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: November 29, 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. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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 25,216,952 shares of Common Stock outstanding as of
December 31, 2008.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except par value amounts)
November 30, February 28,
2008 2008
Assets -------- --------
Current assets:
Cash and cash equivalents $ 5,703 $ 6,588
Accounts receivable, less allowance for
doubtful accounts of $276 and $1,271 at November
30, 2008 and February 28, 2008, respectively 15,337 20,043
Inventories 19,368 25,097
Deferred income tax assets 3,574 5,306
Prepaid expenses and other current assets 8,122 9,733
-------- --------
Total current assets 52,104 66,767
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 3,897 5,070
Deferred income tax assets, less current portion 18,995 14,802
Goodwill 28,224 28,520
Other intangible assets, net 20,612 24,424
Other assets 3,375 3,458
-------- --------
$127,207 $143,041
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 29,752 $ 5,343
Accounts payable 7,560 10,875
Accrued payroll and employee benefits 3,336 4,218
Accrued warranty costs 3,921 3,818
Other current liabilities 9,858 11,800
Deferred revenue 3,014 4,005
-------- --------
Total current liabilities 57,441 40,059
-------- --------
Long-term debt, less current portion - 27,187
Other non-current liabilities 1,023 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; 25,217 and 25,041 shares issued
and outstanding at November 30, 2008 and
February 28, 2008, respectively 252 250
Additional paid-in capital 144,527 144,318
Accumulated deficit (74,982) (71,149)
Accumulated other comprehensive income (loss) (1,054) 1
-------- --------
Total stockholders' equity 68,743 73,420
-------- --------
$127,207 $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 Nine Months Ended
November 30, November 30,
------------------- -------------------
2008 2007 2008 2007
-------- -------- -------- --------
Revenues $ 25,834 $ 32,061 $ 77,043 $111,122
Cost of revenues 18,193 22,033 52,505 100,165
-------- -------- -------- --------
Gross profit 7,641 10,028 24,538 10,957
-------- -------- -------- --------
Operating expenses:
Research and development 3,199 3,868 9,530 11,982
Selling 2,656 2,577 6,575 7,219
General and administrative 2,990 3,498 9,352 10,157
Intangible asset amortization 1,240 1,558 3,812 4,860
Acquired in-process research
and development - - - 310
Impairment loss - 65,745 - 65,745
-------- -------- -------- --------
Total operating expenses 10,085 77,246 29,269 100,273
-------- -------- -------- --------
Operating loss (2,444) (67,218) (4,731) (89,316)
Non-operating income (expense):
Interest expense, net (476) (487) (1,361) (1,388)
Other income (expense), net (46) (135) 89 (324)
-------- -------- -------- --------
Total non-operating expense (522) (622) (1,272) (1,712)
-------- -------- -------- --------
Loss from continuing operations
before income taxes (2,966) (67,840) (6,003) (91,028)
Income tax benefit 1,128 8,909 2,170 17,894
-------- -------- -------- --------
Loss from continuing operations (1,838) (58,931) (3,833) (73,134)
Loss from discontinued
operations, net of tax - - - (597)
Loss on sale of discontinued
operations, net of tax - - - (935)
-------- -------- -------- --------
Net loss $ (1,838) $(58,931) $ (3,833) $(74,666)
======== ======== ======== ========
Basic and diluted loss
per share from:
Continuing operations $ (0.07) $ (2.49) $ (0.15) $ (3.10)
Discontinued operations - - - (0.06)
-------- -------- -------- --------
Total basic and diluted
loss per share $ (0.07) $ (2.49) $ (0.15) $ (3.16)
======== ======== ======== ========
Shares used in computing basic and
diluted loss per share:
Basic 24,809 23,640 24,750 23,621
Diluted 24,809 23,640 24,750 23,621
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
November 30,
---------------------
2008 2007
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,833) $(74,666)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 5,552 7,469
Stock-based compensation expense 838 1,605
Write-off of in-process research and development - 310
Impairment loss - 65,745
Excess tax benefit from stock-based
compensation - (64)
Deferred tax assets, net (2,371) (23,296)
Loss on sale of discontinued operations,
net of tax - 935
Gain on sale of investment - (331)
Changes in operating assets and liabilities:
Accounts receivable 4,643 17,854
Inventories 5,117 (1,531)
Prepaid expenses and other assets 1,269 1,378
Accounts payable (3,315) (16,128)
Accrued warranty costs (948) 12,465
Other accrued liabilities (2,710) 3,767
Deferred revenue (991) 275
Other - 25
------- -------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 3,251 (4,188)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (650) (1,106)
Proceeds from sale of discontinued operations 420 4,000
Earn-out payments on Technocom acquisition (1,183) (703)
Proceeds from sale of property and equipment - 8
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 - (3,340)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,117) (27,355)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repayments (2,778) (2,210)
Proceeds from exercise of stock options - 206
Excess tax benefit from stock-based
compensation expense - 64
------- -------
NET CASH USED IN FINANCING ACTIVITIES (2,778) (1,940)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (241) 982
------- -------
Net change in cash and cash equivalents (885) (32,501)
Cash and cash equivalents at beginning of period 6,588 37,537
------- -------
Cash and cash equivalents at end of period $ 5,703 $ 5,036
======= =======
See notes to unaudited consolidated financial statements.
