UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2008
COMMISSION FILE NUMBER: 0-12182
________________
CALAMP CORP.
(Exact name of Registrant as specified in its Charter)
Delaware 95-3647070
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 N. Rice Avenue
Oxnard, California 93030
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-9000
________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
$.01 par value Common Stock Nasdaq Global Select Market
(Title of Class) (Name of each exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X].
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X].
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. (Check one):
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] Smaller Reporting Company [ ]
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 aggregate market value of voting and non-voting common stock held by non-
affiliates of the registrant as of August 31, 2007 was approximately
$86,711,000. As of May 7, 2008, there were 25,019,392 shares of the
Company's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on July 24, 2008 are incorporated by reference
into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K. This Proxy
Statement will be filed within 120 days after the end of the fiscal year
covered by this report.
PART I
ITEM 1. BUSINESS
THE COMPANY
CalAmp Corp. ("CalAmp" or the "Company"), formerly known as California
Amplifier, Inc., is a leading provider of high value mission-critical
wireless communications solutions that enable anytime/anywhere access.
CalAmp's Wireless DataCom Division services the public safety, industrial
monitoring and controls, and mobile resource management market segments with
wireless solutions built on communications technology platforms that include
proprietary licensed narrowband, standards-based unlicensed broadband and
cellular networks. CalAmp's Satellite Division supplies outdoor customer
premise equipment to the U.S. Direct Broadcast Satellite (DBS) market.
WIRELESS DATACOM DIVISION
The Wireless DataCom Division services the public safety, industrial
monitoring and controls, and mobile resource management market segments 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. Lines of business within the Wireless
DataCom Division include the following:
Public Safety Mobile (PSM)
Municipalities, public safety agencies and emergency first-responders
rely on CalAmp solutions for mobile data and voice communications.
CalAmp designs and builds out multi-network wireless systems that
enable first responders such as fire, police and EMS personnel to talk,
access data and communicate with colleagues, dispatchers and back-
office databases remotely. The Dataradio line is recognized for
innovative advanced wireless data products and systems for mission-
critical applications. The Smartlink line provides seamless
interoperability with and among disparate legacy analog voice land
mobile radio networks within a municipality.
Industrial Monitoring & Controls (IMC)
Utilities, oil, mining, rail and security companies rely on CalAmp
products for wireless data communications with fixed remote sites and
monitoring and actuation of remote equipment. Applications include
remotely measuring fresh and wastewater flows, pipeline flow monitoring
for oil and gas production, remote utility meter reading, internet
enablement and perimeter monitoring.
Mobile Resource Management (MRM)
Enterprises, vehicle financing companies and municipalities rely on
CalAmp products and applications to optimize delivery of services and
protect valuable assets. Applications include fleet management, asset
tracking, student and school bus tracking and route optimization,
vehicle recovery, security and Machine-to-Machine (M2M) communications.
During fiscal years 2007 and 2008, the Company made six acquisitions of
businesses and product lines to expand its Wireless DataCom Division. The
principal acquisitions during this period, consisting of Dataradio, the
Technocom MRM product line, Aercept and Smartlink, are described in the
Overview section of Management's Discussion and Analysis of Financial
Condition and Results of Operations below, and in Note 2 to the accompanying
consolidated financial statements.
SATELLITE DIVISION
The Satellite Division develops, manufactures and sells Direct Broadcast
Satellite (DBS) outdoor consumer premise equipment (CPE) for digital and high
definition satellite TV reception.
The Company's DBS reception products are installed at subscribers'
premises to receive subscription television programming signals that are
transmitted from orbiting satellites. These DBS reception products consist
principally of reflector dish antennae, feedhorns, and electronics which
receive, process, amplify and switch satellite television signals for
distribution over coaxial cable to multiple set-top-boxes inside the home.
The dish antenna reflects the satellite microwave signal back to a focal
point where a feedhorn collects the microwaves and transfers the signals into
an integrated amplifier/downconverter that is referred to in the satellite
industry as a Low Noise Block Downconverter with Feed ("LNBF"). The
microwave amplifier boosts the signal for further processing. The
downconverter translates the signal from a microwave frequency into a lower
intermediate frequency that is then switched and transmitted over coaxial
cable to a specific set-top-box inside the home that can acquire, recognize
and process the signal to create a picture.
The products are sold primarily to the two U.S. DBS system operators,
EchoStar and DirecTV, for incorporation into complete subscription satellite
television systems. Revenue of the Company's Satellite Division amounted to
$50.5 million, $155.1 million and $170.5 million in fiscal years 2008, 2007
and 2006, respectively. The decline in Satellite Division revenue in fiscal
2008 is the result of a product performance issue that resulted in one of the
Company's DBS customers substantially reducing its purchases of the Company's
products. For this reason, sales of DBS products accounted for only 36% of
consolidated revenues for fiscal 2008. This product performance issue is
described in more detail under the Satellite Division heading in Item 7 of
Part II herein and in Note 11 to the accompanying consolidated financial
statements.
For additional information regarding the Company's sales by business
segment and geographical area, see Note 13 to the accompanying consolidated
financial statements.
MANUFACTURING
Electronic devices, components and made-to-order assemblies used in the
Company's products are generally obtained from a number of suppliers,
although certain components are obtained from sole source suppliers. Some
devices or components are standard items while others are manufactured to the
Company's specifications by its suppliers. The Company believes that most
raw materials are available from alternative suppliers. However, any
significant interruption in the delivery of such items could have an adverse
effect on the Company's operations.
Over the past several years, printed circuit board assembly has been
outsourced to contract manufacturers in the Pacific Rim. The Company
performs final assembly and test of most its satellite LNBF and some wireless
datacom products at its facilities in Oxnard, California. The Company
performs additional final assembly and test on other wireless datacom
products at its facilities in Waseca, Minnesota, and Montreal, Canada.
Printed circuit assemblies are mounted in various aluminum and plastic
housings, electronically tested, and subjected to additional environmental
tests on a sampled basis prior to packaging and shipping.
Prior to fiscal 2008, satellite dish antennas were manufactured on a
subcontract basis by metal fabrication companies in the U.S and China. In
fiscal 2008, substantially all of the satellite dish antennas were
manufactured by subcontractors in China. In addition, some of the Company's
satellite LNBF products are manufactured on a subcontract basis by companies
in Taiwan and mainland China.
System integration and staging for the mobile communications networks
are performed at the Company's Montreal, Canada facility and shipped to
customer sites for final deployment.
A substantial portion of the Company's components, and substantially all
printed circuit board assemblies and housings, are procured from foreign
suppliers and contract manufacturers located primarily in mainland China,
Taiwan, and other Pacific Rim countries. Any significant shift in U.S. trade
policy toward these countries, or a significant downturn in the economic or
financial condition of, or any political instability in, these countries,
could cause disruption of the Company's supply chain or otherwise disrupt the
Company's operations, which could adversely impact the Company's business.
ISO 9001 INTERNATIONAL CERTIFICATION
The Company became registered to ISO 9001:1994 in 1995, and upgraded its
registration to ISO9001:2000 in 2003. ISO 9001:2000 is the widely recognized
international standard for quality management in product design,
manufacturing, quality assurance and marketing. The Company believes that
ISO certification is important to its business because most of the Company's
key customers expect their suppliers to have and maintain ISO certification.
The registration assessment was performed by Underwriter's Laboratory, Inc.
according to the ISO 9001:2000 International Standard. Continuous
assessments to maintain certification are performed semi-annually, and the
Company has maintained its certification through each audit evaluation, most
recently in September 2007. In addition, the Company conducts internal
audits of processes and procedures on a quarterly basis. The Company
believes that the loss of its ISO certification could have a material adverse
effect on its operations, and the Company can provide no assurance that it
will be successful in continuing to maintain such certification.
RESEARCH AND DEVELOPMENT
Each of the markets the Company competes in is characterized by rapid
technological change, evolving industry standards, and new product features
to meet market requirements. During the last three years, the Company has
focused its research and development resources primarily on satellite DBS
products, mobile wireless communication systems for public safety voice and
data applications, fixed location wireless communication networks for
industrial monitoring and controls applications, and cellular tracking
products and services for mobile resource management applications. The
Company has developed key technology platforms that can be leveraged across
business units and applications. These include communications technology
platforms based on proprietary licensed narrowband UHF and VHF frequency
radios and modems, standards-based unlicensed broadband wireless IP
router/radio modems, and cellular network based tracking units. In addition,
development resources were allocated to broaden existing product lines,
reduce product costs and improve performance through product redesign
efforts.
Research and development expenses in fiscal years 2008, 2007 and 2006
were $15,710,000, $12,989,000 and $8,018,000, respectively. During this
three year period, the Company's research and development expenses have
ranged between 4.1% and 11.1% of annual consolidated revenues.
SALES AND MARKETING
The Company's revenues were derived mainly from customers in the United
States, which represented 94%, 94%, and 95% of consolidated revenues in
fiscal 2008, 2007 and 2006, respectively.
The Wireless DataCom Division sells its products and services in each of
its market segments through dedicated direct and indirect sales channels.
The sales and marketing functions for the MRM business are located primarily
in Carlsbad, California. The sales and marketing functions for IMC are
located primarily in Waseca, Minnesota. The sales and marketing functions
for PSM are located primarily in Atlanta, Georgia and Montreal, Canada. The
sales and marketing functions for Aercept are located in Lake Forest,
California. In addition, the Wireless DataCom Division has a small sales
office in Europe.
The Satellite Division sells its DBS reception products primarily to the
two DBS system operators in the U.S. for incorporation into complete
subscription satellite television systems. The sales and marketing functions
for the Satellite Division are located primarily at the Company's corporate
headquarters in Oxnard, California.
Sales to customers that accounted for 10% or more of consolidated annual
sales in any one of the last three years, as a percent of consolidated sales,
are as follows:
Year ended February 28,
------------------------------
Customer Segment 2008 2007 2006
-------- --------- ------ ------ ------
DirecTV Satellite 23.9% 18.9% 15.1%
EFJ Wireless 14.2% 5.3% 5.2%
EchoStar Satellite 10.9% 50.6% 61.3%
DirecTV and EchoStar provide satellite television services in the U.S.
EchoStar conducts business using the name Dish Network. EFJ is a provider of
two-way land mobile radios and communication systems for law enforcement,
fire fighters, EMS and the military. The Company believes that the loss of
DirecTV, EchoStar or EFJ as a customer could have a material adverse effect
on the Company's financial position and results of operations.
COMPETITION
The Company's markets are highly competitive. In addition, if the
markets for the Company's products grow, the Company anticipates increased
competition from new companies entering such markets, some of whom may have
financial and technical resources substantially greater than those of the
Company. The Company believes that competition in its markets is based
primarily on performance, reputation, product reliability, technical support
and price. The Company's continued success in these markets will depend in
part upon its ability to continue to design and manufacture quality products
at competitive prices.
Wireless DataCom Division
The Company believes that the principal competitors for its wireless
products include Motorola, M/A-COM, GE-MDS, Tait Radio Communications,
Freewave, GenX, TrackN, Enfora and Webtech Wireless.
Satellite Division
The Company believes that its existing principal competitors for its DBS
products business include Sharp, Wistron NeWeb Corporation, Microelectronics
Technology and Pro Brand. Because the Company's satellite products are not
proprietary, it is possible that they may be duplicated by low-cost
producers, resulting in price and margin pressures.
BACKLOG
The Company's products are sold to customers that do not usually enter
into long-term purchase agreements, and as a result, the Company's backlog at
any date is not significant in relation to its annual sales. In addition,
because of customer order modifications, cancellations, or orders requiring
wire transfers or letters of credit from international customers, the
Company's backlog as of any particular date may not be indicative of sales
for any future period.
INTELLECTUAL PROPERTY
Wireless DataCom Division Patents
At February 28, 2008, the Wireless DataCom Division had 23 patents.
CalAmp acquired U.S. Patent Nos. 6,025,774 and 6,249,217B1 as part of its
acquisition of the Aercept Vehicle Tracking business from AirIQ in March
2007. These patents relate to a vehicle location system that enables
automobile finance companies to locate and repossess vehicles serving as
collateral on loans that go into default. Since the acquisition of these
patents, CalAmp has embarked on an aggressive enforcement and licensing
campaign for this technology and filed patent infringement suits against
ProCon, iMetrik, SkyWatch GPS and TrackN. In fiscal year 2008, CalAmp
entered into licensing agreements for these patents with DriveOK and SkyWatch
GPS. In March 2008, CalAmp entered into a licensing agreement with ProCon
and into a patent infringement settlement agreement with iMetrik.
Satellite Division Patents
As noted above, the Company's satellite products are not proprietary.
In the Company's DBS business, the Company's timely application of its
technology and its design, development and marketing capabilities have been
of substantially greater importance to its business than patents or licenses.
Trademarks
CalAmp(R) and Dataradio(R) are federally registered trademarks of the
Company.
EMPLOYEES
At February 28, 2008, the Company had approximately 390 employees and
approximately 30 contracted production workers. None of the Company's
employees are represented by a labor union. The contracted production
workers are engaged through independent temporary labor agencies in
California.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION
------------------- --- --------------------------
Richard Gold 53 Director, President and Chief Executive
Officer
Michael Burdiek 48 President, Wireless DataCom Division
Patrick Hutchins 45 President, Satellite Division and Chief
Operations Officer
Garo Sarkissian 41 Vice President, Corporate Development
Richard Vitelle 54 Vice President, Finance, Chief
Financial Officer and Corporate Secretary
RICHARD GOLD joined the Company in February 2008 and was appointed
President and Chief Executive Officer in March 2008. Mr. Gold has been a
director of the Company since December 2000 and served as Chairman of the
Board from July 2004 to February 2008. Prior to joining the Company, Mr.
Gold was a Managing Director of InnoCal Venture Capital, a position he held
since May 2004. From December 2002 until May 2004, he served as President
and Chief Executive Officer of Nova Crystals, Inc., a supplier of optical
sensing equipment. He was Chairman of Radia Communications, Inc., a supplier
of wireless communications semiconductors, from June 2002 to July 2003.
Prior to this, he was the President and Chief Executive Officer of Genoa
Corp. and Pacific Monolithics, Inc., and Vice President and General Manager
of Adams Russell Semiconductor. He began his career as an engineer with
Hewlett-Packard Co.
MICHAEL BURDIEK joined the Company as Executive Vice President in June
2006 and was appointed President of the Company's Wireless DataCom Division
in March 2007. Prior to joining the Company, Mr. Burdiek was the President
and CEO of Telenetics Corporation, a publicly held manufacturer of data
communications products. From 2004 to 2005, he worked as an investment
partner and advisor to various firms in the Private Equity sector. From 1987
to 2004, Mr. Burdiek held a variety of technical and general management
positions with Comarco, Inc., a publicly held company, most recently as
Senior Vice President and General Manager of Comarco's Wireless Test Systems
unit. Mr. Burdiek began his career as a design engineer with Hughes Aircraft
Company.
PATRICK HUTCHINS joined the Company as Vice President, Operations in
August 2001, and was appointed President of the Company's Products Division
in April 2004. In March 2007, in conjunction with the realignment of the
Company's internal operating structure, Mr. Hutchins was appointed President
of the Company's Satellite Division and Chief Operations Officer. From March
1997 until joining the Company, Mr. Hutchins served in general management
capacities with several units of Chloride Group PLC and Genlyte Thomas LLC,
most recently serving as the President and General Manager of Chloride
Systems, a division of Genlyte Thomas.
GARO SARKISSIAN joined the Company as Vice President, Corporate
Development in October 2005 and was appointed an executive officer in July
2006. Prior to joining the Company, from 2003 to 2005 he served as Principal
and Vice President of Business Development for Global Technology Investments
(GTI), a private equity firm. Prior to GTI, from 1999 to 2003, Mr.
Sarkissian held senior management and business development roles at
California Eastern Laboratories, a private company developing and marketing
radio frequency (RF), microwave and optical components. Mr. Sarkissian began
his career as an RF engineer in 1988 and developed state-of-the-art RF power
products over a span of 10 years for M/A Com (Tyco) and NEC.
RICHARD VITELLE joined the Company as Vice President, Finance, Chief
Financial Officer and Corporate Secretary in July 2001. Prior to joining the
Company, he served as Vice President of Finance and CFO of SMTEK
International, Inc., a publicly held electronics manufacturing services
provider, where he was employed for a total of 11 years. Earlier in his
career Mr. Vitelle served as a senior manager with Price Waterhouse.
The Company's executive officers are appointed by and serve at the
discretion of the Board of Directors.
AVAILABLE INFORMATION
The Company's primary Internet address is www.calamp.com. The Company
makes its Securities and Exchange Commission ("SEC") periodic reports (Forms
10-Q and Forms 10-K) and current reports (Forms 8-K), and amendments to these
reports, available free of charge through its website as soon as reasonably
practicable after they are filed electronically with the SEC.
Materials that the Company files with the SEC may be read and copied at
the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website
at www.sec.gov that contains reports, proxy and information statements, and
other information regarding the Company that the Company files electronically
with the SEC.
ITEM 1A. RISK FACTORS
The following list describes several risk factors which are unique to
our Company:
The Company is dependent on its significant customers, the loss of any of
which could have a material adverse effect on the Company's future sales and
its ability to sustain its growth.
The Company's top three customers, DirecTV, EFJ and Echostar, accounted
for 23.9%, 14.2% and 10.9%, respectively, of the Company's consolidated
revenues for fiscal 2008. DirecTV, EFJ and Echostar in the aggregate
accounted for 74.8% of CalAmp's consolidated revenues for fiscal 2007 and
81.6% of its consolidated revenues for fiscal 2006. The loss of DirecTV, EFJ
or Echostar as a customer, a deterioration in the overall business of any of
them, or a decrease in the volume of sales by any of them, could result in
decreased sales and could have a material adverse impact on CalAmp's ability
to grow its business. A substantial decrease or interruption in business
from any of the Company's significant customers could result in write-offs or
in the loss of future business and could have a material adverse effect on
the Company's business, financial condition or results of operations.
We do not currently have long-term contracts with customers and our customers
may cease purchasing products at any time, which could significantly harm our
revenues.
We generally do not have long-term contracts with our customers. As a
result, our agreements with our customers do not currently provide us with
any assurance of future sales. These customers can cease purchasing products
from us at any time without penalty, they are free to purchase products from
our competitors, they may expose us to competitive price pressure on each
order and they are not required to make minimum purchases.
Changes in the forecasted product demand from a DBS customer may require an
increase in our inventory reserves and/or reserve for vendor commitment
liabilities.
The Company has on-hand inventory of approximately $10.1 million and
outstanding purchase commitments of $8.6 million for materials that are
specific to the products that the Company manufactures for a key DBS
customer, 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.
Because the markets in which we compete are highly competitive and many of
our competitors have greater resources than us, we cannot be certain that our
products will continue to be accepted in the marketplace or capture increased
market share.
The market for DBS products and other wireless products is intensely
competitive and characterized by rapid technological change, evolving
standards, short product life cycles, and price erosion. We expect
competition to intensify as our competitors expand their product offerings
and new competitors enter the market. Given the highly competitive
environment in which we operate, we cannot be sure that any competitive
advantages currently enjoyed by our products will be sufficient to establish
and sustain our products in the market. Any increase in price or other
competition could result in erosion of our market share, to the extent we
have obtained market share, and would have a negative impact on our financial
condition and results of operations. We cannot provide assurance that we
will have the financial resources, technical expertise or marketing and
support capabilities to compete successfully.
Information about the Company's competitors is included in Part I, Item
1 of this Annual Report on Form 10-K under the heading "COMPETITION".
Multiple factors beyond the Company's control may cause fluctuations in our
operating results and may cause our business to suffer.
The revenues and results of our operations may fluctuate significantly,
depending on a variety of factors, including the following:
> our dependence on two major customers in our satellite products
business that currently account for a substantial portion of our
overall sales;
> the introduction of new products and services by competitors; and
> seasonality in the equipment market for the U.S. DBS subscription
television industry.
We will not be able to control many of these factors. In addition, if
our revenues in a particular period do not meet expectations, we may not be
able to adjust our expenditures in that period, which could cause our
business to suffer.
Our business is subject to many factors that could cause the Company's
quarterly or annual operating results to fluctuate and its stock price to be
volatile.
Our quarterly and annual operating results have fluctuated in the past
and may fluctuate significantly in the future due to a variety of factors,
many of which are outside of our control. Some of the factors that could
affect our quarterly or annual operating results include:
> the timing and amount of, or cancellation or rescheduling of, orders
for our products;
> our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
> announcements, new product introductions and reductions in price of
products offered by our competitors;
> our ability to achieve cost reductions;
> our ability to obtain sufficient supplies of sole or limited source
components for our products;
> our ability to achieve and maintain production volumes and quality
levels for our products;
> our ability to maintain the volume of products sold and the mix of
distribution channels through which they are sold;
> the loss of any one of our major customers or a significant reduction
in orders from those customers;
> increased competition, particularly from larger, better capitalized
competitors;
> fluctuations in demand for our products and services; and
> telecommunications and wireless market conditions specifically and
economic conditions generally.
Due in part to factors such as the timing of product release dates,
purchase orders and product availability, significant volume shipments of
products could occur at the end of a fiscal quarter. Failure to ship
products by the end of a quarter may adversely affect operating results. In
the future, our customers may delay delivery schedules or cancel their orders
without notice. Due to these and other factors, our quarterly revenue,
expenses and results of operations could vary significantly in the future,
and period-to-period comparisons should not be relied upon as indications of
future performance.
Because some of our components, assemblies and electronics manufacturing
services are purchased from sole source suppliers or require long lead times,
our business is subject to unexpected interruptions, which could cause our
operating results to suffer.
