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
DECEMBER 31, 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 73,748,526 on February 06, 2001.
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 12-19
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
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)
December 31, 2000 March 31, 2000
------------------------ --------------------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 18,853 $ 58,339
Short-term investments 30,672 65,603
Accounts receivable, net 138,209 98,520
Inventories 110,877 48,547
Deferred tax asset 1,298 1,285
Other current assets 12,473 9,916
-------------------- ---------------
TOTAL CURRENT ASSETS 312,382 282,210
PROPERTY AND EQUIPMENT, NET 49,342 43,801
OTHER ASSETS 17,563 11,430
-------------------- ---------------
TOTAL ASSETS $ 379,287 337,441
==================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 22 167
Accounts payable 57,079 39,582
Income taxes payable 7,132 2,330
Accrued liabilities 19,985 30,970
-------------------- ---------------
TOTAL CURRENT LIABILITIES 84,218 73,049
STOCKHOLDERS' EQUITY:
Common stock and paid-in capital 382,066 373,477
Accumulated deficit (71,098) (103,288)
Accumulated other comprehensive loss (15,899) (5,797)
-------------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 295,069 264,392
-------------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 379,287 337,441
==================== ===============
See accompanying Notes to Condensed Consolidated Financial Statements.
3 of 23
DMC STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
NET SALES $ 115,194 $ 77,435 $ 307,361 $ 211,915
Cost of sales 79,448 54,013 207,781 149,760
---------------- ---------------- ---------------- ------------------
GROSS PROFIT 35,746 23,422 99,580 62,155
---------------- ---------------- ---------------- ------------------
OPERATING EXPENSES:
Research and development 5,673 6,149 17,677 18,253
Selling, general and administrative 16,654 13,382 47,287 37,128
---------------- ---------------- ---------------- ------------------
TOTAL OPERATING EXPENSES 22,327 19,531 64,964 55,381
---------------- ---------------- ---------------- ------------------
OPERATING INCOME 13,419 3,891 34,616 6,774
OTHER INCOME (EXPENSE):
Interest income 967 584 4,451 1,183
Interest expense (17) (256) (46) (721)
Other income (expense), net (281) 27 (1,151) (1,211)
---------------- ---------------- ---------------- ------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 14,088 4,246 37,870 6,025
Provision for income taxes 2,113 849 5,680 1,205
---------------- ---------------- ---------------- ------------------
NET INCOME $ 11,975 $ 3,397 $ 32,190 $ 4,820
================ ================ ================ ==================
BASIC EARNINGS PER SHARE $ 0.16 $ 0.05 $ 0.44 $ 0.07
================ ================ ================ ==================
DILUTED EARNINGS PER SHARE $ 0.16 $ 0.05 $ 0.42 $ 0.07
================ ================ ================ ==================
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 73,591 66,316 73,283 64,391
Impact of dilutive stock options and warrants 2,490 5,197 3,491 5,048
---------------- ---------------- ---------------- ------------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 76,081 71,513 76,774 69,439
================ ================ ================ ==================
See accompanying Notes to Condensed Consolidated Financial Statements.
4 of 23
DMC STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
December 31,
--------------------------------------------
2000 1999
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32,190 $ 4,820
Adjustments to reconcile net income to net cash used for operating
activities:
Depreciation and amortization 12,959 14,356
Provision for uncollectable accounts 659 662
Provision for inventory reserves 1,456 1,748
Provision for warranty reserves 5,444 5,698
Changes in assets and liabilities:
Increase in accounts receivable (43,222) (26,495)
Decrease (increase) in inventories (65,072) 285
Decrease (increase) in other assets (3,880) 4,028
Increase in accounts payable 18,262 7,620
Increase in income tax payable 4,820 142
Decrease in other accrued liabilities (16,334) (16,136)
---------------- ----------------
NET CASH USED FOR OPERATING ACTIVITIES (52,718) (3,272)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (48,224) (57,824)
Proceeds from available-for-sale securities 83,155 28,228
Purchase of property and equipment (15,534) (15,747)
Minority investments (13,045) (7,000)
---------------- ----------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 6,352 (52,343)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment to banks 0 (2,600)
Payment of capital lease obligations (145) (663)
Proceeds from sales of common stock 8,578 66,285
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,433 63,022
---------------- ----------------
Effect of exchange rate changes in cash (1,553) 189
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (39,486) 7,596
Cash and cash equivalents at beginning of period 58,339 21,518
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,853 $ 29,114
================= ================
SUPPLEMENTAL DATA:
Interest paid $ 53 $ 663
Income taxes paid $ 1,132 $ 278
See accompanying Notes to Condensed Consolidated Financial Statements.
