SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: Commission file number: 0-15895
DECEMBER 31, 1997
DIGITAL MICROWAVE CORPORATION
(Exact name of registrant specified in its charter)
Delaware 77-0016028
- -------------------------------- ------------------------------
(State or other jurisdiction (IRS employer
of incorporation or organization) identification number)
170 Rose Orchard Way
San Jose, CA 95134
- ----------------------------------------- ------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-0777
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of outstanding shares of the Registrant's Common Stock, par value
$.01 per share, was 38,144,994 on January 30, 1998.
Page 1 of 17
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 6-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 6 Exhibits and Reports on Form 8-K 15 & 17
SIGNATURE 16
Page 2 of 17
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS 12/31/97 03/31/97
---------- ---------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 15,128 $ 40,367
Short-term investments 15,555 17,947
Accounts receivable, net 65,459 44,623
Inventories 51,717 45,900
Other current assets 7,435 3,643
-------- --------
Total current assets 155,294 152,480
PROPERTY AND EQUIPMENT, NET 22,128 17,726
OTHER ASSETS 15,553 --
-------- --------
Total assets $192,975 $170,206
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ -- $ 2,016
Current maturities of capital lease obligations 427 681
Accounts payable 23,979 22,890
Income taxes payable 1,318 1,649
Accrued liabilities 21,363 25,284
-------- --------
Total current liabilities 47,087 52,520
LONG-TERM LIABILITIES:
Capital lease obligations, net of current maturities 156 158
-------- --------
Total liabilities 47,243 52,678
STOCKHOLDERS' EQUITY
Common stock and paid-in capital 127,754 121,676
Other stockholders' equity (5) (63)
Retained earnings (accumulated deficit) 17,983 (4,085)
-------- --------
Total stockholders' equity 145,732 117,528
Total liabilities and stockholders' equity $192,975 $170,206
-------- --------
-------- --------
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 3 of 17
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales $71,950 $47,760 $195,790 $126,092
Cost of sales 45,675 31,862 126,298 84,547
------- ------- -------- --------
Gross profit 26,275 15,898 69,492 41,545
------- ------- -------- --------
Operating Expenses:
Research and development 3,968 2,505 11,159 7,433
Selling, general and
administrative 12,141 9,076 33,811 25,705
------- ------- -------- --------
Total operating expenses 16,109 11,581 44,970 33,138
------- ------- -------- --------
Operating income 10,166 4,317 24,522 8,407
Other income (expense)
Interest and other income (expense) (295) 305 242 401
Interest expense (23) (263) (245) (844)
------- ------- -------- --------
Income before provision
for income taxes 9,848 4,359 24,519 7,964
Provision for income taxes 985 436 2,452 796
------- ------- -------- --------
Net income $8,863 $3,923 $22,067 $7,168
------- ------- -------- --------
------- ------- -------- --------
Basic earnings per share $ 0.23 $ 0.12 $ 0.59 $ 0.22
------- ------- -------- --------
------- ------- -------- --------
Diluted earnings per share $ 0.22 $ 0.11 $ 0.56 $ 0.22
------- ------- -------- --------
------- ------- -------- --------
Basic weighted average
shares outstanding 38,009 32,194 37,634 31,941
------- ------- -------- --------
------- ------- -------- --------
Diluted weighted average
shares outstanding 39,841 34,119 39,615 33,275
------- ------- -------- --------
------- ------- -------- --------
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 4 of 17
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
December 31,
-----------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $22,067 $7,168
Adjustments to reconcile net income
to net cash (used for) provided by operating activities:
Depreciation and amortization 6,987 4,200
Provision for valuation reserves 7,361 4,587
Provision for warranty reserves 3,511 1,505
Changes in assets and liabilities:
Increase in accounts receivable (20,234) (5,248)
Increase in inventories (11,238) (11,955)
(Increase) decrease in other current assets (3,692) 109
Increase in accounts payable 591 984
Decrease in income taxes payable (351) --
(Decrease) increase in other accrued liabilities (7,762) 6,291
------- -------
Net cash (used for) provided by operating activities (2,760) 7,641
------- -------
Cash flows from investing activities:
Purchases of available-for-sale securities (8,481) --
Proceeds from sales of available-for-sale securities 10,873 --
Purchase of Granger, Inc., net of cash acquired (11,491) --
Investment in Granger Associates, Ltd. (4,000) --
Purchases of property and equipment (10,062) (4,116)
------- -------
Net cash used for investing activities (23,161) (4,116)
Cash flows from financing activities:
Repayments to bank (2,016) (6,362)
Payment of capital lease obligations (877) (787)
Payment of assumed Granger, Inc. debt (3,286) --
Sale of common stock 6,077 2,514
------- -------
Net cash used for financing activities (102) (4,635)
------- -------
Effect of exchange rate changes on cash 784 139
------- -------
Net decrease in cash and cash equivalents (25,239) (971)
Cash and cash equivalents at beginning of period 40,367 9,018
------- -------
Cash and cash equivalents at end of period $15,128 $8,047
------- -------
------- -------
SUPPLEMENTAL DATA
Interest paid 254 774
Income taxes paid 3,340 --
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 5 of 17
DIGITAL MICROWAVE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Digital Microwave Corporation and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated.
