<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO __________
_________________________________
Commission File No.: 000-21669
DIGITAL LIGHTWAVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4313013
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
601 Cleveland Street, Fifth Floor
Clearwater, Florida 34615
(813) 442-6677
(Address, including zip code, of principal executive offices and Registrant's
telephone number, including area code)
Indicate by check mark whether 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 report (s), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of the Registrant's Common Stock as of March
31, 1997 was 26,177,777.
<PAGE>
DIGITAL LIGHTWAVE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1997
INDEX
PAGE
PART I FINANCIAL INFORMATION 1
Item 1. Financial Statements: 1
Comparative Balance Sheets - March 31, 1997 and 1
December 31, 1996
Comparative Statements of Operations - Three Months 2
Ended March 31, 1997 and March 31, 1996
Comparative Statements of Cash Flows - Three Months 3
Ended March 31, 1997 and March 31, 1996
Notes to Comparative Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial 6
Condition and Results of Operations
PART II OTHER INFORMATION 8
Item 2. Changes in Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
DIGITAL LIGHTWAVE, INC.
BALANCE SHEETS
(IN THOUSANDS)
March 31, December 31,
1997 1996
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................... $ 38,672 $ 1,165
Accounts receivable, net.................... 1,150 2,510
Notes receivable............................ 52 44
Inventories................................. 1,516 850
Prepaid expenses and other current assets... 192 472
--------- -------
Total current assets...................... 41,582 5,041
Property and equipment, net................... 1,974 1,292
Other assets.................................. 48 41
--------- -------
Total assets.............................. $ 43,604 $ 6,374
--------- -------
--------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.... $ 1,964 $ 1,942
Notes payable............................... - 750
--------- -------
Total current liabilities................. 1,964 2,692
Long-term liabilities......................... 189 233
--------- -------
Total liabilities......................... 2,153 2,925
--------- -------
Stockholders' equity:
Preferred stock............................. - -
Common stock................................ 3 2
Additional paid-in capital.................. 53,555 14,242
Accumulated deficit......................... (10,407) (9,095)
--------- -------
43,151 5,149
Less: Note receivable from stockholder....... (1,700) (1,700)
--------- -------
Total stockholders' equity................ 41,451 3,449
--------- -------
Total liabilities and stockholders' equity. $ 43,604 $ 6,374
--------- -------
--------- -------
The accompanying notes are an integral part of these financial statements.
1
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DIGITAL LIGHTWAVE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
(UNAUDITED)
Three Months Ended March 31,
----------------------------
1997 1996
---------- ---------
Sales.......................................... $ 1,498 $ 185
Cost of goods sold............................. 567 125
---------- ----------
Gross profit................................. 931 60
---------- ----------
Operating expenses:
Research and development..................... 878 464
Sales and marketing.......................... 879 86
General and administrative................... 779 335
---------- ----------
Total operating expenses....................... 2,536 885
---------- ----------
Operating income (loss).................. (1,605) (825)
Other income (expense)......................... 293 (307)
---------- ----------
Income (loss) before income tax.......... (1,312) (1,132)
Income tax expense............................. - -
---------- ----------
Net income (loss)........................ $ (1,312) $ (1,132)
---------- ----------
---------- ----------
Net income (loss) per share.................... $ (0.05) $ (0.06)
---------- ----------
---------- ----------
Weighted average common shares outstanding..... 24,754,887 20,221,818
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
DIGITAL LIGHTWAVE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1996
--------- ---------
<S> <S> <C>
Cash flows from operating activities:
Net income (loss)................................................ $(1,312) $(1,132)
Adjustments to reconcile net income (loss) due to
cash used by operating activities
Depreciation................................................... 107 36
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable, net.............. 1,359 (113)
Increase in notes receivable................................. (8) -
Increase in inventories...................................... (666) (186)
Decrease in deferred offering expenses....................... 427 -
(Increase) decrease in prepaid expenses
& other current assets................................... (153) 14
Increase (decrease) in accounts payable and accrued expenses. 44 (50)
------- -------
Net cash used in operating activities.................... (201) (1,431)
------- -------
Cash flows from investing activities:
Purchase of property and equipment................................ (790) (23)
------- -------
Net cash used in investing activities................... (790) (23)
------- -------
Cash flows from financing activities
Proceeds from notes payable...................................... - 1,545
Principal payments on notes payable.............................. (750) (608)
Principal payments on notes payable, related party............... - (50)
Proceeds from sale of common stock, net of expenses.............. 39,314 944
Principal payments-capital lease obligation...................... (66) (35)
------- -------
Net cash provided by financing activities............... 38,498 1,796
------- -------
Net increase in cash and cash equivalents.......................... 37,507 342
Cash and cash equivalents at beginning of period................... 1,165 72
------- -------
Cash and cash equivalents at end of period........................ $ 38,672 $ 414
-------- -------
-------- -------
Noncash investing and financing activities:
Fixed asset additions included in accounts
payable at quarter end...................................... - 9
Notes payable converted to equity............................... - 4,080
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
DIGITAL LIGHTWAVE, INC.
