SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number: 0-15895
September 30, 2000
- ------------------
DMC STRATEX NETWORKS, INC.
--------------------------
(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
---------------
Registrant's former name: Digital Microwave Corporation
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
-------- --------
The number of outstanding shares of the Registrant's common stock, par value
$.01 per share, was 73,617,118 on November 07, 2000.
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 6-11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 5 - Other Information 21
Item 6 - Exhibits and Reports on Form 8-K 21
SIGNATURE 23
2 of 23
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
DMC STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, 2000 March 31, 2000
------------------------ --------------------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 34,612 $ 58,339
Short-term investments 48,110 65,603
Accounts receivable, net 126,505 98,520
Inventories 87,202 48,547
Deferred tax asset 1,443 1,285
Other current assets 10,983 9,916
-------------------- ---------------
TOTAL CURRENT ASSETS 308,855 282,210
PROPERTY AND EQUIPMENT, NET 47,396 43,801
OTHER ASSETS 15,133 11,430
-------------------- ---------------
TOTAL ASSETS $ 371,384 $ 337,441
==================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 54 $ 167
Accounts payable 55,867 39,582
Income taxes payable 5,037 2,330
Accrued liabilities 26,202 30,970
-------------------- ---------------
TOTAL CURRENT LIABILITIES 87,160 73,049
STOCKHOLDERS' EQUITY:
Common stock and paid-in capital 380,693 373,477
Accumulated deficit (83,074) (103,288)
Accumulated other comprehensive loss (13,395) (5,797)
-------------------- --------------
TOTAL STOCKHOLDERS' EQUITY 284,224 264,392
-------------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 371,384 $ 337,441
==================== ==============
See accompanying Notes to Condensed Consolidated Financial Statements.
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DMC STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
NET SALES $ 105,433 $ 68,527 $ 192,167 $ 134,480
Cost of sales 72,110 47,911 128,333 95,747
------------ ------------ ------------ --------------
GROSS PROFIT 33,323 20,616 63,834 38,733
------------ ------------ ------------ --------------
OPERATING EXPENSES
Research and development 5,722 6,336 12,004 12,104
Selling, general and administrative 16,035 12,233 30,633 23,746
------------ ------------ ------------ --------------
TOTAL OPERATING EXPENSES 21,757 18,569 42,637 35,850
------------ ------------ ------------ --------------
OPERATING INCOME 11,566 2,047 21,197 2,883
OTHER INCOME (EXPENSE):
Interest income 1,665 352 3,485 599
Interest expense (13) (220) (29) (465)
Other expense, net (80) (600) (870) (1,238)
------------ ------------ ------------ --------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 13,138 1,579 23,783 1,779
Provision for income taxes 1,971 316 3,568 356
------------ ------------ ------------ --------------
NET INCOME $ 11,167 $ 1,263 $ 20,215 $ 1,423
============ ============ ============ ==============
BASIC EARNINGS PER SHARE $ 0.15 $ 0.02 $ 0.28 $ 0.02
============ ============ ============ ==============
DILUTED EARNINGS PER SHARE $ 0.15 $ 0.02 $ 0.26 $ 0.02
============ ============ ============ ==============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 73,441 63,924 73,128 63,424
Impact of dilutive stock options and warrants 3,311 4,650 3,723 4,891
------------ ------------ ------------ --------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 76,752 68,574 76,851 68,315
============ ============ ============ ==============
See accompanying Notes to Condensed Consolidated Financial Statements.