CALAMP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 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 business 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. Operating results of the Solutions Division are presented as a
discontinued operation in the accompanying consolidated statement of
operations for the nine months ended November 30, 2007.
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 November 29, 2008 and December 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
November 30 for clarity of presentation.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 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 November 30, 2008 and its results of
operations for the three and nine months ended November 30, 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):
November 30, February 28,
2008 2008
------ -------
Raw materials $16,713 $21,908
Work in process 209 325
Finished goods 2,446 2,864
------- -------
$19,368 $25,097
======= =======
Note 3 - GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in goodwill of each reporting unit during the nine months ended
November 30, 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 November 30, 2008 $ 2,255 $ 25,969 $ 28,224
======== ======== =========
Other intangible assets are comprised as follows (in thousands):
November 30, 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 $ 7,254 $11,329 $18,583 $ 4,767 $13,816
Customer lists 5-7 yrs. 8,313 3,417 4,896 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. 1,001 494 507 1,001 344 657
Tradename N/A 3,880 - 3,880 3,880 - 3,880
------- ------ ------- ------- ------ -------
$34,837 $14,225 $20,612 $34,837 $10,413 $24,424
======= ====== ======= ======= ====== =======
Amortization expense of intangible assets was $1.2 million and $1.6
million for the three months ended November 30, 2008 and 2007, respectively,
and was $3.8 million and $4.9 million for the nine month periods then ended.
All intangible asset amortization expense was attributable to the Wireless
DataCom business.
Estimated amortization expense for the fiscal years ending February 28
is as follows (in thousands):
2009 (remainder) $1,241
2010 $4,961
2011 $4,438
2012 $4,091
2013 $1,677
Thereafter $ 324
Note 4 - FINANCING ARRANGEMENTS
Long-term Debt
Long-term debt consists of the following (in thousands):
November 30, February 28,
2008 2008
------ -------
Bank term loan $25,280 $27,530
Subordinated note payable to DBS customer 4,472 5,000
------- -------
Total debt 29,752 32,530
Less portion due within one year (29,752) (5,343)
------- -------
Long-term debt $ - $27,187
======= =======
In May 2006, the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of Montreal (BMO), 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 BMO's prime rate
("Prime Based Loans") plus a margin ranging from 2.50% to 2.75% (the "Prime
Rate Margin") or LIBOR ("LIBOR Based Loans") plus a margin ranging from 3.25%
to 3.75% (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 November 30, 2008, the
effective interest rate on the bank term loan was 7.51% comprised of a one-
month LIBOR rate of 3.76% plus the LIBOR Margin of 3.75%. At December 31,
2008, the effective interest rate on the bank term loan was 4.21% comprised
of a one-month LIBOR rate of 0.46% plus the LIBOR Margin of 3.75%.
The Credit Agreement also provides for a working capital line of credit
of $3,375,000. At November 30, 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 BMO's prime rate plus 4% or
LIBOR plus 5%. There were no outstanding borrowings on the revolver at
November 30, 2008.
The Company made principal repayments of $2,250,000 on the bank term
loan during the nine months ended November 30, 2008. A term loan principal
payment of $750,000 was paid on December 31, 2008, a principal payment of
$1,250,000 is due on March 31, 2009, and principal payments of $1,600,000 are
due on both June 30, 2009 and September 30, 2009. The Company is also
required to make mandatory prepayments under the credit facility in certain
circumstances, including following the Company's incurrence of certain
indebtedness, disposition of its property or extraordinary income. In
addition to these payments, the Company is obligated to pay the Banks 50% of
the legal settlement received in January 2009, as further described in Note
14.
The Credit Agreement has a termination date of December 31, 2009, at
which time all outstanding borrowings are due and payable. The Company is
also obligated to pay penalty interest of $204,000 on June 30, 2009, and an
exit fee of $500,000 on December 31, 2009. The Company recorded the penalty
interest of $204,000 during the four month period from November 2007 to
February 2008. Beginning 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. In addition to these fees, in the event all
outstanding obligations under the Credit Agreement are not paid in full by
June 30, 2009, an additional fee of $150,000 will be due and payable to the
Banks on December 31, 2009.
The Credit Agreement requires minimum levels of consolidated earnings
before interest, taxes, depreciation and amortization (EBITDA) and Wireless
DataCom group revenues. The Company was in compliance with these covenants
at November 30, 2008. However, the Company was not in compliance with the
Wireless DataCom revenue covenant at December 31, 2008, which caused an event
of default with respect to the financial covenants under the Credit Agreement
that will preclude additional borrowing under the revolving credit facility
thereunder until the Company is able to obtain a waiver from the Banks and/or
an amendment of the Credit Agreement. The Company has notified the Banks
and is in discussions with them to obtain a waiver of this covenant
violation. Because the Banks will have the right to call the loan until
such time that a waiver is obtained, the Company has classified the entire
term loan principal balance as a current liability in the consolidated
balance sheet at November 30, 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.
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.
