Model, in which the preferred stock is
treated as a series of call options on the entity's enterprise value. Under
the cost method of accounting, this investment is carried at cost and is only
adjusted for other-than-temporary declines in fair value and distributions of
earnings. Management periodically evaluates the recoverability of this
preferred stock investment based on the performance and the financial
position of the issuer as well as other evidence of market value. Such
evaluations include, but are not limited to, reviewing the investee's cash
position, recent financings, projected and historical financial performance,
cash flow forecasts and financing requirements. During the fiscal year ended
February 28, 2008 and six months ended August 31, 2008, the Company did not
recognize any losses due to other-than-temporary declines of the value of
this investment.
Stock-Based Compensation Expense
The FASB 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 Company recognizes
the compensation expense on a straight-line basis for its graded-vesting
awards. 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. However, the cumulative compensation expense
recognized at any point in time must at least equal the portion of the grant-
date fair value of the award that is vested at that date. As used in this
context, the term "forfeitures" is distinct from "cancellations" or
"expirations", and refers only to the unvested portion of the surrendered
equity awards.
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 August 30, 2008 and September 1, 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
August 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 Segment
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.
Satellite Segment
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 half 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 due to
pricing and competitive pressures. 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 August 31, Six Months Ended August 31,
----------------------------------- ---------------------------------
2008 2007 2008 2007
--------------- --------------- -------------- --------------
% of % of % of % of
Segment $000s Total $000s Total $000s Total $000s Total
----------- ------- ----- ------ ----- ------- ----- ------ -----
Satellite $ 3,176 13.6% $ 9,851 30.2% $10,817 21.1% $32,882 41.6%
Wireless DataCom 20,132 86.4% 22,817 69.8% 40,392 78.9% 46,179 58.4%
------ ----- ------ ----- ------ ----- ------ -----
Total $23,308 100.0% $32,668 100.0% $51,209 100.0% $79,061 100.0%
====== ===== ====== ===== ====== ===== ====== =====
GROSS PROFIT (LOSS) BY SEGMENT
Three Months Ended August 31, Six Months Ended August 31,
----------------------------------- ---------------------------------
2008 2007 2008 2007
--------------- --------------- ---------------- --------------
% of % of % of % of
Segment $000s Total $000s Total $000s Total $000s Total
----------- ------- ----- ------ ----- ------- ------- ------ -------
Satellite $ (81) (1.1%) $(1,835) (29.1%) $ 652 3.9% $(15,751) <(100%)
Wireless DataCom 7,549 101.1% 8,150 129.1% 16,245 96.1% 16,680 > 100%
------ ----- ------ ----- ------ ------- ------ ------
Total $ 7,468 100.0% $ 6,315 100.0% $ 16,897 100.0% $ 929 100%
====== ===== ====== ===== ====== ======= ====== ======
OPERATING INCOME (LOSS) BY SEGMENT
Three Months Ended August 31, Six Months Ended August 31,
----------------------------------- ---------------------------------
2008 2007 2008 2007
--------------- --------------- -------------- --------------
% of % of % of % of
Segment $000s Sales $000s Sales $000s Sales $000s Sales
----------- ------- ----- ------ ----- ------- ----- ------ -----
Satellite $(1,324) (5.7%) $(3,064) (9.4%) $(1,656) (3.2%) $(18,295) (23.1%)
Wireless DataCom 916 3.9% (500) (1.5%) 1,973 3.9% (1,146) (1.4%)
Corporate
expenses (1,408) (6.0%) (1,304) (4.0%) (2,604) (5.2%) (2,657) (3.5%)
------ ----- ------ ----- ------ ----- ------ -----
Total $(1,816) (7.8%) $(4,868) (14.9%) $(2,287) (4.5%) $(22,098) (28.0%)
====== ===== ====== ===== ====== ===== ====== =====
The Satellite segment's operating loss in the six months ended August
31, 2007 includes a $17.8 million charge for estimated expenses to correct a
product performance issue involving a key DBS customer.