4 of 23
DMC STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
September 30,
------------------------------------------------
2000 1999
--------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,215 $ 1,423
Adjustments to reconcile net income to net cash used for operating
activities:
Depreciation and amortization 8,406 8,889
Provision for uncollectable accounts 327 433
Provision for inventory reserves 902 1,128
Provision for warranty reserves 3,135 3,585
Changes in assets and liabilities
Increase in accounts receivable (31,591) (9,798)
Decrease (increase) in inventories (41,674) 4,020
Decrease (increase) in other assets (2,454) 4,841
Increase in accounts payable 17,139 6,029
Increase (decrease) in income tax payable 2,722 (148)
Decrease in other accrued liabilities (8,026) (13,878)
--------------------- ---------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (30,899) 6,524
--------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (48,224) (9,895)
Proceeds from available-for-sale securities 65,717 1,845
Purchase of property and equipment (11,007) (7,043)
Minority investments (5,545) --
--------------------- ---------------------
NET CASH USED FOR INVESTING ACTIVITIES 941 (15,093)
--------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (113) (415)
Proceeds from sales of common stock 7,206 5,239
--------------------- ---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,093 4,824
--------------------- ---------------------
Effect of exchange rate changes in cash (862) (561)
--------------------- ---------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,727) (4,306)
Cash and cash equivalents at beginning of period 58,339 21,518
--------------------- ---------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 34,612 17,212
===================== =====================
SUPPLEMENTAL DATA
Interest paid $ 52 $ 412
Income taxes paid $ 813 $ 137
See accompanying Notes to Condensed Consolidated Financial Statements.
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DMC STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
DMC Stratex Networks, Inc. and its wholly owned subsidiaries (The
Company). Intercompany accounts and transactions have been eliminated.
Certain prior years amounts have been reclassified to conform to current
year presentation.
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 DMC Stratex Networks, Inc. financial statements included in the
Company's annual report and Form 10-K for the fiscal year ended March 31,
2000.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid debt instruments with an original maturity of
three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market where cost includes material, labor and manufacturing overhead,
net of applicable reserves. Inventories consist of (in thousands):
SEPTEMBER 30, 2000 MARCH 31, 2000
------------------ --------------
(Unaudited)
Raw materials $ 55,461 $ 22,558
Work in process 14,627 13,833
Finished goods 17,114 12,156
-------------------- ----------------
$ 87,202 $ 48,547
==================== ================
OTHER ASSETS
Included in other assets are goodwill and other intangibles which are
being amortized on a straight line basis over their useful lives
ranging from 5 to 10 years, as well as minority investments accounted
for using the cost method of accounting.
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ACCRUED LIABILITIES
Accrued liabilities included the following:
September 30, March 31,
------------------- -------------------
2000 2000
---- ----
(Unaudited)
------------------- -------------------
(in thousands)
Customer deposits $ 350 $ 770
Accrued payroll and benefits 5,590 4,703
Accrued commissions 955 1,929
Accrued warranty 4,646 5,533
Accrued restructuring, purchase order
cancellation and other costs 2,929 6,188
Other 11,732 11,847
------------------- -------------------
$ 26,202 $ 30,970
------------------- -------------------
CURRENCY TRANSLATION
The functional currency of the Company's subsidiaries located in the
United Kingdom and Latin America is the U.S. dollar. Accordingly, all
of the monetary assets and liabilities of these subsidiaries are
remeasured into U.S. dollars at the current exchange rate as of the
applicable balance sheet date, and all non-monetary assets and
liabilities are remeasured at historical rates. Sales and expenses are
remeasured at the average exchange rate prevailing during the period.
Gains and losses resulting from the remeasurement of the subsidiaries'
financial statements are included in the Consolidated Statements of
Operations. The Company's other international subsidiaries use their
local currency as their functional currency. Assets and liabilities of
these subsidiaries are translated at the current exchange rates in
effect at the balance sheet date, and income and expense accounts are
translated at the average exchange rates during the year. The resulting
translation adjustments are included in accumulated other comprehensive
loss in the accompanying financial statements.
FINANCIAL INSTRUMENTS
The Company enters into forward foreign exchange contracts to hedge
some of its firm committed backlog, open purchase orders and certain
assets and liabilities denominated in foreign currencies. At September
30, 2000, the Company had forward foreign exchange contracts to
exchange various foreign currencies for U.S. dollars in the gross
amount of $46.7 million. Market value gains and losses on forward
foreign exchange contracts are recognized as offsets to the exchange
gains or losses on the hedged transactions. The amount of unrealized
loss on these contracts at September 30, 2000 is $0.2 million.