While the financial information furnished is unaudited, the financial
statements included in this report reflect all adjustments (consisting only
of normal recurring adjustments) which the Company considers necessary for a
fair presentation of the results of operations for the interim periods
covered and of the financial condition of the Company at the date of the
interim balance sheet. The results for interim periods are not necessarily
indicative of the results for the entire year. The condensed consolidated
financial statements should be read in connection with the Digital Microwave
Corporation financial statements included in the Company's annual report and
Form 10-K for the year ended March 31, 1997.
CASH AND CASH EQUIVALENTS
For purposes of the condensed consolidated statements of cash flows, the
Company considers all highly liquid debt instruments with an original
maturity of three months or less from the date of purchase 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. Inventories
consist of:
(In thousands)
December 31, 1997 March 31, 1997
----------------- --------------
(Unaudited)
Raw materials 18,873 $ 16,594
Work in process 16,621 15,122
Finished goods 16,223 14,184
--------- ---------
$ 51,717 $ 45,900
--------- ---------
--------- ---------
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.
Page 6 of 17
CURRENCY TRANSLATION
In April 1997, the Company changed the functional currency of its
subsidiaries from the U.S. dollar to the local currency of each subsidiary
except for its Latin American subsidiaries. Accordingly, all the assets and
liabilities of these subsidiaries, except for the Latin American
subsidiaries, are remeasured into U.S. dollars at current exchange 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 as a component of
stockholders' equity, except for the Latin American subsidiaries which are
included in the Consolidated Statement of Operations.
FINANCIAL INSTRUMENTS
In April 1997, the Company began entering into forward foreign exchange
contracts to hedge some of its backlog, as well as certain assets and
liabilities denominated in foreign currencies. At December 31, 1997, the
Company had forward foreign exchange contracts to exchange various foreign
currencies for U.S. dollars in the gross amount of $32.2 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.
NET INCOME PER SHARE
Stockholders approved a two-for-one stock split paid in the form of a stock
dividend in November 1997. Accordingly, all share and earnings per share
data for all periods presented have been retroactively adjusted to reflect
the stock split.
In February 1997, the Financial Accounting Standards Board issued Statement
on Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share,"
effective December 15, 1997. As a result, the Company's reported earnings
per share after adjustment for the November 1997 stock split for the three
and nine months ended December 31, 1996 were restated. Under the new
requirements, primary earnings per share have been replaced with basic
earnings per share and fully diluted earnings per share were replaced with
diluted earnings per share.
Under SFAS 128, basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed by dividing net income by
the weighted average number of common shares and dilutive stock options
outstanding during the period.