Some of our key components are complex to manufacture and have long lead
times. Also, our DBS dish antennas, LNBF housings, subassemblies and some of
our electronic components are purchased from sole source vendors for which
alternative sources are not readily available. In the event of a reduction
or interruption of supply, or a degradation in quality, as many as six months
could be required before we would begin receiving adequate supplies from
alternative suppliers, if any. As a result, product shipments could be
delayed and revenues and results of operations could suffer. Furthermore, if
we receive a smaller allocation of component parts than is necessary to
manufacture products in quantities sufficient to meet customer demand,
customers could choose to purchase competing products and we could lose
market share.
If we do not meet product introduction deadlines, our business could be
adversely affected.
Our inability to develop new products or product features on a timely
basis, or the failure of new products or product features to achieve market
acceptance, could adversely affect our business. In the past, we have
experienced design and manufacturing difficulties that have delayed the
development, introduction or marketing of new products and enhancements and
which caused us to incur unexpected expenses. In addition, some of our
existing customers have conditioned their future purchases of our products on
the addition of product features. In the past we have experienced delays in
introducing new features. Furthermore, in order to compete in some markets,
we will have to develop different versions of existing products that operate
at different frequencies and comply with diverse, new or varying governmental
regulations in each market.
If demand for our products fluctuates rapidly and unpredictably, it may be
difficult to manage the business efficiently which may result in reduced
gross margins and profitability.
Our cost structure will be based in part on our expectations for future
demand. Many costs, particularly those relating to capital equipment and
manufacturing overhead, are relatively fixed. Rapid and unpredictable shifts
in demand for our products may make it difficult to plan production capacity
and business operations efficiently. If demand is significantly below
expectations, we may be unable to rapidly reduce these fixed costs, which can
diminish gross margins and cause losses. A sudden downturn may also leave us
with excess inventory, which may be rendered obsolete as products evolve
during the downturn and demand shifts to newer products. Our ability to
reduce costs and expenses may be further constrained because we must continue
to invest in research and development to maintain our competitive position
and to maintain service and support for our existing customer base.
Conversely, in the event of a sudden upturn, we may incur significant costs
to rapidly expedite delivery of components, procure scarce components and
outsource additional manufacturing processes. These costs could reduce our
gross margins and overall profitability. Any of these results could
adversely affect our business.
Because we currently sell, and we intend to grow the sales of, certain of our
products in countries other than the United States, we are subject to
different regulatory schemes. We may not be able to develop products that
work with the standards of different countries, which could result in our
inability to sell our products and, further, we may be subject to political,
economic, and other conditions affecting such countries that could result in
reduced sales of our products and which could adversely affect our business.
If our sales are to grow in the longer term, we believe we must grow our
international business. Many countries require communications equipment used
in their country to comply with unique regulations, including safety
regulations, radio frequency allocation schemes and standards. If we cannot
develop products that work with different standards, we will be unable to
sell our products in those locations. If compliance proves to be more
expensive or time consuming than we anticipate, our business would be
adversely affected. Some countries have not completed their radio frequency
allocation process and therefore we do not know the standards with which we
would be forced to comply. Furthermore, standards and regulatory
requirements are subject to change. If we fail to anticipate or comply with
these new standards, our business and results of operations will be adversely
affected.
Sales to customers outside the U.S. accounted for 6%, 6% and 5% of
CalAmp's total sales for the fiscal years ended February 28, 2008, 2007 and
2006, respectively. Assuming that we continue to sell our products to such
customers, we will be subject to the political, economic and other conditions
affecting countries or jurisdictions other than the U.S., including Africa,
the Middle East, Europe and Asia. Any interruption or curtailment of trade
between the countries in which we operate and our present trading partners,
change in exchange rates, significant shift in U.S. trade policy toward these
countries, or significant downturn in the political, economic or financial
condition of these countries, could cause demand for and sales of our
products to decrease, or subject us to increased regulation including future
import and export restrictions, any of which could adversely affect our
business.
Additionally, a substantial portion of our components and subassemblies
are currently procured from foreign suppliers located primarily in Hong Kong,
mainland China, Taiwan, and other Pacific Rim countries. Any significant
shift in U.S. trade policy toward these countries or a significant downturn
in the political, economic or financial condition of these countries could
cause disruption of our supply chain or otherwise disrupt operations, which
could adversely affect our business.
We may not be able to adequately protect our intellectual property, and our
competitors may be able to offer similar products and services that would
harm our competitive position.
Other than in our DBS products business, which currently does not depend
upon patented technology, our ability to succeed in wireless data
communications markets may depend, in large part, upon our intellectual
property for some of our wireless. We currently rely primarily on patents,
trademark and trade secret laws, confidentiality procedures and contractual
provisions to establish and protect our intellectual property. These
mechanisms provide us with only limited protection. We currently hold 23
patents and have 2 patent applications pending. As part of our
confidentiality procedures, we enter into non-disclosure agreements with all
of our executive officers, managers and supervisory employees. Despite these
precautions, third parties could copy or otherwise obtain and use our
technology without authorization, or develop similar technology
independently. Furthermore, effective protection of intellectual property
rights is unavailable or limited in some foreign countries. The protection
of our intellectual property rights may not provide us with any legal remedy
should our competitors independently develop similar technology, duplicate
our products and services, or design around any intellectual property rights
we hold.
We may be subject to infringement claims which may disrupt the conduct of our
business and affect our profitability.
We may be subject to legal proceedings and claims from time to time
relating to the intellectual property of others, even though we take steps to
assure that neither our employees nor our contractors knowingly incorporate
unlicensed copyrights or trade secrets into our products. It is possible
that third parties may claim that our products and services may infringe upon
their trademark, patent, copyright, or trade secret rights. Any such claims,
regardless of their merit, could be time consuming, expensive, cause delays
in introducing new or improved products or services, require us to enter into
royalty or licensing agreements or require us to stop using the challenged
intellectual property. Successful infringement claims against us may
materially disrupt the conduct of our business and affect profitability.
We may engage in future acquisitions that have adverse consequences for our
business.
In May 2006 we acquired Dataradio and the TechnoCom MRM product line, in
March 2007 we acquired Aircept and in April 2007 we acquired Smartlink Radio
Networks. We may make additional acquisitions of businesses, products or
technologies in the future in order to complement our existing product
offerings, augment our market coverage or enhance our technological
capabilities. However, we cannot be sure that we will be able to locate
suitable acquisition opportunities. The acquisitions that we have completed
and that we may complete in the future could result in the following, any of
which could seriously harm our results of operations or the price of our
stock: (1) issuances of our equity securities that would dilute the
percentage ownership of our current stockholders; (2) large one-time write-
offs; (3) the incurrence of debt and contingent liabilities; (4) difficulties
in the assimilation and integration of the acquired companies; (5) diversion
of management's attention from other business concerns; (6) contractual
disputes; (7) risks of entering geographic and business markets in which we
have no or only limited prior experience; and (8) potential loss of key
employees or customers of acquired organizations.
Availability of radio frequencies may restrict the growth of the wireless
communications industry and demand for our products.
Radio frequencies are required to provide wireless services. The
allocation of frequencies is regulated in the United States and other
countries throughout the world and limited spectrum space is allocated to
wireless services. The growth of the wireless communications industry may be
affected if adequate frequencies are not allocated or, alternatively, if new
technologies are not developed to better utilize the frequencies currently
allocated for such use.
Industry growth has been and may continue to be affected by the
availability of licenses required to use frequencies and related costs. Over
the last several years, frequency spectrum has been reallocated for specific
applications and the related frequency relocation costs have increased
significantly. This significant reassignment of spectrum has slowed and may
continue to slow the growth of the industry. Growth is slowed because some
customers have funding constraints limiting their ability to purchase new
technology to upgrade systems and the financial results for a number of
businesses have been affected by the industry's rate of growth. Slowed
industry growth may restrict the demand for our products.
A failure to rapidly transition or to transition at all to newer digital
technologies could adversely affect our business.
Our success, in part, will be affected by the ability of our wireless
businesses to continue their transition to newer digital technologies, and to
successfully compete in these markets and gain market share. We face intense
competition in these markets from both established companies and new
entrants. Product life cycles can be short and new products are expensive to
develop and bring to market.
We will depend upon wireless networks owned and controlled by others,
unproven business models and emerging wireless carrier models to deliver
existing services and to grow.
If we do not have continued access to sufficient capacity on reliable
networks, we may be unable to deliver services and our sales could decrease.
Our ability to grow and achieve profitability partly depends on our ability
to buy sufficient capacity on the networks of wireless carriers and on the
reliability and security of their systems. All of our services will be
delivered using airtime purchased from third parties. We will depend on
these companies to provide uninterrupted service free from errors or defects
and would not be able to satisfy our customers' needs if they failed to
provide the required capacity or needed level of service. In addition, our
expenses would increase and profitability could be materially adversely
affected if wireless carriers were to increase the prices of their services.
Our existing agreements with the wireless carriers generally have one-year
terms. Some of these wireless carriers are, or could become, our competitors,
and if they compete with us, they may refuse to provide us with their
services.
New laws and regulations that impact the industry could increase costs or
reduce opportunities for us to earn revenue.
Except as described below under "Governmental Regulation", we are not
currently subject to direct regulation by the Federal Communications
Commission or any other governmental agency, other than regulations
applicable to Delaware corporations of similar size that are headquartered in
California. However, in the future, we may become subject to regulation by
the FCC or another regulatory agency. In addition, the wireless carriers that
supply airtime and certain hardware suppliers are subject to regulation by
the FCC, and regulations that affect them could increase our costs or reduce
our ability to continue selling and supporting our services.
Governmental Regulation
CalAmp's products are subject to certain mandatory regulatory approvals
in the United States, Canada and other countries in which it operates. In
the United States, the Federal Communications Commission ("FCC") regulates
many aspects of communication devices including radiation of electromagnetic
energy, biological safety and rules for devices to be connected to the
telephone network. In Canada, similar regulations are administered by
Industry Canada. Although CalAmp has obtained necessary FCC and Industry
Canada approvals for all products it currently sells, there can be no
assurance that such approvals can be obtained for future products on a timely
basis, or at all. In addition, such regulatory requirements may change or
the Company may not in the future be able to obtain all necessary approvals
from countries other than Canada or the United States in which it currently
sells its products or in which it may sell its products in the future.
The FCC and Industry Canada may be slow in adopting new regulations
allowing private wireless networks to deliver higher data rates in licensed
frequency bands for public safety applications. This could adversely affect
demand for private networks as traditional private network users may opt for
public network connections for all or part of their wireless communication
needs. This could have a material adverse effect on the Company's business,
results of operations and financial condition since the Company's Public
Safety Mobile data products are currently used predominantly in private
networks.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
The Company's principal facilities, all leased, are as follows:
Square
Location Footage Use
---------------------- ------- ---------------------------------
Oxnard, California 98,000 Corporate office, Satellite Division
offices and manufacturing plant
Carlsbad, California 6,000 Wireless DataCom Division's
M2M offices
Lake Forest, California 16,000 Wireless DataCom Division's
Aercept offices
Atlanta, Georgia 6,000 Dataradio sales and systems
engineering offices
Chaska, Minnesota 4,000 Product design facility
Waseca, Minnesota 28,000 Dataradio offices and manufacturing
plant
Montreal, Quebec, Canada 24,000 Dataradio offices, product design
and assembly operations
Paris, France 150 Sales office
San Diego, California 22,000 Former Solutions Division offices
which were vacated in 2007 and are
available for sublease
ITEM 3. LEGAL PROCEEDINGS
In May 2007, a patent infringement suit was filed against the Company.
The lawsuit contends that the Company infringed on four patents and seeks
injunctive and monetary relief. The Company asserted counterclaims in August
2007, through which the Company denies infringement of any valid claim of the
plaintiff and seeks a declaration to that effect. The Court ordered the
dismissal of claims related to three patents. Discovery is ongoing for the
remaining claim. The Company believes the lawsuit is without merit and
intends to vigorously defend against this action. No loss accrual has been
made in the accompanying financial statements for this matter.
A lawsuit was filed against the Company on September 15, 2006 by CN
Capital, the seller of the assets of Skybility which the Company acquired in
April 2005. The lawsuit contends that the Company owes CN Capital
approximately $1.6 million under the earn-out provision of the Skybility
Asset Purchase Agreement dated April 18, 2005. On February 26, 2007, the
Company filed a cross-complaint against CN Capital for breach of contract,
negligent interference with prospective economic advantage, and contract
rescission. The Company believes the lawsuit filed by CN Capital is without
merit and intends to vigorously defend against this action. No loss accrual
has been made in the accompanying consolidated 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 that 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.
In May 2001, the Securities and Exchange Commission ("SEC") commenced an
investigation into the circumstances surrounding the misstatements in the
Company's consolidated financial statements for its 2000 and 2001 fiscal
years caused by its former controller. In April 2004, the SEC concluded its
investigation and issued a cease and desist order directing the Company to
not violate federal securities laws in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 2008.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock trades on The Nasdaq Global Select Market
under the ticker symbol CAMP. The following table sets forth, for the last
two years, the quarterly high and low sale prices for the Company's Common
Stock as reported by Nasdaq:
LOW HIGH
Fiscal Year Ended February 28, 2008
1st Quarter $ 4.25 $ 9.50
2nd Quarter 3.55 4.86
3rd Quarter 2.24 4.50
4th Quarter 2.15 3.11
Fiscal Year Ended February 28, 2007
1st Quarter $ 9.00 $13.90
2nd Quarter 5.44 9.89
3rd Quarter 6.01 8.00
4th Quarter 7.10 9.15
At May 9, 2008 the Company had approximately 1,800 stockholders of
record. The number of stockholders of record does not include the number of
persons having beneficial ownership held in "street name" which are estimated
to approximate 6,600. The Company has never paid a cash dividend and has no
current plans to pay cash dividends on its Common Stock. The Company's bank
credit agreement prohibits payment of dividends without the prior written
consent of the bank.
In December 2007, the Company issued 1,000,000 shares of common stock to
a DBS customer in partial settlement of a product performance issue as
further described in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations. The Company issued these
shares in reliance upon the exemption from registration in Section 4(2) of
the Securities Act of 1933, as amended, as a transaction by an issuer not
involving any public offering. This issuance was made without general
solicitation or advertising and was made in reliance upon representations
from the DBS customer that the DBS customer was a sophisticated investor, had
adequate access to information about the Company and acquired the shares for
the DBS customer's own account, and not with a view to sale or distribution.
ITEM 6. SELECTED FINANCIAL DATA
Year ended February 28,
-----------------------------------------------
2008 2007 2006 2005 2004
-------- -------- -------- -------- -------
(In thousands except per share amounts)
OPERATING DATA
Revenues $140,907 $211,714 $196,908 $194,835 $128,616
Cost of revenues 122,412 166,279 151,319 159,071 110,950
-------- -------- ------- ------- -------
Gross profit 18,495 45,435 45,589 35,764 17,666
-------- -------- ------- ------- -------
Operating expenses:
Research and development 15,710 12,989 8,018 6,187 5,363
Selling 10,633 6,765 2,715 2,225 2,336
General and administrative 14,966 9,792 6,685 5,678 3,880
Intangible asset amortization 6,418 3,463 778 104 104
Write-off of acquired in-
process research and
development 310 6,850 310 471 -
Impairment loss 71,276 - - - -
-------- -------- ------- ------- -------
Total operating expenses 119,313 39,859 18,506 14,665 11,683
-------- -------- ------- ------- -------
Operating income (loss) (100,818) 5,576 27,083 21,099 5,983
Other income (expense), net (2,472) 591 533 (120) (243)
-------- -------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes (103,290) 6,167 27,616 20,979 5,740
Income tax benefit
(provision) 20,940 (4,716) (11,154) (7,874) (26)
-------- -------- ------- ------- -------
Income (loss) from
continuing operations (82,350) 1,451 16,462 13,105 5,714
Loss from discontinued
operations, net of tax (597) (32,639) (1,900) (5,029) -
Loss on sale of discontinued
operations, net of tax (1,202) - - - -
-------- -------- ------- ------- -------
Net income (loss) $(84,149) $(31,188) $14,562 $ 8,076 $ 5,714
======= ======= ======= ====== =======
Basic earnings (loss)
per share from:
Continuing operations $ (3.45) $ 0.06 $ 0.72 $ 0.61 $ 0.39
Discontinued operations (0.08) (1.40) (0.08) (0.23) -
-------- -------- ------- ------- -------
Total basic earnings (loss)
per share $ (3.53) $ (1.34) $ 0.64 $ 0.38 $ 0.39
======= ======= ======= ====== =======
Diluted earnings (loss)
per share from:
Continuing operations $ (3.45) $ 0.06 $ 0.70 $ 0.59 $ 0.37
Discontinued operations (0.08) (1.40) (0.08) (0.23) -
-------- -------- ------- ------- -------
Total diluted earnings (loss)
per share $ (3.53) $ (1.34) $ 0.62 $ 0.36 $ 0.37
======= ======= ======= ====== =======
February 28,
----------------------------------------------
2008 2007 2006 2005 2004
------- ------- ------- ------- -------
(In thousands)
BALANCE SHEET DATA
Current assets $ 66,767 $113,524 $ 99,236 $ 88,534 $67,365
Current liabilities $ 40,059 $ 38,637 $ 21,873 $ 29,662 $24,722
Working capital $ 26,708 $ 74,887 $ 77,368 $ 58,872 $42,643
Current ratio 1.7 2.9 4.5 3.0 2.7
Total assets $143,041 $229,703 $204,346 $196,755 $98,619
Long-term debt $ 27,187 $ 31,314 $ 5,511 $ 7,679 $ 7,690
Stockholders' equity $ 73,420 $151,251 $176,109 $158,288 $65,363
Factors affecting the year-to-year comparability of the Selected Financial
Data include business acquisitions, significant operating charges and
adoption of new accounting standards, as follows:
> In fiscal 2008, the Company recorded a $17.9 million charge for
estimated expenses to resolve a product performance issue involving a key
DBS customer.
> In fiscal 2008, the Company recorded a Satellite Division goodwill
impairment charge of $44.4 million and a Wireless DataCom Division
goodwill impairment charge of $26.9 million.
> In the first quarter of fiscal 2007, the Company acquired Dataradio
Inc. and the TechnoCom MRM product line and in the first quarter of
fiscal 2008 the Company acquired the Aercept vehicle tracking business
and the Smartlink business, as further described in Note 2 to the
accompanying consolidated financial statements.
> In the first quarter of fiscal 2007, the Company recorded charges of
$6,850,000 for the write-off of in-process research and development
costs in connection with the Dataradio acquisition and $29,848,000 for
the impairment of goodwill and other intangible assets of the Solutions
Division, as further described in Notes 2 and 5, respectively, to the
accompanying consolidated financial statements.
> At the beginning of fiscal 2007, the Company adopted the provisions of
Financial Accounting Standards Board Statement No. 123R, "Share-Based
Payments", as further described in Note 1 of the accompanying
consolidated financial statements under the caption "Accounting for
Stock Options".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
Forward looking statements in this Form 10-K 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. Words such as
"may", "will", "expect", "intend", "plan", "believe", "seek", "could",
"estimate", "judgment", "targeting", "should", "anticipate", "goal" and
variations of these words and similar expressions, are intended to identify
forward-looking statements. Actual results could differ materially from those
implied by such forward-looking statements due to a variety of factors,
including general and industry economic conditions, product demand, increased
competition, competitive pricing and continued pricing declines in the DBS
market, the timing of customer approvals of new product designs, operating
costs, the Company's ability to efficiently and cost-effectively integrate
its acquired businesses, the Company's ability to resume shipments of certain
newer generation products to one of its key DBS customers, the risk that the
ultimate cost of resolving a product performance issue with that DBS customer
may exceed the amount of reserves established for that purpose, and other
risks and uncertainties that are set forth under the caption "Risk Factors"
in Part I, Item 1A of this Annual Report on Form 10-K. 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.
Basis of Presentation
The Company uses a 52-53 week fiscal year ending on the Saturday
closest to February 28, which for fiscal years 2008, 2007 and 2006 fell on
March 1, 2008, March 3, 2007, and February 25, 2006, respectively. In these
consolidated financial statements, the fiscal year end for all years is shown
as February 28 for clarity of presentation. Fiscal years 2008 and 2006 each
consisted of 52 weeks, while fiscal year 2007 consisted of 53 weeks.
Overview
CalAmp Corp. ("CalAmp" or the "Company"), formerly known as California
Amplifier, Inc., is a leading provider of high value mission-critical
wireless communications solutions that enable anytime/anywhere access.
CalAmp's Wireless DataCom Division services the public safety, industrial
monitoring and controls, and mobile resource management market segments with
wireless solutions built on communications technology platforms that include
proprietary licensed narrowband, standards-based unlicensed broadband and
cellular networks. CalAmp's Satellite Division supplies outdoor customer
premise equipment to the U.S. Direct Broadcast Satellite (DBS) market.
In March 2007, effective at the beginning of fiscal 2008, the Company
split its Products Division into two separate reporting segments: the
Satellite Division and the Wireless DataCom Division. The Satellite Division
consists of the Company's DBS business, and the Wireless DataCom Division
consists of CalAmp's legacy wireless businesses other than DBS and the
businesses acquired as described below. Segment information presented in this
Form 10-K for the years ended February 28, 2007 and 2006 has been
reclassified to present information on this new reporting segment basis.
The Solutions Division, the remaining operations of which were sold in August
2007, is presented as a discontinued operation in the accompanying
consolidated statements of operations.
Wireless DataCom Division
The Wireless DataCom Division services the public safety, industrial
monitoring and controls, and mobile resource management market segments with
wireless solutions that extend communications networks to field applications,
thereby enabling coordination of emergency response teams, increasing
productivity and optimizing workflow for the mobile workforce, improving
management controls over valuable remote assets, and enabling novel
applications in a connected world. The Wireless DataCom Division is
comprised of the Company's legacy wireless businesses other than DBS and
businesses acquired during the last two years. These principal acquisitions
are described below, and further details are provided in Note 2 to the
accompanying consolidated financial statements.
