<PAGE> 1
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 June 30, 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 33775
(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 June
30, 1997 was 26,177,777.
<PAGE> 2
DIGITAL LIGHTWAVE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Comparative Balance Sheets - June 30, 1997 and 1
December 31, 1996
Comparative Statements of Operations - Three Months 2
Ended June 30, 1997 and June 30, 1996
Comparative Statements of Operations - Six Months 3
Ended June 30, 1997 and June 30, 1996
Comparative Statements of Cash Flows - Six Months 4
Ended June 30, 1997 and June 30, 1996
Notes to Comparative Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and 6
Results of Operations
PART II OTHER INFORMATION 8
Item 6. Exhibit and Reports on Form 8-K 8
SIGNATURES 8
</TABLE>
<PAGE> 3
PART I FINANCAL INFORMATION
Item 1. Financial Statements
DIGITAL LIGHTWAVE, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,227 $ 1,165
Accounts receivable, net 4,104 2,510
Notes receivable 52 44
Inventories 1,726 850
Prepaid expenses and other current assets 172 472
---------- -----------
Total current assets 42,281 5,041
Property and equipment, net 2,619 1,292
Other assets 58 41
---------- -----------
Total assets $ 44,958 $ 6,374
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,028 $ 1,942
Notes payable - 750
---------- -----------
Total current liabilities 2,028 2,692
Long-term liabilities 142 233
---------- -----------
Total liabilities 2,170 2,925
---------- -----------
Stockholders' equity:
Preferred stock - -
Common stock 3 2
Additional paid-in capital 53,555 14,242
Accumulated deficit (9,070) (9,095)
---------- -----------
44,488 5,149
Less: Note receivable from stockholder (1,700) (1,700)
---------- -----------
Total stockholders' equity 42,788 3,449
---------- -----------
Total liabilities and stockholders' equity $ 44,958 $ 6,374
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
DIGITAL LIGHTWAVE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Sales $ 5,310 $ 1,129
Cost of goods sold 1,590 397
----------- -----------
Gross profit 3,720 732
Operating expenses:
Engineering and development 948 522
Sales and marketing 1,179 374
General and administrative 795 217
----------- -----------
Total operating expenses 2,922 1,113
----------- -----------
Operating income (loss) 798 (381)
Other income (expense) 539 (85)
----------- -----------
Income (loss) before income tax 1,337 (466)
Provision for income taxes - -
----------- -----------
Net income (loss) $ 1,337 $ (466)
=========== ===========
Net income (loss) per share $ 0.05 $ (0.02)
=========== ===========
Weighted average common and common
equivalent shares outstanding 26,321,990 21,944,216
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
DIGITAL LIGHTWAVE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Sales $ 6,808 $ 1,314
Cost of goods sold 2,157 522
----------- -----------
Gross profit 4,651 792
----------- -----------
Operating expenses:
Engineering and development 1,826 986
Sales and marketing 2,058 460
General and administrative 1,574 552
----------- -----------
Total operating expenses 5,458 1,998
----------- -----------
Operating income (loss) (807) (1,206)
Other income (expense) 832 (392)
----------- -----------
Income (loss) before income tax 25 (1,598)
Provision for income taxes - -
----------- -----------
Net income (loss) $ 25 $ (1,598)
=========== ===========
Net income (loss) per share $ - $ (0.08)
=========== ===========
Weighted average common and common equivalent
shares outstanding 25,610,545 21,285,587
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
DIGITAL LIGHTWAVE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) 25 (1,598)
Adjustments to reconcile net income(loss) due to
cash used by operating activities:
Depreciation 250 71
Changes in operating assets and liabilities:
Increase in accounts receivable, net (1,594) (991)
Increase in notes receivable (8) -
(Increase) decrease in inventories (876) 59
Decrease in deferred offering expenses 427 -
Decrease in prepaid expenses (144) (183)
Increase(decrease) in accounts payable and
accrued expenses 46 (249)
------- -------
Net cash used in operating activities (1,874) (2,891)
------- -------
Cash flows from investing activities:
Purchase of property and equipment (1,487) (218)
------- -------
Net cash used in investing activities (1,487) (218)
------- -------
Cash flows from financing activities:
Proceeds from notes payable - 2,295
Principal payments on notes payable (750) (583)
Principal payments on notes payable,
related party - (202)
Proceeds from sale of common stock,
net of expenses 39,314 2,554
Principal payments-capital lease obligation (141) (76)
------- -------
Net cash provided by financing activities 38,423 3,988
------- -------
Net increase in cash and cash equivalents 35,062 879
Cash and cash equivalents at beginning of period 1,165 72
------- -------
Cash and cash equivalents at end of period $36,227 $ 951
======= =======
Noncash investing and financing activities:
Fixed asset additions included in accounts
payable 90 10
Notes payable converted to equity - 5,301
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
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 and six month periods ended June 30, 1997,
respectively, 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 10K 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 June 30, 1997 and December 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(In Thousands)
<S> <C> <C>
Raw materials . . . . . . . . . . $ 694 $ 336
Work-in-process . . . . . . . . . 830 339
Finished goods . . . . . . . . . 202 175
-------- --------
$ 1,726 $ 850
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------
1997 1996
------------ ---------
<S> <C> <C>
Weighted average common stock outstanding 26,177,777 21,235,886
Weighted average common stock equivalents outstanding 144,213 708,330
---------- ----------
Shares used in net income (loss) per share calculation 26,321,990 21,944,216
========== ==========
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Weighted average common stock outstanding 25,466,332 20,577,257
Weighted average common stock equivalents outstanding 144,213 708,330
---------- -----------
Shares used in net income (loss) per share calculation 25,610,545 21,285,587
========== ===========
</TABLE>
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.