5 of 23
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) that 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 Company's financial statements included in its 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):
DECEMBER 31, 2000 MARCH 31, 2000
----------------- --------------
(Unaudited)
Raw materials $ 59,878 $ 22,558
Work in process 19,525 13,833
Finished goods 31,474 12,156
-------------------- ----------------
$ 110,877 $ 48,547
==================== ================
OTHER ASSETS
Included in other assets is goodwill of $0.9 million that is being
amortized on a straight line basis over the useful life ranging from
five to ten years, as well as minority investments. The minority
investments were purchased for the promotion of business and strategic
objectives. Investments in marketable securities are reported at fair
value with unrealized gains and losses recorded in stockholders'
equity. Investments in non-marketable securities are recorded at the
lower of cost or market.
6 of 23
During the third quarter of Fiscal 2001, the Company recorded $5.0
million in unrealized losses, which consisted primarily of a $4.7
million unrealized loss on our investment in Endwave Corporation. The
Company considers this loss to be temporary in nature, and accordingly,
this unrealized loss has been recorded in stockholders' equity.
ACCRUED LIABILITIES
Accrued liabilities included the following (in thousands):
December 31, 2000 March 31, 2000
----------------- --------------
(Unaudited)
---------------------------------------
Customer deposits $ 1,850 $ 770
Accrued payroll and benefits 7,232 4,703
Accrued commissions 575 1,929
Accrued warranty 4,533 5,533
Accrued restructuring, purchase order
cancellation and other costs 1,477 6,188
Other 4,318 11,847
---------------------------------------
$ 19,985 $ 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.
DERIVATIVE 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 December
31, 2000, the Company had forward foreign exchange contracts to
exchange various foreign currencies for U.S. dollars in the gross
amount of $45.2 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 as of December 31, 2000 was $0.3 million.
7 of 23
NET INCOME PER SHARE
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
Accounts receivable concentrated with certain customers primarily in
the telecommunications industry and in certain geographic locations
potentially subject the Company to concentration of credit risk. Two
customers, one in the United States and one in China, accounted for
approximately 20% and 12% respectively of the total accounts receivable
balance at the end of the third quarter of Fiscal 2001. The Company
expects to collect most of these amounts during the fourth quarter of
Fiscal 2001. In addition to sales in North America and Western Europe,
the Company actively markets and sells products in Africa, Asia,
Eastern Europe, the Middle East and South America. 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 Nine Months Ended
December 31, December 31,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
Net income $ 11,975 $ 3,397 $ 32,190 $ 4,820
Other comprehensive
income (loss) net of tax:
Unrealized currency gain (loss) 2,521 (551) (3,538) (1,573)
Unrealized holding gain (loss)
on investments (5,025) 858 (6,564) 586
---------------- ---------------- ----------------- ----------------
Comprehensive income $ 9,471 $ 3,704 $ 22,088 $ 3,833
================ ================ ================= ================
8 of 23
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 is currently assessing the impact
of this standard and 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 is currently assessing the impact of
this guidance and will adopt SAB 101 in the fourth quarter of Fiscal
2001 and does not anticipate that adoption 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 Altium, DART, DXR, SPECTRUM
II and XP4 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 Nine Months Ended
December 31, December 31,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
Products:
Revenues $ 106,480 $ 73,019 $ 284,253 $ 201,183
Operating income 13,708 4,176 34,553 7,656
Services:
Revenues 8,714 4,416 23,108 10,732
Operating income (loss) (289) (285) 63 (882)
Total:
Revenues $ 115,194 $ 77,435 $ 307,361 $ 211,915
Operating income 13,419 3,891 34,616 6,774
The following table sets forth revenues from unaffiliated customers by
product (in thousands) for:
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
SPECTRUM II $ 23,536 $ 30,286 $ 77,710 $ 90,588
XP4 34,834 16,039 82,982 41,187
DXR 9,261 11,030 28,302 29,446
Altium 34,536 12,499 81,354 28,760
Other products 4,313 3,165 13,905 11,202
----------------- --------------- ---------------- -----------------