7 of 23
NET INCOME PER SHARE
The Financial Accounting Standards Board (the "FASB") issued Statement
on Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." Under SFAS 128, basic earnings per share are computed by
dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share are computed
by dividing net income by the weighted average number of common shares
and potentially dilutive securities 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. There
were two customers in the United States and one in China that each
accounted for approximately 12% of the total Accounts Receivable
balance at the end of the second quarter of Fiscal 2001. The Company
expects to collect most of these amounts during the third quarter of
Fiscal 2001. In addition to sales in Western Europe and North America,
the Company actively markets and sells products in Asia, Eastern
Europe, South America, the Middle East and Africa. The Company performs
on-going credit evaluations of its customers' financial conditions and
generally requires no collateral, although sales to Asia, Eastern
Europe, and the Middle East are primarily paid through letters of
credit.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement on Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income
and its components (revenue, expenses, gains and losses) in a full set
of general-purpose financial statements. The following table reconciles
comprehensive income under the provisions of SFAS 130 (in thousands)
for:
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Net income $ 11,167 $ 1,263 $ 20,215 $ 1,423
Other comprehensive
income (loss) net of tax:
Unrealized currency loss (5,026) (765) (6,059) (1,022)
Unrealized holding loss
on short-term investments (306) (263) (1,539) (272)
---------------- ----------------- ----------------- ----------------
Comprehensive income $ 5,835 $ 235 $ 12,617 $ 129
================ ================= ================= ================
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which establishes standards for the reporting and display
of comprehensive income and its components in general purpose financial
statements. SFAS 133 is effective for companies in the fiscal year
beginning after June 15, 2000, which for the Company would be fiscal
2002. SFAS 133 requires the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of
the hedged assets, liabilities or firm commitments through earnings, or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The Company believes that the adoption of this
new pronouncement will not have a material effect on the Company's
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in
financial statements. The Company expects to adopt the accounting
change in the fourth quarter of Fiscal 2001 and does not anticipate SAB
101 will have a material impact on its consolidated financial position,
results of operations or cash flows.
OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
The Company is organized into two operating segments: Products and
Services. The Chief Executive Officer has been identified as the Chief
Operating Decision-Maker as defined by SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." Resources are
allocated to each of these groups using information on their revenues
and operating profits before interest and taxes.
The products operating segment includes the SPECTRUM II, XP4, DART,
Altium and DXR digital microwave systems for digital transmission
markets. The Company designs, develops, and manufactures these products
in Seattle, Washington; San Jose, California; and Wellington, New
Zealand. The Services operating segment includes, but is not limited
to, installation, repair, network design, path surveys, integration,
and other services. The Company maintains regional service centers in
San Jose, California; Lanarkshire, Scotland; and Clark Field, Pampanga,
Philippines.
9 of 23
The following table sets forth revenues and operating income by
operating segments (in thousands) for:
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Products:
Revenues $ 97,463 $ 65,524 $ 177,773 $ 128,164
Operating income 11,786 2,684 20,845 3,480
Services:
Revenues 7,970 3,003 14,394 6,316
Operating income (loss) (220) (637) 352 (597)
Total:
Revenues $ 105,433 $ 68,527 $ 192,167 $ 134,480
Operating income 11,566 2,047 21,197 2,883
The following table sets forth revenues from unaffiliated customers by
product (in thousands) for:
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
SPECTRUM II $ 29,543 $ 30,783 $ 54,174 $ 60,302
XP4 31,436 12,074 48,148 25,148
DXR 8,843 7,408 19,041 18,416
Altium 23,068 11,019 46,818 16,261
Other Products 4,573 4,240 9,592 8,037
----------------- --------------- ---------------- -----------------
Total Products 97,463 65,524 177,773 128,164
Total Services 7,970 3,003 14,394 6,316
----------------- --------------- ---------------- -----------------
Total Revenue $ 105,433 $ 68,527 $ 192,167 $ 134,480
================= =============== ================ =================
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The following table sets forth revenues from unaffiliated customers by
geographic region (in thousands) for:
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
United States $ 34,967 $ 14,566 $ 49,093 $ 26,420
Mexico 12,176 7,176 37,994 10,470
Other Americas 10,212 6,063 16,799 10,336
Europe 23,506 16,201 50,026 34,940
Africa 6,159 4,069 10,034 11,332
China 8,308 10,248 11,569 21,683
Other Asia/Pacific 10,105 10,204 16,652 19,299
----------------- --------------- ---------------- -----------------
Total Revenue $ 105,433 $ 68,527 $ 192,167 $ 134,480
================= =============== ================ =================
Long-lived assets by country and consisting of net property and
equipment was as follows (in thousands):
September 30, 2000 March 31, 2000
------------------ -----------------
United States $ 31,694 $ 29,423
United Kingdom 10,791 9,719
Other foreign countries 4,911 4,659
-------------------- -------------------
Total property and equipment, net $ 47,396 $ 43,801
==================== ===================
SUBSEQUENT EVENTS
On October 2, 2000, the Company invested $6.0 million for a minority
interest (i.e. less than 10%) in Endwave Corporation, a supplier of
broadband wireless access equipment, based in Sunnyvale, California.