NOTES TO COMPARATIVE FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, these
statements include all adjustments, consisting of normal and recurring
adjustments, considered necessary for a fair presentation of results for such
periods. The results of operations for the three month period ending March
31, 1997 are not necessarily indicative of results which may be achieved for
the full fiscal year or for any future period. The unaudited interim
financial statements should be read in conjunction with the financial
statements and notes thereto contained in Digital Lightwave's Form 10-K for
the period ended December 31, 1996, File No. 000-21669.
1. Initial Public Offering:
On February 6, 1997, the Company consummated its Initial Public Offering
of 3,658,860 shares issued by the Company at a price of $12.00 per share.
Aggregate net proceeds to the Company were approximately $39.5 million. On
February 28, 1997, the Company paid off all the then outstanding notes
($750,000 principal amount) with proceeds from the Initial Public Offering.
2. Inventories:
Inventories at March 31, 1997 and December 31, 1996 are summarized as
follows:
March 31, 1997 December 31, 1996
-------------- -----------------
(in thousands)
Raw materials............ $ 638 $ 336
Work-in-process.......... 234 339
Finished goods........... 644 175
------- --------
$ 1,516 $ 850
------- --------
------- --------
3. Computation of Net Income (Loss) Per Share:
Net income (loss) per common and common equivalent shares has been
computed using the weighted average number of common and common equivalent
shares outstanding using the treasury stock method for all periods presented.
Shares used in the net income (loss) per share calculation are summarized as
follows:
Three Months Ended March 31,
----------------------------
1997 1996
---------- ---------
Weighted average common stock outstanding 24,754,887 19,842,118
Weighted average common stock equivalents outstanding* 0 379,700
---------- ----------
Shares used in net loss per share calculation 24,754,887 20,221,818
---------- ----------
---------- ----------
4
<PAGE>
* Common stock equivalents for the three months ended March 31, 1997 are not
shown since the effect would be anti-dilutive.
4. New Accounting Pronouncements:
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share," which is effective for periods ending after
December 15, 1997. This statement establishes standards for computing and
presenting earnings per share data. Management is currently assessing the
impact of SFAS No. 128 on the Company's presentation of earnings per share
data in future periods.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains certain statements of a forward-looking nature relating
to future events or the future performance of the Company. Prospective and
current investors are cautioned that such statements are only predictions and
that actual events or results may differ materially. In evaluating such
statements as well as the future prospects of the Company generally, such
investors should specifically consider various factors identified in the
Company's Report on Form 10-K for the period ended December 31, 1996,
including the matters set forth above under the caption "Risk Factors," which
could cause actual results to differ materially from those indicated by such
forward-looking statements.
OVERVIEW
The Company manufactures and sells Network Information Computers, has
developed prototypes of certain Remote Access Agents and has other products in
design and development. The Company's products are based on the Company's core
software, firmware and hardware technology which was developed over a five
year period. In February 1996, the Company commenced sales of the ASA 312. To
date, the Company has not entered into long term agreements or blanket
purchase orders for the sale of its products, but generally obtains purchase
orders for immediate shipment and other cancelable purchase commitments. The
Company's sales during a particular quarter are, therefore, highly dependent
upon orders placed by customers during the quarter. Consequently, sales may
fluctuate significantly from quarter to quarter due to the timing and amount
of orders from customers, among other factors.
Gross profit may be affected in the future by the introduction of new products
which generate differing gross margins and by the sales mix during a given
period. The Company plans to pursue OEM relationships with respect to the sale
of Remote Access Agents. The Company has not negotiated any such arrangements
but anticipates that its pricing to OEMs would be less than with respect to
direct sales resulting in lower gross margins in connection with these
arrangements. However sales and marketing expenses are generally lower in the
case of sales to OEMs.
The Company believes that its operating expenses will continue to increase as
a result of a variety of factors including: (i) increased research and
development expenses associated with the completion of the products in
development and the continued enhancement of existing products; and (ii)
increased selling, general and administrative expenses associated with
continued expansion of sales and marketing capabilities, product advertising
and promotion. The Company recognizes research and development expenses when
incurred.
RESULTS OF OPERATIONS
Net sales for the first quarter 1997 were $1.5 million, an increase of 710%
over net sales of $185,000 for the first quarter 1996. Net sales during both
periods consisted of domestic sales of the Company's ASA 312 Network
Information Computers. Net sales increased primarily as a result of a 730%
increase in the number of units sold. Average selling price per unit
decreased from $37,050 to $35,835 from period to period as a result of
standard discounts associated with volume purchases.
Gross profit was 62% for the first quarter 1997 compared to 32% for the first
quarter 1996. The increase in the gross profit percentage resulted primarily
from the benefit of allocating fixed production costs over a larger sales
base and, to a lesser extent, to component cost reductions gained from
purchasing larger lot sizes.