On May 26, 2006 the Company acquired privately held Dataradio Inc., a
leading supplier of proprietary advanced mobile and fixed wireless data
communication systems, products, and solutions for public safety, critical
infrastructure and industrial control applications, for a cash payment of
Canadian $60.1 million, or U.S. $54.3 million at the effective exchange rate.
The Dataradio acquisition expanded CalAmp's wireless data communications
business while furthering the Company's strategic goals of diversifying its
customer base and expanding its product offerings into higher-margin growth
markets. In connection with the acquisition of Dataradio the Company
recorded a charge of $6,850,000 for in-process research and development costs
of the acquired business as part of the purchase price allocation. Dataradio
became part of the Company's Wireless DataCom Division.
Also on May 26, 2006, the Company acquired the Mobile Resource
Management product line from privately held TechnoCom Corporation. This
product line is used to help track fleets of cars and trucks. These location
monitoring units communicate via public (i.e. cellular) wireless networks and
are distributed on an OEM basis to application service providers and system
integrators offering mobile resource management solutions. In addition, the
business offers a backend device management system to minimize support and
service costs and also sophisticated unit firmware providing a greater range
of vehicle information and communication capabilities. The purchase price
for this acquisition was $2.4 million in cash and an earn-out payment equal
to revenues in excess of $3,100,000 during the 12-month period following the
acquisition. The Company made earn-out payments of $985,000 during fiscal
2008, leaving a balance of $1.3 million that is included in other accrued
liabilities in the consolidated balance sheet at February 28, 2008. The
Company expects to pay the remaining balance plus interest at 7% over the
next 12 months using cash flows generated from operations.
On March 16, 2007, the Company acquired Aercept (formerly known as
Aircept), a vehicle tracking business, from AirIQ Inc., a Canadian company,
for cash consideration of $19 million. The source of funds for the purchase
price was the Company's cash on hand. Aercept's business involves the sale
of end-to-end hosted asset tracking services to vehicle lenders that
specialize in automobile financing for high credit risk individuals.
Aercept's products utilize Global Positioning Satellite (GPS) and cellular
technology to provide up-to-date location and tracking information. Aercept,
which has approximately 35 employees, became part of the Company's Wireless
DataCom Division.
On April 4, 2007, the Company acquired the business and substantially
all the assets of SmartLink Radio Networks, a privately-held company, for
cash consideration of $7.9 million. The source of funds for the purchase
price was the Company's cash on hand. SmartLink provides proprietary
interoperable radio communications platforms and integration services for
public safety and critical infrastructure applications. SmartLink's software
defined switch provides interoperability with legacy analog wireless
communications networks without the need to replace the installed base of
land mobile radios. SmartLink became part of the Company's new Wireless
DataCom Division. SmartLink's operations were integrated into CalAmp's
facilities in Montreal, Canada and Atlanta, Georgia.
Satellite Division
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, which
accounted for 73% and 86% of consolidated revenue in fiscal years 2007 and
2006, respectively. In fiscal 2008, as the result of a DBS product
performance issue as described below, one of the Company's DBS customers
substantially reduced its purchases of the Company's products. For this
reason, sales of DBS products accounted for only 36% of consolidated revenues
for fiscal 2008. The DBS system operators have approximately 30% share of
the total subscription television market in the U.S. In calendar 2007, the
size of the U.S. DBS market grew by 5% from 29.1 million subscribers to
approximately 30.6 million subscribers at December 31, 2007.
During fiscal 2007, the Company received notification from one of its
DBS customers of a field performance issue with a DBS product that the
Company began shipping in September 2004. After examining the various
component parts used in the manufacture of these products, it was determined
by the Company that the performance issue was the result of a deterioration
of the printed circuit board (PCB) laminate material used in these products.
From the time the problem was isolated to the PCB laminate material
until March 2007, the Company worked with the supplier of the laminate
material and with the DBS customer to identify a corrective action.
Notwithstanding these efforts, on March 26, 2007 the laminate supplier filed
a Complaint for Declaratory Relief in the State of Massachusetts in which it
claimed that it is not responsible for the field performance issue of these
DBS products.
On May 16, 2007, the Company filed a lawsuit against the PCB laminate
supplier in the U.S. District Court for the Central District of California
for negligence, strict product liability, intentional misrepresentation and
negligent interference with prospective economic advantage, among other
causes of action. CalAmp expects to vigorously pursue all legal options to
recover its damages from that supplier.
During fiscal 2007, the DBS customer returned approximately 250,000
units to the Company for analysis and rework. An additional 985,000 units
were returned by this customer during fiscal 2008, and it is anticipated that
additional units could be returned to the Company during fiscal 2009. In
addition to returning product, in May 2007 this DBS customer put on hold all
orders for CalAmp products, including newer generation products, pending the
requalification of all products manufactured by the Company for this
customer.
During the fiscal 2007 fourth quarter, CalAmp increased its reserve for
accrued warranty costs by $500,000 for this matter. This amount was
predicated on the customer accepting a planned corrective action procedure
for the previous generation products that CalAmp had developed for existing
and projected future product returns. Under this planned corrective action,
CalAmp expected that the field performance issue could be resolved by
retuning the circuitry as a lower cost alternative to replacing certain parts
and materials.
Prior to the issuance of its financial statements for the fiscal 2008
first quarter, the Company learned that the DBS customer would not accept the
Company's proposed rework approach for the previous generation products that
involved retuning the circuitry. This led the Company to conclude that
certain parts, including the radio frequency board assembly, would need to be
replaced, which is a significantly more costly process. As a result, the
Company recorded a charge of $16.3 million in the quarter ended May 31, 2007
to increase the reserves for this matter. The resulting loss caused an event
of default with respect to the financial covenants under the Company's bank
credit agreement, as discussed further under Liquidity and Capital Resources
below. During the remainder of fiscal 2008, the Company recorded additional
charges of $1.6 million related to this matter. Total fiscal 2008 charges of
$17.9 million related to this matter are included in cost of revenues in the
accompanying consolidated statements of operations. At November 30, 2007,
the Company had reserves in the aggregate amount of $18.1 million for this
matter. The Company reached a settlement agreement with this customer in
December 2007 as further described in Note 11 to the accompanying
consolidated financial statements. Pursuant to the settlement agreement, the
Company agreed to rework certain DBS products previously returned to the
Company or to be returned over a 15-month period and will provide extended
warranty periods for workmanship (18 months) and product failures due to the
issue with the PCB laminate material (36 months). In addition, as part of
the settlement the Company issued to the customer a $5 million non-interest
bearing note payable, a $1 million credit against outstanding receivables due
from the customer, 1,000,000 shares of common stock and 350,000 common stock
purchase warrants exercisable at $3.72 per share for three years. The note
is repayable at a rate of $5 per unit on the first 1,000,000 DBS units
purchased by the customer after the date of the settlement agreement. The
consideration issued by the Company under the settlement agreement reduced
the reserves by $8.8 million. At February 28, 2008, the Company had total
reserves of $8.5 million for this matter, plus the $5 million note payable.
While CalAmp believes that its established reserves as of February 28, 2008
will be adequate to cover the total costs of this settlement agreement,
including future product rework costs, no assurances can be given that the
ultimate expenses will not materially increase from the current estimate.
The cash impact of these reserves is anticipated to occur over two or three
years.
Solutions Division
The Company's acquisition of Vytek Corporation ("Vytek") in April 2004
gave rise to goodwill of approximately $72 million. In accordance with the
applicable accounting rules, the goodwill of $72 million was apportioned
between CalAmp's Solutions Division and Products Division because both
divisions were expected to benefit from the acquisition. The apportionment
analysis resulted in allocating $37 million of the goodwill to the Products
Division and the remaining $35 million to the Solutions Division. As a
result of the fiscal 2007 annual impairment test of the Solutions Division
goodwill conducted as of April 30, 2006, the Company determined that there
was an impairment of goodwill, and accordingly, an impairment charge was
recorded in fiscal 2007 in the amount of $29,012,000. In addition, the
Company recorded an $836,000 impairment charge related to the other
intangible assets arising from the Vytek acquisition. The impairment charges
reflected the declining revenues associated with the Solutions Division's
information technology professional consulting business, due primarily to the
inability of the Solutions Division to generate new recurring revenue streams
to grow the business.
The Company sold the TelAlert software business of the Solutions
Division to a privately held company on August 9, 2007 for total
consideration of $9.4 million, consisting of $4.0 million in cash, a non-
interest bearing note with present value of $2.3 million and preferred stock
of the acquirer valued at $3.1 million. The note is payable in 18 equal
monthly installments of $140,000, which commenced December 9, 2007.
The Company recognized a pre-tax gain of $2.1 million on the sale of the
TelAlert software business. The income tax expense attributable to the gain
was $3.0 million because at the time of sale there was goodwill of $5.4
million associated with this business that was not deductible for income tax
purposes.
The TelAlert software business was the remaining business of the
Solutions Division. Operating results for the Solutions Division have been
presented in the accompanying consolidated statements of operations as a
discontinued operation, as further described in Note 2 to the accompanying
consolidated financial statements. The Solutions Division goodwill and
intangible asset impairment charges in fiscal 2007 described above in the
aggregate amount of $29,848,000 are included in the "Loss from operations of
discontinued operations, net of tax" in the accompanying consolidated
statement of operations for the year ended February 28, 2007.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of sales and expenses during the reporting periods.
Areas where significant judgments are made include, but are not limited to:
the allowance for doubtful accounts, inventory valuation, product warranties,
the deferred tax asset valuation allowance, 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 or other collection issues. As further described in Note 1 to the
accompanying consolidated financial statements, the Company's customer base
is quite concentrated, with three customers accounting for 49% of the
Company's fiscal 2008 sales. 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 demand represented by orders in backlog and management
estimate of sales forecast at the end of the quarter, 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 11 to the consolidated financial
statements, at February 28, 2008 the Company had an inventory reserve of $2.4
million that was established during fiscal 2008 in connection with a product
performance issue involving a key DBS customer. Also as described in Note
11, the Company had on-hand inventory of $10.1 million and outstanding
purchase commitments of $8.6 million for materials that are specific to the
products that the Company manufactures for this customer. These amounts are
not currently reserved for because the Company believes these materials can
be used in the ordinary course of business as future shipments of products
are made to this customer. Nonetheless, changes in the forecasted product
demand from this customer could require that the inventory reserve and/or the
reserve for vendor commitment liabilities be increased to cover some portion
of these amounts.
Product Warranties
The Company initially provides for the estimated cost of product
warranties at the time revenue is recognized. While it engages in extensive
product quality programs and processes, including actively monitoring and
evaluating the quality of its component suppliers, the Company's warranty
obligation is affected by product failure rates and material usage and
service delivery costs incurred in correcting a product failure. Should
actual product failure rates, material usage or service delivery costs differ
from management's estimates, revisions to the estimated warranty liability
would be required.
As further described in Note 11 to the accompanying consolidated
financial statements, at February 28, 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
warranty reserve will be adequate to cover total future product rework costs
under this settlement agreement, no assurances can be given that the ultimate
costs will not materially differ from the current estimate.
Deferred Income Tax Valuation Allowance
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and for income tax purposes. A deferred income
tax asset is recognized if realization of such asset is more likely than not,
based upon the weight of available evidence that includes historical
operating performance and the Company's forecast of future operating
performance. The Company evaluates the realizability of its deferred income
tax asset on a quarterly basis, and a valuation allowance is provided, as
necessary, in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". During this
evaluation, the Company reviews its forecasts of income in conjunction with
the positive and negative evidence surrounding the realizability of its
deferred income tax asset to determine if a valuation allowance is needed.
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Income Tax Uncertainties"
("FIN 48"). FIN 48 defines the threshold for recognizing the benefits of tax
return positions in the financial statements as "more-likely-than-not" to be
sustained by the taxing authorities. FIN 48 provides guidance on the de-
recognition, measurement and classification of income tax uncertainties,
along with any related interest and penalties. FIN 48 also includes guidance
concerning accounting for income tax uncertainties in interim periods and
increases the level of disclosures associated with any recorded income tax
uncertainties. The Company adopted FIN 48 at the beginning of the fiscal
2008 first quarter. As a result of adopting FIN 48, the Company: (i)
increased deferred income tax assets and income taxes payable by $5.0 million
each; and (ii) increased income taxes receivable and reduced goodwill by $1.2
million each.
At February 28, 2008, the Company had an aggregate deferred tax asset
balance of $20.1 million. The current portion of this deferred tax asset is
$5.3 million and the noncurrent portion is $14.8 million. The noncurrent
portion of the deferred income tax assets is comprised primarily of the tax
benefit associated with the net operating losses incurred during fiscal 2008
and prior years.
The Company also has deferred tax assets for Canadian income tax
purposes arising from the acquisition of Dataradio amounting to $5.4 million
at February 28, 2008, which relate primarily to research and development tax
credits for Canadian federal and Quebec provincial income taxes. Of this
total Canadian deferred tax assets amount, $2.2 million existed at the time
of the Dataradio acquisition in May 2006 and $3.2 million arose subsequent to
the acquisition. The Company has provided a 100% valuation allowance against
these Canadian deferred tax assets at February 28, 2008 reflecting the
Company's belief that it is more likely than not that the associated tax
benefit will not be realized. If in the future a portion or all of the $5.4
million valuation allowance for the Canadian deferred tax assets is no longer
deemed to be necessary, reductions of the valuation allowance up to $2.2
million will decrease the goodwill balance associated with the Dataradio
acquisition, and reductions of the valuation allowance in excess of $2.2
million will reduce the income tax provision.
Impairment Assessments of Goodwill, Purchased Intangible Assets and
Other Long-Lived Assets
At February 28, 2008, the Company had $28.5 million in goodwill and
$24.4 million in other intangible assets on its balance sheet. The Company
believes the estimate of its valuation of long-lived assets and goodwill is a
"critical accounting estimate" because if circumstances arose that led to a
decrease in the valuation it could have a material impact on the Company's
results of operations.
The Company makes judgments about the recoverability of non-goodwill
intangible assets and other long-lived assets whenever events or changes in
circumstances indicate that an impairment in the remaining value of the
assets recorded on the balance sheet may exist. The Company tests the
impairment of goodwill annually and, in certain situations, on an interim
basis if indicators of impairment arise. Goodwill of the Satellite Division
and Wireless DataCom Division is tested annually for impairment as of
December 31 each year. If an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying value, goodwill would be evaluated for impairment between annual
tests. Management has appropriate processes in place to monitor for interim
triggering events.
In order to estimate the fair value of long-lived assets, the Company
typically makes various assumptions about the future prospects for the
business that the asset relates to, considers market factors specific to that
business and estimates future cash flows to be generated by that business.
The Company must make estimates and judgments about the 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 based on management's best estimates based on limited information. Based
on these assumptions and estimates, the Company determines whether it needs
to record an impairment charge to reduce the value of the asset stated on the
balance sheet to reflect its estimated fair value. Assumptions and estimates
about future values and remaining useful lives are complex and often
subjective. They can be affected by a variety of factors, including external
factors such as industry and economic trends, and internal factors such as
changes in the Company's business strategy and its internal forecasts.
Although management believes the assumptions and estimates that have been
made in the past have been reasonable and appropriate, different assumptions
and estimates could materially impact the Company's reported financial
results. More conservative assumptions of the anticipated future benefits
from these businesses could result in impairment charges, which would
decrease net income and result in lower asset values on the balance sheet.
Conversely, less conservative assumptions could result in smaller or no
impairment charges, higher net income and higher asset values.
As a result of the Solutions Division goodwill impairment test conducted
as of April 30, 2006, the Company recorded an impairment charge of $29.8
million in the first quarter of fiscal 2007. The Solutions Division goodwill
impairment test conducted as of April 30, 2007, which utilized a market-based
approach to determine fair value, indicated that no impairment existed as of
that date. The Company sold the TelAlert software business of the Solutions
Division in August 2007 which resulted in the discontinuation of the
operations of the Solutions Division. See Note 2 - Acquisitions and
Discontinued Operation for further discussion.
As a result of a product performance issue with a key DBS customer, as
described above, the DBS customer substantially reduced its purchases of the
Company's products during fiscal 2008. Revenues with this customer declined
from $86.5 million in the nine months ended November 30, 2006 to $13.9
million in the nine months ended November 30, 2007. In addition, the
Company's market capitalization declined substantially after the public
announcement of the issue with the key DBS customer and continued to decline
through the third quarter ended November 30, 2007 and at that date was
significantly lower than the carrying value of the Company's consolidated net
assets. The Company believes that the decline in its market capitalization
during the third quarter was primarily attributable to the uncertainty
surrounding the interruption of its commercial relationship with this key
customer. Although the Company reached a settlement agreement with this
customer in December 2007, the Company's market capitalization remained
significantly below the carrying value of its consolidated net assets.
Phase I of the impairment test conducted as of November 30, 2007
indicated that the carrying value of net assets of the Satellite Division and
the Wireless DataCom Division exceeded the fair values of these reporting
units by $37,744,000 and $22,571,000, respectively. The fair values were
determined using discounted cash flow (DCF) analyses of financial projections
for each reporting unit. The Satellite Division DCF reflected the reduced
revenue from the key DBS customer, the Company's best estimate of forecasted
revenues, profitability and cash flows over the next several years, and a
market-based discount rate reflecting the perceived risk premium in the
market. The Phase II impairment analysis involves a revaluation of all net
assets, both tangible and intangible, and in the case of intangible assets,
both recognized and unrecognized. Phase II of the impairment analysis
indicated additional impairment losses for the Satellite and Wireless DataCom
Divisions of $6,620,000 and $4,341,000, respectively. Accordingly, an
aggregate charge of $71,276,000 was recorded in fiscal 2008 for the goodwill
impairment losses for the Satellite and Wireless DataCom divisions of
$44,364,000 and $26,912,000, respectively.
The principal reasons for the impairment of the Satellite Division
goodwill are: (i) the interruption of the commercial relationship with a key
customer that substantially reduced the revenue and operating profitability
of this division; and (ii) the sustained decline in the Company's market
capitalization. With respect to the Wireless DataCom Division, despite the
fact that the revenue and gross profit of this business were higher in the
current three and nine-month periods than the comparable periods of the prior
year, this reporting unit was also determined to be impaired. This is
because in calculating the fair values of the Company's two reporting units
using a DCF method, the Company employed a higher cost of capital in the
November 30, 2007 impairment analysis compared to previous analyses as a
result of the current assessment of risk, which took into consideration the
Company's overall liquidity constraints at the present time.
Revenue Recognition
The Company recognizes revenue from product sales when persuasive
evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or determinable and collection of the sales price is probable. In
cases where terms of sale include subjective customer acceptance criteria,
revenue is deferred until the acceptance criteria are met. Critical
judgments made by management related to revenue recognition include the
determination of whether or not customer acceptance criteria are perfunctory
or inconsequential. The determination of whether or not the customer
acceptance terms are perfunctory or inconsequential impacts the amount and
timing of revenue recognized. Critical judgments also include estimates of
warranty reserves, which are established based on historical experience and
knowledge of the product.
Products sold in connection with service contracts are recorded as
deferred revenues and the associated product costs are recorded as deferred
costs. These deferred amounts are recognized over the life of the service
contract on a straight-line basis.
The Company also undertakes projects that include the design,
development and manufacture of public safety communication systems that are
specially customized to customers' specifications or that involve fixed site
construction. Sales under such contracts are recorded under the percentage-
of-completion method in accordance with Statement of Position No. 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts." Costs and estimated revenues are recorded as work is performed
based on the percentage that incurred costs bear to estimated total costs
utilizing the most recent estimates of costs. If the current contract
estimate indicates a loss, provision is made for the total anticipated loss
in the current period. Critical estimates made by management related to
revenue recognition under the percentage-of-completion method include the
estimation of costs at completion and the determination of the overall margin
rate on the specific project.
Results of Operations, Fiscal Years 2006 Through 2008
The following table sets forth, for the periods indicated, the
percentage of revenues represented by items included in the Company's
consolidated statements of operations:
Year Ended February 28,
----------------------------
2008 2007 2006
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 86.9 78.5 76.8
----- ----- -----
Gross profit 13.1 21.5 23.2
----- ----- -----
Operating expenses:
Research and development 11.1 6.2 4.0
Selling 7.5 3.2 1.4
General and administrative 10.6 4.7 3.4
Intangible asset amortization 4.6 1.6 0.4
Write-off of acquired in-process
research and development 0.2 3.2 0.2
Impairment loss 50.6 - -
----- ----- -----
Operating income (loss) (71.5) 2.6 13.8
Other income (expense), net (1.8) 0.3 0.2
----- ----- -----
Income (loss) from continuing
operations before income taxes (73.3) 2.9 14.0
Income tax benefit (provision) 14.9 (2.2) (5.6)
----- ----- -----
Income (loss) from continuing
operations (58.4) 0.7 8.4
Loss from discontinued operations,
net of tax (0.4) (15.4) (1.0)
Loss on sale of discontinued
operations, net of tax (0.9) - -
----- ----- -----
Net income (loss) (59.7%) (14.7)% 7.4%
===== ===== =====
The Company's revenue, gross profit and operating income (loss) by
business segment for the last three years are as follows:
REVENUE BY SEGMENT
Year Ended February 28,
--------------------------------------------------------
2008 2007 2006
--------------- --------------- ---------------
Segment % of % of % of
(Division) $000s Total $000s Total $000s Total
----------- ------- ----- ------- ----- ------- -----
Satellite $ 50,490 35.8% $155,127 73.3% $170,503 86.6%
Wireless DataCom 90,417 64.2% 56,587 26.7% 26,405 13.4
------- ----- ------- ----- ------- -----
Total $140,907 100.0% $211,714 100.0% $196,908 100.0%
======= ===== ======= ===== ======= =====
GROSS PROFIT (LOSS) BY SEGMENT
Year Ended February 28,
--------------------------------------------------------
2008 2007 2006
--------------- --------------- ---------------
Segment % of % of % of
(Division) $000s Total $000s Total $000s Total
----------- ------- ----- ------- ----- ------- -----
Satellite $(14,808) (80.1%) $ 23,402 51.5% $36,274 79.6%
Wireless DataCom 33,303 180.1% 22,033 48.5% 9,315 20.4
------- ----- ------- ----- ------ -----
Total $ 18,495 100.0% $ 45,435 100.0% $45,589 100.0%
======= ===== ======= ===== ====== =====
OPERATING INCOME (LOSS) BY SEGMENT
Year Ended February 28,
--------------------------------------------------------
2008 2007 2006
--------------- --------------- ---------------
% of % of % of
Segment Total Total Total
(Division) $000s Revenue $000s Revenue $000s Revenue
----------- ------- ----- ------- ----- ------- -----
Satellite $ (63,924) (45.4%) $ 17,317 8.2% $30,785 15.6%
Wireless DataCom (30,473) (21.6%) (5,888) (2.8%) 576 0.3%
Corporate expenses (6,421) (4.6%) (5,853) (2.8%) (4,278) (2.2%)
------- ----- ------- ----- ------ -----
Total $(100,818) (71.6%) $ 5,576 2.6% $27,083 13.7%
======= ===== ======= ===== ====== =====
The Satellite Division's negative gross profit of $14.8 million and
operating loss of $63.9 million in fiscal 2008 includes a $17.9 million
charge for estimated expenses to correct a product performance issue
involving key DBS customer, as further described in Note 11 to the
accompanying consolidated financial statements. The operating loss of $63.9
million for that period also includes a goodwill impairment charge of $44.4
million.