Endwave completed an initial public offering of common stock on October
17, 2000. The Company agreed to place purchase orders totaling $5.0
million over the next two years with Endwave, if their product meets
Company specifications and quality requirements.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains trend analyses and other forward-looking
statements within the meaning of Section 27a of the Securities Act of 1933 and
Section 21e of the Securities Exchange Act of 1934. All statements, trend
analyses and other information contained herein relative to markets for our
services and products and trends in revenue, as well as other statements
including such words as "anticipate," "believe," "plan," "estimate," "expect,"
"goal" and "intend" and other similar expressions constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks, and our actual results could differ materially from those set
forth in the forward-looking statements as a result of factors set forth
elsewhere herein, including "factors that may affect future financial results,"
page 16, as well as factors set forth in our Annual Report filed on Form 10-K
for the year ended March 31, 2000.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships of certain items
from our Condensed Consolidated Statements of Operations as percentages of net
sales:
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 68.4 69.9 66.8 71.2
------------------ ----------------- ----------------- ----------------
Gross profit 31.6 30.1 33.2 28.8
Research & development 5.4 9.2 6.3 9.0
Selling, general & administrative 15.2 17.9 15.9 17.7
------------------ ----------------- ----------------- ----------------
Operating income 11.0 3.0 11.0 2.1
Other income (expense), net 1.5 (0.7) 1.4 (0.8)
------------------ ----------------- ----------------- ----------------
Income before provision for income
taxes 12.5 2.3 12.4 1.3
Provision for income taxes 1.9 0.5 1.9 0.2
------------------ ----------------- ----------------- ----------------
Net income 10.6 % 1.8 % 10.5 % 1.1 %
================== ================= ================= ================
NET SALES
Net sales for the second quarter of Fiscal 2001 increased to $105.4 million,
compared to $68.5 million reported in the second quarter of Fiscal 2000 due to
increased customer demand and improved manufacturing capacity. Our XP4 product
line net sales increased significantly to
12 of 23
$31.4 million in the second quarter of Fiscal 2001, from $12.1 million in the
comparable second quarter of Fiscal 2000, and our Altium product line net sales
increased to $23.1 million from $11.0 million. Net sales to U.S. customers were
$35.0 million in the second quarter of Fiscal 2001 compared to $14.6 million in
the second quarter of Fiscal 2000. Net sales to European customers increased to
$23.5 million in the second quarter of Fiscal 2001 compared to $16.2 million in
the second quarter of Fiscal 2000. Service revenue increased to $8.0 million in
the second quarter of Fiscal 2001 compared to $3.0 million in the second quarter
of Fiscal 2000 due to additional installation work as a result of increased
sales.
Net sales for the first half of Fiscal 2001 were $192.2 million, compared to
$134.5 million reported in the first half of Fiscal 2000 due to increased
customer demand and improved manufacturing capacity. The increase in net sales
was due primarily to increased sales of our XP4, Altium and DXR product lines.
Sales to Mexico increased to $38.0 million in the first half of Fiscal 2001
compared to $10.5 million in the first half of Fiscal 2000. Sales to U.S.
customers were $49.1 million in the first half of Fiscal 2001 compared to $26.4
million in the first half of Fiscal 2000. We also saw an increase in sales in
Europe to $50.0 million in the first half of Fiscal 2001 compared to $34.9 in
the first half of Fiscal 2000. However, we experienced sales declines in the
Asia Pacific region, which includes China, as sales there were $28.2 million in
the first half of Fiscal 2001 compared to $41.0 million in the first half of
Fiscal 2000. These declines were largely due to capacity constraints in the XP4
product line. Service revenue increased to $14.4 million in the first half of
Fiscal 2001 compared to $6.3 million in the first half of Fiscal 2000 due to
additional installation work as a result of increased sales.