During the nine months ended November 30, 2008, principal payments of
$528,000 were made on this note. The balance of $4,472,000 at November 30,
2008 has been classified as a current liability in the accompanying
consolidated balance sheet as of that date based on expected shipments of DBS
units to this customer during the next 12 months. 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 effective March 1, 2007. As of
November 30, 2008, the Company has unrecognized tax benefits of $6,432,000
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 2008 remain open to
examination by Canada federal and Quebec provincial tax authorities. In
addition, 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 provisions 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 November 30, 2008 and 2007 was
$1,128,000 and $8,909,000, respectively. The income tax benefit applicable to
the loss from continuing operations for the nine months ended November 30,
2008 and 2007 was $2,170,000 and $17,894,000, respectively. The effective
income tax rate on the pretax loss from continuing operations was 36% and 20%
in the nine months ended November 30, 2008 and 2007, respectively. The
effective tax rate in the nine months ended November 30, 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. The effective tax rate in the nine months ended November 30,
2007 was less than the combined federal and state statutory rates because
$45.1 million of the goodwill impairment charge recorded in that period was
not deductible for income tax purposes.
Note 6 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income
(loss) 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 was the same
amount for both basic and diluted loss per share for all periods presented.
Stock options outstanding at November 30, 2008 and 2007 were excluded from
the computation of diluted loss per share for the three and nine month
periods then ended because the Company reported a loss from continuing
operations in such periods and the effect of inclusion would be antidilutive
(i.e., including such options would result in a lower loss per share).
Note 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 nine months ended November
30, 2008 and 2007 (in thousands):
Three Months Ended Nine Months Ended
November 30, November 30,
------------------- -------------------
2008 2007 2008 2007
-------- -------- -------- --------
Net loss $(1,838) $(58,931) $ (3,833) $(74,666)
Foreign currency
translation adjustments (632) 378 (1,055) 1,103
Realized gain on
available-for-sale investments - - - (45)
------- -------- ------- --------
Comprehensive loss $(2,470) $(58,553) $ (4,888) $(73,608)
======= ======== ======= ========
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 Nine Months Ended
November 30, November 30,
------------------- -------------------
2008 2007 2008 2007
-------- -------- -------- --------
Cost of revenues $ 30 $ 23 $ 53 $ 53
Research and development 100 49 195 160
Selling 24 100 72 225
General and administrative 323 374 518 1,082
------ ------ ------ ------
$ 477 $ 546 $ 838 $ 1,520
====== ====== ====== ======
Changes in the Company's outstanding stock options during the nine
months ended November 30, 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 578 $ 2.42
Exercised (50) $ 1.75
Forfeited or expired (1,010) $ 8.51
-----
Outstanding at November 30, 2008 1,900 $ 8.13 6.6 years $ -
=====
Exercisable at November 30, 2008 1,037 $11.38 4.7 years $ -
=====
Of the 50,000 stock options exercised during the current fiscal year,
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 nine months ended November 30, 2008 were as
follows:
Weighted
Number of Average
Shares Fair Value at
(000s) Grant Date
-------- ----------
Outstanding at February 28, 2008 534 $ 3.70
Granted 633 2.06
Vested (159) 4.28
Forfeited (51) 3.87
-----
Outstanding at November 30, 2008 957 $ 2.51
=====
Of the 159,000 restricted stock shares and RSUs that vested during the
period, 43,430 shares were retained by the Company to cover the required
amount of employee withholding taxes.
The Company issued 36,000 bonus stock shares during the quarter ended
November 30, 2008, of which 13,242 shares were retained by the Company to
cover the required amount of employee withholding taxes.
As of November 30, 2008, there was $3.9 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 2.8 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 nine ended November 30, 2008 or 2007, as a percent
of consolidated revenues, are as follows:
Three Months Ended Nine Months Ended
November 30, November 30,
------------------- -------------------
Customer 2008 2007 2008 2007
------- ------- ------- -------
A 19.4% 2.5% 10.0% 12.5%
B 8.9% 22.5% 13.2% 23.7%
C 1.9% 16.1% 5.6% 15.8%
Accounts receivable from the customers referred to in the table above,
expressed as a percent of consolidated net accounts receivable, are as
follows:
November 30, February 28,
Customer 2008 2008
------ ------
A 14.7% 5.1%
B 9.0% 26.6%
C 2.7% 9.0%
Customers A and B are customers of the Company's Satellite business
unit. Customer C is customer of the Company's Wireless DataCom business.
Revenue with Customer C was down in the current year compared to the prior
year in part because the Company is now selling certain products to
subcontractors of Customer C rather than to Customer C directly. 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 one 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 for the nine
months ended November 30, 2008 and 2007 is as follows (in thousands):
Nine months ended
November 30,
-----------------
2008 2007
------- -------
Balance at beginning of period $ 4,869 $ 1,295
Charged to costs and expenses 206 13,393
Deductions (1,154) (928)
------- ------
Balance at end of period $ 3,921 $13,760
======= ======
Warranty expense for the nine months ended November 30, 2007 included a
charge of approximately $12.9 million for the cost of estimated warranty
repairs to correct a product performance issue involving a DBS customer, as
further described in Note 13. The warranty reserve at November 30, 2007
included $13.4 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 12 months.
