1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended Commission file number: 0-15895
June 30, 1996
DIGITAL MICROWAVE CORPORATION
(Exact name of registrant specified in its charter)
DELAWARE 77-0016028
(State or other jurisdiction (IRS employer
of incorporation or organization) identification number)
170 Rose Orchard Way
San Jose, CA 95134
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-0777
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 the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JULY 31, 1996
Common Stock - $0.01 par value 15,264,670
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INDEX
PAGE
COVER PAGE 1
INDEX 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8K 12-13
SIGNATURE 14
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PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS 6/30/96 03/31/96
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,459 $ 8,299
Restricted cash 1,427 719
Accounts receivable, net 33,051 33,398
Inventories, net 43,636 35,347
Other current assets 2,933 2,973
------- -------
Total current assets 83,506 80,736
PROPERTY AND EQUIPMENT, NET 14,854 15,061
------- -------
Total assets $98,360 $95,797
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 3,018 $ 3,106
Current maturities of note payable 3,334 3,334
Current maturities of capital lease obligations 969 1,025
Accounts payable 20,154 16,252
Income taxes payable 1,103 973
Other accrued liabilities 16,547 18,590
------- -------
Total current liabilities 45,125 43,280
LONG-TERM LIABILITIES:
Note payable, net of current maturities 1,111 1,944
Capital lease obligations, net of current
maturities 598 838
------- -------
Total liabilities 46,834 46,062
STOCKHOLDERS' EQUITY 51,526 49,735
------- -------
Total liabilities and stockholders' equity $98,360 $95,797
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
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DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
June 30,
--------
1996 1995
---- ----
Net sales $ 36,807 $ 39,693
Cost of sales 24,902 29,708
-------- --------
Gross profit 11,905 9,985
-------- --------
Operating Expenses:
Research and development 2,461 2,952
Selling, general and administrative 7,927 6,473
-------- --------
Total operating expenses 10,388 9,425
-------- --------
Operating income 1,517 560
Other income:
Interest and other income (expense), net 13 380
Interest expense (282) (671)
-------- --------
Income before provision for income taxes 1,248 269
Provision for income taxes 125 27
-------- --------
Net income $ 1,123 $ 242
======== ========
Net income per share $ 0.07 $ 0.02
======== ========
Weighted average number of common & common
equivalent shares outstanding 16,242 13,823
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
June 30,
--------
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 1,123 $ 242
Adjustments to reconcile net income
to net cash used for operating activities:
Depreciation and amortization 1,117 1,684
Provision for valuation reserves 783 1,070
Provision for warranty reserve 386 282
Changes in assets and liabilities:
Decrease (increase) in restricted cash (708) 443
Decrease (increase) in accounts receivable 343 (2,648)
Decrease (increase) in inventories (9,074) (162)
Decrease (increase) in other current assets 43 (520)
(Decrease) increase in accounts payable 3,903 (507)
(Decrease) increase in other accrued liabilities (2,296) (103)
------- -------
Net cash used for operating activities (4,380) (219)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (746) (1,541)
------- -------
Cash flows from financing activities:
Borrowings from (repayments to) bank (922) 3,145
Payment of capital lease obligations (296) (187)
Sale of common stock 668 447
------- -------
Net cash provided by financing activities (550) 3,405
------- -------
Effect of exchange rate changes on cash (164) 61
------- -------
Net increase (decrease) in cash and cash equivalents (5,840) 1,706
Cash and cash equivalents at beginning of year 8,299 1,919
------- -------
Cash and cash equivalents at end of period $ 2,459 $ 3,625
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
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DIGITAL MICROWAVE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Digital Microwave Corporation and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated.
While the financial information furnished is unaudited, the financial
statements included in this report reflect all adjustments (consisting
only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the results of operations for the
interim periods covered and of the financial condition of the Company at
the date of the interim balance sheet. The results for interim periods
are not necessarily indicative of the results for the entire year. The
condensed consolidated financial statements should be read in connection
with the Digital Microwave Corporation financial statements included in
the Company's annual report and Form 10-K for the year ended March 31,
1996.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with an original maturity of
three months or less to be cash equivalents.
RESTRICTED CASH
The Company is required to segregate and maintain certain cash balances
as security for letters of credit provided to secure performance or bid
bonds under some of the Company's revenue contracts. As of June 30, 1996,
the Company was required to segregate and maintain $1.4 million which is
included as restricted cash in the accompanying balance sheets.
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INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market where cost includes material, labor and manufacturing overhead.
Inventories consist of:
(In thousands)
June 30, 1996 March 31, 1996
------------- --------------
(Unaudited)
Raw materials 15,202 $11,840
Work in process 17,358 16,342
Finished goods 11,076 7,165
------- -------
$43,636 $35,347
======= =======
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period.
LITIGATION AND CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in
the normal course of its business. In the opinion of management, these
proceedings will not have a material adverse effect on the financial
position and results of operations of the Company.