During the second quarter of Fiscal 2001, we received $132.5 million in new
orders shippable over the next 12 months, compared to $71.2 million in the
second quarter of Fiscal 2000, an increase of 86%. During the first half of
Fiscal 2001, we received $258.5 million in new orders shippable over the next 12
months, compared to $139.0 million in the first half of Fiscal 2000, an increase
of 86%. The backlog at September 30, 2000 was $178.3 million, compared to $111.8
million at March 31, 2000.
We include in our backlog purchase orders with respect to which a delivery
schedule has been specified for product shipment within one year. Orders in our
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.
GROSS PROFIT
Gross profit as a percentage of net sales for the second quarter of Fiscal 2001
was 31.6% compared to 30.1% in the second quarter of Fiscal 2000. Our gross
margin in the second quarter of Fiscal 2001 increased due to our increased
capacity utilization.
Gross profit as a percentage of net sales for the first half of Fiscal 2001 was
33.2% compared to 28.8% in the first half of Fiscal 2000. The increase in gross
profit was primarily the result of our shift in revenue to the Altium and XP4
product lines as well as increased capacity utilization.
RESEARCH AND DEVELOPMENT
In the second quarter of Fiscal 2001, research and development expenses
decreased to $5.7 million from $6.3 million in the second quarter of Fiscal
2000. The decrease is due to a decline from the prior year in design costs for
the Altium product and the completion of the
13 of 23
initial design of the Velocity chip. As a percentage of net sales, research and
development expenses decreased to 5.4% in the second quarter of Fiscal 2001
compared to 9.2 % in the second quarter of Fiscal 2000 due to the decrease in
expenses and an increase in net sales.
In the first half of Fiscal 2001, research and development expenses decreased by
$0.1 million to $12.0 million from $12.1 million in the same period in Fiscal
2000. As a percentage of net sales, research and development expenses were 6.3%
in the first half of Fiscal 2001 compared to 9.0% in the first half of Fiscal
2000 due to an increase in net sales.
We expect to increase research and development expenses during the second half
of Fiscal 2001 as we develop new high capacity products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the second quarter of Fiscal 2001, selling, general and administrative
expenses increased to $16.0 million from $12.2 million in the second quarter of
Fiscal 2000. This increase was a result of higher depreciation and other costs
attributable to purchases of enterprise-wide business and manufacturing systems
and higher travel expenses related to increased sales volume. As a percentage of
net sales, selling, general and administrative expenses decreased to 15.2% in
the second quarter of Fiscal 2001 compared to 17.9% in the comparable quarter of
Fiscal 2000 due to an increase in net sales.
In the first half of Fiscal 2001, selling, general and administrative expenses
increased to $30.6 million from $23.7 million in the first half of Fiscal 2000.
This increase was a result of higher depreciation and other costs attributable
to purchases of enterprise-wide business and manufacturing systems and higher
travel expenses related to increased sales volume. As a percentage of net sales,
selling, general and administrative expenses were 15.9% in the first half of
Fiscal 2001 compared to 17.7% in the comparable period of Fiscal 2000 due to an
increase in net sales.
OTHER INCOME (EXPENSE)
The increase in interest income in the second quarter of Fiscal 2001 of $1.3
million was primarily due to higher average cash balances compared to the second
quarter of Fiscal 2000. Interest expense decreased in the second quarter of
Fiscal 2001 compared to the second quarter of Fiscal 2000 primarily due to lower
average lease obligations. Other expense decreased to $0.1 million in the second
quarter of Fiscal 2001 from $0.6 million expense in the second quarter of Fiscal
2000 primarily due to lower foreign exchange cover costs and foreign exchange
losses.