The Wireless DataCom Division operating loss of $30.5 million in fiscal
2008 includes a goodwill impairment charge of $26.9 million. The Wireless
DataCom Division operating loss of $5.9 million in fiscal 2007 includes a
charge of $6.9 million to write off in-process research and development costs
associated with the Dataradio acquisition.
Fiscal Year 2008 compared to Fiscal Year 2007
As further discussed under the caption "Basis of Presentation" above,
fiscal years 2008 and 2007 contained 52 weeks and 53 weeks, respectively, as
a result of the Company's 52-53 week fiscal year method. The Company
believes that the inclusion of the one additional week in fiscal 2007 does
not materially affect the comparability of the operating results between
these two periods.
Revenue
Satellite Division revenue declined $104.6 million, or 67%, to $50.5
million for fiscal 2008 from $155.1 million for fiscal 2007. This decline
was primarily attributable to the action taken by a key DBS customer to put
on hold all orders with the Company, including orders for newer generation
products, pending a requalification of all products manufactured by CalAmp
for this customer and a review of production processes. Revenues from this
customer in fiscal 2008 were $92 million lower than in fiscal 2007. The
Company reached a settlement agreement with this customer in December 2007 as
further described in Note 11. The Company expects to resume shipments to
this customer in the fiscal 2009 first quarter.
Wireless DataCom Division revenue increased by $33.8 million, or 60%, to
$90.4 million for fiscal 2008 compared to fiscal 2007 due to: (i) an $8.8
million increase in sales of radio modules to a Wireless DataCom customer in
support of that customer's contract with the U.S. Department of Defense;
(ii) the acquisition of Aercept in March 2007, which contributed revenue of
$12.4 million in fiscal 2008; and the fact that the operations of Dataradio
and the Technocom MRM business are included for all 52 weeks of fiscal 2008
versus only 40 weeks of fiscal 2007.
Gross Profit and Gross Margins
The Satellite Division had negative gross profit of $(14.8) million for
fiscal 2008 compared with a gross profit of $23.4 for fiscal 2007. The
decline in gross profit is primarily attributable to the $17.9 million charge
for estimated expenses to correct a product performance issue with a key DBS
customer and the $104.6 million decline in revenue in fiscal 2008 compared to
the prior year.
Gross profit of the Wireless DataCom Division increased 51% to $33.3
million for fiscal 2008 compared to $22.0 million last year, which is
commensurate with the 60% revenue increase of this division. Wireless
DataCom's gross margin decreased from 38.9% for fiscal 2007 to 36.8% for
fiscal 2008 due to a change in product mix, primarily due to the acquisition
at the beginning of fiscal 2008 of Aercept, which is currently operating at
lower gross margins than the other businesses within the Wireless DataCom
businesses.
See also Note 13 to the accompanying consolidated financial statements
for additional operating data by business segment.
Operating Expenses
Consolidated research and development ("R&D") expense increased by $2.7
million to $15.7 million for fiscal 2008 from $13.0 million last year,
primarily from higher R&D expenses of Dataradio. Dataradio's R&D expense
accounted for $3.4 million of the increase, offset by a reduction in R&D
expense associated with the Company's Satellite Division and the Wireless
DataCom Division's OEM business. Dataradio was included for all 52 weeks of
the fiscal 2008 period and only 40 weeks of the fiscal 2007 period.
Consolidated selling expenses increased by $3.9 million to $10.6 million
for fiscal year 2008 from $6.8 million last year. This increase is primarily
due to higher selling expenses of Dataradio and Aercept, which accounted for
$2.4 million and $1.2 million of the increase, respectively. As noted
above, Dataradio was included for all 52 weeks of the fiscal 2008 period
versus only 40 weeks of the fiscal 2007 period, and Aercept was acquired in
March 2007.
Consolidated general and administrative expenses ("G&A") increased by
$5.2 million for fiscal 2008, which increase is primarily due to the
acquisitions of Dataradio in May 2006, Aercept in March 2007 and SmartLink in
April 2007, which collectively accounted for increased G&A of $3.4 million
for fiscal 2008 compared to last year.
Amortization of intangibles increased from $3.5 million for fiscal 2007
to $6.4 million for fiscal 2008. The increase was primarily attributable to
the acquisitions of Aercept and SmartLink.
The in-process research and development ("IPR&D") write-off declined
from $6.9 million for fiscal 2007 to $310,000 for fiscal 2008. Last year's
IPR&D write-off was related to the acquisition of Dataradio, while this
year's IPR&D write-off was related to the acquisition of SmartLink. The
IPR&D of $6.9 million in fiscal 2007 is further described in Note 2 -
Acquisitions and Discontinued Operations.
Operating Loss
The operating loss for fiscal 2008 was $100.8 million, compared to
operating income of $5.6 million for fiscal 2007. The operating loss in the
current period is attributable to the impairment charge of $71.3 million, the
$17.9 million charge for the DBS product performance issue noted above, and
the reduction in gross profit due to the $92 million decline in revenues from
a key DBS customer.
Non-Operating Income (Expense), Net
Non-operating expense for fiscal 2008 was $2,472,000 for fiscal 2008,
compared to non-operating income of $591,000 for fiscal 2007. The change was
primarily due to (i) an increase in net interest expense of $1,450,000
because of lower invested cash and higher debt in fiscal 2008; (ii) $694,000
in foreign currency loss in the current year compared to a $362,000 gain last
year; and (iii) a gain of $689,000 last year on currency hedging activities
in connection with the Dataradio acquisition, for which the purchase price
was denominated in Canadian dollars.
Income Tax Provision
Income tax benefit allocated to loss from continuing operations for the
year ended February 28, 2008 was $20,940,000. Income tax expense allocated
to income from continuing operations for the year ended February 28, 2007 was
$4,716,000. Income tax expense allocated to income from discontinued
operations for the year ended February 28, 2008 was $2,431,000. Income tax
benefit allocated to loss from discontinued operations for the year ended
February 28, 2007 was $1,935,000. The effective income tax rate on income
(loss) from continuing operations was 20% and 76% in the year ended February
28, 2008 and 2007, respectively. The effective income tax rate in fiscal
2008 of 20% was impacted by nondeductible goodwill of $49.4 million while the
76% in fiscal 2007 was impacted by in-process research and development
expense of $6.9 million.
Fiscal Year 2007 compared to Fiscal Year 2006
Revenue
Satellite Division revenue decreased $15,376,000, or 9.0%, to
$155,127,000 in fiscal 2007 from $170,503,000 in fiscal 2006. The decline in
revenue is attributable to a decrease in unit sales volume of approximately
16% from fiscal 2006 to fiscal 2007, partially offset by an increase in
average selling prices per unit of approximately 6%.
Wireless DataCom Division revenue increased $30,182,000, or 114%, to
$56,587,000 in fiscal 2007 from $26,405,000 in fiscal 2006. The operations
of Dataradio and the TechnoCom MRM product line that were acquired in May
2006 contributed revenues of $22,821,000 and $4,335,000, respectively, for
the 40-week period from date of acquisition to the end of fiscal 2007
Gross Profit and Gross Margins
Satellite Division gross profit decreased in fiscal 2007 to $23,402,000
from $36,274,000 in fiscal 2006. Gross profit of the Satellite Division
declined in fiscal 2007 compared to fiscal 2006 because of the $15,376,000
decline in revenue and a shift in product mix toward lower margin end-of-life
DBS products. In addition, freight costs for incoming materials of the
Satellite Division were $4.4 million higher in fiscal 2007 compared to fiscal
2006 because of the Company's decision to expedite materials in order to meet
customer requirements in response to supply chain disruptions and demand
volatility.
Satellite Division's gross margin in fiscal 2007 was 15.1% compared to
21.2% in fiscal 2006. The decline in gross margin is primarily the result of
higher freight costs and lower margins on final shipments of end-of-life DBS
products.
Wireless DataCom Division gross profit increased in fiscal 2007 to
$22,033,000 from $9,315,000 in fiscal 2006, due to the gross profit
contribution of Dataradio and the TechnoCom product line of $13.2 million for
the 40-week period from the date of acquisition to the end of fiscal 2007.
Wireless DataCom Division's gross margin in fiscal 2007 was 38.9%
compared to 35.3% in fiscal 2006.
See also Note 13 to the accompanying consolidated financial statements
for additional operating data by business segment.
Operating Expenses
Consolidated research and development expense increased by $4,971,000
from $8,018,000 in fiscal 2006 to $12,989,000 in fiscal 2007. R&D expense of
Dataradio, which was acquired in the first quarter of fiscal 2007, accounted
for substantially all of this increase.
Consolidated selling expenses increased by $4,050,000 from $2,715,000 in
fiscal 2006 to $6,756,000 in fiscal 2007. This increase is primarily the
result of Dataradio's fiscal 2007 selling expenses of $4.2 million.
Consolidated general and administrative expenses ("G&A") increased by
$3,107,000 from $6,685,000 in fiscal 2006 to $9,792,000 in fiscal 2007. This
change is primarily attributable to stock-based compensation expense included
in fiscal 2007 G&A of $1,349,000 and Dataradio's G&A of $1,337,000.
Amortization of intangibles increased from $778,000 in fiscal 2006 to
$3,463,000 in fiscal 2007. The increase was primarily attributable to
amortization expense on identifiable intangible assets from the acquisitions
of Dataradio and the TechnoCom MRM product line.
The in-process research and development ("IPR&D") write-off increased to
$6,850,000 in fiscal 2007 from $310,000 in fiscal 2006. The IPR&D write-off
in fiscal 2006 was related to the acquisition of Skybility and the IPR&D
write-off in fiscal 2007 was related to the acquisition of Dataradio.
Operating Income
The fiscal 2007 operating income was $5,576,000, compared to $27,083,000
in fiscal 2006. The decrease in operating income for fiscal 2007 is
attributable to the $6,850,000 write-off of IPR&D associated with the
Dataradio acquisition, incremental operating expenses associated with the
aforementioned fiscal 2007 acquisitions, and share-based compensation expense
of $1,808,000 recorded in fiscal 2007 pursuant to FAS 123R.
Non-Operating Income (Expense), Net
Non-operating income in fiscal 2007 was $591,000, compared to $533,000
in fiscal 2006. This increase is primarily attributable to a gain of
$689,000 realized on foreign currency hedging activities in connection with
the acquisition of Dataradio, for which the purchase price was denominated in
Canadian dollars. Interest income was $517,000 higher in fiscal 2007 than
the prior year due to higher average cash balances and higher interest rates
during fiscal 2007. These increases in non-operating income were partially
offset by interest expense that was $1,538,000 higher in fiscal 2007 than the
prior year due to the new bank borrowing described in Note 6 to the
accompanying consolidated financial statements.
Income Tax Provision
Income tax expense allocated to income from continuing operations for
the years ended February 28, 2007 and 2006 was $4,716,000 and $11,154,000,
respectively. Income tax benefit allocated to loss from discontinued
operations for the years ended February 28, 2007 and 2006 was $1,935,000 and
$1,287,000, respectively. The effective income tax rate on income from
continuing operations was 76% and 40% in the year ended February 28, 2007 and
2006, respectively, primarily attributable to nondeductible in-process
research and development expense of $6,850,000 in fiscal 2007.
Liquidity and Capital Resources
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $6,588,000 at February 28, 2008, and its $1
million working capital bank line of credit. During fiscal year 2008, cash
and cash equivalents decreased by $30,949,000. This net decrease consisted
of cash used by operating activities of $1,541,000, capital expenditures of
$1,359,000, cash in the aggregate amount of $28,148,000 used for business
acquisitions, and debt repayments of $6,728,000, partially offset by proceeds
from the sale of an investment of $1,045,000, proceeds from the sale of
discontinued operations of $4,420,000, the effect of exchange rate changes on
cash of $1,077,000 and other net activity of $285,000.
Cash was provided by a decrease in operating working capital during
fiscal 2008 in the aggregate amount of $19,087,000, comprised of a decrease
of $18,700,000 in accounts receivable, a decrease of $1,116,000 in
inventories, a decrease of $2,629,000 in prepaid expenses and other assets
and an increase in accrued liabilities of $13,795,000, partially offset by
decreases in accounts payable and deferred revenue of $16,807,000 and
$346,000, respectively.
The Company believes that inflation and foreign currency exchange rates
did not have a material effect on its operations in fiscal 2008.
In May 2006, the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of Montreal, as administrative agent, and the other
financial institutions that from time to time may become parties to the
Credit Agreement. The Company initially borrowed $35 million under the term
loan and $3 million under the working capital line of credit. Borrowings are
secured by substantially all of the assets of CalAmp Corp. and its domestic
subsidiaries. Of the total proceeds of $38 million, $7 million was used to
pay off the Company's existing loans with U.S. Bank and the remaining $31
million, plus cash on hand of approximately $23 million, was used to fund the
purchase price for the Dataradio acquisition. During fiscal 2007 the Company
repaid in full the $3 million principal balance of the working capital line
of credit.
The Credit Agreement contained certain financial covenants and ratios
including: a total Leverage Ratio of not more than 2.75; total stockholders'
equity of not less than the sum of (i) $140,887,000, (ii) 50% of net income
for each fiscal year (excluding years with net losses) and (iii) 50% of net
cash proceeds from any issuance of equity; and a fixed charge coverage ratio
(earnings before interest, taxes, depreciation and other noncash charges to
fixed charges) of not less than 1.50. The net loss of $11.4 million in the
first quarter of fiscal 2008 caused an event of default with respect to the
financial covenants under the Credit Agreement. The Credit Agreement
provides that the interest rate on borrowings can be increased by 2.0% during
any period in which an event of default exists. Effective November 6, 2007
the banks elected to impose this additional default interest of 2.0%,
resulting in accrued interest expense of $204,000 (the "Default Interest
Amount"), which is included in other accrued liabilities in the consolidated
balance sheet at February 28, 2008.
In February 2008, the Company entered into an amendment of the credit
agreements with the banks (the "Amended Agreement"). Pursuant to the Amended
Agreement, cash proceeds of $3.8 million from the August 2007 sale of the
Company's TelAlert software business that had been held in escrow by the
banks were applied to reduce borrowings under the term loan, resulting in an
outstanding principal balance of $27.5 million at February 28, 2008. The
interest rate on the term loan was also increased by 0.5% as a result of this
amendment, and giving effect to this change, the term loan bears interest at
7.1% as of February 28, 2008. Term loan principal payments of $750,000 are
due on the last day of each calendar quarter during 2008, and a principal
payment of $1,250,000 is due on March 31, 2009. In addition, any collections
of the scheduled $140,000 per month on a note receivable from the buyer of
the TelAlert software business must be applied to reduce the term loan
principal.
The Amended Agreement has a termination date of June 30, 2009, at which
time all outstanding borrowings under the credit agreement are due and
payable. In the event that all outstanding obligations under the Amended
Agreement are paid in full by December 31, 2008, the Default Interest Amount
of $204,000 will be forgiven, and in the event that the Company receives cash
of at least $5,000,000 as a result of issuing equity or subordinated debt by
December 31, 2008, the Default Interest Amount will be reduced to $123,000.
Furthermore, in the event all outstanding obligations under the Amended
Agreement are not paid in full by December 31, 2008, an exit fee of $500,000
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 will be reduced to
$300,000.
At February 28, 2008, $2.4 million of the working capital line of credit
was reserved for outstanding irrevocable stand-by letters of credit. The
Amended Agreement also makes available $1 million for borrowings under a
working capital revolving loan. Borrowings under the revolver would bear
interest at the bank's prime rate plus 2% or LIBOR plus 3%. There were no
outstanding borrowings on the revolver at February 28, 2008.
Pursuant to the Amended Agreement, the banks agreed to waive all
financial covenant violations for fiscal 2008. The financial covenants with
which the Company had been noncompliant were eliminated as a result of this
amendment, and were replaced with new covenants that are effective for the
first quarter of fiscal 2009 that require minimum levels of consolidated
earnings before interest, taxes, depreciation and amortization (EBITDA) and
Wireless DataCom Division revenues. In addition, the Amended Agreement
contains a provision by which an event of default would occur if a certain
key customer of the Company's Satellite Division does not grant final
authorization/clearance for shipment of new generation products by June 30,
2008.
The Credit Agreement includes customary affirmative and negative
covenants including, without limitation, negative covenants regarding
additional indebtedness, investments, maintenance of the business, liens,
guaranties, transfers and sales of assets, and the payment of dividends and
other restricted payments.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Contractual Obligations
Following is a summary of the Company's contractual cash obligations as
of February 28, 2008 (in thousands):
Payments Due by Period
-------------------------------
Contractual Less than 1-3 3-5 More than
Obligations 1 year years years 5 years Total
--------------- -------- ------- ------ ------- -------
Bank debt $ 2,580 $24,950 $ - $ - $27,530
Subordinated
note payable 2,763 2,237 - - 5,000
Operating leases 2,526 3,166 415 - 6,107
Purchase
obligations 10,878 - - - 10,878
------- ------- ------ ------- -------
Total contractual
cash obligations $18,747 $30,353 $ 415 $ - $49,515
======= ======= ======= ======= =======
Purchase obligations consist of obligations under non-cancelable
purchase orders, primarily for inventory purchases of raw materials,
components and subassemblies.
The Company believes that its cash on hand, its cash generated from
operations and the amount available under its working capital line of credit
are collectively sufficient to support operations, fund capital equipment
requirements and discharge contractual cash obligations for at least the next
12 months.
New Authoritative Pronouncements
See Note 1 of the accompanying consolidated financial statements for a
description of new authoritative accounting pronouncements either recently
adopted or which had not yet been adopted by the Company as of the end of
fiscal 2008.
ITEM 7A. 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. Cumulative foreign currency translation gain included in the other
comprehensive income (loss) in stockholders' equity amounted to $802,000 as
of February 28, 2008.
Debt Risk
The Company has variable-rate bank debt. The estimated fair value of
the Company's variable-rate debt approximates the carrying value of such debt
since the variable interest rates are market-based, and the Company believes
such debt could be refinanced on materially similar terms. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of CalAmp Corp. is responsible for establishing and
maintaining adequate internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended.
The management of CalAmp Corp. has assessed the effectiveness of the
Company's internal control over financial reporting as of February 28, 2008.
In making this assessment, management used criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
"Internal Control - Integrated Framework". Based on its assessment,
management of CalAmp Corp. has concluded that, as of February 28, 2008, the
Company's internal control over financial reporting is effective based on
those criteria.
CalAmp Corp. acquired Aercept on March 16, 2007 and as permitted by the
guidance issued by the Office of the Chief Accountant of the Securities and
Exchange Commission, management excluded from its assessment of the
effectiveness of CalAmp Corp.'s internal control over financial reporting as
of February 28, 2008 Aercept's internal control over financial reporting
associated with total assets of $21.1 million and total revenues of $12.4
million included in the consolidated financial statements of CalAmp Corp. and
subsidiaries as of and for the year ended February 28, 2008.
KPMG LLP, our independent registered public accounting firm has audited
the effectiveness of the Company's internal control over financial reporting
as of February 28, 2008, as stated in their report, which is included herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of CalAmp Corp.:
We have audited the accompanying consolidated balance sheets of CalAmp
Corp. and subsidiaries as of February 28, 2008 and 2007, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the years in the three-year period
ended February 28, 2008. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CalAmp
Corp. and subsidiaries as of February 28, 2008 and 2007, and the results of
their operations and their cash flows for each of the years in the three-year
period ended February 28, 2008, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 7 to the consolidated financial statements,
effective March 1, 2007, the Company adopted the provisions of Financial
Accounting Standard Board Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109". Also, as
discussed in Note 1 to the consolidated financial statements, effective March
1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment".