Note 11 - OTHER FINANCIAL INFORMATION
"Net cash provided (used) by operating activities" in the consolidated
statements of cash flows includes cash payments (receipts) for interest and
income taxes as follows (in thousands):
Nine months ended
November 30,
-----------------
2008 2007
------- -------
Interest paid $ 987 $1,751
Income taxes paid (net
refunds received) $ (790) $ (620)
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Nine months ended
November 30,
-----------------
2008 2007
------- -------
Earn-out amount for TechnoCom
acquisition included in goodwill
and other current liabilities $ - $ 1,567
Other Assets in the consolidated balance sheets consist of the
following (in thousands):
November 30, February 28,
2008 2008
------ -------
Investment in preferred stock of
a privately-held company $ 3,137 $ 3,137
Deposits and other 238 321
------- -------
$ 3,375 $ 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):
November 30, February 28,
2008 2008
------ -------
Accrued warranty costs (non-current portion) $ - $ 1,051
Deferred rent 674 981
Deferred revenue 349 343
------- -------
$ 1,023 $ 2,375
======= =======
Note 12 - SEGMENT INFORMATION
Segment information for the three and nine months ended November 30,
2008 and 2007 is as follows (dollars in thousands):
Three months ended Three months ended
November 30, 2008 November 30, 2007
------------------------------------ -------------------------------------
Business Segments Business Segments
------------------- -------------------
Wireless Wireless
Satellite DataCom Corporate Total Satellite DataCom Corporate Total
-------- -------- ------- ----- -------- ------- ------- -----
Revenues $ 7,384 $ 18,450 $ 25,834 $ 8,353 $ 23,708 $ 32,061
Gross profit 253 $ 7,388 $ 7,641 $ 221 $ 9,807 $ 10,028
Gross margin 3.4% 40.0% 29.6% 2.6% 41.4% 31.3%
Operating loss $ (838) $ (293) $(1,313) $ (2,444) $(44,061) $(21,842) $(1,315) $(67,218)
Nine months ended Nine months ended
November 30, 2008 November 30, 2007
------------------------------------ -------------------------------------
Business Segments Business Segments
------------------- -------------------
Wireless Wireless
Satellite DataCom Corporate Total Satellite DataCom Corporate Total
-------- -------- ------- ----- -------- ------- ------- ------
Revenues $ 18,201 $ 58,842 $ 77,043 $ 41,235 $ 69,887 $111,122
Gross profit
(loss) $ 905 $ 23,633 $ 24,538 $(15,530) $ 26,487 $ 10,957
Gross margin 5.0% 40.2% 31.8% (37.7%) 37.9% 9.9%
Operating
income (loss) $ (2,494) $ 1,680 $(3,917) $ (4,731) $(62,356) $(22,988) $(3,972) $(89,316)
The Satellite segment's negative gross profit of $15.5 million and
operating loss of $62.4 million in the nine months ended November 30, 2007
included a $17.9 million charge for estimated expenses to correct a product
performance issue involving a DBS customer, as further described in Note 13.
The Satellite segment operating losses in the three and nine months ended
November 30, 2007 also included a goodwill impairment charge of $43.2
million.
The Wireless DataCom segment operating losses in the three and nine
months ended November 30, 2007 included a goodwill impairment charge of $22.6
million.
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 $287,000 in the three months ended November 30, 2008 and 2007,
respectively, and $248,000 and $852,000 in the nine months ended November 30,
2008 and 2007, respectively. The decrease in stock-based compensation
expense in the latest nine 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 November 30, 2008, the Company has aggregate reserves of $6.5 million
for DBS product field performance issues, of which $3.4 million is a reserve
for accrued warranty costs, $1.6 million is an inventory reserve, and $1.5
million is a vendor liability reserve included in other current liabilities.
The inventory reserve consists of $432,000 for estimated costs to rework on-
hand inventory to make it saleable and $1,137,000 for potentially obsolete
products and materials.
While the Company believes that its reserves of $6.5 million as of
November 30, 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 $7.0 million and
outstanding purchase commitments of $7.9 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 November 2008, a class action lawsuit was filed against the
Company, the former owner of the Company's Aercept business unit and one of
Aercept's distributors. The class has not been certified. The lawsuit
alleges that Aercept made misrepresentations when the plaintiff purchased
analog vehicle tracking devices in 2005, which was prior to CalAmp's
acquisition of Aercept in an asset purchase. The tracking devices ceased
functioning in early 2008 due to termination of analog service by the
wireless network operators. The Company is seeking dismissal of the lawsuit
on the basis that the assertion of successor liability is not supported by
the law or the facts. No loss accrual has been made in the accompanying
financial statements for this matter.
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, but the USPTO
has not yet acted on this response. In light of USPTO's preliminary office
action, the case has been stayed by the District Court until the USPTO
reaches 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 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 defective 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. Rogers
Corporation ("Rogers") manufactures and supplies printed circuit laminate to
sub-contractors of the Company that is incorporated into the Company's DBS
products. On January 6, 2009, the Company reached an out-of court settlement
with Rogers, as further described in Note 14, pursuant to which Rogers paid
the Company $9 million.
In addition to the foregoing matters, 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.
Note 14 - SUBSEQUENT EVENTS
On January 6, 2009, the Company reached an out-of-court settlement of
litigation with Rogers Corporation pursuant to which Rogers paid the Company
$9 million cash. In the settlement agreement the parties acknowledged that
Rogers admitted no wrongdoing or liability for any claim, and that Rogers
agreed to settle this litigation to avoid the time, expense and inconvenience
of continued litigation. Both parties agreed to file stipulations with the
court to dismiss the litigation, and gave mutual releases of all claims and
demands existing as of the settlement date. Under the provisions of the
Fifth Amendment to the Company's bank Credit Agreement entered into in October
2008, one-half of the net cash proceeds from this legal settlement, which
amounts to approximately $4.1 million, is payable to the Banks as a term loan
reduction.