CONCENTRATION OF CREDIT RISK
Trade receivables concentrated with certain customers primarily in the
telecommunications industry and in certain geographic locations
potentially subject the Company to concentration of credit risk. In
addition to sales in Western Europe and North America, the Company
actively markets and sells products in the Far East, Eastern Europe and
South America. The Company performs on-going credit evaluations of its
customers' financial conditions and generally requires no collateral.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth items from the Condensed Consolidated Statements
of Operations as percentages of net sales:
Three Months Ended
June 30,__
------------------
1996 1995
---- ----
Net sales 100.0% 100.0%
Cost of sales 67.7 74.8
---- ----
Gross profit 32.3 25.2
Research & development 6.7 7.5
Selling, general & administrative 21.5 16.3
---- ----
Operating income 4.1 1.4
Other expense, net (0.7) (0.7)
---- ----
Income before tax 3.4 0.7
Income before provision for
income taxes 0.3 0.1
--- ---
Net income 3.1% 0.6%
=== ===
Net sales for the first quarter of fiscal year 1997 were $36.8 million, compared
to $39.7 million reported in the same quarter of fiscal year 1996. The decrease
in net sales in the first quarter of fiscal 1997 was primarily due to lower
sales in the Asia Pacific region. Sales in the Asia Pacific region declined
from $12.8 million in the first quarter of fiscal 1996 to $10.1 in the similar
quarter of fiscal 1997.
During the first quarter of fiscal 1997, the Company received $34 million in
orders shippable over the next twelve months, compared to $36 million in the
first quarter of fiscal 1996. The decline was due primarily to the timing
of orders from customers, some of which were not booked until July. The twelve
month backlog at June 30, 1996 was $81 million, compared to $84 million at March
31, 1996.
The Company includes in its backlog purchase orders with respect to which a
delivery schedule has been specified for product shipment within one year.
Orders in the Company's current backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser without significant
penalty. Accordingly, although useful for scheduling production, backlog as of
any particular date may not be a reliable measure of sales for any future
period.
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Gross margin as a percentage of net sales for the first quarter of fiscal 1997
was 32.3% compared to 25.2% in the same quarter of fiscal 1996. The improved
margins were the result of lower manufacturing expenses as a result of lower
component material costs and improved manufacturing efficiency. In
addition, the first quarter of fiscal 1996 had lower gross margins because of
the shipment of interim product to E-Plus at no margin due to delays in
acceptance of SPECTRUM(TM) II equipment. The Company received SPECTRUM(TM) II
product acceptance from E-Plus during the second quarter of fiscal 1996.
Research and development expenses decreased by $0.5 million, from $3.0 million
in the first quarter of fiscal 1996 to $2.5 million in the same period in fiscal
1997. As a percentage of net sales, research and development expenses were 6.7%
in the first quarter of fiscal 1997 compared to 7.5% in the first quarter of
fiscal 1996. This decrease was primarily attributable to the lower spending as
the SPECTRUM(TM) II product transitioned from development stage to expansion to
other bandwidths.
Selling, general and administrative expenses were $7.9 million in the first
quarter of fiscal 1997 compared to $6.5 million in the first quarter of fiscal
1996. As a percentage of net sales, selling, general and administrative expenses
were 21.5% in the first quarter of fiscal 1997 compared to 16.3% in the
comparable quarter of fiscal 1996. The increase was mostly attributable to
higher head count and related travel expense as the Company continues to
increase its sales and worldwide support capability. In addition, there was an
increase in bonus expense in the first quarter of fiscal 1997 compared to the
prior year due to the improvement of the profitability of the Company.
Interest and other income, net was minimal in the first quarter of fiscal 1997
compared to $0.4 million in the similar quarter of fiscal 1996. This decrease
was primarily due to an exchange loss in this fiscal year as compared to an
exchange gain in the prior fiscal year first quarter on receivables denominated
in foreign currencies. Interest expense in the first quarter of fiscal 1997 was
$0.3 million compared to $0.7 million in the first quarter of fiscal 1996. The
decrease in interest expense was primarily attributable to the lower principal
balances outstanding on the line of credit and note payable in fiscal 1997.
The Company recorded an income tax provision in the first quarter of both fiscal
years 1997 and 1996 at an effective rate of 10%. This was less than the
statutory rate primarily due to the utilization of the net operating loss carry
forwards.
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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The statements in this Form 10-Q concerning the Company's expenses, revenue,
liquidity and cash needs contain forward-looking statements concerning the
Company's future operations and financial results. These forward-looking
statements are based on current expectations and the Company assumes no
obligations to update this information. Numerous factors, such as economic and
competitive conditions, incoming order levels, shipment volumes, product
margins, and foreign exchange rates, could cause actual results to differ from
those described in these statements, and prospective investors and stockholders
should carefully consider the factors set forth below in evaluating these
forward-looking statements.
Sales of the Company's products are concentrated in a small number of customers.