Revenue
Satellite revenue declined $6.7 million, or 68%, to $3.2 million in the
three months ended August 31, 2008 from $9.9 million for the same period in
the previous fiscal year. As discussed above, a key DBS customer 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. 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. Revenues from this key DBS
customer were $964,000 higher for the quarter ended August 31, 2008 compared
to the same period last year. However, a reduction of orders from the
Company's other principal DBS customer resulted in a $7.5 million decline in
revenues from that customer for the latest quarter compared to the same
period in the previous fiscal year due to pricing and competitive pressures.
Although the Company expects that its Satellite revenue will ramp up over the
next several quarters, in the foreseeable future it does not expect its
Satellite revenue to return to historical levels as a result of competition
in the market.
For the six months ended August 31, 2008, Satellite revenue decreased
$22.1 million, or 67%, to $10.8 million from $32.9 million over the same
period of the prior year. Revenues from both of the Company's principal DBS
customers declined due to the reasons noted above.
Wireless DataCom revenue decreased by $2.7 million, or 12%, to $20.1
million in the second quarter of fiscal 2009 compared to the fiscal 2008
second 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.
For the six months ended August 31, 2008, Wireless DataCom revenue
decreased $5.8 million, or 13%, to $40.4 million over the same period of the
prior year. This decrease in revenue is due to an $8.5 million decrease in
sales of radio modules to a Wireless DataCom customer, partially offset by
increases in sales of MRM products and the $1.5 million sale of patent rights
during the six months ended August 31, 2008.
Gross Profit (Loss) and Gross Margins
The Satellite gross loss was $81,000 in the fiscal 2009 second quarter
compared with a gross loss of $1.8 million in the second quarter of last
year. The negative gross profit for both periods is primarily attributable
to the loss of revenues from a key DBS customer. Satellite's negative gross
profit of $1.8 million in the three months ended August 31, 2007 includes a
$1.5 million additional charge for estimated expenses to correct a product
performance issue involving a key DBS customer, in addition to a more
significant charge recorded in the preceding quarter, as further described in
Note 13 to the accompanying unaudited consolidated financial statements. The
gross loss in the latest quarter was benefited by a $383,000 reduction in
expenses to correct this product performance issue as a result of revising
estimates of future product rework costs and of the total number of products
that are expected to be returned by the customer for rework.
The Satellite segment had a gross profit of $652,000 for the six months
ended August 31, 2008, compared with a negative gross profit of $15.8 million
for the same period last year. The operating loss for the six months ended
August 31, 2008 is primarily attributable to the loss of revenues from a key
DBS customer. Satellite's negative gross profit of $15.8 million in the six
months ended August 31, 2007 includes a $17.8 million charge for estimated
expenses to correct a product performance issue involving a key DBS customer.
The operating loss for the six months ended August 31, 2008 was benefited by
(i) $587,000 associated with the sale of Satellite products for which the
inventory cost had been fully reserved in the prior fiscal year; and (ii) a
reduction of $383,000 in estimated expenses to correct a product performance
issue. If these benefits had not been recorded, Satellite negative gross
margin in the latest six month period would have been 2.9%.
Wireless DataCom gross profit decreased 7% to $7.5 million in the fiscal
2009 second quarter compared to the second quarter of last year, due to the
12% decrease in revenues. Wireless DataCom's gross margin increased from
35.7% in the second quarter of fiscal 2008 to 37.5% in the second quarter of
fiscal 2009 primarily due to a significant increase in the gross margin of
MRM products in the current period.