Page 7 of 17
PURCHASE OF GRANGER, INC AND INVESTMENT IN GRANGER ASSOCIATES
On May 14, 1997, the Company acquired all of the outstanding shares of
Granger, Inc., a U.S. manufacturer of wireless products and provider of
installation services. The purchase price of Granger, Inc. and the
purchase of certain rights, totaled $14.7 million. In May 1997, the
Company paid $3.3 million of Granger, Inc. debt assumed in the
acquisition. The purchase price and repayment of debt was funded with
existing cash. The acquisition has been accounted for using the purchase
method of accounting. Accordingly, the results of the operations of
Granger, Inc. have been combined with those of the Company since the date
of the acquisition. In addition, a portion of the purchase price was
allocated to the net assets acquired based on their estimated fair values.
The fair value of tangible assets acquired and liabilities assumed was $5.8
million and $1.9 million, respectively.
Concurrent with the acquisition of Granger, Inc., the Company made a
minority investment in Granger Associates, Ltd., a privately held company
based in the United Kingdom, for $4.0 million. This minority investment
has been accounted for using the cost method of accounting.
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, such as
Asia, potentially subject the Company to concentration of credit risk. At
January 31, 1998, trade receivables from Asian Customers totaled
approximately $25 million with approximately $15 million on letters of
credit. 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.
The Company will continue to be affected, for the foreseeable future, by
the unstable economies in the Asia Pacific region. Further, it is not
possible to determine the future effect a continuation of the economic
crisis may have on the Company's liquidity and earnings. Related effects
will be reported in the financial statements as they become known and
estimable.
Page 8 of 17
PROPOSED MERGER WITH MAS TECHNOLOGY
On December 22, 1997, the Company signed a definitive agreement to merge with
MAS Technology, Limited, a New Zealand company ("MAS") which designs,
manufactures, markets and supports digital microwave radio links for the
worldwide telecommunications market. Under the terms of the agreement, the
Company will exchange 1.2 shares of its Common Stock for each outstanding
share of MAS stock and stock options. The Company expects to issue
approximately 8.6 million shares to MAS share and option holders. Based upon
the capitalization of Digital Microwave and MAS as of December 31, 1997, MAS
shareholders will own approximately 17.7% of the outstanding Digital
Microwave Common Stock following consummation of the reorganization, assuming
no exercise of outstanding options to acquire Digital Microwave or MAS stock
options. The combination is intended to qualify as a tax-free reorganization
accounted for as a pooling-of-interests transaction. Each company has
scheduled a stockholders' meeting for March 23, 1998 to approve the
combination. There can be no assurance that the proposed merger will be
consummated by the Company.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth items from the Condensed Consolidated Statements
of Operations as percentages of net sales:
Three Months Ended Nine Months Ended
December 31 December 31
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.5 66.7 64.5 67.1
----- ----- ----- -----
Gross profit 36.5 33.3 35.5 32.9
Research & development 5.5 5.2 5.7 5.9
Selling, general & administrative 16.9 19.0 17.3 20.3
----- ----- ----- -----
Operating income 14.1 9.1 12.5 6.7
Other expense, net (0.4) -- -- (0.4)
----- ----- ----- -----
Income before provision
for income taxes 13.7 9.1 12.5 6.3
Provision for income taxes 1.4 0.9 1.2 0.6
----- ----- ----- -----
Net income 12.3% 8.2% 11.3% 5.7%
----- ----- ----- -----
----- ----- ----- -----
Page 9 of 17
Net sales for the third quarter of fiscal year 1998 were $72.0 million,
compared to $47.8 million reported in the same quarter of fiscal year 1997.
Net sales for the first nine months of fiscal 1998 were $195.8 million,
compared to net sales of $126.1 million for the similar period in fiscal
1997. The increase in net sales in the first nine months of fiscal 1998 as
compared to the first nine months of fiscal 1997 was due to higher Spectrum
II-TM- sales in all major geographic areas.
During the third quarter of fiscal 1998, the Company received $74.2 million
in new orders shippable over the next twelve months, compared to $48.6
million in the second quarter of fiscal 1997. Backlog at December 31, 1997
was $103.5 million, unchanged from the prior quarter.
The Company includes in its backlog purchase orders with respect to which a
delivery schedule has been specified for product shipment within one year.