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), CalAmp Corp.'s internal
control over financial reporting as of February 28, 2008, based on criteria
established in "Internal Control - Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated May 14, 2008 expressed an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
May 14, 2008
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of CalAmp Corp.:
We have audited CalAmp Corp.'s internal control over financial
reporting as of February 28, 2008, based on criteria established in "Internal
Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management's Report on
Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, CalAmp Corp. maintained, in all material respects,
effective internal control over financial reporting as of February 28, 2008,
based on criteria established in "Internal Control - Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
Management excluded Aercept from its assessment of the effectiveness of
CalAmp Corp.'s internal control over financial reporting as of February 28,
2008. Aercept, acquired on March 16, 2007, accounted for $21.1 million, or
15%, of the Company's total assets as of February 28, 2008, and contributed
approximately $12.4 million, or 9%, of the Company's total revenue for the
year ended February 28, 2008. Our audit of internal control over financial
reporting of CalAmp Corp. also excluded an evaluation of the internal control
over financial reporting of Aercept.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of CalAmp Corp. and subsidiaries as of February 28, 2008 and 2007, and
the related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for each of the years in the
three-year period ended February 28, 2008, and our report dated May 14, 2008
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Los Angeles, California
May 14, 2008
CALAMP CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
February 28,
---------------------
2008 2007
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 6,588 $ 37,537
Accounts receivable, less allowance for
doubtful accounts of $1,271 and $347 at
February 28, 2008 and 2007, respectively 20,043 38,439
Inventories 25,097 25,729
Deferred income tax assets 5,306 4,637
Prepaid expenses and other current assets 9,733 7,182
-------- --------
Total current assets 66,767 113,524
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 5,070 6,308
Deferred income tax assets, less current portion 14,802 -
Goodwill 28,520 90,001
Other intangible assets, net 24,424 18,643
Other assets 3,458 1,227
-------- --------
$143,041 $229,703
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 5,343 $ 2,944
Accounts payable 10,875 26,186
Accrued payroll and employee benefits 4,218 3,478
Accrued warranty costs 3,818 1,295
Other current liabilities 11,800 2,799
Deferred revenue 4,005 1,935
-------- --------
Total current liabilities 40,059 38,637
-------- --------
Long-term debt, less current portion 27,187 31,314
Deferred income tax liabilities - 7,451
Other non-current liabilities 2,375 1,050
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 3,000 shares
authorized; no shares issued or outstanding - -
Common Stock, $.01 par value; 40,000 shares
authorized; 25,041 and 23,595 shares issued
and outstanding at February 28, 2008 and
2007, respectively 250 236
Additional paid-in capital 144,318 139,175
Retained earnings (accumulated deficit) (71,149) 13,000
Accumulated other comprehensive income (loss) 1 (1,160)
-------- --------
Total stockholders' equity 73,420 151,251
-------- --------
$143,041 $229,703
======== ========
See accompanying notes to consolidated financial statements.
CALAMP CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended February 28,
-----------------------------
2008 2007 2006
-------- -------- -------
Revenues $140,907 $211,714 $196,908
Cost of revenues 122,412 166,279 151,319
-------- -------- --------
Gross profit 18,495 45,435 45,589
-------- -------- --------
Operating expenses:
Research and development 15,710 12,989 8,018
Selling 10,633 6,765 2,715
General and administrative 14,966 9,792 6,685
Intangible asset amortization 6,418 3,463 778
Write-off of acquired in-process
research and development 310 6,850 310
Impairment loss 71,276 - -
-------- -------- --------
Total operating expenses 119,313 39,859 18,506
-------- -------- --------
Operating income (loss) (100,818) 5,576 27,083
Non-operating income (expense):
Interest income (expense), net (1,903) (453) 568
Other income (expense), net (569) 1,044 (35)
-------- -------- --------
Total non-operating income (expense) (2,472) 591 533
-------- -------- --------
Income (loss) from continuing
operations before income taxes (103,290) 6,167 27,616
Income tax benefit (provision) 20,940 (4,716) (11,154)
-------- -------- --------
Income (loss) from continuing operations (82,350) 1,451 16,462
Loss from discontinued operations,
net of tax (597) (32,639) (1,900)
Loss on sale of discontinued
operations, net of tax (1,202) - -
-------- -------- --------
Net income (loss) $(84,149) $(31,188) $ 14,562
======== ======== ========
Basic earnings (loss) per share from:
Continuing operations $ (3.45) $ 0.06 $ 0.72
Discontinued operations (0.08) (1.40) (0.08)
-------- -------- --------
Total basic earnings (loss) per share $ (3.53) $ (1.34) $ 0.64
======== ======== ========
Diluted earnings (loss) per share from:
Continuing operations $ (3.45) $ 0.06 $ 0.70
Discontinued operations (0.08) (1.40) (0.08)
-------- -------- --------
Total diluted earnings (loss) per share $ (3.53) $ (1.34) $ 0.62
======== ======== ========
Shares used in computing basic and
diluted earnings (loss) per share:
Basic 23,881 23,353 22,605
Diluted 23,881 23,353 23,415
See accompanying notes to consolidated financial statements.
CALAMP CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
Accum-
ulated
Common Other Total
Common Stock Additional Stock Compre- Stock-
-------------- Paid-in Held in Retained hensive holders'
Shares Amount Capital Escrow Earnings Loss Equity
------ ------ ------ -------- -------- ------ ------
Balances at
February 28, 2005 22,714 $227 $131,784 $(2,548) $29,626 $(801) $158,288
Net income and
comprehensive income - - - - 14,562 - 14,562
Sales of common stock
held in escrow - - - 16 - - 16
Exercise of stock
options 516 5 2,285 - - - 2,290
Tax benefits from exer-
cise of non-qualified
stock options - - 1,143 - - - 1,143
Other (26) - (190) - - - (190)
------ ---- ------- -------- ------- ------ --------
Balances at
February 28, 2006 23,204 232 135,022 (2,532) 44,188 (801) 176,109
Net loss - - - - (31,188) - (31,188)
Change in unrealized
gain on available-for-
sale investments - - - - - 45 45
Foreign currency trans-
lation adjustments - - - - - (404) (404)
------
Comprehensive loss (31,547)
Sales of common stock
held in escrow - - - 2,532 - - 2,532
Issuance of restricted
Stock 20 - - - - - -
Stock-based compen-
sation expense - - 2,213 - - - 2,213
Exercise of stock
options and warrants 373 4 1,393 - - - 1,397
Tax benefits from exer-
cise of non-qualified
stock options - - 568 - - - 568
Other (2) - (21) - - - (21)
------ ---- ------- -------- ------- ------ --------
Balances at
February 28, 2007 23,595 236 139,175 - 13,000 (1,160) 151,251
Net loss - - - - (84,149) - (84,149)
Change in unrealized
gain on available-for-
sale investments - - - - - (45) (45)
Foreign currency trans-
lation adjustments - - - - - 1,206 1,206
------
Comprehensive loss (82,988)
Issuance of restricted
stock, net of
forfeitures 380 4 (4) - - - -
Stock-based compen-
sation expense - - 2,238 - - - 2,238
Exercise of stock
options and warrants 66 - 212 - - - 212
Issuance of stock and
warrants 1,000 10 2,802 - - - 2,812
Other - - (105) - - - (105)
------ ---- ------- -------- ------- ------ --------
Balances at
February 28, 2008 25,041 $250 $144,318 $ - $(71,149) $ 1 $ 73,420
====== ==== ======== ======== ======= ====== ========
See accompanying notes to consolidated financial statements.
CALAMP CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year ended February 28,
-----------------------------
2008 2007 2006
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(84,149) $(31,188) $14,562
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization 9,681 6,920 4,372
Stock-based compensation expense 2,238 2,213 -
Write-off of in-process research and development 310 6,850 310
Impairment loss 71,276 29,848 -
Loss on sale of equipment - 85 43
Tax benefit from exercise of stock options - - 1,158
Excess tax benefit from stock-based compensation - (496) -
Deferred tax assets, net (20,784) 1,485 6,236
Loss on sale of discontinued operations,
net of tax 1,202 - -
Gain of sale of investment (331) - -
Other (6) - -
Changes in operating assets and liabilities:
Accounts receivable 18,700 (3,755) (1,704)
Inventories 1,116 (2,059) 4,266
Prepaid expenses and other assets 2,629 (2,689) 427
Accounts payable (16,807) 12,962 (6,377)
Accrued liabilities 13,795 (3,995) (666)
Deferred revenue (346) 542 (247)
-------- -------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,476) 16,723 22,380
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,359) (2,828) (2,296)
Proceeds from sale of property and equipment 7 16 146
Proceeds from sale of investment 1,045 - -
Proceeds from sale of discontinued operations 4,420 - -
Acquisition of Aercept (19,318) - -
Acquisition of Smartlink (7,845) - -
Acquisition of Dataradio net of cash acquired - (48,053) -
Acquisition of TechnoCom product line (985) (2,486) -
Acquisition of Skybility business - - (4,897)
Proceeds from Vytek escrow fund distribution - 480 -
Other - (240) -
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (24,035) (53,111) (7,047)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 38,000 -
Debt repayments (6,728) (11,421) (2,888)
Proceeds from exercise of stock options 213 1,397 2,290
Excess tax benefit from stock-based compensation - 496 -
-------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (6,515) 28,472 (598)
------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,077 (330) -
-------- -------- --------
Net change in cash and cash equivalents (30,949) (8,246) 14,735
Cash and cash equivalents at beginning of year 37,537 45,783 31,048
-------- -------- --------
Cash and cash equivalents at end of year $ 6,588 $ 37,537 $ 45,783
======== ======== ========
See accompanying notes to consolidated financial statements.
CALAMP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of Business
CalAmp Corp. ("CalAmp" or the "Company"), formerly known as California
Amplifier, Inc., is a leading provider of high value mission-critical
wireless communications solutions that enable anytime/anywhere access.
CalAmp's Wireless DataCom Division services the public safety, industrial
monitoring and controls, and mobile resource management market segments with
wireless solutions built on communications technology platforms that include
proprietary licensed narrowband, standards-based unlicensed broadband and
cellular networks. CalAmp's Satellite Division supplies outdoor customer
premise equipment to the U.S. Direct Broadcast Satellite (DBS) market.
In March 2007, effective at the beginning of fiscal 2008, the Company
split its Products Division into two separate reporting segments: the
Satellite Division and the Wireless DataCom Division. The Satellite Division
consists of the Company's DBS business, and the Wireless DataCom Division
consists of CalAmp's legacy wireless businesses other than DBS and the
businesses acquired as described in Note 2 - Acquisitions and Discontinued
Operation below. Segment information presented for the years ended February
28, 2007 and 2006 has been reclassified to present information on this new
reporting segment basis. The Solutions Division, the remaining operations of
which were sold in August 2007, is presented as a discontinued operation in
the accompanying consolidated statements of operations.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company (a Delaware corporation) and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Areas where significant judgments are made include, but are not
limited to: allowance for doubtful accounts; inventory valuation; product
warranties; deferred income tax asset valuation allowances; valuation of
goodwill, purchased intangible assets and other long-lived assets; and
revenue recognition.
Fiscal Year
The Company uses a 52-53 week fiscal year ending on the Saturday
closest to February 28, which for fiscal years 2008, 2007 and 2006 fell on
March 1, 2008, March 3, 2007, and February 25, 2006, respectively. In these
consolidated financial statements, the fiscal year end for all years is shown
as February 28 for clarity of presentation. Fiscal years 2008 and 2006 each
consisted of 52 weeks, while fiscal year 2007 consisted of 53 weeks.
Revenue Recognition
The Company recognizes revenue from product sales when persuasive
evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or determinable and collection of the sales price is reasonably
assured. Generally, these criteria are met at the time product is shipped,
except for shipments made on the basis of "FOB Destination" terms, in which
case title transfers to the customer and the revenue is recorded by the
Company when the shipment reaches the customer. Products sold in connection
with service contracts are recorded as deferred revenues and the associated
product costs are recorded as deferred costs. These deferred amounts are
recognized over the life of the service contract on a straight-line basis.
Customers do not have rights of return except for defective products returned
during the warranty period.
The Company also undertakes projects that include the design,
development and manufacture of public safety communication systems that are
specially customized to customers' specifications or that involve fixed site
construction. Sales under such contracts are recorded under the percentage-
of-completion method in accordance with Statement of Position No. 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts." Costs and estimated revenues are recorded as work is performed
based on the percentage that incurred costs bear to estimated total costs
utilizing the most recent estimates of costs. If the current contract
estimate indicates a loss, provision is made for the total anticipated loss
in the current period.
Cash and Cash Equivalents
The Company considers all highly liquid investments with remaining
maturities at date of purchase of three months or less to be cash
equivalents.
Concentrations of Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and
trade receivables. The Company currently invests its excess cash in money
market mutual funds and commercial paper. The Company had cash and cash
equivalents in one U.S. bank in excess of federally insured amounts.
Because the Company sells into markets dominated by a few large service
providers, a significant percentage of consolidated revenues and consolidated
accounts receivable relate to a small number of customers. Revenues from
customers which accounted for 10% or more of consolidated annual revenues in
any one of the last three years, as a percent of consolidated revenues, are
as follows:
Year ended February 28,
------------------------------
Customer 2008 2007 2006
-------- ------ ------ ------
A 23.9% 18.9% 15.1%
B 14.2% 5.3% 5.2%
C 10.9% 50.6% 61.3%
Accounts receivable amounts at fiscal year-end from the customers
referred to in the table above, expressed as a percent of consolidated net
accounts receivable, are as follows:
February 28,
--------------------
Customer 2008 2007
-------- ------ ------
A 26.6% 24.4%
B 9.0% 16.4%
C 5.1% 30.6%
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, due to
insolvency or other collection issues.
Inventories
Inventories include costs of materials, labor and manufacturing
overhead. Inventories are stated at the lower of cost or net realizable
value, with cost determined principally by the use of the first-in, first-out
method.
Investments
The Company classifies investments in one of three categories: trading,
available-for-sale or held-to-maturity. Trading securities are bought and
held principally for the purpose of selling them in the near term. Held-to-
maturity securities are those securities that the Company has the ability and
intent to hold until maturity. All other securities not included in trading
or held-to-maturity are classified as available-for-sale.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses on trading securities are included in earnings.
Unrealized holding gains and losses on available-for-sale securities, net of
the related tax effect, are excluded from earnings and are reported as a
component of accumulated other comprehensive income (loss) until realized, or
until holding losses are deemed to be other than temporary, at which time an
impairment charge is recorded.
Property, equipment and improvements
Property, equipment and improvements are stated at cost. The Company
follows the policy of capitalizing expenditures that increase asset lives,
and expensing ordinary maintenance and repairs as incurred. When assets are
sold or disposed of, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in
general and administrative expense.
Depreciation and amortization are based upon the estimated useful lives
of the related assets using the straight-line method. Plant equipment and
office equipment are depreciated over useful lives ranging from two to five
years, while tooling is depreciated over 18 months. Leasehold improvements
are amortized over the shorter of the lease term or the useful life of the
improvements.
Operating Leases
Rent expense under operating leases is recognized on a straight-line
basis over the lease term. The difference between the rent expense and the
rent payment is recorded as an increase or decrease in deferred rent
liability.
The Company accounts for tenant allowances in lease agreements as a
deferred rent liability. The liability is then amortized on a straight-line
basis over the lease term as a reduction of rent expense.
The Company's estimated loss to sublease the vacated offices of the
discontinued Solutions Division is included in the deferred rent liability.
The current and non-current portions of the deferred rent liability are
included in other current liabilities and other non-current liabilities,
respectively, in the accompanying consolidated balance sheets.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price and related costs over
the value assigned to the net tangible assets and identifiable intangible
assets of businesses acquired. As required under Statement of Financial
Accounting Standards No. 142, "Accounting for Goodwill and Intangible
Assets", goodwill is not amortized. Instead, goodwill is tested for
impairment on an annual basis and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of
a reporting unit below its carrying amount.
The cost of identified intangible assets is amortized over the assets'
estimated useful lives ranging from one to seven years on a straight-line
basis as no other discernable pattern of usage is more readily determinable.
Accounting for Long-Lived Assets Other Than Goodwill
The Company reviews property and equipment and other long-lived assets
other than goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amounts of an asset may not be
recoverable. Recoverability is measured by comparison of the asset's
carrying amount to the undiscounted future net cash flows an asset is
expected to generate. If an asset is considered to be impaired, the
impairment to be recognized is measured by the amount at which the carrying
amount of the asset exceeds the projected discounted future cash flows
arising from the asset.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate:
Cash and cash equivalents, accounts receivable and accounts payable -
The carrying amount is a reasonable estimate of fair value given the short
maturity of these instruments.
Long-term debt - The carrying value approximates fair value since the
interest rate on the long-term debt approximates the interest rate which is
currently available to the Company for the issuance of debt with similar
terms and maturities.
Warranty
The Company warrants its products against defects over periods ranging
from 3 to 24 months. 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 revenues for the preceding three years and also considers the
impacts of the known operational issues that may have a greater impact than
historical trends. See Note 10 for a table of annual increases in and
reductions of the warranty liability for the last three years.
Deferred 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 which 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 assets to determine if a valuation allowance is needed.
Due to the adoption of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes", deferred tax assets are not recorded to the
extent they are attributed to uncertain tax positions.
Foreign Currency Translation and Accumulated Other Comprehensive Income
(Loss) Account
The Company's French subsidiary uses the U.S. dollar as its functional
currency. As a result of changing the functional currency of the Company's
French subsidiary from the French franc to the U.S. dollar in 2002, the
foreign currency translation loss of $801,000 that is included in accumulated
other comprehensive income (loss) will remain unchanged until such time as
the French subsidiary ceases to be part of the Company's consolidated
financial statements. No income tax expense or benefit has been allocated to
this component of accumulated other comprehensive loss because the Company
expects that undistributed earnings of this foreign subsidiary will be
reinvested indefinitely.
The Company's Canadian subsidiary uses the Canadian dollar, the local
currency, as its functional currency. Its financial statements are
translated into U.S. dollars using current or historical rates, as
appropriate, with translation gains or losses included in the accumulated
other comprehensive loss account in the stockholders' equity section of the
consolidated balance sheet. Cumulative foreign currency translation gain as
of February 28, 2008 amounted to $802,000.
The aggregate foreign transaction exchange gains (losses) included in
determining income (loss) from continuing operations before income taxes were
$(694,000), $362,000 and $(48,000) in fiscal 2008, 2007 and 2006,
respectively.
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 average market price of the common
stock during the period exceeds the exercise price of the options.
Accounting for Stock Options
The Financial Accounting Standards Board issued SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS No. 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 No. 123R at the beginning of fiscal 2007 using the modified
prospective method. Accordingly, periods prior to fiscal 2007 were not
restated. Under this adoption method, the Company records stock-based
compensation expense for all awards granted on or after the date of adoption
of SFAS No. 123R and for the portion of previously granted awards that
remained unvested at the date of adoption. Currently, the Company's stock-
based compensation relates to stock options, restricted stock and restricted
stock units awarded to employees and directors.
In the financial statements of periods prior to fiscal 2007, the Company
presented all tax benefits of deductions resulting from the exercise of stock
options as operating cash flows in the consolidated statements of cash flows.
SFAS No. 123R requires the cash flows resulting from the benefits of tax
deductions in excess of the compensation cost recognized for those options to
be classified as financing cash flows. As a result of adopting SFAS No.
123R, $496,000 of such excess tax benefits have been classified as a
financing cash inflow in the accompanying consolidated statement of cash
flows for fiscal 2007.
Prior to fiscal 2007, the Company applied the provisions of APB No. 25,
"Accounting for Stock Issued to Employees," as permitted under SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of SFAS Statement No. 123."
The following table details the effect on net income and earnings per
share assuming compensation expense had been recorded in the consolidated
statement of operations during fiscal year 2006 using the fair value method
prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation".
Amounts are shown in thousands except per share amounts.
Year ended
February 28,
2006
------
Net income as reported $14,562
Less total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (1,832)
------
Pro forma net income $12,730
======
Earnings per share:
Basic -
As reported $.64
Pro forma $.56
Diluted -
As reported $.62
Pro forma $.54
Included in the $1,832,000 stock-based employee compensation expense
for fiscal 2006 was $607,000 expense, net of tax, pertaining to 82,125
options granted in February and April 2004 at exercise prices of $14.76 and
$13.52 for which the vesting was accelerated in February 2006. These options
were granted to employees who are not officers and directors of the Company.
The Board of Directors authorized the acceleration of vesting of these out-
of-the-money options to avoid the recognition of the related expense in
future financial statements.
Other Current Liabilities
Other current liabilities consist of the following (in thousands):
February 28,
-----------------------
2008 2007
------- ------
Deferred revenues $ 4,005 $ 1,935
Income taxes payable 3,803 -
Other 3,992 864
------- -------
$11,800 $ 2,799
======= =======
Recent Authoritative Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements." This statement defines fair value, establishes a framework
for using fair value to measure assets and liabilities, and expands
disclosures about fair value measurements. The statement applies whenever
other statements require or permit assets or liabilities to be measured at
fair value. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. However, in February 2008, the FASB issued FSP FAS 157-2
which delays the effective date of SFAS No. 157 for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually). This FSP partially defers the effective date of SFAS No. 157 to
fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years for items within the scope of this FSP. The Company is
currently determining the effects, if any, this pronouncement will have on
its financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
"Business Combinations". SFAS No. 141(R) establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures the assets acquired, liabilities assumed, and any noncontrolling
interest in the acquiree. This statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the Company's fiscal year 2010.
In December 2007, the FASB issued SFAS No. 160 "Noncontrolling
Interests in Consolidated Financial Statements - an amendment to ARB No. 51".
SFAS No. 160 establishes accounting and reporting standards that require the
ownership interest in subsidiaries held by parties other than the parent to
be clearly identified and presented in the consolidated balance sheets within
equity, but separate from the parent's equity; the amount of consolidated net
income attributable to the parent and the noncontrolling interest to be
clearly identified and presented on the face of the consolidated statement of
earnings; and changes in a parent's ownership interest while the parent
retains its controlling financial interest in its subsidiary to be accounted
for consistently. This statement is effective for fiscal years beginning on
or after December 15, 2008 (the Company's fiscal year ended February 28,
2010). The Company is currently determining the effects, if any, this
pronouncement will have on its financial statements.