Wireless DataCom's gross profit decreased 3% to $16.2 million for the
six months ended August 31, 2008, compared to $16.7 million for the same
period of the prior year. Wireless DataCom's gross margin increased from
36.1% in the first half of fiscal 2008 to 40.2% in the first half of fiscal
2009 due primarily to the $1.5 million patent sale in the first quarter of
fiscal 2009. Excluding the patent sale, Wireless DataCom's gross margin was
37.9% in the first half of fiscal 2009, compared to 36.1% in the first half
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
$664,000 to $3,131,000 in the second quarter of fiscal 2009 from $3,795,000
last year. For the six month year-to-date periods, R&D expense decreased
$1,783,000 from $8,114,000 last year to $6,331,000 this year. These decreases
are primarily due to personnel reductions in the MRM and Public Safety Mobile
("PSM") businesses of the Wireless DataCom group.
Consolidated selling expenses decreased by $726,000 to $1,647,000 in the
second quarter of this year from $2,373,000 last year. For the six month
year-to-date periods, selling expenses decreased by $723,000 from $4,642,000
last year to $3,919,000 this year. These decreases are primarily due to bad
debt reserve reductions in the three and six month periods ended August 31,
2008 of $722,000 and $927,000, respectively, related to a Wireless DataCom
customer.
Consolidated general and administrative expenses ("G&A") decreased by
$191,000 to $3,266,000 in the second quarter of this year compared to the
prior year. This decrease is principally the net result of Smartlink
integration costs in the second quarter of last year that were not present
this year, partially offset by a $303,000 charge for severance costs of the
Company's former Satellite Division president in the second quarter of this
year and increased legal expenses of $173,000.
For the six month periods, consolidated G&A decreased by $297,000 to
$6,362,000 in fiscal 2009 from $6,659,000 last year. The decrease is
primarily the result of a reduction of approximately $700,000 in G&A of the
PSM business unit, which included Smartlink integration costs of
approximately $400,000 in the first six months of last year that were not
present this year, and lower stock-based compensation expense of $513,000.
The reduction in stock-based compensation expense included in G&A 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. Partially offsetting the effect of the lower stock-based
compensation expense and the nonrecurring Smartlink integration costs of last
year were higher legal expenses of $620,000 and the aforementioned severance
costs of $303,000.
Amortization of intangibles decreased from $1,558,000 in the second
quarter of last year to $1,240,000 in the second quarter of this year. The
decrease was primarily attributable to the contracts backlog intangible
assets arising from the May 2006 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 six months ended August 31, 2007 was related to the acquisition of
SmartLink in April 2007.
Operating Loss
The operating loss in the second quarter of this year was $1,816,000,
compared to an operating loss of $4,868,000 in the second quarter of last
year. The operating loss in the second quarter of last year is primarily
attributable to the decline in revenues from a key DBS customer and the $1.5
million charge for estimated expenses to correct a product performance issue
with that customer.
The operating loss in the six months ended August 31, 2008 was
$2,287,000, compared to an operating loss of $22,098,000 in the six months
ended August 31, 2007. The operating loss last year is attributable to the
$17.8 million charge for the DBS product performance issue and the decline in
revenues from a key DBS customer.
Non-operating Expense, Net
Non-operating expense decreased $173,000 in total from the second
quarter of last year to the second quarter of this year due to lower interest
expense of $140,000 in the latest quarter.
Non-operating expense was $750,000 in the six months ended August 31,
2008, compared to non-operating expense of $1,090,000 in the six months ended
August 31, 2007. The approximate $340,000 decrease in non-operating expense
was primarily due to a foreign currency gain of $133,000 in the current year
compared to a $520,000 foreign currency loss last year. This effect was
partially offset by a gain of $330,000 on the sale of an investment that was
recorded in the six months ended August 31, 2007.
Income Tax Provision
The income tax benefit applicable to the loss from continuing operations
for the three months ended August 31, 2008 and 2007 was $652,000 and
$2,117,000, respectively. The income tax benefit applicable to the loss from
continuing operations for the six months ended August 31, 2008 and 2007 was
$1,042,000 and $8,985,000, respectively. The effective income tax rate on
the loss from continuing operations was 34% and 39% in the six months ended
August 31, 2008 and 2007, respectively. The effective tax rate in the six
months ended August 31, 2008 was less than the combined U.S. federal and
state statutory rates because no tax benefit was recorded on the pretax loss
generated by the Company's Canadian subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $4,697,000 at August 31, 2008. During the six
months ended August 31, 2008, cash and cash equivalents decreased by
$1,891,000. This decrease is comprised of debt repayments of $1,500,000,
cash used in investing activities of $717,000 (primarily from capital
expenditures of $561,000), and the effect of exchange rate changes on cash of
$388,000, partially offset by cash provided by operating activities of
$714,000.