Orders in the Company's current backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser without
significant penalty. Accordingly, although useful for scheduling production,
backlog as of any particular date may not be a reliable measure of sales for
any future period.
Gross profits in the third quarter and first nine months of fiscal 1998 were
3% higher compared to the same periods in fiscal 1997 primarily due to
improved manufacturing yields and efficiency, lower component material costs
and a lower mix of older products which have lower margins. In addition, net
sales for the first nine months of fiscal 1998 of SPECTRUM II-TM- increased
to $124.5 million or 143% from $51.2 million for the similar period of fiscal
1997, while net sales for the M-Series product line decreased from $25.9
million to $9.1 million for the same periods. The Company has seen its gross
profit continue to improve; however, there can be no assurance that the
Company will be able to maintain its gross profit at current levels. Of
particular concern is the unstable economic environment in Asia and the
related currency devaluation of most Asian countries, as well as the intense
competitive price pressure of the telecommunications market, which could
result in downward pricing pressure on the Company's products. See "Factors
That May Affect Future Financial Results."
Research and development expenses increased by $1.5 million, from $2.5
million in the third quarter of fiscal 1997 to $4.0 million in the same
period in fiscal 1998. For the first nine months of fiscal 1998, research
and development expenses of $11.2 million were $3.8 million higher than the
$7.4 million reported in the comparable period of fiscal 1997. The increase
in research and development expenses was primarily attributable to the
Company's development of its new Altium-TM- high-capacity wireless platform.
The Company will continue to invest in the development of new products and
features in order to maintain and enhance its competitive position and
expects research and development spending to continue to increase in fiscal
1998.
Selling, general and administrative expenses of $12.1 million in the third
quarter of fiscal 1998 increased by $3.0 million as compared to $9.1 million in
the third quarter of
Page 10 of 17
fiscal 1997. For the first nine months of fiscal 1998, selling, general and
administrative expenses increased by $8.1 million to $33.8 million from $25.7
million in the similar period of fiscal 1997. The increase was mostly
attributable to an increase in personnel and related travel expense, as well
as increased sales office costs, as the Company continued to increase its
sales and worldwide support capability. In addition, goodwill amortization
related to the acquisition of Granger, Inc. on May 14, 1997, as well as the
selling and administrative expenses of Granger, Inc., partially contributed
to the increase. There also was an increase in sales commission and bonus
expense in the first nine months of fiscal 1998 compared to the similar
period of fiscal 1997 due to the increased sales and improved profitability
of the Company during that period.
Interest and other income (expense) was a loss of $295,000 in the third
quarter of fiscal 1998 compared to income of $305,000 in the similar quarter
of fiscal 1997. This decrease in interest and other income is attributable
to foreign exchange losses and bank fees related to customer letters of
credit primarily related to Asia sales. For the first nine months of fiscal
1998, interest and other income, net was $242,000 compared to $401,000 in the
same period of fiscal 1997. This decrease was primarily due to higher losses
related to foreign currency exchange rate fluctuations and bank fees for
customer letters of credit, but partially offset by higher interest income of
$1.3 million on higher average cash balances as compared to the similar
period of fiscal 1997. Interest expense in the third quarter of fiscal 1998
decreased to $23,000 from $263,000 in the third quarter of fiscal 1997. For
the first nine months of fiscal 1998, interest expense was $245,000 compared
to $844,000 in the comparable period in fiscal 1997. The decrease in
interest expense for both periods was primarily attributable to the Company's
lower debt balances during the comparable periods.
The Company recorded an income tax provision in the third quarter and first
nine months of both fiscal years 1998 and 1997 at an effective rate of 10%.
This was less than the statutory rate primarily due to the utilization of net
operating loss carry forwards and the deferred tax asset originated from
warranty and asset valuation reserves. The Company expects, assuming
continued operating profitability, that the effective tax rate will reflect a
benefit in future periods as the Company continues to utilize its deferred
tax asset.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The statements in this Form 10-Q concerning the Company's expenses, revenue,
liquidity and cash needs contain forward-looking statements concerning the
Company's future operations and financial results within the meaning of 27A
of the Securities Act and section 21E of the Exchange Act. These
forward-looking statements are based on current expectations and the Company
assumes 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
Page 11 of 17
the factors set forth below in evaluating these forward-looking statements.