PROVISION FOR INCOME TAXES
In the second quarter of Fiscal 2001, we recorded a provision for income taxes
at less than the statutory rate primarily due to the anticipated utilization of
net operating loss carry forwards in Fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities in the first half of Fiscal 2001 was
$30.9 million, compared to net cash provided by operating activities of $6.5
million in the first half of Fiscal 2000. The increase in cash used for
operations was primarily the result of increased receivables and increased
inventory. Inventory increased $41.7 million in the first half of Fiscal 2001
due to increased product backlog. Backlog at September 30, 2000 was $178.3
million compared to
14 of 23
$111.8 million at March 31, 2000. Accounts receivable increased $31.6 million in
the first half of Fiscal 2001 due to increased sales and the timing of shipments
as 48% of our Fiscal 2001 second quarter shipments occurred in the last month of
the period. Accounts payable increased $17.1 million in support of the increase
in purchase volume of inventory in the first half of Fiscal 2001. Other accrued
liabilities decreased by $8.0 million in the first half of Fiscal 2001 as
compared to a decrease of $13.9 million in the same period of Fiscal 2000; the
decrease in the prior year was largely due to the payment of restructuring
charges during Fiscal 2000.
Purchases of property and equipment increased by $11.0 million in the first half
of Fiscal 2001 compared to an increase of $7.0 million in the first half of
Fiscal 2000. The first half Fiscal 2001 activity was attributable to purchases
in manufacturing to meet increased production volumes and purchases of
enterprise-wide business and manufacturing systems. The volume of purchases and
proceeds relating to available-for-sale securities increased in the first half
of Fiscal 2001 due to higher cash balances compared to the same period of the
prior year. Cash balances have increased as a result of our sale of common stock
under a shelf registration statement in the third quarter of Fiscal 2000. We
made $5.5 million in minority investments during the first half of Fiscal 2001;
these investments were all within the telecommunications industry and
represented a less than 10% ownership. We expect to continue to make such
minority investments in other companies in the future.
Proceeds from the sale of common stock are primarily derived from the exercise
of employee stock options and the employee stock purchase plan.
At September 30, 2000, our principal sources of liquidity consisted of $82.7
million in cash and cash equivalents and short-term investments. However,
depending on the growth of our business, we may require additional financing; we
may not be able to obtain such additional financing in the required time frame
on commercially reasonable terms, or at all. We believe that we have the
financial resources needed to meet our business requirements for the next 12
months.
EUROPEAN MONETARY UNION
In January 1999, a new currency called the "euro" was introduced in certain
Economic and Monetary Union ("EMU") countries. During 2002, all EMU countries
are expected to be operating with the euro as their single currency. Uncertainty
exists as to the effect the euro currency will have on the marketplace.
Additionally, all of the rules and regulations have not yet been defined and
finalized by the European Commission with regard to the euro currency. We have
assessed the effect the euro formation will have on our internal systems and the
sale of our products. Our European sales and operating transactions are based
primarily in U.S. dollars or U.K. pounds sterling, neither of which are subject
to the euro conversion. While we do have some sales denominated in the European
Currency Unit, this currency is successfully being converted in the market to
the new European Monetary Unit at parity. In addition, we upgraded our internal
computer systems to convert the European currencies to the euro. The cost of
upgrading our systems in connection with the euro conversion was not material
and we expect no harm to our business, financial condition, or results of
operations due to the upgrade.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields, without significantly increasing risk.
Our short-term investments are for fixed interest rates; therefore, changes in
interest rates will not generate a gain or loss on these investments unless they
are sold prior to maturity. Actual gains and losses due to the sale of our
investments prior to maturity have been immaterial. Investments are generally
not held for more than one year. The average length of investments held at the
end of the second quarter of Fiscal 2001 was 60 days and had an average yield of
6.7% per annum.
It is our policy not to enter into derivative financial instruments except for
hedging of foreign currency exposures. We hedge certain portions of our exposure
to foreign currency fluctuations through the use of forward foreign exchange
contracts. We enter into forward foreign exchange contracts for purposes other
than trading; however, we do not engage in any foreign currency speculation.
Forward foreign exchange contracts represent agreements to buy or sell a
specified amount of foreign currency at a specified price in the future. These
contracts generally have maturities that do not exceed one month. At September
30, 2000, we had forward foreign exchange contracts to exchange various foreign
currencies for U.S. dollars in the aggregate amount of $46.7 million, primarily
in New Zealand dollars and British pounds. Gains and losses associated with
currency rate changes on forward foreign exchange contracts are recorded
currently in income as they offset corresponding gains and losses on the foreign
currency-denominated assets and liabilities being hedged. Therefore, the
carrying value of forward foreign exchange contracts approximates their fair
value. We believe that the credit risk with respect to our forward foreign
exchange contracts is minimal because we execute contracts with major financial
institutions. Market risk with respect to forward foreign exchange contracts is
offset by the corresponding exposure related to the underlying assets and
liabilities.