Total products 106,480 73,019 284,253 201,183
Total services 8,714 4,416 23,108 10,732
----------------- --------------- ---------------- -----------------
Total revenue $ 115,194 $ 77,435 $ 307,361 $ 211,915
================= =============== ================ =================
10 of 23
The following table sets forth revenues from unaffiliated customers by
geographic region (in thousands) for:
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
Africa $ 6,550 $ 4,912 $ 16,584 $ 16,244
China 11,675 12,084 23,244 33,767
Europe 23,137 22,592 73,163 57,532
Mexico 2,813 10,775 40,807 21,245
Other Americas 9,302 3,945 26,101 14,281
Other Asia/Pacific 11,578 6,664 28,230 25,963
United States 50,139 16,463 99,232 42,883
----------------- --------------- ---------------- -----------------
Total Revenue $ 115,194 $ 77,435 $ 307,361 $ 211,915
================= =============== ================ =================
Long-lived assets by country and consisting of net property and
equipment was as follows (in thousands):
December 31, 2000 March 31, 2000
----------------- --------------
United States $ 30,945 $ 29,423
United Kingdom 12,769 9,719
Other foreign countries 5,628 4,659
-------------------- ------------------------
Total property and equipment, net $ 49,342 $ 43,801
==================== ========================
SUBSEQUENT EVENTS
At December 31, 2000, the Company had an investment of $4.0 million in
Southern California Edison bonds. Subsequent to December 31, 2000, these
bonds have suffered approximately a 20% loss in fair market value as of
February 8, 2001, due to the California energy crisis. These bonds mature on
June 1, 2001. The Company intends to hold these bonds for now, pending
further developments. However, this unrealized loss could become a realized
loss in the future if the decrease in fair value is other than temporary.
(See other assets footnote for accounting policy).
11 of 23
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, as
amended, and Section 21e of the Securities Exchange Act of 1934, as amended. 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 Nine Months Ended
December 31, December 31,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 69.0 69.8 67.6 70.7
------------------ ----------------- ----------------- -----------------
Gross profit 31.0 30.2 32.4 29.3
Research & development 4.9 7.9 5.8 8.6
Selling, general & administrative 14.5 17.3 15.4 17.5
------------------ ----------------- ----------------- -----------------
Operating income 11.6 5.0 11.2 3.2
Other income (expense), net 0.6 0.5 1.1 (0.4)
------------------ ----------------- ----------------- -----------------
Income before provision for income
taxes 12.2 5.5 12.3 2.8
Provision for income taxes 1.8 1.1 1.8 0.5
------------------ ----------------- ----------------- -----------------
Net income 10.4 % 4.4 % 10.5 % 2.3 %
================== ================= ================= =================
NET SALES
Net sales for the third quarter of Fiscal 2001 increased to $115.2 million,
compared to $77.4 million reported in the third quarter of Fiscal 2000 due to
increased customer demand and improved manufacturing capacity. Our Altium
product line net sales increased significantly to $34.5 million in the third
quarter of Fiscal 2001, from $12.5 million in the comparable quarter of
12 of 23
Fiscal 2000, and our XP4 product line net sales increased to $34.8 million
from $16.0 million. Net sales of our Spectrum II product line decreased to
$23.5 million from $30.3 million in the comparable quarter of Fiscal 2000.
Net sales to U.S. customers were $50.1 million in the third quarter of Fiscal
2001 compared to $16.5 million in the third quarter of Fiscal 2000 due to
increased sales to competitive local exchange carriers and rapid growth in
system build outs. Net sales to Mexico decreased to $2.8 million in the third
quarter of Fiscal 2001 compared to $10.8 million in the third quarter of
Fiscal 2000; however, for the first nine months of Fiscal 2001 Mexico sales
are almost double in comparison to the first nine months of Fiscal 2000.
Service revenue increased to $8.7 million in the third quarter of Fiscal 2001
compared to $4.4 million in the third quarter of Fiscal 2000 due to
additional installation work as a result of increased sales.
Net sales for the first nine months of Fiscal 2001 were $307.4 million, compared
to $211.9 million reported in the first nine months 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 and Altium product
lines. Sales to U.S. customers increased to $99.2 million in the first nine
months of Fiscal 2001 compared to $42.9 million in the first nine months of
Fiscal 2000. Sales to Mexico were $40.8 million in the first nine months of
Fiscal 2001 compared to $21.2 million in the first nine months of Fiscal 2000.