On January 7, 2009, the Company eliminated approximately 40 employment
positions that represented approximately 8 percent of the workforce. Most of
this workforce reduction involved employees in the Company's Wireless DataCom
segment. The total estimated cost for severance and for salary and wage
payments during the "working notice" period is approximately $930,000, of
which approximately $800,000 and $130,000 will be expensed in the quarters
ending February 28, 2009 and May 31, 2009, respectively.
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 29% of the
Company's total revenue for the nine months ended November 30, 2008 and two
customers accounting for 24% of the Company's net accounts receivable balance
as of November 30, 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 November 30, 2008 the Company had an
inventory reserve of $1.6 million that was established during fiscal 2008 in
connection with a product performance issue involving a key DBS customer.
Also as described in Note 13, the Company had on-hand inventory of $7.0
million and outstanding purchase commitments of $7.9 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, 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 November 30, 2008 the Company had a
$3.4 million reserve for accrued warranty costs in connection with a product
performance issue involving a key DBS customer. While the Company believes
that this $3.4 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.
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
(FIN 48), which was adopted by the Company in fiscal 2008, 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 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. At
November 30, 2008, the Company had unrecognized tax benefits of $6,432,000
which, if recognized, would impact the effective tax rate on income from
continuing operations.
At November 30, 2008, the Company had an aggregate deferred income tax
asset balance of $22,569,000. The current portion of the deferred tax asset
is $3,574,000 and the noncurrent portion is $18,995,000.
Impairment Assessments of Goodwill, Purchased Intangible Assets and
Other Long-Lived Assets
At November 30, 2008, the Company had $28.2 million in goodwill and
$20.6 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 believes that the Company 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 in Note 13 to the accompanying unaudited consolidated
financial statements. 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 in the statement of operations
and lower asset values on the balance sheet. Conversely, less conservative
assumptions could result in smaller or no impairment charges.
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 nine months ended November 30, 2008, the Company did
not recognize any losses due to other-than-temporary decline of the value of
this investment.
Stock-Based Compensation Expense
The FASB issued Statement of Financial Accounting Standards 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 November 29, 2008 and December 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
November 30 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 business 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 business 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.
In May 2008, the Company resumed product shipments to this customer. Sales to
the other key DBS customer in fiscal 2009 are 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 will 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 November 30, Nine Months Ended November 30,
----------------------------------- ---------------------------------
2008 2007 2008 2007
--------------- --------------- -------------- --------------
% of % of % of % of
Segment $000s Total $000s Total $000s Total $000s Total
----------- ------- ------ ------ ------ ------- ------ ------ ------
Satellite $ 7,384 28.6% $ 8,353 26.1% $18,201 23.6% $ 41,235 37.1%
Wireless DataCom 18,450 71.4% 23,708 73.9% 58,842 76.4% 69,887 62.9%
------ ------ ------ ------ ------ ------ ------ ------
Total $25,834 100.0% $32,061 100.0% $77,043 100.0% $111,122 100.0%
====== ====== ====== ====== ====== ====== ======= ======
GROSS PROFIT (LOSS) BY SEGMENT
Three Months Ended November 30, Nine Months Ended November 30,
----------------------------------- ---------------------------------
2008 2007 2008 2007
--------------- --------------- ---------------- --------------
% of % of % of % of
Segment $000s Total $000s Total $000s Total $000s Total
----------- ------- ----- ------ ------ ------- ------- ------ -----
Satellite $ 253 3.3% $ 221 2.2% $ 905 3.7% $(15,530) (142%)
Wireless DataCom 7,388 96.7% 9,807 97.8% 23,633 96.3% 26,487 242%
------ ------ ------ ------ ------- ------ ------ -----
Total $ 7,641 100.0% $10,028 100.0% $ 24,538 100.0% $ 10,957 100%
====== ====== ====== ====== ====== ======= ====== =====
OPERATING INCOME (LOSS) BY SEGMENT
Three Months Ended November 30, Nine Months Ended November 30,
----------------------------------- ---------------------------------
2008 2007 2008 2007
--------------- --------------- -------------- --------------
% of % of % of % of
Segment $000s Sales $000s Sales $000s Sales $000s Sales
----------- ------- ------ ------ ------ ------- ----- ------ -----
Satellite $ (838) (3.2%) $(44,061) (137.4%) $(2,494) (3.2%) $(62,356) (56.1%)
Wireless DataCom (293) (1.1%) (21,842) (68.1%) 1,680 2.2% (22,988) (20.7%)
Corporate
expenses (1,313) (5.1%) (1,315) (4.1%) (3,917) (5.1%) (3,972) (3.6%)
------ ------ ------- ------ ------ ----- ------ -----
Total $(2,444) (9.4%) $(67,218) (209.6%) $(4,731) (6.1%) $(89,316) (80.4%)
====== ====== ======= ====== ====== ===== ====== =====
The Satellite segment negative gross profit of $15.5 million and
operating loss of $62.4 million in the nine months ended November 30, 2007
included a $17.9 million charge for estimated expenses to correct a product
performance issue involving a key DBS customer. The Satellite segment
operating losses in the three and nine months ended November 30, 2007 also
included a goodwill impairment charge of $43.2 million.