FOREIGN CURRENCY RATE RISK
Although nearly all of our sales and expenses are denominated in U.S. dollars,
we have experienced some foreign exchange gains and losses to date, and expect
to incur additional gains and losses in Fiscal 2001. We did engage in foreign
currency hedging activities during the quarter ended September 30, 2000, as
explained above, and intend to continue doing so as needed.
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS
The statements in this Form 10-Q concerning our future products, expenses,
revenues, gross margins, liquidity and cash needs, as well as our plans and
strategies, contain forward-looking statements concerning our future operations
and financial results within the meaning of Section 27A of the Securities Act
and Section 21E of the Exchange Act. All statements, trend analyses and other
information contained herein relative to markets for our services and products
and trends in revenue, as well as other statements including such words as
"anticipate," "believe," "plan," "estimate," "expect," "goal" and "intend" and
other similar expressions constitute forward-looking statements. These
forward-looking statements are based on current expectations and we assume no
obligation to update this information. Numerous factors, such as economic and
competitive conditions, timing and volume of incoming orders, shipment volumes,
product
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margins, and foreign exchange rates, could cause actual results to differ
materially from those described in these statements, and prospective investors
and stockholders should carefully consider the factors set forth in our Report
on Form 10-K, filed on June 29, 2000, and those set forth below in evaluating
these forward-looking statements.
Sales of our products are concentrated in a small number of customers. For the
first half of Fiscal 2001, the top three customers accounted for 35% of the net
sales. As of September 30, 2000, three of our customers accounted for 39% of the
backlog. The worldwide telecommunications industry is dominated by a small
number of large corporations, and we expect 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 our inability to gain additional
customers could harm our business, financial condition and results of
operations. In addition, a substantial portion of shipments may occur near the
end of each quarter. Accordingly, our 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.
Wireless infrastructure suppliers are experiencing, and will likely continue to
experience, price pressure that has resulted, and is expected to continue to
result, in downward pricing pressure on our products. As a result, we have in
the past experienced, and expect to continue to experience, declining average
sales prices for our products. Our ability to maintain our gross profit margins
is dependent upon our ability to continue to introduce new products and product
enhancements. Our inability to respond to increased price competition would harm
our business, financial condition and results of operations.
The markets for our products are extremely competitive, and we expect that
competition will increase. Our existing and potential competitors include
established and emerging companies, such as Alcatel, L. M. Ericsson, Microwave
Communications Division of Harris Corporation, NEC, Nera, Nokia, P-COM, Inc.,
Sagem, SIAE, and Siemens AG, many of which have more extensive engineering,
manufacturing, and marketing capabilities and significantly greater financial,
technical, and personnel resources than us. We believe that our ability to
compete successfully will depend on a number of factors, both within and outside
our control, including price, quality, availability, customer service and
support, breadth of product line, product performance and features, rapid
time-to-market delivery capabilities, reliability, timing of new product
introductions by us, our customers and our competitors, and the ability of our
customers to obtain financing.
We expect that international sales will continue to account for the majority of
its net product sales for the foreseeable future. As a result, we are subject to
the risks of doing business internationally, including unexpected changes in
regulatory requirements, fluctuations in foreign currency exchange 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. There can be no
assurance that currency fluctuations, changes in the rate of inflation or any of
the factors mentioned above will not harm our business, financial condition and
results of operations.
Our manufacturing operations are highly dependent upon the delivery of materials
by outside suppliers in a timely manner. In addition, we depend in part upon
subcontractors to assemble major components and subsystems used in its products
in a timely and satisfactory manner.
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While we enter into long-term or volume purchase agreements with a few of our
suppliers, no assurance can be given that materials, components, and subsystems
will be available in the quantities we require, if at all. Our inability to
develop alternative sources of supply quickly and on a cost-effective basis
could materially impair our ability to manufacture and deliver our products in a
timely manner, which could harm our business, financial condition and results of
operations. We may experience material supply problems or component or subsystem
delays in the future.