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"). At the Company's option,
borrowings under the Credit Agreement bear interest at bank's prime rate
("Prime Based Loans") plus a margin ranging from 0.50% to 0.75% (the "Prime
Rate Margin") or LIBOR ("LIBOR Based Loans") plus a margin ranging from 1.25%
to 1.75% (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. At August 31, 2008, the
effective interest rate on the term loan was 4.22% comprised of a one-month
LIBOR rate of 2.47% plus LIBOR Margin of 1.75%.
The Credit Agreement also provides for a working capital line of credit
of $3,375,000. At August 31, 2008, $1,725,000 of the working capital line of
credit was reserved for outstanding irrevocable stand-by letters of credit
and $1,650,000 was available for working capital borrowings. Outstanding
amounts 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 August 31, 2008.
The Company made principal repayments of $1,500,000 during the six
months ended August 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, collections on
a note receivable from the buyer of the TelAlert software business must be
applied to reduce the term loan principal.
The Credit Agreement has a termination date of June 30, 2009, at which
time all outstanding borrowings are due and payable. In the event all
outstanding obligations under the Credit 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. The Company
recorded the penalty interest expense of $204,000 during the four month
period from November 2007 to February 2008. Beginning in March 2008, the
Company has been accruing the $500,000 exit fee as interest expense on a
ratable basis over the remainder of the loan agreement term.
The Credit Agreement requires 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
August 31, 2008. 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.
Scheduled principal payments of the bank term loan by fiscal year are
as follows:
Fiscal Year
-----------
2009 (remainder) $ 1,500,000
2010 24,530,000
----------
$26,030,000
===========
As noted above, the Company's Credit Agreement with the Banks has a
maturity date of June 30, 2009. The Company has requested an extension of
the maturity date, and is currently in discussions with the Banks on this
matter. In the mid-term future, the Company expects to refinance the
outstanding borrowings under the Credit Agreement with an asset-based loan,
possibly supplemented by proceeds from another funding source. Although the
Company believes that its expectations are reasonable, in light of the
Company's current financial condition, economic conditions generally, and the
turbulent state of the credit markets at the present time, no assurance can
be given that the Company will be able to obtain an extension of the Credit
Agreement maturity date from the Banks, or that the Company will be able to
refinance the outstanding borrowings under the Credit Agreement from other
funding sources.
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 DBS units to this customer, the entire $5
million note balance has been classified as a current liability in the
accompanying consolidated balance sheet as of August 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 August 31, 2008 the Company had a $4.3
million reserve for accrued warranty costs and a $553,000 reserve to rework
products in inventory in connection with the aforementioned DBS product
performance issue. Also as described in Note 13, at August 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.
Substantially all of the cash impact of these reserves is anticipated to
occur over the next 12 months.
FORWARD LOOKING STATEMENTS
Forward looking statements in this Form 10-Q which include, without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, projections and other information
regarding future performance, are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The words "may",
"will", "could", "plans", "intends", "seeks", "believes", "anticipates",
"expects", "estimates", "judgment", "goal", and variations of these words and
similar expressions, are intended to identify forward-looking statements.