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
therein 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 Original Equipment Manufacturer (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.
6
<PAGE> 9
RESULTS OF OPERATIONS
Net sales for the second quarter 1997 were $5.3 million, an increase of 370%
over net sales of $1.1 million for the second quarter 1996. Net sales for the
six months ended June 30, 1997 were $6.8 million compared to $1.3 million for
the six months ended June 30, 1996. Net sales during both periods consisted of
domestic sales of the Company's ASA 312 Network Information Computers.
A significant portion of second quarter 1997 sales resulted from business with
new customers and sales of ATM software upgrades for the Network Information
Computers which were released during second quarter 1997.
Gross profit was 70% for the second quarter 1997 compared to 65% for the second
quarter 1996. Gross profit was 68% for the six months ended June 30, 1997
compared to 60% for the six months ended June 10, 1996. The increases in the
gross profit percentage for both periods 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.
Operating expenses of $2.9 million for second quarter 1997 increased 163% from
$1.1 million for second quarter 1996. Operating expenses were $5.4 million for
the six months ended June 30, 1997 an increase of 173% over operating expenses
of $2.0 million for the six months ended June 30, 1996. The increases in
operating expenses for both periods reflect 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.
Engineering and development expenses increased 82% to $948,000 in the second
quarter 1997 from $522,000 in the second quarter 1996. Engineering and
development expenses were $1.8 million for the six months ended June 30, 1997,
an increase of 85% over operating expenses of $1 million for the six months
ended June 30, 1996. The increases in both periods were due primarily to the
addition of engineering personnel and expenses as the company continued to
invest in the enhancement of its existing products and the development of its
Remote Access Agents.
Sales and marketing expenses increased 215% to $1.2 million in the second
quarter 1997 from $374,000 in the second quarter 1996. Sales and marketing
expenses were $2.1 million for the six months ended June 30, 1997, a 347%
increase over sales and marketing expenses of $460,000 for the six months ended
June 30, 1996. The increases in both periods were 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 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.
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 266% to $795,000 in the second
quarter 1997 from $217,000 in the second quarter 1996. General and
administrative expenses were $1.6 million for the six months ended June 30,
1997, a 185% increase over sales general and administrative expenses of
$552,000 for the six months ended June 30, 1996. The increases in both periods
were primarily due to the expansion of facilities, personnel and systems to
support the growth of the Company's business.
Other income (net) was $539,000 in the second quarter 1997 compared to other
expense (net) of $85,000 in the second quarter 1996. Other income (net) for
the six months ended June 30, 1997 was $832,000 compared to other expense (net)
of $392,000 for the six months ended June 30, 1996. The income in 1997 is
primarily the result of interest income earned on the net proceeds from the
Company's Initial Public Offering in February 1997. The expense in 1996
consisted primarily of interest expense on indebtedness retired later during
1996.
7
<PAGE> 10
Net income (loss) per share increased from ($.02) per share for the second
quarter 1996 to $.05 per share for the second quarter 1997. Net income (loss)
per share increased from ($.08) per share for the six months ended June 30,
1996 to $.00 per share for the six months ended June 30, 1997. The calculation
of the net income per share in the second quarter 1997 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
and common stock equivalents outstanding during each respective period.
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 1997 were $36.2 million compared to $1.2
million at December 31, 1996. The increase was due primarily to net proceeds
of approximately $39.5 million upon the Company's completion of its Initial
Public Offering on February 6, 1997.
As of June 30, 1997, the Company's working capital was approximately $40.3
million. For the six months ended June 30, 1997, capital expenditures were
approximately $1.5 million. 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.
PART II OTHER INFORMATION
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibit
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
</TABLE>
No reports on Form 8-K were filed by Digital Lightwave during the
quarter ended June 30, 1997.
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: August 13, 1997 By: /s/ Bryan J. Zwan
-----------------------------
Bryan J. Zwan
Chief Executive Officer and
President
(Principal Executive Officer)
Date: August 13, 1997 By: /s/ Beth A. Morris
-----------------------------
Beth A. Morris
Vice President - Finance
(Principal Financial and
Accounting Officer)
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DIGITAL LIGHTWAVE FOR THE PERIOD ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 36,227
<SECURITIES> 0
<RECEIVABLES> 4,104
<ALLOWANCES> 0
<INVENTORY> 1,726
<CURRENT-ASSETS> 42,281
<PP&E> 3,249
<DEPRECIATION> 630
<TOTAL-ASSETS> 44,958
<CURRENT-LIABILITIES> 2,028
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 42,785
<TOTAL-LIABILITY-AND-EQUITY> 44,958
<SALES> 5,310
<TOTAL-REVENUES> 5,310
<CGS> 1,590
<TOTAL-COSTS> 1,590
<OTHER-EXPENSES> 2,922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (539)
<INCOME-PRETAX> 1,337
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,337
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