The Wireless DataCom segment operating losses in the three and nine
months ended November 30, 2007 included a goodwill impairment charge of $22.6
million.
Revenue
Satellite revenue declined $1.0 million, or 12%, to $7.4 million in the
three months ended November 30, 2008 from $8.4 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 $4.2 million higher for the quarter ended November 30, 2008
compared to the same period last year. However, a reduction of orders from
the Company's other principal DBS customer resulted in a $4.9 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 fully return to pre-fiscal 2008 levels as a result of
competition in the market.
For the nine months ended November 30, 2008, Satellite revenue decreased
$23.0 million, or 56%, to $18.2 million from $41.2 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 $5.3 million, or 22%, to $18.5
million in the third quarter of fiscal 2009 compared to the fiscal 2008 third
quarter. Almost half of the decrease was due 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. The remainder of the decrease was due to
lower revenues of the Wireless DataCom business units attributable to
deteriorating macroeconomic conditions. For the nine months ended November
30, 2008, Wireless DataCom revenue decreased by $11.0 million, or 16%, to
$58.8 million over the same period last year. This decrease in revenue is
primarily due to a $10.1 million decrease in sales of radio modules to a key
Wireless DataCom customer.
Gross Profit (Loss) and Gross Margins
Satellite gross profit increased by $32,000 to $253,000 in the fiscal
2009 third quarter compared to the third quarter of last year. The gross
profit in the latest quarter was benefited by a $352,000 reduction in
expenses associated with the correction of a 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. Excluding this benefit, gross profit decreased by $320,000 primarily
due to a $1 million decline in revenue in the latest quarter compared to the
prior year.
The Satellite segment had gross profit of $905,000 for the nine months
ended November 30, 2008, compared with a negative gross profit of $15.5
million for the same period last year. Satellite's negative gross profit of
$15.5 million in the nine months ended November 30, 2007 includes a $17.9
million charge for estimated expenses to correct a product performance issue
involving a key DBS customer. The gross profit for the nine months ended
November 30, 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 $735,000 in estimated expenses
to correct a product performance issue. If these benefits had not been
recorded, the Satellite segment's gross margin in the latest nine month
period would have been negative 2.4%.
Wireless DataCom gross profit decreased 25% to $7.4 million in the
fiscal 2009 third quarter compared to the third quarter of last year, due
mainly to the 22% decrease in revenues. Wireless DataCom's gross margin
slightly decreased from 41.4% in the third quarter of fiscal 2008 to 40.0% in
the third quarter of fiscal 2009.
Wireless DataCom's gross profit decreased 11% to $23.6 million for the
nine months ended November 30, 2008, compared to $26.5 million for the same
period of the prior year. Wireless DataCom's gross margin increased to 40.2%
for the nine months ended November 30, 2008 compared to 37.9% for the same
period last year. This margin improvement was due primarily to a $1.5
million patent sale in the first quarter of fiscal 2009 for which the cost of
revenues was zero. Excluding the patent sale, Wireless DataCom's gross
margin was 38.6% in the nine months ended November 30, 2008.
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
$669,000 to $3,199,000 in the third quarter of fiscal 2009 from $3,868,000
last year. For the nine month year-to-date periods, R&D expense decreased
$2,452,000 from $11,982,000 last year to $9,530,000 this year. These
decreases are primarily due to personnel reductions in the Public Safety
Mobile ("PSM") units of the Wireless DataCom segment.
Consolidated selling expenses increased by $79,000 to $2,656,000 in the
third quarter of this year from $2,577,000 last year. For the nine month
year-to-date periods, selling expenses decreased by $644,000 from $7,219,000
last year to $6,575,000 this year, primarily due to bad debt reserve
reductions of $927,000 related to a Wireless DataCom customer.
Consolidated general and administrative expenses ("G&A") decreased by
$508,000 to $2,990,000 in the third quarter of this year compared to the
prior year. This decrease is principally the net result of Smartlink
integration costs in the third quarter of last year that were not present
this year. For the nine month periods, consolidated G&A decreased by
$805,000 to $9,352,000 in fiscal 2009 from $10,157,000 last year. The
decrease is primarily the result of a reduction of approximately $1 million
in G&A of the PSM business unit, which included Smartlink integration costs
of approximately $700,000 in the nine month period of last year that were not
present this year, and lower stock-based compensation expense of $564,000.
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 $617,000 and a $303,000 charge for
severance costs of the Company's former Satellite Division president in the
second quarter of this year.
Amortization of intangibles decreased from $1,558,000 in the third
quarter of last year to $1,240,000 in the third quarter of this year. For
the nine month year-to-date periods, amortization decreased by $1,048,000
from $4,860,000 last year to $3,812,000 this year. These decreases were
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 nine months ended November 30, 2008 was related to the acquisition of
SmartLink in April 2007.
Non-operating Expense, Net
Non-operating expense decreased $100,000 from the third quarter of last
year to the third quarter of this year due to lower interest expense of
$122,000 in the latest quarter.
Non-operating expense was $1,272,000 in the nine months ended November
30, 2008, compared to $1,712,000 in the nine months ended November 30, 2007.