These forward-looking statements reflect the Company's current views with
respect to future events and financial performance and are subject to certain
risks and uncertainties, including, without limitation, product demand,
market growth, new competition, competitive pricing and continued pricing
declines in the DBS market, supplier constraints, manufacturing yields, the
ability to manage cost increases in inventory materials including timing and
market acceptance of new product introductions, the Company's ability to
harness new technologies in a competitively advantageous manner, the
Company's 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 $379,000 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 August 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. In August 2007, the Company denied the plaintiff's
claims and asserted counterclaims. The District Court subsequently ordered
the dismissal of claims related to three patents and in June 2008, the United
States Patent and Trademarks Office (USPTO) issued a preliminary office
action rejecting the plaintiff's claim involving the remaining patent in the
lawsuit. In August 2008, the plaintiff filed a response to the USPTO's
preliminary office action requesting reconsideration in light of the
amendments to the claim and remarks contained in the response. In light of
USPTO's office action, the case has been stayed by the District Court until
the USPTO comes to a final decision in the reexamination proceeding. 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.
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 at the
present time. Additional risks are as follows:
1. Our Credit Agreement with the Banks has a maturity date of
June 30, 2009.
At August 31, 2008, outstanding borrowings on the bank term loan
amounted to $26 million. The Company has requested an extension of the
maturity date and is currently in discussions with the Banks on this matter.
Notwithstanding the fact that the Company has made all required principal and
interest payments on the term loan when due and the fact that the Company was
in compliance with all loan covenants at August 31, 2008, if the Company is
unable to obtain an extension of the maturity date, and if it cannot
refinance the term loan balance from the proceeds of an asset-based loan
and/or other funding sources by June 30, 2009, the Banks could call the loan
and declare the Company to be in default.
2. Reduced consumer or corporate spending due to uncertainties in the
macroeconomic environment could adversely affect our revenues and
our ability to make payments on our debt.
We depend on demand from the consumer, original equipment manufacturer,
industrial, automotive and other markets we serve for the end market
applications of our products. Our revenues are based on certain levels of
consumer and corporate spending. If there are significant reductions in
consumer or corporate spending as a result of uncertain conditions in the
macroeconomic environment, such as higher energy prices, fluctuations in
interest rates and mortgage failures, our revenues and profitability could be
adversely affected.
Our ability to make payments of principal and interest on our
indebtedness depends upon our future performance and ability to generate
positive operating cash flows, which is subject to general economic
conditions, industry cycles and financial, business and other factors
affecting our consolidated operations, many of which are beyond our control.
If we are unable to generate sufficient cash flow from operations in the
future to service our debt, we may be required to, among other things:
* refinance or restructure all or a portion of our indebtedness;
* obtain additional financing in the debt or equity markets;
* sell selected assets or businesses;
* reduce or delay planned capital expenditures; or
* reduce or delay planned operating expenditures.
Such measures might not be sufficient to enable us to service our debt,
and if not, we could then be in default under the applicable terms governing
our debt, which could have a material adverse affect on us. In addition, any
such financing, refinancing or sale of assets might not be available on
economically favorable terms, if at all.
3. Rises in interest rates could adversely affect our financial
condition.
An increase in prevailing interest rates has an immediate effect on the
interest rates charged on our variable rate bank debt, which rise and fall
upon changes in interest rates on a periodic basis. Any increased interest
expense associated with increases in interest rates affects our cash flow and
our ability to service our debt.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2008 Annual Meeting of Stockholders held on July 24, 2008, six
directors stood for reelection to a one year term expiring at the fiscal 2009
Annual Meeting. All six of the director nominees were reelected. The
results of the election of directors are summarized as follows:
Votes
Against or
Votes For Withheld Unvoted
---------- ---------- ---------
Frank Perna, Jr. 21,928,108 424,333 2,679,733
Kimberly Alexy 21,986,443 365,998 2,679,733
Richard Gold 21,925,119 427,322 2,679,733
A.J. "Bert" Moyer 17,952,267 4,400,174 2,679,733
Thomas Pardun 21,741,278 611,163 2,679,733
Larry Wolfe 21,736,079 616,362 2,679,733
ITEM 6. EXHIBITS
Exhibit 31.1 - Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 31.2 - Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
(1) Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
October 7, 2008 /s/ Richard K. Vitelle
------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)