6.
<PAGE>
Operating expenses of $2.5 million for the first quarter 1997 increased 187%
from $885,000 for first quarter 1996. The increase in operating expenses
reflects the Company's growth and emergence from the development stage. Head
count and related expenses grew to support and service the marketing, sales
and manufacturing of the Company's products.
Research and development expenses increased 89% to $878,000 in the first
quarter 1997 from $464,000 in the first quarter 1996. This increase was due
primarily to the addition of engineering personnel and expenses incurred in
the ongoing development of new products as well as enhancement of the
Company's existing product.
Sales and marketing expenses increased 922% to $879,000 in the first quarter
1997 from $86,000 in the first quarter 1996. This increase was due primarily
to expenses associated with: (i) a regional direct sales force (which was in
place in the 1997 period but not the 1996 period); (ii) increased commissions
related to increased sales; (iii) expenses associated with marketing support
personnel (who were in place in the 1997 period but not the 1996 period);
(iv) expenses associated with attendance at a greater number of trade shows;
and (v) additional expenses associated with the Company's OEM Marketing
Group, which was established during the first quarter 1997, to further define
the Company's Remote Access Agents in concert with telecommunications
equipment manufacturers and to develop channel partnerships with these
entities in order to establish complementary sales channels for the
distribution of the Remote Access Agents.
The Company anticipates sales and marketing expenses to increase
substantially as the Company pursues its strategy of increasing its direct
sales capabilities and seeks other sales channels for its products.
General and administrative expenses increased 133% to $779,000 in the first
quarter 1997 from $335,000 in the first quarter 1996. This increase was
primarily due to the expansion of facilities, personnel and systems to
support the growth of the Company's business.
Other income (net) was $293,000 in the first quarter 1997 compared to other
expense (net) of $307,000 in the first quarter 1996. The income in first
quarter 1997 is primarily the result of interest income of approximately
$276,000 earned on the net proceeds from the Company's Initial Public
Offering in February 1997. The expense in first quarter 1996 consisted
primarily of interest expense on indebtedness retired later during 1996.
Net income (loss) per share decreased from ($.06) per share for the first
quarter 1996 to ($.05) per share for the first quarter 1997. The calculation
of the net loss per share in the current quarter reflects a higher number of
shares outstanding as a result of the Initial Public Offering. The
calculation is based on the weighted average number of shares of common stock
outstanding during each respective period.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 1997 were $38.7 million compared to
$1.2 million at December 31, 1996. This increase was due primarily to the
Company completing its Initial Public Offering on February 6, 1997, which
resulted in net proceeds of $39.5 million.
As of March 31, 1997, the Company's working capital was approximately $39.6
million. For the three months ended March 31, 1997, capital expenditures
were approximately $800,000. Future capital expenditures will depend on
several factors including timing of introductions of new products and
enhancements to existing products as well as continued product development
efforts. The Company believes that its available funds and anticipated cash
flows from its operations will satisfy the Company's projected working
capital and capital expenditure requirements for at least the next 12 months.
7
<PAGE>
PART II OTHER INFORMATION
Item 2. Changes in Securities
On February 6, 1997, the Company completed its Initial Public Offering of a
total of 4,600,000 shares of common stock, of which 3,658,860 shares were
sold by the Company, and 941,140 shares were sold by selling stockholders.
The total number of shares of common stock issued and outstanding as of March
31, 1997 was 26,177,777.
Item 4. Submission of Matters to a Vote of Security Holders
On January 8, 1997, the Board of Directors were elected for the ensuing year
and the Certificate of Incorporation of the Company was amended to terminate
the classifications of directors of the Corporation and the provisions for
staggered terms of directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Exhibit Description
------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Digital Lightwave during the quarter
ended March 31, 1997.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DIGITAL LIGHTWAVE, INC.
Date: May 14, 1997 By: /s/ Bryan J. Zwan
-----------------------------
Bryan J. Zwan
Chief Executive Officer and
President
(Principal Executive Officer)
Date: May 14, 1997 By: /s/ Beth A. Morris
------------------------------
Beth A. Morris
Vice President - Finance
(Principal Financial and
Accounting Officer)
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 38,672
<SECURITIES> 0
<RECEIVABLES> 1,394
<ALLOWANCES> 0
<INVENTORY> 1,516
<CURRENT-ASSETS> 41,582
<PP&E> 2,460
<DEPRECIATION> 486
<TOTAL-ASSETS> 43,604
<CURRENT-LIABILITIES> 1,964
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 41,448
<TOTAL-LIABILITY-AND-EQUITY> 43,604
<SALES> 1,498
<TOTAL-REVENUES> 1,498
<CGS> 567
<TOTAL-COSTS> 567
<OTHER-EXPENSES> 2,536
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (293)
<INCOME-PRETAX> (1,312)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,312)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,312)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