Sales of the Company's products are concentrated in a small number of
customers. For the third quarter and first nine months of fiscal 1998, the
top three customers accounted for 25% and 21% of net sales, respectively.
As of December 31, 1997, three of the Company's customers accounted for 19%
of total backlog. The worldwide telecommunications industry is dominated by a
small number of large corporations, and the Company expects that a
significant portion of its future product sales will continue to be
concentrated in a limited number of customers. The loss of any existing
customer, a significant reduction in the level of sales to any existing
customer, or the failure of the Company to gain additional customers could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, a substantial portion of shipments
may occur near the end of each quarter. Accordingly, the Company's results
are difficult to predict and delays in product delivery or closing of a sale
can cause revenues and net income to fluctuate significantly from anticipated
levels and from quarter to quarter.
The markets for the Company's products are extremely competitive and the
Company expects that competition will increase. The Company's existing and
potential competitors include established and emerging companies, such as
California Microwave Corporation, L.M. Ericsson, Siemens AG, Farinon Division
of Harris Corporation, P-COM, Alcatel, Innova, Nokia, NERA, NEC, and SIAE,
many of which may have more extensive engineering, manufacturing, and
marketing capabilities and substantially greater financial, technical, and
personnel resources than the Company. The Company believes that its ability
to compete successfully will depend on a number of factors both within and
outside its control, including price, quality, availability, product
performance and features, timing of new product introductions by the Company,
its customers and its competitors, the ability of its customers to obtain
financing, and customer service and technical support. The Company continues
to experience customer demands for shorter delivery cycles. The Company
increased its inventory levels in order to respond to this demand, which in
turn, may increase the risk of obsolescence of its inventories.
The Company expects that international sales will continue to account for the
majority of its net product sales for the foreseeable future. As a result,
the Company is subject to the risks of doing business internationally,
including unexpected changes in regulatory requirements, fluctuations in
foreign currency exchange rates as recently experienced in Asia, 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. The Company will continue to be
affected, for the foreseeable future, by the unstable economies in the Asia
Pacific region. Further, it is not possible to determine the future effect a
continuation of the economic crisis may have on the Company's liquidity and
earnings. Related effects will be reported in the financial statements as
they become known and estimable.
Page 12 of 17
Manufacturers of digital microwave telecommunications equipment are
experiencing, and are likely to continue to experience, intense price
pressure, which has resulted, and is expected to continue to result, in
downward pricing pressure on the Company's products. As a result, the
Company has experienced, and expects to continue to experience, declining
average sales prices for its products. The Company's future profitability is
dependent upon its ability to reduce costs, improve manufacturing
efficiencies and introduce new products and product enhancements.
The Company's manufacturing operations are highly dependent upon the delivery
of materials by outside suppliers in a timely manner. In addition, the
Company depends in part upon subcontractors to assemble major components and
subsystems used in its products in a timely and satisfactory manner. From
time to time the Company has experienced delivery delays from key suppliers,
which impacted sales. There can be no assurance that the Company will not
experience material supply problems or component or subsystem delays in the
future.
The Company has pursued, and will continue to pursue, growth opportunities
through internal development and acquisitions of complementary business and
technologies. Acquisitions may involve difficulties in the retention of
personnel, diversion of management's attention, unexpected legal liabilities,
and tax and accounting issues. There can be no assurance that the Company
will be able to successfully identify suitable acquisition candidates,
complete acquisitions, integrate acquired businesses into its operations, or
expand into new markets. Once integrated, acquired businesses may not
achieve comparable levels of revenues, profitability, or productivity as the
existing business of the Company, or otherwise perform as expected.