Note 2 - ACQUISITIONS AND DISCONTINUED OPERATIONS
The Company acquired several businesses and product lines in the past
two years that are now part of the Wireless DataCom Division. The more
significant acquisitions are as follows:
Aercept Acquisition
-------------------
On March 16, 2007, the Company acquired Aercept (formerly known as
Aircept), a vehicle tracking business, from AirIQ Inc., a Canadian company,
for cash consideration of $19 million. The source of funds for the purchase
price was the Company's cash on hand. Aercept's business involves the sale
of Global Positioning Satellite (GPS) and cellular-based wireless asset
tracking products and services to vehicle lenders that specialize in
automobile financing for high credit risk individuals.
The purchase price allocation for the Aercept acquisition is as follows
(in thousands):
Purchase price paid in cash $19,000
Direct costs of acquisition 318
-------
Total cost of acquisition 19,318
Fair value of net assets acquired:
Current assets $ 3,992
Property and equipment 275
Other assets 55
Intangible assets:
Developed/core technology $4,970
Customer lists 1,730
Contracts backlog 530
Covenants not to compete 510
-----
Total intangible assets 7,740
Current liabilities (3,909)
------
Total fair value of net assets acquired 8,153
-------
Goodwill $11,165
=======
The Company paid a premium (i.e., goodwill) over the fair value of the
net tangible and identified intangible assets acquired for the following
reasons:
> Aercept is the market leader for this product and the associated
services.
> Aercept offers an end-to-end solution comprised of hardware, hosted
application software and wireless data services. This brings core
competencies to CalAmp that can be leveraged across other business
units.
The goodwill arising from the Aercept acquisition is expected to be
deductible for income tax purposes.
Pro forma financial information on this acquisition has not been provided
because the effects are not material to the Company's consolidated financial
statements.
SmartLink Acquisition
---------------------
On April 4, 2007, the Company acquired the business and substantially
all the assets of SmartLink Radio Networks, a privately-held company, for
cash consideration of $7.9 million. The source of funds for the purchase
price was the Company's cash on hand. SmartLink provides proprietary
interoperable radio communications platforms and integration services for
public safety and critical infrastructure applications. SmartLink's software
defined switch provides interoperability with legacy analog wireless
communications networks without the need to replace the installed base of
land mobile radios. SmartLink's operations were integrated into CalAmp's
Dataradio facilities in Montreal, Canada and Atlanta, Georgia.
The purchase price allocation for the Smartlink acquisition is as
follows (in thousands):
Purchase price paid in cash $ 7,900
Settlement from escrow (100)
Direct costs of acquisition 45
-------
Total cost of acquisition 7,845
Fair value of net assets acquired:
Current assets $ 793
Property and equipment 208
Intangible assets:
Developed/core technology $3,730
Customer lists 910
Contracts backlog 740
In-process research and
development ("IPR&D") 310
-----
Total intangible assets 5,690
Current liabilities (1,866)
------
Total fair value of net assets acquired 4,825
-------
Goodwill $ 3,020
=======
The Company paid a premium (i.e., goodwill) over the fair value of the
net tangible and identified intangible assets acquired for the following
reasons:
> SmartLink has a competitively positioned unique product for the large
public safety mobile voice communications market.
> SmartLink's public safety mobile voice products and systems are
complementary to Dataradio's public safety mobile data communications
business.
> SmartLink's products have historically had relatively high gross
margins.
The $310,000 allocated to IPR&D in the preliminary purchase price
allocation above was charged to expense immediately following the
acquisition.
The goodwill arising from the SmartLink acquisition is expected to be
deductible for income tax purposes.
Pro forma financial information on this acquisition has not been
provided because the effects are not material to the Company's consolidated
financial statements.
Dataradio Acquisition
---------------------
On May 26, 2006, the Company completed the acquisition of Dataradio
Inc. ("Dataradio"), a privately held Canadian company. Under the terms of
the acquisition agreement dated May 9, 2006, the Company acquired all capital
stock of Dataradio for a cash payment of Canadian $60.1 million, or U.S.
$54,291,000 at the effective Canadian Dollar (CAD $) to U.S. Dollar exchange
rate on May 26, 2006. This acquisition expands the Company's wireless data
communications business for public safety and Machine-to-Machine (M2M)
applications. It also furthers the Company's strategic goals of diversifying
its customer base and expanding its product offerings into higher-margin
growth markets.
CAD $7 million (equivalent to U.S. $6,323,397 at the effective exchange
rate on May 26, 2006) of the purchase price was deposited into an escrow
account. In October 2006, CAD $4 million was released from escrow to the
selling stockholders of Dataradio. The remaining CAD $3 million held in
escrow is available as a source for the payment of indemnification claims of
the Company. In February 2008, the Company received US $1.4 million from the
escrow account as indemnification for certain uncollected receivables that
arose prior to acquisition. The remaining amount in the escrow account, if
any, after satisfying indemnification claims is scheduled to be distributed
to Dataradio's selling stockholders on May 26, 2008. Amounts required to pay
claims by the Company that are not resolved by such date will be held in the
escrow account until such claims are resolved.
Dataradio's operations are included in the accompanying consolidated
statement of operations for all 52 weeks of fiscal 2008 and for the 40-week
period from May 26, 2006 to February 28, 2007 for fiscal 2007.
At the time of the acquisition Dataradio was focused in three primary
business lines: wireless data systems for public safety and first response
applications; wireless data modems for fixed location critical infrastructure
and industrial applications; and design and manufacture of radio frequency
modules. Dataradio now operates as the Public Safety and Industrial
Monitoring and Controls business units of the Company's Wireless DataCom
Division.
The purchase price allocation for the Dataradio acquisition is as
follows (in thousands):
Purchase price paid in cash $54,291
Direct costs of acquisition 474
------
Total cost of acquisition $54,765
Fair value of net assets acquired:
Current assets (including cash of $6,711) $20,306
Property and equipment 927
Intangible assets:
Developed/core technology $6,980
Customer relationships 3,750
Contracts backlog 1,480
Tradename 3,880
In-process research and
development ("IPR&D") 6,850
-----
Total intangible assets 22,940
Current liabilities (8,749)
Deferred tax liabilities, net (5,980)
Long-term liabilities (317)
------
Total fair value of net assets acquired 29,127
------
Goodwill at acquisition date $25,638
======
The Company paid a premium (i.e., goodwill) over the fair value of the
net tangible and identified intangible assets acquired for a number of
reasons, including the following:
> Dataradio is an established provider of radio frequency ("RF") modems
and systems for public safety and private network data applications.
> Dataradio has a history of profitable operations.
> The products of Dataradio have high gross margins.
> Dataradio has a diversified customer base.
> CalAmp will have access to Dataradio's engineering resources.
The goodwill arising from the Dataradio acquisition is not deductible
for income tax purposes.
The $6,850,000 allocated to IPR&D in the purchase price allocation
above was charged to expense following the acquisition. IPR&D consists of
next generation products for fixed and mobile wireless applications. For
purposes of valuing IPR&D, it was assumed that: (i) these products would be
introduced in 2007; (ii) annual revenue in 2007 through 2011 would range
between $4.2 million and $12.6 million for fixed wireless products, and
between $6.7 million and $13.9 million for mobile wireless products; (iii)
annual revenues from the fixed wireless products and mobile wireless products
are allocated 75% and 80%, respectively, to IPR&D and 25% and 20%,
respectively, to core technology; (iv) the gross margin percentage would
range between 58% and 60% for fixed wireless products, and between 61% and
66% for mobile wireless products; and (v) the operating margin in years 2007
through 2011 is approximately 26% for fixed wireless products and 32% for
mobile wireless products. The projected after-tax cash flows were then
present valued using a discount rate of 25%.
TechnoCom Product Line Acquisition
----------------------------------
On May 26, 2006, the Company acquired the business and certain assets
of the Mobile Resource Management ("MRM") product line from TechnoCom
Corporation ("TechnoCom"), a privately held company, pursuant to an Asset
Purchase Agreement dated May 25, 2006 (the "Agreement"). This Technocom
product line is used to help track fleets of cars and trucks. The
acquisition of the Technocom product line was motivated primarily by the
strategic goals of increasing the Company's presence in markets that offer
higher growth and profit margin potential and diversifying the Company's
business and customer base.
Revenues and cost of sales generated by the Technocom product line are
included in the accompanying consolidated statement of operations for all 52
weeks of fiscal 2008 and for the 40-week period from May 26, 2006 to February
28, 2007 for fiscal 2007.
The Company acquired the business of the Technocom product line, its
inventory, intellectual property and other intangible assets. No liabilities
were assumed in the acquisition. Pursuant to the Agreement, the Company made
an initial cash payment of $2,439,000.
The purchase price allocation for the TechnoCom product line
acquisition is as follows (in thousands):
Purchase price paid in cash $2,439
Direct costs of acquisition 47
------
Total cost of acquisition 2,486
Fair value of net assets acquired:
Inventories $ 290
Intangible assets:
Developed/core technology 980
Customer relationships 810
Contracts backlog 310
Covenants not to compete 170
-----
Total fair value of net assets acquired 2,560
------
Negative goodwill at acquisition date $ (74)
======
The Company also agreed to make an additional future cash payment equal
to the amount of net revenues attributable to the Technocom product line
during the 12-month period following the acquisition that exceeds $3,100,000
(the "Earn-out Payment"). The Earn-out Payment amounted to $2.2 million,
which increased the goodwill associated with the TechnoCom product line
acquisition. The Company paid $985,000 of the $2.2 million during fiscal
2008, leaving a balance of $1.3 million that is included in other accrued
liabilities in the consolidated balance sheet at February 28, 2008. The
Company expects to pay the balance owed, including interest at 7%, during the
next 12 months using cash flows generated from operations.
Discontinued Operations
-----------------------
The Company sold the TelAlert software business of the Solutions
Division to a privately held company on August 9, 2007 for total
consideration of $9.4 million, consisting of $4.0 million in cash, a non-
interest bearing note with present value of $2.3 million and preferred stock
of the acquirer valued at $3.1 million. The note is payable in 18 equal
monthly installments of $140,000, which commenced in December 2007, and the
outstanding balance was $1,970,000 at February 28, 2008.
The Company recognized a pre-tax gain of $1.6 million on the sale of the
TelAlert software business. The income tax expense attributable to the gain
was $2.8 million because at the time of sale there was goodwill of $5.4
million associated with this business that is not deductible for income tax
purposes.
The TelAlert software business was the last remaining business of the
Solutions Division. Accordingly, operating results for the Solutions
Division have been presented in the accompanying consolidated statements of
operations as a discontinued operation, and are summarized as follows (in
thousands):
Year ended February 28,
---------------------------------
2008 2007 2006
------- ------ ------
Revenues $ 1,691 $ 9,135 $20,585
Operating loss $ (996) $(32,928) $(3,190)
Loss from discontinued
operations, net of tax $ (597) $(32,639) $( 1,900)
Loss on sale of discontinued
operations, net of tax $(1,202) $ - $ -
The Solutions Division operating loss in fiscal 2007 includes the
goodwill impairment charge of $29,012,000 and intangible assets impairment
charge of $836,000.
NOTE 3 - INVENTORIES
Inventories consist of the following (in thousands):
February 28,
-----------------------
2008 2007
------- ------
Raw materials $21,908 $21,256
Work in process 325 505
Finished goods 2,864 3,968
------- -------
$25,097 $25,729
======= =======
NOTE 4 - PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following (in
thousands):
February 28,
-----------------------
2008 2007
------- ------
Leasehold improvements $ 1,453 $ 1,425
Plant equipment and tooling 18,218 19,099
Office equipment, computers
and furniture 5,568 4,994
------- -------
25,239 25,518
Less accumulated depreciation
and amortization (20,169) (19,210)
------- -------
$ 5,070 $ 6,308
======= =======
Note 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
In March 2007, the Company split the Products Division into two separate
reporting segments: the Satellite Division and the Wireless DataCom
Division. The Products Division goodwill balance as of February 28, 2007 was
allocated to the Satellite Division and the Wireless DataCom Division on the
basis of the relative fair values of these two new divisions after
specifically allocating the goodwill arising from the Dataradio acquisition
to the Wireless DataCom Division. The reallocation of the goodwill among
segments was retroactively reflected in the historical information presented
below.
Changes in goodwill of each reporting unit are as follows (in
thousands):
Wireless
Satellite DataCom Solutions
Division Division Division Total
-------- --------- --------- --------
Balance as of February 28, 2005 $ 45,467 $ 12,318 $ 35,049 $ 92,834
Realized deferred tax assets
from Vytek acquisition - - (1,219) (1,219)
Removal of goodwill associated
with sale of assets - - (230) (230)
Other change - - 1 1
-------- --------- -------- --------
Balance as of February 28, 2006 45,467 12,318 33,601 91,386
Distribution of escrow shares as
additional purchase price for
the 2004 Vytek acquisition 1,052 - 1,000 2,052
Goodwill associated with Data-
radio acquisition 25,638 - 25,638
Impairment writedown - - (29,012) (29,012)
Other changes 100 (163) (63)
-------- --------- -------- --------
Balance as of February 28, 2007 46,619 37,956 5,426 90,001
Goodwill associated with
Aercept acquisition - 11,165 - 11,165
Goodwill associated with
SmartLink acquisition - 3,020 - 3,020
Goodwill associated with TechnoCom
acquisition for earn-out payment - 2,205 - 2,205
Adjustment of goodwill associated
with Dataradio acquisition - (1,069) - (1,069)
Removal of goodwill associated with
discontinued operations - - (5,426) (5,426)
Impairment writedown (44,364) (26,912) - (71,276)
Other changes - (100) - (100)
-------- --------- -------- --------
Balance as of February 28, 2008 $ 2,255 $ 26,265 $ - $ 28,520
======== ========= ======== ========
The Solutions Division goodwill impairment test conducted as of April
30, 2006 resulted in an impairment of goodwill and other intangible assets in
the aggregate amount of $29,848,000. Such amount is included in the loss on
discontinued operations, net of tax in the consolidated statement of
operations for fiscal 2007. For the Solutions Division goodwill impairment
test conducted as of April 30, 2007 the Company used a market approach to
calculate the fair value of this business unit, which resulted in the
determination that there was no impairment of the Solutions Division goodwill
as of that date. The Company discontinued the operations of the Solutions
Division during the second quarter of fiscal 2008, as further described in
Note 2, with the remaining goodwill of $5,426,000 included in the
determination of the gain or loss on sale of the TelAlert business.
Impairment tests of goodwill associated with the Satellite Division and
Wireless DataCom Division are conducted annually as of December 31 and, in
certain situations, on an interim basis if indicators of impairment arise.
If an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying value, goodwill
would be evaluated for impairment at an interim date between annual testing
dates.
As a result of a product performance issue with a key DBS customer, as
described above, the DBS customer substantially reduced its purchases of the
Company's products during fiscal 2008. Revenues with this customer declined
from $86.5 million in the nine months ended November 30, 2006 to $13.9
million in the nine months ended November 30, 2007. In addition, the
Company's market capitalization declined substantially after the public
announcement of the issue with the key DBS customer and continued to decline
through the third quarter ended November 30, 2007 and at that date was
significantly lower than the carrying value of the Company's consolidated net
assets. The Company believes that the decline in its market capitalization
during the third quarter was primarily attributable to the uncertainty
surrounding the interruption of its commercial relationship with this key
customer. Although the Company reached a settlement agreement with this
customer in December 2007, the Company's market capitalization remained
significantly below the carrying value of its consolidated net assets. In
light of these factors, the Company performed an interim goodwill impairment
analysis as of November 30, 2007.
Phase I of the impairment test conducted as of November 30, 2007
indicated that the carrying value of net assets of the Satellite Division and
the Wireless DataCom Division exceeded the fair values of these reporting
units by $37,744,000 and $22,571,000, respectively. The fair values were
determined using discounted cash flow (DCF) analyses of financial projections
for each reporting unit. The Satellite Division DCF reflected the reduced
revenue from the key DBS customer, the Company's best estimate of forecasted
revenues, profitability and cash flows over the next several years, and a
market-based discount rate reflecting the perceived risk premium in the
market. The Phase II impairment analysis involves a revaluation of all net
assets, both tangible and intangible, and in the case of intangible assets,
both recognized and unrecognized. Phase II of the impairment analysis
indicated additional impairment losses for the Satellite and Wireless DataCom
Divisions of $6,620,000 and $4,341,000, respectively. Accordingly, an
aggregate charge of $71,276,000 was recorded in fiscal 2008 for the goodwill
impairment losses for the Satellite and Wireless DataCom divisions of
$44,364,000 and $26,912,000, respectively.
The principal reasons for the impairment of the Satellite Division
goodwill are: (i) the interruption of the commercial relationship with a key
customer that substantially reduced the revenue and operating profitability
of this division; and (ii) the sustained decline in the Company's market
capitalization. With respect to the Wireless DataCom Division, despite the
fact that the revenue and gross profit of this business are higher in the
current three and nine-month periods than the comparable periods of the prior
year, this reporting unit was also determined to be impaired. This is
because in calculating the fair values of the Company's two reporting units
using a DCF method, the Company used a higher cost of capital in the November
30, 2007 impairment analysis compared to previous analyses as a result of the
current assessment of risk, which took into consideration the Company's
overall liquidity constraints at the present time.
Intangible assets are comprised as follows (in thousands):
February 28, 2008 February 28, 2007
------------------------ -------------------------
Amorti- Gross Accum. Gross Accum.
zation Carrying Amorti- Carrying Amorti-
Period Amount zation Net Amount zation Net
----- ------ ------ ----- ------ ------ -----
Developed/core
technology 5-7 yrs. $18,583 $4,767 $13,816 $12,992 $3,816 $9,176
Customer lists 5-7 yrs. 8,313 2,334 5,979 6,680 1,848 4,832
Contracts
backlog 1 yr. 3,060 2,968 92 1,790 1,378 412
Covenants not
to compete 4-5 yrs. 1,001 344 657 491 148 343
Licensing right 2 yrs. - - - 200 200 -
Tradename N/A 3,880 - 3,880 3,880 - 3,880
------ ------ ------ ------ ------ ------
$34,837 $10,413 $24,424 $26,033 $7,390 $18,643
====== ====== ====== ====== ====== ======
Amortization expense of intangible assets was $6,418,000, $3,463,000,
and $778,000 for the years ended February 28, 2008, 2007 and 2006,
respectively. All intangible asset amortization expense is attributable to
the Wireless DataCom Division.
Estimated amortization expense for the fiscal years ending February 28
is as follows:
2009 $5,053,000
2010 $4,961,000
2011 $4,438,000
2012 $4,091,000
2013 $1,677,000
Thereafter $ 324,000
NOTE 6 - FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Long-term Debt
Long-term debt consists of the following (in thousands):
February 28,
----------------------
2008 2007
------ ------
Bank term loan $27,530 $34,250
Subordinated note payable to DBS customer 5,000 -
Capital lease obligations - 8
------- -------
Total debt 32,530 34,258
Less portion due within one year (5,343) (2,944)
------- -------
Long-term debt $27,187 $31,314
======= =======
In May 2006, the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of Montreal, as administrative agent, and the other
financial institutions that from time to time may become parties to the
Credit Agreement. The Company initially borrowed $35 million under the term
loan and $3 million under the working capital line of credit. Borrowings are
secured by substantially all of the assets of CalAmp Corp. and its domestic
subsidiaries. Of the total proceeds of $38 million, $7 million was used to
pay off the Company's existing loans with U.S. Bank and the remaining $31
million, plus cash on hand of approximately $23 million, was used to fund the
purchase price for the Dataradio acquisition. During fiscal 2007 the Company
repaid in full the $3 million principal balance of the working capital line
of credit.
The Credit Agreement contained certain financial covenants and ratios
including: a total Leverage Ratio of not more than 2.75; total stockholders'
equity of not less than the sum of (i) $140,887,000, (ii) 50% of net income
for each fiscal year (excluding years with net losses) and (iii) 50% of net
cash proceeds from any issuance of equity; and a fixed charge coverage ratio
(earnings before interest, taxes, depreciation and other noncash charges to
fixed charges) of not less than 1.50. The net loss of $11.4 million in the
first quarter of fiscal 2008 caused an event of default with respect to the
financial covenants under the Credit Agreement. The Credit Agreement
provides that the interest rate on borrowings can be increased by 2.0% during
any period in which an event of default exists. Effective November 6, 2007
the banks elected to impose this additional default interest of 2.0%,
resulting in accrued interest expense of $204,000 (the "Default Interest
Amount"), which is included in other accrued liabilities in the consolidated
balance sheet at February 28, 2008.
In February 2008, the Company entered into an amendment of the credit
agreements with the banks (the "Amended Agreement"). Pursuant to the Amended
Agreement, cash proceeds of $3.8 million from the August 2007 sale of the
Company's TelAlert software business that had been held in escrow by the
banks were applied to reduce borrowings under the term loan, resulting in an
outstanding principal balance of $27.5 million at February 28, 2008. The
interest rate on the term loan was also increased by 0.5% as a result of this
amendment, and giving effect to this change, the term loan bears interest at
7.1% as of February 28, 2008. Term loan principal payments of $750,000 are
due on the last day of each calendar quarter during 2008, and a principal
payment of $1,250,000 is due on March 31, 2009. In addition, any collections
of the scheduled $140,000 per month on a note receivable from the buyer of
the TelAlert software business must be applied to reduce the term loan
principal.
The Amended Agreement has a termination date of June 30, 2009, at which
time all outstanding borrowings under the credit agreement are due and
payable. In the event that all outstanding obligations under the Amended
Agreement are paid in full by December 31, 2008, the Default Interest Amount
of $204,000 will be forgiven, and in the event that the Company receives cash
of at least $5,000,000 as a result of issuing equity or subordinated debt by
December 31, 2008, the Default Interest Amount will be reduced to $123,000.