We have pursued, and will continue to pursue, growth opportunities through
internal development and acquisitions of complementary businesses and
technologies. Acquisitions may involve difficulties in the retention of
personnel, diversion of management's attention, unexpected legal liabilities,
and tax and accounting issues. We may not be able to successfully identify
suitable acquisition candidates, complete acquisitions, integrate acquired
businesses into our operations, or expand into new markets. Once integrated,
acquired businesses may not achieve comparable levels of revenues,
profitability, or productivity as our existing business or otherwise perform as
expected. Our inability to manage our growth effectively could harm our
business, financial condition and results of operations.
SUBSEQUENT EVENTS
On October 2, 2000, we invested $6.0 million for a minority interest (i.e. less
than 10%) in Endwave Corporation, a supplier of broadband wireless access
equipment, based in Sunnyvale, California. Endwave completed an initial public
offering of common stock on October 17, 2000. We agreed to place purchase orders
totaling $5.0 million over the next two years with Endwave, if their product
meets our specifications and quality requirements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a description of our market risks, see page 16, "Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Quantitative and Qualitative Disclosures About Market Risk."
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PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) We held our annual meeting of stockholders on August 8, 2000.
(b) The following directors were elected at the meeting, by the following votes:
Name Votes in Favor Votes Withheld
- ---- -------------- --------------
Charles D. Kissner 55,780,161 98,251
Richard C. Alberding 55,778,804 99,608
John W. Combs 55,763,233 115,179
V. Frank Mendicino 55,778,261 100,151
Sam Smookler 55,779,508 98,904
Paul S. Bachow 55,749,556 128,856
James D. Meindl 55,774,543 103,869
Howard Oringer 55,773,965 104,447
(c) At the annual meeting, the following other matters were voted upon:
1. A proposal to change our name from "Digital Microwave Corporation"
to "DMC Stratex Networks, Inc.":
Broker
------
For Against Abstain Non-Vote
--- ------- ------- --------
55,468,626 341,762 68,024 -0-
2. A proposal to increase the number of authorized shares of
common stock from 95,000,000 to 150,000,000:
Broker
------
For Against Abstain Non-Vote
--- ------- ------- --------
53,596,968 2,213,488 67,956 -0-
3. Proposal to ratify the appointment of Arthur Andersen LLP as
the independent public accountants of Digital Microwave
Corporation for Fiscal 2001:
Broker
------
For Against Abstain Non-Vote
--- ------- ------- --------
55,273,812 562,797 41,803 -0-
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ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
For a list of exhibits to this Form 10-Q, see the exhibit index located
on page 22.
(b) Reports on Form 8-K
None
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EXHIBIT INDEX
Exhibit
Number Description
- ----------------------------------
2.1 Agreement and Plan of Reorganization and Amalgamation, dated December
22, 1997, among the Company, South Amalgamation Sub Ltd. and MAS
(incorporated by reference to Exhibit 2.1 to the Company's Registration
Statement on Form S-4 (File No. 333-45053)).
2.2 Agreement and Plan of Reorganization and Merger, dated as of July 22,
1998, by and among the Company, Iguana Merger Corp. and Innova
Corporation (incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-4 (File No. 333-62673)).
2.3 Certificate of Ownership and Merger merging DMC Stratex Networks, Inc.
into Digital Microwave Corporation, dated August 9, 2000 (incorporated
by reference to Exhibit 2.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000).
3.1 Certificate of Amendment of Certificate of Incorporation of DMC Stratex
Networks, Inc., dated August 9, 2000 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
3.2 Amended and Restated Bylaws (Amended and Restated as of August 8, 2000).
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 Amended and Restated Rights Agreement dated as of November 3, 1998,
between the Company and Chase Mellon Shareholder Services, L.L.C.,
including the form of the Certificate of Designation for the Series A
Junior Participating Stock (incorporated by reference to Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
27.1 Financial Data Schedule for the quarter ended September 30, 2000.
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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.
DMC STRATEX NETWORKS, INC.
Date: November 13, 2000 By /s/ Carl A. Thomsen
-------------------- ------------------------------------
Carl A. Thomsen
Senior Vice President, Chief Financial Officer
and Secretary
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