The $440,000 decrease was primarily due to (i) a foreign currency gain of
$92,000 in the current year compared to a $655,000 foreign currency loss last
year; and (ii) lower interest expense of $245,000 in the latest nine month
period. This effect was partially offset by a gain of $330,000 on the sale
of an investment that was recorded in the nine months ended November 30,
2007.
Income Tax Provision
The income tax benefit applicable to the loss from continuing operations
for the three months ended November 30, 2008 and 2007 was $1,128,000 and
$8,909,000, respectively. The income tax benefit applicable to the loss from
continuing operations for the nine months ended November 30, 2008 and 2007
was $2,170,000 and $17,894,000, respectively. The effective income tax rate
on the pretax loss from continuing operations was 36% and 20% in the nine
months ended November 30, 2008 and 2007, respectively. The effective tax
rate in the nine months ended November 30, 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. The effective
tax rate in the nine months ended November 30, 2007 was less than the
combined federal and state statutory rates because $45.1 million of the
goodwill impairment charge recorded in that period was not deductible for
income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $5,703,000 at November 30, 2008. During the
nine months ended November 30, 2008, cash and cash equivalents decreased by
$885,000. Cash provided by operating activities was $3,251,000, which was
reduced by debt repayments of $2,778,000 and cash used in investing
activities of $1,117,000 (capital expenditures of $650,000 and net payments
of $887,000 for earn-out consideration payable in acquisitions, partially
offset by collections of note receivable of $420,000). The negative effect of
exchange rate changes on cash was $241,000.
In May 2006, the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of Montreal (BMO), 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 BMO's prime rate
("Prime Based Loans") plus a margin ranging from 2.50% to 2.75% (the "Prime
Rate Margin") or LIBOR ("LIBOR Based Loans") plus a margin ranging from 3.25%
to 3.75% (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 November 30, 2008, the
effective interest rate on the bank term loan was 7.51% comprised of a one-
month LIBOR rate of 3.76% plus the LIBOR Margin of 3.75%. At December 31,
2008, the effective interest rate on the bank term loan was 4.21% comprised
of a one-month LIBOR rate of 0.46% plus the LIBOR Margin of 3.75%.
The Credit Agreement also provides for a working capital line of credit
of $3,375,000. At November 30, 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 BMO's prime rate plus 4% or
LIBOR plus 5%. There were no outstanding borrowings on the revolver at
November 30, 2008.
The Company made principal repayments of $2,250,000 on the bank term
loan during the nine months ended November 30, 2008. A term loan principal
payment of $750,000 was paid on December 31, 2008, a principal payment of
$1,250,000 is due on March 31, 2009, and principal payments of $1,600,000 are
due on both June 30, 2009 and September 30, 2009. The Company is also
required to make mandatory prepayments under the credit facility in certain
circumstances, including following the Company's incurrence of certain
indebtedness, disposition of its property or extraordinary income. In
addition to these payments, the Company is obligated to pay the Banks 50% of
the legal settlement received in January 2009, as further described in Note
14 to the accompanying unaudited consolidated financial statements.
The Credit Agreement has a termination date of December 31, 2009, at
which time all outstanding borrowings are due and payable. The Company is
also obligated to pay penalty interest of $204,000 on June 30, 2009, and an
exit fee of $500,000 on December 31, 2009. The Company recorded the penalty
interest of $204,000 during the four month period from November 2007 to
February 2008. Beginning 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. In addition to these fees, in the event all
outstanding obligations under the Credit Agreement are not paid in full by
June 30, 2009, an additional fee of $150,000 will be due and payable to the
Banks on December 31, 2009.
The Credit Agreement requires minimum levels of consolidated earnings
before interest, taxes, depreciation and amortization (EBITDA) and Wireless
DataCom group revenues. The Company was in compliance with these covenants
at November 30, 2008. However, the Company was not in compliance with the
Wireless DataCom revenue covenant at December 31, 2008, which caused an event
of default with respect to the financial covenants under the Credit Agreement
that will preclude additional borrowing under the revolving credit facility
thereunder until the Company is able to obtain a waiver from the Banks
and/or an amendment of the Credit Agreement. The Company has notified the Banks
and is in discussions with them to obtain a waiver of this covenant
violation. In the near term the Company believes that it has sufficient
liquidity such that the restriction on borrowing under the revolving credit
facility will not adversely affect its operations. However, if the Banks are
unwilling to agree to a waiver or an amendment or exercise their rights to
accelerate borrowings outstanding under the Credit Agreement, the inability
to borrow under the revolving credit facility and/or the acceleration of such
indebtedness would materially adversely affect the Company's financial
position and operations, including its ability to fund its currently
anticipated working capital and capital expenditure needs. Furthermore,
because the Banks will have the right to call the loan until such time that
a waiver is obtained, the Company has classified the entire term loan
principal balance as a current liability in the consolidated balance sheet at
November 30, 2008. The Banks have not provided the Company with the written
notice that would be required to accelerate the loan, and the Company
believes that it will be able to obtain a waiver or amendment and avoid an
acceleration of the Credit Agreement. Nonetheless, no assurance can be given
that the Company will be successful in obtaining a waiver or amendment, or
that it will be able to avoid an acceleration of the amounts outstanding
under the Credit Agreement.
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.