For the first quarter of fiscal 1997, the top four customers accounted for 38%
of the net sales. As of June 30, 1996, four of the Company's customers accounted
for 43% of the backlog, of which 12% was attributable to orders under the E-Plus
contract. The worldwide telecommunications industry is dominated by a small
number of large corporations, and the Company expects that a significant portion
of its future product sales will continue to be concentrated in a limited number
of customers. The loss of any existing customer, a significant reduction in the
level of sales to any existing customer, or the failure of the Company to gain
additional customers could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, a
substantial portion of shipments may occur near the end of each quarter.
Accordingly, the Company's results are difficult to predict and delays in
product delivery or closing of a sale can cause revenues and net income to
fluctuate significantly from anticipated levels and from quarter to quarter.
The markets for the Company's products are extremely competitive and the Company
expects that competition will increase. The Company's existing and potential
competitors include large and emerging domestic and international companies,
such as California Microwave Corporation, Alcatel, Ericsson, Siemens AG, Harris
Corporation, Nokia, NEC, and P-Com, many of which have significantly greater
financial , technical, manufacturing, marketing, sales and distribution
resources and management expertise than the Company. The Company believes that
its ability to compete successfully will depend on a number of factors both
within and outside its control, including price, quality, availability, product
performance and features; timing of new product introductions by the Company,
its customers and its competitors; the ability of its customers to obtain
financing; and customer service and technical support. The Company is also
experiencing customer demands for shorter delivery cycles. As a result of this,
the Company may increase its inventory levels in order to respond to this
demand which in turn may increase the risk of obsolescence of the inventories.
The Company expects that international sales will continue to account for the
majority of its net product sales for the foreseeable future. As a result, the
Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements; fluctuations in foreign currency
rates; imposition of tariffs and other barriers and restrictions; the burdens of
complying with a variety of foreign laws and general economic and geopolitical
conditions, including inflation and trade relationships.
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Manufacturers of digital microwave telecommunications equipment are
experiencing, and are likely to continue to experience, intense price pressure,
which has resulted, and is expected to continue to result in downward pricing
competition on the Company's products. As a result, the Company has experienced,
and expects to continue to experience, declining average sales prices for its
products. The Company's future profitability is dependent upon its ability to
reduce costs in line with, or faster than, declines in prices.
The Company's manufacturing operations are highly dependent upon the delivery of
materials by outside suppliers in a timely manner. From time to time the Company
has experienced delivery delays from key suppliers which impacted sales. There
can be no assurance that the Company will not experience material supply
problems or component or subsystem delays in the future.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities in the first quarter of fiscal 1997 was
$4.4 million, compared to net cash used for operating activities of $0.2 million
in the first quarter of fiscal 1996. Total assets at June 30, 1996 of $98.4
million increased by $2.6 million from $95.8 million at March 31, 1996,
principally due to increases in inventory. Inventories increased primarily as a
result of increases in inventory purchases in anticipation of a higher volume of
shipments. As a result of the increased inventory, cash and cash equivalents,
decreased from $8.3 million at March 31, 1996 to $2.5 million at June 30, 1996.
Total liabilities at June 30, 1996 of $46.8 million were $0.7 million higher
than the $46.1 million at March 31, 1996. The increase was primarily due to
higher accounts payable from inventory purchases as explained above. The
increase in accounts payable was offset by a reduction in accrued liabilities.
At June 30, 1996, the Company's principal sources of liquidity consisted of $2.5
million in cash and cash equivalents and a revolving bank credit facility that
provides up to $25.0 million in credit, of which approximately $22.0 million was
available and $3.0 million was outstanding at June 30, 1996.
The Company's lines of credit and term note payable require the Company to meet
certain financial covenants, including minimum tangible net worth, minimum debt
coverage ratios and profitability requirements. As of June 30, 1996, the Company
was in compliance with the covenants.
The Company believes that the liquidity provided by existing cash balances,
anticipated future cash flows from operations, and the Company's existing
borrowing arrangements will be sufficient to meet both working capital and
capital expenditure requirements at least through fiscal 1997.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
For a list of exhibits to this Form 10-Q, see exhibit index located on
page 13.
(b) None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL MICROWAVE CORPORATION
Date: August 14, 1996 By /s/ Carl A. Thomsen
--------------------------- ---------------------------------------
Carl A. Thomsen
Vice President and Chief Financial
Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1
(File No. 33-13431)).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 to the Company's Annual Report on Form 10-K for the year ended
March 31, 1993).
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Annual Report on Form 10-K for the
year ended March 31, 1988).
4.2 Rights Agreement dated as of October 24, 1991, between the Company
and Manufacturers Hanover Trust Company of California, including
the Certificate of Designations for the Series A Junior
Participating Preferred Stock (incorporated by reference to
Exhibit 1 of the Company's Current Report on 8-K filed on November
5, 1991).
10.38 Amendment to Loan Agreement dated June 24, 1996, between the
Company and CoastFed Business Credit Corporation.
27.1 Financial data schedule
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