The Company's failure to manage its growth effectively and implement new
computer systems could have a material adverse impact on the Company's
business, financial condition and results of operations. The year 2000 issue
exists because the Company's current computer programs, which process its
operational and financial transactions, use only two digits to identify a
year in the date fields. Such programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, these computer programs could fail or create erroneous results by
or at the year 2000. The Company has purchased new computer programs to
address this issue and intends to implement these applications during fiscal
year 1999. There can be no assurances that the Company will not experience
serious unanticipated negative consequences and material costs caused by
addressing this issue.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities in the first nine months of fiscal
1998 was $2.8 million, compared to $7.6 million provided by operating
activities in the similar period of fiscal 1997. The use of cash in the
first nine months of fiscal 1998 was primarily due to the increased level of
accounts receivable and inventories and reduction of accrued
Page 13 of 17
liabilities. Accounts receivable increased primarily due to the higher sales
activity. Inventory turnover improved during the first nine months of fiscal
1998 compared to the similar period of fiscal 1997, however, inventories
increased as measured in dollars primarily as a result of the higher sales
volume. Other accrued liabilities decreased primarily due to a decrease in
customer deposits and the payments of annual profit sharing and bonus
payments.
In May 1997, the Company completed the acquisition of Granger, Inc. for total
consideration of $14.7 million and purchased a minority interest in Granger
Associates, Ltd., a UK company, for $4.0 million. At December 31, 1997,
other assets included the minority interest mentioned above and the excess of
cost over net assets acquired (goodwill), net of accumulated amortization of
$10.8 million related to the acquisition of Granger, Inc. Other changes to
cash from investing activities during the first nine months of fiscal 1998
included the sale of some short-term investments to fund operations, and an
increase in property plant and equipment of $10.1 million primarily due to
purchases of additional test equipment as a result of the higher sales volume
and purchases of equipment for the increased headcount. The Company expects
the investment in plant and equipment to increase over the next year as it
invests in a new manufacturing facility in Scotland and new computer
applications for its internal processes.
At December 31, 1997, the Company's principal sources of liquidity consisted
of $30.7 million in cash and cash equivalents and short-term investments and
a revolving bank credit facility that provides up to $20.0 million in credit,
of which $18.6 million was available. This credit facility expires in June
1998. The Company has requested and received approval to increase this
facility to an aggregate of $25 million subject to satisfactory completion of
required documentation.
The Company's line of credit requires the Company to meet certain financial
covenants, including minimum liquidity, tangible net worth and profitability
requirements. As of December 31, 1997, the Company was in compliance with
the covenants.
The Company believes that the liquidity provided by existing cash balances,
anticipated future cash flows from operations, and the Company's existing
borrowing arrangements will be sufficient to meet both working capital and
capital expenditure requirements for the next six months.
Page 14 of 17
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held a Special Meeting of Stockholders on November 5, 1997.
(b) At the Special Meeting of Stockholders, the following matters were voted
upon:
1. A proposal to amend Article IV of the Restated Certificate of
Incorporation of the Company to (i) increase the total number of
shares that the Company has authority to issue to 65,000,000 shares
from 35,000,000 shares, (ii) increase the number of shares of Common
Stock authorized for issuance by the Company to 60,000,000 from
30,000,000 shares, and (iii) remove references to Series A and
Series B Preferred Stock.
Affirmative votes: 16,309,180
Negative votes: 81,088
Abstain: 47,544
Non-votes: 383,802
2. A proposal to amend Article IV of the Restated Certificate of
Incorporation of the Company to effect a two-for-one stock split of the
Company's Common Stock.
Affirmative votes: 16,776,446
Negative votes: 12,800
Abstain: 32,368
Non-votes: 0
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
For a list of exhibits to this Form 10-Q, see exhibit index located on
page 17.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K for the three-month
period ended December 31, 1997.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL MICROWAVE CORPORATION
Date: February 12, 1998 By /s/ Carl A. Thomsen
-----------------------
Vice President, Chief Financial Officer and
Secretary
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EXHIBIT INDEX
DESCRIPTION
3.1 Amendment to Restated Certificate of Incorporation, dated as of
November 5, 1997
3.2 Amendment to Bylaws, dated as of May 13, 1997
11.1 Statement Re: Computation of per share earnings
27.1 Financial data schedule
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