Furthermore, in the event all outstanding obligations under the Amended
Agreement are not paid in full by December 31, 2008, an exit fee of $500,000
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 will be reduced to
$300,000.
At February 28, 2008, $2.4 million of the working capital line of
credit was reserved for outstanding irrevocable stand-by letters of credit.
The Amended Agreement also makes available $1 million for borrowings under a
working capital revolving loan. Borrowings under the revolver would bear
interest at the bank's prime rate plus 2% or LIBOR plus 3%. There were no
outstanding borrowings on the revolver at February 28, 2008.
Pursuant to the Amended Agreement, the banks agreed to waive all
financial covenant violations for fiscal 2008. The financial covenants with
which the Company had been noncompliant were eliminated as a result of this
amendment, and were replaced with new covenants that are effective for the
first quarter of fiscal 2009 that require minimum levels of consolidated
earnings before interest, taxes, depreciation and amortization (EBITDA) and
Wireless DataCom Division revenues. In addition, the Amended Agreement
contains a provision by which an event of default would occur if a certain
key customer of the Company's Satellite Division does not grant final
authorization/clearance for shipment of new generation products by June 30,
2008.
The Credit Agreement includes customary affirmative and negative
covenants including, without limitation, negative covenants regarding
additional indebtedness, investments, maintenance of the business, liens,
guaranties, transfers and sales of assets, and the payment of dividends and
other restricted payments.
Scheduled principal payments of the term loan with Bank of Montreal by
fiscal year are as follows:
Fiscal Year Term Loan
----------- ---------
2009 $ 2,580,000
2010 24,950,000
----------
$27,530,000
===========
On December 14, 2007, the Company entered into a settlement agreement
with its key DBS customer. Under the terms of the settlement agreement, the
Company issued to the customer a $5 million non-interest bearing promissory
note that is payable at a rate of $5.00 per unit on the first one million DBS
units purchased by this customer after the date of the settlement agreement.
Based on expected shipments of the DBS units, an amount of $2,763,000 has
been classified as current and $2,237,000 has been classified as non-current
in the accompanying consolidated balance sheet as of February 28, 2008. The
promissory note, which is subordinated to the outstanding indebtedness under
CalAmp's bank credit facility, will be accelerated if the Company becomes
insolvent, files for bankruptcy, or undergoes a change of control.
Other Non-Current Liabilities
Other non-current liabilities consist of the following (in thousands):
February 28,
----------------------
2008 2007
------ ------
Accrued warranty costs $ 1,051 $ -
Deferred rent 981 701
Deferred revenue 343 349
------- -------
$ 2,375 $ 1,050
======= =======
Contractual Cash Obligations
Following is a summary of the Company's contractual cash obligations as
of February 28, 2008 (in thousands):
Future Cash Payments Due by Fiscal Year
---------------------------------------
Contractual There-
Obligations 2009 2010 2011 2012 2013 after Total
--------------- ------ ------ ------ ------ ------ ------ ------
Bank debt $ 2,580 $24,950 $ - $ - $ - $ - $27,530
Subordinated
note payable 2,763 2,237 - - - - 5,000
Operating leases 2,526 1,761 1,405 392 23 - 6,107
Purchase
obligations 10,878 - - - - - 10,878
------- ------ ------ ------ ------ ----- ------
Total contractual
cash obligations $18,747 $28,948 $1,405 $ 392 $ 23 $ - $49,515
======= ======= ====== ===== ====== ===== ======
Purchase obligations consist of obligations under non-cancelable
purchase orders, primarily for inventory purchases of raw materials,
components and subassemblies.
Rent expense under operating leases was $3,202,000, $2,545,000, and
$2,291,000 for fiscal years 2008, 2007 and 2006, respectively.
NOTE 7 - INCOME TAXES
The Company's income (loss) from continuing operations before income
taxes consists of the following (in thousands):
Year ended February 28,
---------------------------------
2008 2007 2006
------- ------ ------
Domestic $(100,427) $ 6,645 $27,506
Foreign (2,863) (478) 110
--------- ------- -------
$(103,290) $ 6,167 $27,616
========= ======= =======`
Income tax provision (benefit) attributable to income (loss) from
continuing operations consists of the following (in thousands):
Year ended February 28,
--------------------------------
2008 2007 2006
------ ------ ------
Current:
Federal $ - $ 618 $ 2,328
State - 194 300
Foreign 15 29 151
-------- ------- --------
Total current 15 841 2,779
-------- ------- --------
Deferred:
Federal (15,972) 3,712 4,624
State (4,983) (1,182) 2,440
-------- ------- --------
Total deferred (20,955) 2,530 7,064
-------- ------- --------
Charge in lieu of taxes
attributable to tax
benefit from stock options
and warrants - 1,345 1,311
-------- ------- --------
$(20,940) $ 4,716 $ 11,154
======== ======= ========
Total income tax expense (benefit) was allocated as follows (in
thousands):
Year ended February 28,
--------------------------------
2008 2007 2006
------ ------ ------
Income (loss) from continuing
operations $(20,940) $ 4,716 $ 11,154
Income (loss) from discontinued
operations 2,431 (1,935) (1,287)
-------- ------- --------
$(18,509) $ 2,781 $ 9,867
======== ======= ========
Differences between the income tax provision attributable to income
from continuing operations and income taxes computed using the statutory U.S.
federal income tax rate are as follows (in thousands):
Year ended February 28,
----------------------------------
2008 2007 2006
------ ------ ------
Income tax at U.S. statutory
federal rate of 35% $(36,152) $ 2,158 $ 9,666
State income taxes, net of
federal income tax effect (2,708) (55) 1,526
Foreign taxes 73 192 113
In-process research and development - 2,398 -
Nondeductible goodwill 17,289 - -
Valuation allowance reductions 937 - -
Other, net (379) 23 (151)
-------- ------- -------
$(20,940) $ 4,716 $11,154
======== ======= =======
The components of the net deferred income tax asset (liability) at
February 28, 2008 and 2007 for U.S. income tax purposes are as follows (in
thousands):
February 28,
-----------------------
2008 2007
------ ------
Inventory reserve $ 1,675 $ 537
Allowance for doubtful accounts 519 192
Warranty reserve 1,967 507
Compensation and vacation accruals 893 486
Depreciation and amortization 2,378 (9,127)
Stock-based compensation 1,498 781
Net operating loss carryforwards 8,122 1,283
Research and development credits 2,794 2,490
Other tax credits 1,689 1,690
Other, net 407 188
------- ------
21,942 (973)
Valuation allowance (1,834) (1,841)
------- ------
Net deferred tax asset (liability) $20,108 (2,814)
Less current portion 5,306 4,637
------- ------
Non-current portion $14,802 $(7,451)
======= ======
The Company believes that it is more likely than not that the results
of future operations will generate sufficient taxable income to realize the
deferred tax assets above.
The Company also has deferred tax assets for Canadian income tax
purposes of approximately $5.4 million at February 28, 2008 which relate
primarily to research and development tax credits for Canadian federal and
Quebec provincial income taxes. The Company has recorded a 100% valuation
allowance on the Canadian federal and Quebec provincial deferred tax assets
reflecting the uncertainty regarding the future realization of these tax
benefits.
At February 28, 2008, the Company had net operating loss carryforwards
("NOLs") of approximately $18.6 million and $29.9 million for federal and
state purposes, respectively. The federal NOLs expire at various dates
through fiscal 2024, and the state NOLs expire at various dates through
fiscal 2015.
As of February 28, 2008, the Company had foreign tax credit
carryforwards of $633,000 expiring at various dates through 2013 and research
and development tax credit carryforwards of $2.9 million and $1.9 million for
federal and state income tax purposes, respectively, expiring at various
dates through 2028.
The Company has not provided withholdings and U.S. federal income taxes
on undistributed earnings of its foreign subsidiaries because such earnings
are or will be reinvested indefinitely in such subsidiaries or will be
approximately offset by credits for foreign taxes paid. It is not practical
to determine the U.S. federal income tax liability, if any, that would be
payable if such earnings were not reinvested indefinitely.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" (FIN 48). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial statements
as "more-likely-than-not" to be sustained by the taxing authorities. FIN 48
provides guidance on the de-recognition, measurement and classification of
income tax uncertainties, along with any related interest and penalties.
FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties. The Company adopted
FIN 48 at the beginning of the fiscal 2008 first quarter. A reconciliation
of the beginning and ending amount of unrecognized tax benefits is as follows
(in thousands):
Balance at March 1, 2007 $ 5,935
Decrease related to prior year position (476)
Increase related to current year position 825
-------
Balance at February 28, 2008 $ 6,284
=======
The unrecognized tax benefits of $6,284,000, if recognized, would
impact the effective tax rate on income from continuing operations.
Estimated interest and penalties related to the underpayment of income
taxes are classified as a component of interest expense in the consolidated
statement of operations.
The Company files income tax returns in the U.S. federal jurisdiction,
various states and foreign jurisdictions. Income tax returns filed for
fiscal years 1999 and earlier are not subject to examination by U.S. federal
and state tax authorities. Certain income tax returns for fiscal years 2000
through 2007 remain open to examination by U.S federal and state tax
authorities. The income tax returns filed by the Company's French subsidiary
for fiscal years 2004 through 2007 are currently being examined by the French
tax authorities. Certain income tax returns for fiscal years 2005 through
2007 remain open to examination by Canada federal and Quebec provincial tax
authorities. The Company believes that it has made adequate provision for
all income tax uncertainties pertaining to these open tax years.
NOTE 8 - STOCKHOLDERS' EQUITY
Stock Options
Effective July 30, 2004, the Company adopted the 2004 Incentive Stock
Plan (the "2004 Plan"). Under the 2004 Plan, various types of equity awards
can be made, including stock options, stock appreciation rights, restricted
stock, restricted stock units (RSUs), phantom stock and bonus stock. To
date, only stock options, restricted stock and RSUs have been granted under
the 2004 Plan. Equity awards to officers and other employees become
exercisable on a vesting schedule established by the Compensation Committee
of the Board of Directors at the time of grant, usually over a four-year
period. Options can no longer be granted under the Company's 1999 Stock
Option Plan and the 1989 Key Employee Stock Option Plan.
Option are granted with exercise prices equal to market value on the
date of grant. Option grants expire 10 years after the date of grant. The
Company treats an equity award with graded vesting as a single award for
expense attribution purposes and recognizes compensation cost on a straight-
line basis over the requisite service period of the entire award.
The following table summarizes the stock option activity for fiscal
years 2008, 2007 and 2006 (in thousands except dollar amounts):
Weighted
Number of Average
Options Option Price
-------- --------
Outstanding at February 28, 2005 2,644 $10.46
Granted 743 6.21
Exercised (516) 4.43
Forfeited or expired (248) 14.16
----- ------
Outstanding at February 28, 2006 2,623 $10.09
Granted 667 12.23
Exercised (341) 4.10
Forfeited or expired (488) 15.99
----- ------
Outstanding at February 28, 2007 2,461 $10.33
Granted 355 4.46
Exercised (66) 3.24
Forfeited or expired (368) 11.03
----- ------
Outstanding at February 28, 2008 2,382 $ 9.54
===== ======
Exercisable at February 28, 2008 1,442 $10.64
===== ======
Changes in the shares of the Company's nonvested restricted stock and
RSUs during the fiscal years 2008 and 2007 were as follows (in thousands
except dollar amounts):
Weighted
Number of Average
Shares Fair Value
-------- ----------
Outstanding at February 28, 2006 - $ -
Granted 24 6.51
Vested - -
Forfeited (4) 6.51
-----
Outstanding at February 28, 2007 20 6.51
Granted 542 3.71
Vested (80) 4.84
Forfeited (8) 4.28
-----
Outstanding at February 28, 2008 474 $3.63
=====
At February 28, 2008, there were 967,801 award units available for
grant under the 2004 Plan. The grant of one stock option or stock
appreciation right is equal to one award unit. The grant of other forms of
equity awards, including restricted stock, RSUs, phantom stock and bonus
stock, each reduce the amount of award units available to grant under the
2004 Plan at the rate of 1.2 award units for each share of stock or RSU
granted.
Under the 2004 Plan, on the day of the annual stockholders meeting each
non-employee director receives an equity award of up to 10,000 award units.
Equity awards granted to non-employee directors generally vest one year from
date of grant.
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following assumptions:
Year ended February 28,
Black-Scholes --------------------------------
Valuation Assumptions (1) 2008 2007 2006
------------------------ ------ ------ ------
Expected life (years) (2) 6 6 5
Expected volatility (3) 61%-64% 69%-81% 68%-95%
Risk-free interest rates (4) 4.5%-4.6% 4.6%-5.2% 3.9%-4.6%
Expected dividend yield 0% 0% 0%
(1) Beginning on the date of adoption of SFAS No. 123R, forfeitures are
estimated based on historical experience; prior to the date of adoption,
forfeitures were recorded as they occurred.
(2) The expected life of stock options is estimated based on historical
experience.
(3) The expected volatility is estimated based on historical volatility of
the Company's stock price.
(4) Based on the U.S. Treasury constant maturity interest rate whose term
is consistent with the expected life of the stock options.
The weighted average fair value for stock options granted in fiscal
years 2008, 2007 and 2006 was $2.71, $8.63, and $4.51, respectively.
The weighted average remaining contractual term and the aggregate
intrinsic value of options outstanding as of February 28, 2008 was 6.3 years
and $67,000, respectively. The weighted average remaining contractual term
and the aggregate intrinsic value of options exercisable as of February 28,
2008 was 4.9 years and $67,000, respectively. The total intrinsic value for
stock options exercised during the year ended February 28, 2008 was $179,000.
Net cash proceeds from the exercise of stock options for the years ended
February 28, 2008, 2007 and 2006 was $213,000, $1,397,000 and $2,290,000,
respectively. The income tax benefit from exercise of stock options for the
same time periods was $-0-, $568,000 and $1,143,000, respectively.
Stock-based compensation expense for the years ended February 28, 2008
and 2007 is included in the following captions of the consolidated statements
of operations as follows (in thousands):
Year ended February 28,
-----------------------
2008 2007
------- ------
Cost of revenues $ 64 $ 78
Research and development 205 220
Selling 294 161
General and administrative 1,590 1,349
------ ------
$2,153 $1,808
====== ======
Included in the loss from discontinued operations in the consolidated
statements of operations is stock-based compensation expense of $85,000 and
$405,000 for the years ended February 28, 2008 and 2007, respectively.
As of February 28, 2008, there was $5.5 million of total unrecognized
stock-based compensation cost related to nonvested stock options and
nonvested restricted stock. That cost is expected to be recognized over a
weighted-average remaining vesting period of 2.6 years.
Preferred Stock Purchase Rights
At February 28, 2008, 25,040,842 preferred stock purchase rights are
outstanding. Each right may be exercised to purchase one-hundredth of a
share of Series A Participating Junior Preferred Stock at a purchase price of
$50 per right, subject to adjustment. The rights may be exercised only after
commencement or public announcement that a person (other than a person
receiving prior approval from the Company) has acquired or obtained the right
to acquire 20% or more of the Company's outstanding common stock. The
rights, which do not have voting rights, may be redeemed by the Company at a
price of $.01 per right within ten days after the announcement that a person
has acquired 20% or more of the outstanding common stock of the Company. In
the event that the Company is acquired in a merger or other business
combination transaction, provision shall be made so that each holder of a
right shall have the right to receive that number of shares of common stock
of the surviving company which at the time of the transaction would have a
market value of two times the exercise price of the right. 750,000 shares of
Series A Junior Participating Cumulative Preferred Stock, $.01 par value, are
authorized.
Note 9 - EARNINGS PER SHARE
Following is a summary of the calculation of basic and diluted weighted
average shares outstanding for fiscal 2008, 2007 and 2006 (in thousands):
Year ended February 28,
--------------------------------
2008 2007 2006
------ ------ ------
Weighted average shares:
Basic weighted average number
of common shares outstanding 23,881 23,353 22,605
Effect of dilutive securities:
Stock options - - 628
Shares held in escrow - - 182
------ ------ ------
Diluted weighted average number
of common shares outstanding 23,881 23,353 23,415
====== ====== ======
Options outstanding at February 28, 2008 and 2007 were excluded from
the computation of diluted earnings per share for the years then ended
because the Company reported a year-to-date net loss and the effect of
inclusion would be antidilutive (i.e., including such options would result in
a lower loss per share).
Outstanding stock options in the amount of 533,000 at February 28, 2006
which had exercise prices ranging from $10.49 to $304.67, were not included
in the computation of diluted earnings per share for the year then ended
because the exercise price of these options was greater than the average
market price of the common stock and accordingly the effect of inclusion
would be antidilutive.
In connection with the acquisition of Vytek, at February 28, 2006,
224,876 shares of common stock were held in an escrow account to satisfy
indemnification claims by the Company as further described in Note 2 herein.
These shares held in escrow were excluded from the basic weighted average
number of common shares outstanding. However, the dilutive impact of these
shares was included in the diluted weighted average number of common shares
outstanding in 2006.
NOTE 10 - OTHER FINANCIAL INFORMATION
"Net cash provided (used) by operating activities" in the consolidated
statements of cash flows includes cash payments for interest and income as
follows (in thousands):
Year ended February 28,
--------------------------------
2008 2007 2006
------ ------ ------
Interest paid $ 2,322 $ 1,964 $ 453
Income taxes paid (net
refunds received) $(1,645) $(1,364) $2,721
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Year ended February 28,
--------------------------------
2008 2007 2006
------ ------ ------
Non-cash consideration issued in
partial satisfaction of product
performance claim by key customer:
Common stock $ 2,560 $ - $ -
Warrants $ 252 $ - $ -
Subordinated note payable $ 5,000 $ - $ -
Non-cash consideration received from
the sale of the Solutions Division's
TelAlert software business:
Note receivable,
net of payments received $ 1,970 $ - $ -
Fair value of preferred stock $ 3,137 $ - $ -
Earn-out amount for TechnoCom
acquisition, net of payments $ 1,284 $ - $ -
Company common stock issued from
escrow fund as additional
purchase consideration for the
2004 Vytek acquisition $ - $ 2,052 $ -
Valuation and Qualifying Accounts
Following is the Company's schedule of valuation and qualifying
accounts for the last three years (in thousands):
Charged
Balance at (credited) Balance
beginning to costs and at end
of period expenses Deductions Other of period
--------- -------- --------- --------- ---------
Allowance for doubtful accounts:
-------------------------------
Fiscal 2006 $ 477 $ (71) $ (203) $ - $ 203
Fiscal 2007 203 116 (56) 84 (1) 347
Fiscal 2008 347 1,398 (1,111) 637 (2) 1,271
Warranty reserve:
----------------
Fiscal 2006 $ 746 $ 223 $ (492) $ - $ 477
Fiscal 2007 477 1,708 (981) 91 (1) 1,295
Fiscal 2008 1,295 13,435 (1,049) (8,812)(3) 4,869
(1) These represent amounts of allowances and reserves pertaining
to the assets acquired from Dataradio.
(2) These represent amounts of allowances and reserves pertaining
to the assets acquired from AirIQ.
(3) The warranty reserve was reduced by $8.8 million as the result
of a settlement agreement with a key DBS customer, as further
described in Note 11.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases the building that houses its corporate office,
Satellite Division offices and manufacturing plant in Oxnard, California
under an operating lease that expires June 30, 2011. The lease agreement
requires the Company to pay all maintenance, property taxes and insurance
premiums associated with the building. The Wireless DataCom Division leases
facilities in California, Minnesota, Georgia, Canada and France. The Company
is obligated under a lease commitment for offices in San Diego, California,
in which the Solutions Division operated until the TelAlert business was
sold. The Company has subleased a portion of the San Diego office space and
is attempting to sublease the remainder. The Company also leases certain
manufacturing equipment and office equipment under operating lease
arrangements. A summary of future operating lease commitments is included in
the contractual cash obligations table in Note 6.
DBS Product Field Performance Issues
During fiscal 2007, the Company received notification from one of its
DBS customers of field performance issues with a DBS product that the Company
began shipping in September 2002. After examining the various component
parts used in the manufacture of these products, it was determined by the
Company that the performance issue was the result of a deterioration of the
printed circuit board (PCB) laminate material used in these products.
During fiscal 2007, the DBS customer returned approximately 250,000
units to the Company for analysis and rework. An additional 985,000 units
have been returned by this customer subsequent to fiscal 2007, and it is
expected that additional units will be returned to the Company in the future.
In addition to returning product, in May 2007 this DBS customer put on hold
all orders for CalAmp products, including newer generation products, pending
the requalification of all products manufactured by the Company for this
customer.
During fiscal 2007 fourth quarter, CalAmp increased its accrued warranty
costs by $500,000 for this matter. This amount was predicated on the
customer accepting a planned corrective action procedure that CalAmp had
developed for existing and projected future product returns. Under this
planned corrective action, CalAmp expected that the field performance issue
could be resolved by retuning the circuitry as a lower cost alternative to
replacing certain parts and materials.
Prior to the issuance of its financial statements for the fiscal 2008
first quarter, the Company learned that the DBS customer would not accept the
Company's proposed rework approach for the previous generation products that
involved retuning the circuitry. This led the Company to conclude that
certain parts, including the radio frequency board assembly, would need to be
replaced, which is a significantly more costly process. As a result, the
Company recorded a charge of $16.3 million in the quarter ended May 31, 2007
to increase reserves for this matter. These additional reserves encompass
activities such as:
> Extending corrective measures to cover all products returned within
three years of initial shipment that utilize the aforementioned
laminate;
> Performing substantial corrective measures on older generation
products by replacing the PCB material and components; and
> Reserving for materials that are expected to be unusable.