Sales in Europe increased to $73.2 million in the first nine months of Fiscal
2001 compared to $57.5 in the first nine months of Fiscal 2000. However, we
experienced sales declines in China as sales there were $23.2 million in the
first nine months of Fiscal 2001 compared to $33.8 million in the first nine
months of Fiscal 2000. These declines were due largely to capacity constraints
in the XP4 product line. Service revenue increased to $23.1 million in the first
nine months of Fiscal 2001 compared to $10.7 million in the first nine months of
Fiscal 2000 due to additional installation work as a result of increased sales.
During the third quarter of Fiscal 2001, we received $133.6 million in new
orders shippable over the next 12 months, compared to $104.3 million in the
third quarter of Fiscal 2000, an increase of 28%. During the first nine months
of Fiscal 2001, we received $392.1 million in new orders shippable over the next
12 months, compared to $243.3 million in the first nine months of Fiscal 2000,
an increase of 61%. The backlog at December 31, 2000 was $189.0 million,
compared to $92.6 million at December 31, 1999 and $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 third quarter of Fiscal 2001
was 31.0% compared to 30.2% in the third quarter of Fiscal 2000. Our gross
margin in the third quarter of Fiscal 2001 increased due to our increased
capacity utilization.
Gross profit as a percentage of net sales for the first nine months of Fiscal
2001 was 32.4% compared to 29.3% in the first nine months of Fiscal 2000. The
increase in gross profit was primarily the result of our shift in revenue to the
newer Altium and XP4 product lines, from older product lines with lower margins,
as well as increased capacity utilization.
13 of 23
RESEARCH AND DEVELOPMENT
In the third quarter of Fiscal 2001, research and development expenses decreased
to $5.7 million from $6.1 million in the third quarter of Fiscal 2000. The
decrease was due to a decline from the prior year in design costs for the Altium
product and the completion of the initial design of a modem chip set. As a
percentage of net sales, research and development expenses decreased to 4.9% in
the third quarter of Fiscal 2001 compared to 7.9% in the third quarter of Fiscal
2000 due to the decrease in expenses and an increase in net sales.
In the first nine months of Fiscal 2001, research and development expenses
decreased by $0.6 million to $17.7 million from $18.3 million in the same period
in Fiscal 2000. As a percentage of net sales, research and development expenses
were 5.8% in the first nine months of Fiscal 2001 compared to 8.6% in the first
nine months of Fiscal 2000 due to an increase in net sales.
We expect to increase research and development expenses during the fourth
quarter of Fiscal 2001 as we develop new high capacity products.
SELLING, GENERAL AND ADMINISTRATIVE
In the third quarter of Fiscal 2001, selling, general and administrative
expenses increased to $16.7 million from $13.4 million in the third 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 sales expenses incurred to address growing market opportunities. As a
percentage of net sales, selling, general and administrative expenses decreased
to 14.5% in the third quarter of Fiscal 2001 compared to 17.3% in the comparable
quarter of Fiscal 2000 due to an increase in net sales.
In the first nine months of Fiscal 2001, selling, general and administrative
expenses increased to $47.3 million from $37.1 million in the first nine
months of Fiscal 2000. This increase was a result of higher depreciation and
other costs attributable to purchases of enterprise-wide business systems and
higher sales expenses incurred to address growing market opportunities. As a
percentage of net sales, selling, general and administrative expenses were
15.4% in the first nine months of Fiscal 2001 compared to 17.5% in the
comparable period of Fiscal 2000 due to an increase in net sales.
OTHER INCOME (EXPENSE)
The increase in interest income in the third quarter of Fiscal 2001 of $0.4
million compared to the third quarter of Fiscal 2000 was primarily due to higher
average cash balances. Interest expense decreased in the third quarter of Fiscal
2001 compared to the third quarter of Fiscal 2000 primarily due to lower average
lease obligations. Other expense increased by $0.3 million in the third quarter
of Fiscal 2001 compared to the third quarter of Fiscal 2000 primarily due to
higher foreign exchange cover costs and foreign exchange losses.
PROVISION FOR INCOME TAXES
In the third 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.