As noted above, the Company's Credit Agreement with the Banks has a
maturity date of December 31, 2009. Prior to maturity 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 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.
During the nine months ended November 30, 2008, principal payments of
$528,000 were made on this note. The balance of $4,472,000 at November 30,
2008 has been classified as a current liability in the accompanying
consolidated balance sheet as of that date based on expected shipments of DBS
units to this customer during the next 12 months. 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 November 30, 2008 the Company had a
$3.4 million reserve for accrued warranty costs and a $432,000 reserve to
rework products in inventory in connection with the aforementioned DBS
product performance issue. Also as described in Note 13 to the accompanying
unaudited consolidated financial statements, at November 30, 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
apply new technologies in a competitively advantageous manner, 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, the
Company's ability to obtain a waiver from the Banks under its Credit
Agreement of an event of default arising from a financial covenant violation
that arose at the end of December 2008, the ability of the Company to
successfully refinance the borrowings under the Credit Agreement on
economically favorable terms at or prior to the December 31, 2009 maturity
date, and other risks and uncertainties that are set forth under the "Risk
Factors" in Part II, Item 1A herein and 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 loss related to the
Company's Canadian subsidiary and French subsidiary of $253,000 and $801,000,
respectively, is included in accumulated other comprehensive income (loss) in
the stockholders' equity section of the consolidated balance sheet at
November 30, 2008.
Interest Rate Risk
The Company has variable-rate bank debt. At November 30, 2008, the
effective interest rate on the bank term loan was 7.51% comprised of a one-
month LIBOR rate of 3.76% and the LIBOR Margin of 3.75%. A fluctuation of
one percent in the LIBOR rate would have an annual impact of approximately
$150,000 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 November 2008, a class action lawsuit was filed against the Company,
the former owner of the Company's Aercept business unit and one of Aercept's
distributors. The class has not been certified. The lawsuit alleges that
Aercept made misrepresentations when the plaintiff purchased analog vehicle
tracking devices in 2005, which was prior to CalAmp's acquisition of Aercept
in an asset purchase. The tracking devices ceased functioning in early 2008
due to termination of analog service by the wireless network operators. The
Company is seeking dismissal of the lawsuit on the basis that the assertion
of successor liability is not supported by the law or the facts. No loss
accrual has been made in the accompanying financial statements for this
matter.
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, but the USPTO
has not yet acted on this response. In light of USPTO's preliminary office
action, the case has been stayed by the District Court until the USPTO
reaches 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 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 defective 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. Rogers
Corporation ("Rogers") manufactures and supplies printed circuit laminate to
sub-contractors of the Company that is incorporated into the Company's DBS
products. On January 6, 2009, the Company reached an out-of court settlement
with Rogers, as further described in Note 14 to the accompanying unaudited
consolidated financial statements, pursuant to which Rogers paid the Company
$9 million.
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. The Company is currently in default under its Credit Agreement as a
result of its noncompliance with the Wireless DataCom revenue
covenant at December 31, 2008.
As of December 31, 2008, the Company was in violation of a financial
covenant under its Credit Agreement causing an event of default which will
preclude additional borrowings under the revolving credit facility. The
Company has notified the Banks and is in discussions with them to resolve the
issue. If the Banks are unwilling to agree to a waiver or an amendment or
exercise their rights to accelerate borrowings outstanding under the Credit
Agreement, the inability to borrow under the revolving credit facility and/or
the acceleration of such indebtedness would materially adversely affect the
Company's financial position and operations, including its ability to fund
its currently anticipated working capital and capital expenditure needs.
2. Our Credit Agreement with the Banks has a maturity date of
December 31, 2009.
At November 30, 2008, outstanding borrowings on the bank term loan
amounted to $25.3 million. There is no assurance that the Company will be
able to refinance the term loan balance from other funding sources, or extend
the maturity date of the loan, by its maturity date of December 31, 2009.
3. Reduced consumer or corporate spending due to uncertainties in the
macroeconomic environment could adversely affect our revenues and
cash flow, and our ability to make payments on our debt and operate
our businesses.
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 the significant reductions in consumer
or corporate spending as a result of uncertain conditions in the
macroeconomic environment continue, our revenues, profitability and cash flow
could be adversely affected.
Our ability to make payments of principal and interest on our
indebtedness depends upon our future financial 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.
4. 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
could affect our ability to service our debt.
ITEM 5. OTHER INFORMATION
Effective December 19, 2008, the employment agreements of the Company's
four executive officers were amended to bring the provisions dealing with
severance and other benefits payable in the event of involuntary termination
or termination with "Good Reason" (as defined) following a change of control
into compliance with the safe harbor provisions of Section 409A of the
Internal Revenue Code. The form of amendment is attached hereto as Exhibit
10.1.
ITEM 6. EXHIBITS
Exhibit 10.1 - Form of Amendment to Employment Agreement dated
December 19, 2008 (for each of the executive
officers: Richard Gold, Michael Burdiek, Richard
Vitelle and Garo Sarkissian) (1)
Exhibit 31.1 - Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 31.2 - Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (1)
Exhibit 32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
(1) Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
January 13, 2009 /s/ Richard K. Vitelle
------------------------------ ---------------------------------
Date Richard K. Vitelle
Vice President Finance & CFO
(Principal Financial Officer
and Chief Accounting Officer)