The $16.3 million charge in the quarter ended May 31, 2007 and resulting
loss for that quarter caused an event of default with respect to the
financial covenants under the Company's bank credit agreement, as discussed
further in Note 5. During the quarters ended August 31, 2007 and November
30, 2007, the Company recorded an additional charge of $1.5 million and $0.1
million, respectively related to this matter. Total fiscal 2008 charges
related to this matter of $17.9 million are included in cost of revenues in
the accompanying consolidated statements of operations. At February 28,
2008, the Company has aggregate reserves of $8.5 million for this matter, of
which $2.4 million is an inventory reserve, approximately $1.8 million is a
vendor liability reserve included in other accrued liabilities, and the
remaining $4.3 million is a reserve for accrued warranty costs.
On December 14, 2007, the Company entered into a settlement agreement
with this customer. Under the terms of the settlement agreement, CalAmp
agreed to rework certain DBS products previously returned to the Company or
to be returned over a 15-month period and will provide extended warranty
periods for workmanship (18 months) and product failures due to the issue
with the PCB laminate material (36 months). In addition, as part of the
settlement:
> The Company issued to the customer one million shares of CalAmp
common stock.
> The Company issued to the customer a fully vested warrant to
purchase an additional 350,000 shares of common stock at $3.72
per share, exercisable for three years.
> The customer agreed to restrictions on 500,000 shares of the
common stock issued in connection with the settlement and the
warrant shares that limit sales to 285,000 shares in any one year
period following the settlement date. The customer also agreed to
vote all of its CalAmp shares (including the warrant shares)
either with the recommendation of the Company's Board of Directors
or in the same proportion as all other outstanding shares.
> The Company issued to the customer a $5 million non-interest bearing
promissory note that is payable at a rate of $5.00 per unit on the
first one million DBS units purchased by a key DBS customer after
the date of the settlement agreement. The promissory note, which is
subordinated to the outstanding indebtedness under CalAmp's bank
credit facility, will be accelerated if the Company becomes
insolvent, files for bankruptcy, or undergoes a change of control.
> The Company granted piggyback registration rights to the customer
to include its CalAmp shares in certain offerings by the Company.
> The customer agreed to pay $1.3 million of $2.3 million in
outstanding accounts receivable due to the Company, with the
remaining $1 million of receivables canceled by the Company as
additional consideration for the settlement.
> The parties agreed to immediately release each other from claims
related to certain products manufactured with the defective PCB
laminate material, and to release claims related to other newer
products upon the later of: (i) the 15-month anniversary of the
settlement agreement; and (ii) the date that the Company has
shipped a total of 400,000 reworked products; provided that if
this delayed release date has not occurred within two years of the
original settlement date, such claims will not be released. In
addition, each party has agreed not to initiate any proceeding
with respect to the delayed release claims prior to the earlier of
the delayed release date and the second anniversary of the
settlement, subject to certain acceleration events based on the
Company's performance under the settlement agreement.
In the fourth quarter of fiscal 2008, the Company recorded the
subordinated note payable of $5,000,000, the issuance of one million shares
of common stock valued at $2,560,000 (the fair value of the shares as of the
settlement date of December 14, 2007), the common stock purchase warrants
valued at $252,000 and the reduction of accounts receivable of $1,000,000. A
corresponding reduction of $8,812,000 was made in the reserve for accrued
warranty costs to reflect this settlement consideration given by the Company.
While the Company believes that its established reserves as of February
28, 2008 of $8.5 million will be adequate to cover total future product
rework costs under this settlement agreement, no assurances can be given that
the ultimate costs will not materially differ from the current estimate.
The Company has on-hand inventory of approximately $10.1 million and
outstanding purchase commitments of $8.6 million for materials that are
specific to the products that the Company manufactures for this customer,
which amounts are not currently reserved for because the Company believes
these materials can be used in the ordinary course of business as future
shipments of products are made to this customer. Nonetheless, changes in the
forecasted product demand from this customer could require that the inventory
reserve and/or the reserve for vendor commitment liabilities be increased to
cover some portion of these amounts.
NOTE 12 - LEGAL PROCEEDINGS
In May 2007, a patent infringement suit was filed against the Company.
The lawsuit contends that the Company infringed on four patents and seeks
injunctive and monetary relief. The Company asserted counterclaims in August
2007, through which the Company denies infringement of any valid claim of the
plaintiff and seeks a declaration to that effect. The Court ordered the
dismissal of claims related to three patents. Discovery is ongoing for the
remaining claim. The Company believes the lawsuit is without merit and
intends to vigorously defend against this action. No loss accrual has been
made in the accompanying financial statements for this matter.
A lawsuit was filed against the Company on September 15, 2006 by CN
Capital, the seller of the assets of Skybility which the Company acquired in
April 2005. The lawsuit contends that the Company owes CN Capital
approximately $1.6 million under the earn-out provision of the Skybility
Asset Purchase Agreement dated April 18, 2005. On February 26, 2007, the
Company filed a cross-complaint against CN Capital for breach of contract,
negligent interference with prospective economic advantage, and contract
rescission. The Company believes the lawsuit filed by CN Capital is without
merit and intends to vigorously defend against this action. No loss accrual
has been made in the accompanying financial statements for this matter.
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.
In May 2001, the Securities and Exchange Commission ("SEC") commenced
an investigation into the circumstances surrounding the misstatements in the
Company's consolidated financial statements for its 2000 and 2001 fiscal
years caused by its former controller. In April 2004, the SEC concluded its
investigation and issued a cease and desist order directing the Company to
not violate federal securities laws in the future.
NOTE 13 - SEGMENT AND GEOGRAPHIC DATA
Information by business segment is as follows:
Year ended Year ended
February 28, 2008 February 28, 2007
------------------------------------ -------------------------------------
Operating Segments Operating Segments
------------------- -------------------
Satellite Wireless Satellite Wireless
Division DataCom Corporate Total Division DataCom Corporate Total
-------- -------- ------- ----- -------- ------- ------- -----
Revenues $ 50,490 $ 90,417 $ 140,907 $155,127 $ 56,587 $211,714
Gross profit
(loss) $(14,808) $ 33,303 $ 18,495 $ 23,402 $ 22,033 $ 45,435
Gross margin (29.3)% 36.8% 13.1% 15.1% 38.9% 21.5%
Operating
income (loss) $(63,924) $(30,473) $(6,421) $(100,818) $ 17,317 $ (5,888) $(5,853)$ 5,576
Identifiable
Assets $ 22,856 $ 85,609 $ 34,576 $ 143,041 $124,227 $ 92,019 $13,457 $229,703
Year ended
February 28, 2006
------------------------------------
Operating Segments
-------------------
Satellite Wireless
Division DataCom Corporate Total
-------- -------- ------- -----
Revenues $ 170,503 $ 26,405 $196,908
Gross profit
(loss) $ 36,274 $ 9,315 $ 45,589
Gross margin 21.2% 35.3% 23.2%
Operating
income (loss) $ 30,785 $ 576 $(4,278) $ 27,083
Identifiable
Assets $ 79,885 $ 30,266 $94,195 $204,346
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 for the CEO, CFO and several
other corporate staff members, and expenses such as audit fees, investor
relations, stock listing fees, director and officer liability insurance, and
board of director fees and expenses.
The Company does not have significant long-lived assets outside the
United States.
The Company's revenues were derived mainly from customers in the United
States, which represented 94%, 94% and 95% of consolidated revenues in fiscal
2008, 2007 and 2006, respectively.
NOTE 14 - QUARTERLY FINANCIAL INFORMATION (unaudited)
The following summarizes certain quarterly statement of operations data
for each of the quarters in fiscal years 2008 and 2007 (in thousands, except
percentages and per share data):
Fiscal 2008
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
Revenues $46,393 $32,668 $32,061 $29,785 $140,907
Gross profit (loss)(5,386) 6,315 10,028 7,538 18,495
Gross margin (11.6)% 19.3% 31.3% 25.3% 13.1%
Loss from
continuing
operations (10,945) (3,258) (58,931) (9,216) (82,350)
Loss from discon-
tinued operations (417) (180) - - (597)
Loss on sale of
discontinued
operations - (935) - (267) (1,202)
Net loss (11,362) (4,373) (58,931) (9,483) (84,149)
Net loss per
diluted share (0.48) (0.19) (2.49) (0.38) (3.53)
The gross loss and loss from continuing operations in the fiscal 2008
first quarter include a pretax charge of $16.3 million for a DBS product
performance issue as described in Note 11.
The losses from continuing operations in the fiscal 2008 third and
fourth quarters include goodwill impairment charges of $65,745,000 and
$5,531,000, respectively.
Fiscal 2007
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ------
Revenues $42,957 $54,629 $59,103 $55,025 $211,714
Gross profit 10,088 12,656 12,041 10,650 45,435
Gross margin 23.5% 23.2% 20.4% 19.4% 21.5%
Income (loss)
from continuing
operations (3,409) 1,698 1,439 1,723 1,451
Loss from discon-
tinued operations(30,642) (463) (543) (991) (32,639)
Net income (loss) (34,051) 1,235 896 732 (31,188)
Net income (loss)
per diluted share (1.47) 0.05 0.04 0.03 (1.34)
The loss from continuing operations in the fiscal 2007 first quarter is
the result of the IPR&D write-off of $6,850,000 associated with the
acquisition of Dataradio.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of 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) of the Securities
Exchange Act of 1934), as amended (the "Exchange Act") as of February 28,
2008, that the Company's disclosure controls and procedures are effective, at
the reasonable assurance level, 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.
Management's Report on Internal Control over Financial Reporting
The report of management of the Company regarding internal control over
financial reporting is set forth in Item 8 of this Annual Report on Form 10-K
under the caption "Management's Report on Internal Control over Financial
Reporting" and incorporated herein by reference.
Attestation Report of Independent Registered Public Accounting Firm
The attestation report of the Company's independent registered public
accounting firm regarding internal control over financial reporting is set
forth in Item 8 of this Annual Report on Form 10-K under the caption "Report
of Independent Registered Public Accounting Firm" and incorporated herein by
reference.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial
reporting during the fourth quarter of fiscal 2008 that have materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Compensatory Arrangements of Executive Officers
On March 10, 2008, the Board of Directors of the Company, upon the
recommendation of the Compensation Committee, established the target and
maximum bonuses and performance goals under the fiscal 2009 executive officer
incentive compensation plan. The individuals covered by the fiscal 2009
executive officer incentive compensation plan are:
> Richard Gold President and Chief Executive Officer
> Michael Burdiek President, Wireless DataCom Division
> Patrick Hutchins President, Satellite Division
> Garo Sarkissian Vice President Corporate Development
> Richard Vitelle Vice President Finance, Chief Financial
Officer and Corporate Secretary
Mr. Gold is eligible for target and maximum bonuses of up to 80% and
150%, respectively, of his annual salary. Messrs. Burdiek, Hutchins and
Vitelle are each eligible for target bonuses of up to 50% of annual salary,
and maximum bonuses of up to 120% of annual salary. Mr. Sarkissian is
eligible for target and maximum bonuses of up to 40% and 80%, respectively,
of his annual salary.
The target and maximum bonus amounts for Messrs. Gold, Sarkissian and
Vitelle are based 70% on the Company attaining certain levels of consolidated
revenue and consolidated earnings before interest, taxes, depreciation and
amortization (EBITDA) for fiscal 2009 and 30% on these individuals achieving
certain other business goals.
The target and maximum bonus amounts for Mr. Burdiek are based 60% on
the Wireless DataCom Division attaining certain levels of revenue and EBITDA
for fiscal 2009, 20% on the Company attaining certain levels of consolidated
EBITDA for fiscal 2009, and 20% on Mr. Burdiek achieving certain other
business goals.
The target and maximum bonus amounts for Mr. Hutchins are based 60% on
the Satellite Division attaining certain levels of revenue and EBITDA for
fiscal 2009, 20% on the Company attaining certain levels of consolidated
EBITDA for fiscal 2009, and 20% on Mr. Hutchins achieving certain other
business goals.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about executive officers is included in Part I, Item 1 of
this Annual Report on Form 10-K.
The following information will be included in the Company's definitive
proxy statement for the Annual Meeting of Stockholders to be held on July 24,
2008 and is incorporated herein by reference in response to this item:
> Information regarding directors of the Company who are standing for
reelection.
> Information regarding the Company's Audit Committee and designated
"audit committee financial experts".
> Information on the Company's "Code of Business Conduct and Ethics" for
directors, officers and employees.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" in the
Company's definitive proxy statement for the Annual Meeting of Stockholders
to be held on July 24, 2008 is incorporated herein by reference in response
to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information under the caption "Stock Ownership" in the Company's
definitive proxy statement for the Annual Meeting of Stockholders to be held
on July 24, 2008 is incorporated herein by reference in response to this
item.
Securities Authorized for Issuance under Equity Compensation Plans
At February 28, 2008, the Company had three stock option plans, the
"1989 Plan", the "1999 Plan" and the "2004 Plan". Options to purchase the
Company's common stock have been granted to both employees and non-employee
directors. Options can no longer be granted under the 1989 and 1999 Plans.
The 1989, 1999 and 2004 Plans were all approved by the Company's
stockholders.
Further information about these plans is set forth in Note 8 to the
consolidated financial statements. Certain information about the plans is as
follows:
Number of Number of securities
securities to be Weighted-average remaining available for
issued upon exercise price future issuance under
exercise of of outstanding equity compensation
outstanding options, plans (excluding
options, warrants warrants and securities reflected in
and rights rights the first column)
----------- ---------- -------------
2,382,000 $9.54 968,000
=========== ========== =============
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information contained under the captions "Certain Relationships and
Related Transactions" and "Director Independence" in the Company's definitive
proxy statement for the Annual Meeting of Stockholders to be held on July 24,
2008 is incorporated herein by reference in response to this item.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained under the caption "Independent Public
Accountants" in the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on July 24, 2008 is incorporated herein by
reference in response to this item.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report:
1. The following consolidated financial statements of CalAmp Corp. and
subsidiaries are filed as part of this report under Item 8 -
Financial Statements and Supplementary Data:
Form 10-K
Page No.
--------
Management's Report on Internal Control Over
Financial Reporting 39
Reports of Independent Registered Public
Accounting Firm 40
Consolidated Balance Sheets 43
Consolidated Statements of Operations 44
Consolidated Statements of Stockholders' Equity
and Comprehensive Income (Loss) 45
Consolidated Statements of Cash Flows 46
Notes to Consolidated Financial Statements 48
2. Financial Statements Schedules:
------------------------------
Schedule II - Valuation and Qualifying Accounts is included in the
consolidated financial statements which are filed as part of this report
under Item 8 - Financial Statements and Supplementary Data.
All other financial statement schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
3. Exhibits
--------
Exhibits required to be filed as part of this report are:
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Certificate of Incorporation
reflecting the change in the Company's name to CalAmp Corp.
and the increase in authorized common stock from 30 million
to 40 million shares (incorporated by reference to Exhibit
3.1 of the Company's Report on Form 10-Q for the period
ended August 31, 2004).
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 of the Company's Annual Report on Form 10-K for
the year ended February 28, 2005).
4.1 Amended and Restated Rights Agreement, amended and restated
as of September 5, 2001, by and between Registrant and
Mellon Investor Services LLC, as Rights Agent (incorporated
by reference to Exhibit 4.1 filed with Company's Annual
Report on Form 10-K for the year ended February 28, 2007).
4.2 Warrant, dated December 14, 2007, issued by CalAmp Corp. to
EchoStar Technologies Corporation (incorporated by
reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K dated December 14, 2007).
10. Material Contracts:
(i) Other than Compensatory Plan or Arrangements:
10.1 Building lease dated June 10, 2003 between the Company and
Sunbelt Enterprises for a facility in Oxnard, California
(incorporated by reference to Exhibit 10-1 filed with the
Company's Report on Form 10-Q for the quarter ended May 31,
2003).
10.2 Credit Agreement dated as of May 26, 2006 between and among
the Company, certain subsidiaries of the Company and Bank of
Montreal as administrative agent (incorporated by reference
to Exhibit 10.1 of the Company's Current Report on Form 8-K
filed on June 2, 2006).
10.3 Second Amendment and Consent to Credit Agreement dated
August 9, 2007 between CalAmp Corp. and Bank of Montreal as
administrative agent (incorporated by reference to Exhibit
10-1 filed with the Company's Report on Form 10-Q for the
quarter ended August 31, 2007).
10.4 Third Amendment and Consent to Credit Agreement dated
December 1, 2007 between CalAmp Corp. and Bank of Montreal
as administrative agent (incorporated by reference to
Exhibit 10-1 filed with the Company's Report on Form 10-Q
for the quarter ended November 30, 2007).
10.5 Fourth Amendment and Waiver to Credit Agreement dated
February 29, 2008 between CalAmp Corp. and Bank of Montreal
as administrative agent (incorporated by reference to
Exhibit 10-1 filed with the Company's Current Report on
Form 8-K dated February 29, 2008).
10.6 Form of Directors and Officers Indemnity Agreement
(incorporated by reference to Exhibit 10.3 of the
Company's Annual Report on Form 10-K for the year ended
February 28, 2005).
10.7 Settlement Agreement, dated December 14, 2007, by and
Between CalAmp Corp. and EchoStar Technologies Corporation
(incorporated by reference to Exhibit 10.1 filed with the
Company's Current Report on Form 8-K dated December 14,
2007).
10.8 Subordinated Promissory Note, dated December 14, 2007, in
the amount of $5,000,000 issued by CalAmp Corp. to EchoStar
Technologies Corporation (incorporated by reference to
Exhibit 10.2 filed with the Company's Current Report on
Form 8-K dated December 14, 2007).
10.9 Registration Rights Agreement, dated December 14, 2007, by
and between CalAmp Corp. and EchoStar Technologies
Corporation (incorporated by reference to Exhibit 10.3
filed with the Company's Current Report on Form 8-K dated
December 14, 2007).
10.10 Voting and Lock-Up Agreement, dated December 14, 2007, by
and between CalAmp Corp. and EchoStar Technologies
Corporation (incorporated by reference to Exhibit 10.4
filed with the Company's Current Report on Form 8-K dated
December 14, 2007).
(ii) Compensatory Plans or Arrangements required to be filed as
Exhibits to this Report pursuant to Item 15 (b) of this
Report:
10.11 1989 Key Employee Stock Option Plan (incorporated by
reference to Exhibit 4.4 of the Company's Registration
Statement No. 33-31427 on Form S-8).
10.11.1 Amendment No. 1 to the 1989 Key Employee Stock Option Plan
(incorporated by reference to Exhibit 4.7 of the Company's
Registration Statement No. 33-36944 on Form S-8).
10.11.2 Amendment No. 2 to the 1989 Key Employee Stock Option Plan
(incorporated by reference to Exhibit 4.8 of the Company's
Registration Statement No. 33-72704 on Form S-8).
10.11.3 Amendment No. 3 to the 1989 Key Employee Stock Option Plan
(incorporated by reference to Exhibit 4.10 of the
Company's Registration Statement No. 33-60879 on Form S-
8).
10.12 The 1999 Stock Option Plan (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement No.
333-93097 on Form S-8).
10.13 CalAmp Corp. 2004 Stock Incentive Plan as amended and
Restated (incorporated by reference to Exhibit 10.6 filed
with Company's Annual Report on Form 10-K for the year
ended February 28, 2007).
10.14 Employment Agreement between the Company and Patrick
Hutchins dated May 31, 2002 (incorporated by
reference to Exhibit 10.6 filed with Company's Annual
Report on Form 10-K for the year ended February 28, 2004).
10.15 Employment Agreement between the Company and Fred Sturm
dated May 31, 2002 (incorporated by reference to Exhibit
10.7 filed with Company's Annual Report on Form 10-K for
the year ended February 28, 2004).
10.16 Employment Agreement between the Company and Richard
Vitelle dated May 31, 2002 (incorporated by reference to
Exhibit 10.9 filed with Company's Annual Report on Form
10-K for the year ended February 28, 2004).
10.17 Employment Agreement between the Company and Michael
Burdiek dated July 2, 2007 (incorporated by reference to
Exhibit 10.1 of the Company's Report on Form 10-Q for the
period ended May 31, 2007).
10.18 Employment Agreement between the Company and Garo
Sarkissian dated July 2, 2007 (incorporated by reference to
Exhibit 10.2 of the Company's Report on Form 10-Q for the
period ended May 31, 2007).
10.19 Employment Agreement between the Company and Richard Gold,
effective March 4, 2008 (incorporated by reference
to Exhibit 10.1 of the Company's Current Report on Form 8-K
dated March 4, 2008).
10.20 Letter Agreement between the Company and Fred Sturm, dated
March 4, 2008 (incorporated by reference
to Exhibit 10.2 of the Company's Current Report on Form 8-K
dated March 4, 2008).
21 Subsidiaries of the Registrant.
23 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Each management contract or compensatory plan or arrangement required to
be filed as an exhibit to this form is filed as part of Item 15(a)(3)Exhibits
and specifically identified as such.
(c) Other Financial Statement Schedules. None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on May 14, 2008.
CALAMP CORP.
By: /s/ Richard Gold
__________________________
Richard Gold
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Frank Perna, Jr. Chairman of the May 14, 2008
______________________ Board of Directors ___________________
Frank Perna, Jr.
/s/ Arthur Hausman Director May 13, 2008
______________________ ___________________
Arthur Hausman
/s/ A.J. Moyer Director May 14, 2008
______________________ ___________________
A.J. Moyer
/s/ Thomas Pardun Director May 13, 2008
______________________ ___________________
Thomas Pardun
/s/ Richard Gold President, Chief Executive May 14, 2008
______________________ Officer and Director ___________________
Richard Gold (principal executive officer)
/s/ Richard Vitelle VP Finance, Chief Financial May 14, 2008
______________________ Officer and Treasurer ___________________
Richard Vitelle (principal accounting officer)