14 of 23
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities in the first nine months of Fiscal 2001
was $52.7 million, compared to net cash used of $3.3 million in the first nine
months of Fiscal 2000. The increase in cash used for operations was primarily
the result of increased receivables and increased inventory. Inventory increased
$65.1 million, excluding a foreign exchange impact, in the first nine months of
Fiscal 2001 due to increased product backlog. Backlog at December 31, 2000 was
$189.0 million, compared to $92.6 million at December 31, 1999 and $111.8
million at March 31, 2000. Accounts receivable increased $43.2 million during
the first nine months of Fiscal 2001, excluding a foreign exchange impact, due
to increased sales and the timing of shipments as 59% of our Fiscal 2001 third
quarter shipments occurred in the last month of the period. Accounts payable
increased $18.3 million, excluding a foreign exchange impact, in support of the
increase in purchase volume of inventory in the first nine months of Fiscal
2001.
Purchases of property and equipment were $15.5 million in the first nine
months of Fiscal 2001 compared to $15.7 million in the first nine months of
Fiscal 2000. The first nine months Fiscal 2001 activity was attributable to
purchases in manufacturing to meet increased production volumes and purchases
of enterprise-wide business and manufacturing systems. The proceeds relating
to available-for-sale securities in the first nine months of Fiscal 2001
relate to working capital requirements and higher average cash balances
compared to the same period of the prior year. We made $13.0 million in
minority investments during the first nine months of Fiscal 2001; these
investments were all within the telecommunications industry and represented a
less than 10% ownership in each of the companies. We expect to continue to
make similar minority investments 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. However, in the
third quarter of Fiscal 2000 we received proceeds of $55.1 million from the
issuance of 3.45 million shares of our common stock under our shelf registration
statement. In addition, our filing of a new registration statement on Form S-3
became effective in the third quarter of Fiscal 2001. Under this new
registration statement, we may sell up to $300 million in debt securities,
common stock and debt and common stock warrants.
At December 31, 2000, our principal sources of liquidity consisted of $49.5
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 at least the
next 12 months.
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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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our short-term 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 third quarter of Fiscal 2001 was 60 days and
had an average yield of 6.5% per annum.
We are exposed to equity price risks on the marketable portion of equity
securities included in our portfolio of investments entered into for the
promotion of business and strategic objectives. These investments are generally
in companies in the telecommunications industry sector, many of which are small
capitalization stocks. We typically do not attempt to reduce or eliminate our
market exposure on these securities. A 20% adverse change in equity prices would
result in an approximate $0.3 million decrease in the fair value of our
available-for-sale securities as of the end of the third quarter of Fiscal 2001.
During the third quarter of Fiscal 2001 we recorded $5.0 million in unrealized
losses, which consisted primarily of a $4.7 million unrealized loss on our
investment in Endwave Corporation. We consider this loss to be temporary in
nature and accordingly this unrealized loss has been recorded in stockholders'
equity and the investment has been recorded at fair value on the balance sheet.
In addition, at December 31, 2000, we had an investment of $4.0 million in
Southern California Edison bonds. Subsequent to December 31, 2000, these
bonds have suffered approximately a 20% loss in fair market value as of
February 8, 2001, due to the California energy crisis. These bonds mature on
June 1, 2001. The Company intends to hold these bonds for now, pending
further developments. However, this unrealized loss could become a realized
loss in the future if the decrease in fair value is other than temporary.
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
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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 December 31, 2000, we had forward foreign exchange
contracts to exchange various foreign currencies for U.S. dollars in the
aggregate amount of $45.2 million, primarily in New Zealand dollars, British
pounds and the euro. 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.
Although nearly all 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 December 31, 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 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 nine months of Fiscal 2001, the top three customers accounted for 36% of
the net sales. As of December 31, 2000, three of our customers accounted for 34%
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.
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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, Ceragon, L. M. Ericsson,
Microwave Communications Division of Harris Corporation, NEC, Nera, Nokia,
P-COM, Inc., Sagem, SIAE, Siemens AG and Triton Network Systems, 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 a large portion
of our 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.
Due to the energy crisis in California, our operations may be adversely affected
by periodic rolling blackouts, which could result in product delivery delays,
lower than expected revenues and higher costs.
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. 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
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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.
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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 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
(incorporated by reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 31, 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 December 31, 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: February 13, 2001 By /s/ Carl A. Thomsen
-------------------- -------------------------------
Carl A. Thomsen
Senior Vice President, Chief Financial
Officer and Secretary
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