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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 1995
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 NUMBER 0-7428
CALIFORNIA MICROWAVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-1668412
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S.
EMPLOYER IDENTIFICATION NUMBER)
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985 ALMANOR AVENUE, SUNNYVALE, CALIFORNIA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 732-4000
NO CHANGE
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FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.
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
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
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<CAPTION>
CLASSES OUTSTANDING AT APRIL 30,1995
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<S> <C>
COMMON STOCK $.10 PAR VALUE 12,353,929
</TABLE>
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<PAGE>
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months
March 31, Ended March 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Sales $104,871 $104,702 $310,726 $249,814
Cost of products sold 75,467 78,140 226,080 181,834
Gross margin 29,404 26,562 84,646 67,980
Expenses:
Research and development 6,283 4,157 16,490 9,945
Marketing and administration 15,453 15,244 43,712 38,139
Amortization of intangible
assets 633 543 1,901 1,445
Total expenses 22,369 19,944 62,103 49,529
Operating income 7,035 6,618 22,543 18,451
Interest (expense) (1,079) (985) (3,327 ) (1,738)
Interest income 30 145 255 287
Income before income taxes 5,986 5,778 19,471 17,000
Provision for income taxes 1,824 1,913 6,813 6,290
Net income $4,162$ 3,865 $12,658 $ 10,710
Average shares and equivalents (thousands):
Primary 12,952 12,828 12,801 12,625
Fully diluted 15,174 15,120 15,120 13,633
Net income per share:
Primary $.32 $.30 $.99 $.85
Fully Diluted $.31 $.29 $.95 $.84
Dividends per share -0- -0- -0- -0-
</TABLE>
See accompanying notes.
<PAGE>
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED, SEE NOTE A)
<TABLE>
<CAPTION>
March 31 June 30
1995 1994
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $7,098 $13,268
Short-term investments 490 434
Accounts receivable 110,356 107,925
Inventories 73,674 69,700
Prepaid expenses 3,003 1,927
Total current assets 194,621 193,254
Net property, plant and equipment 34,423 33,155
Intangibles and other assets 66,055 67,574
$295,099 $293,983
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 300 $ 389
Accounts payable 28,731 36,273
Accrued income taxes 1,546 2,108
Other accrued liabilities 34,923 42,510
Total current liabilities 65,500 81,280
Long-term liabilities 70,369 71,958
Stockholders' equity:
Common stock 1,235 1,203
Capital in excess of par value 71,745 66,187
Retained earnings 86,788 74,130
Unamortized restricted stock plan expense (538) (775)
Total stockholders' equity 159,230 140,745
$295,099 $293,983
</TABLE>
A- The balance sheet at June 30, 1994 has been derived from the
audited financial statements at that date, but does not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See accompanying notes.
<PAGE>
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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<CAPTION>
Nine Months Ended
March 31
1995 1994
<S> <C> <C>
Operating activities:
Net income $12,658 $10,710
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 5,763 4,808
Amortization of intangible assets 1,901 1,445
Debt issuance costs paid - (1,999)
Net effect of changes in:
Accounts receivable (2,431) (17,186)
Inventories (3,974) (15,190)
Prepaid expenses (1,076) 368
Accounts payable (7,542) (7,816)
Accrued income taxes 419 2,995
Other accrued liabilities 549 (5,944)
Net cash provided by (used in)
operating activities 6,267 (27,809)
Investing activities:
Capital expenditures (6,814) (5,435)
Acquisition of net assets of businesses
purchased, net of cash acquired (9,600) (25,552)
Proceeds from sale of assets - 161
Unexpended plant and equipment funds - 136
Other (438) (605)
Net cash provided by (used in)
investing activities (16,852) (31,295)
Financing activities:
Proceeds from issuance of convertible
subordinated notes - 63,200
Payments on long-term debt (214) (114)
Proceeds from issuance of common stock 4,629 4,424
Net cash provided by (used in) financing
activities 4,415 67,510
Net increase (decrease) in cash and
cash equivalents (6,170) 8,406
Cash and cash equivalents at beginning of year 13,268 5,251
Cash and cash equivalents at end of period $7,098 $13,657
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest $1,922 $ 836
Income taxes 6,474 3,295
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The information at March 31, 1995, and for the three and
nine month periods ended March 31, 1995 and 1994, is
unaudited, but includes all adjustments (consisting only of
normal recurring adjustments) which the management of
California Microwave, Inc., believes are necessary for fair
presentation of the results for the periods presented.
Interim results are not necessarily indicative of results
for a full year. The consolidated interim financial
statements should be read in conjunction with the audited
consolidated financial statements for the year ended June
30, 1994, included in the California Microwave, Inc. 1994
Annual Report to Stockholders and the Form S-4 Registration
Statement, dated May 1, 1995, filed with the Securities and
Exchange Commission.
NOTE 2 - FISCAL PERIODS
The Company's nine months and fiscal year periods end on the
Saturday closest to March 31 and June 30, respectively. For
clarity of presentation, all fiscal periods are reported as
ending on a calendar month-end.
NOTE 3 - INVENTORIES ($000)
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<CAPTION>
March 31 June 30
1995 1994
<S> <C> <C>
Projects in process $ 32,145 $20,963
Less progress billings 10,050 4,702
22,095 16,261
Work-in-process and finished goods 30,016 28,208
Raw materials and parts 21,563 25,231
$73,674 $69,700
</TABLE>
NOTE 4 - UNBILLED ACCOUNTS RECEIVABLE
Included in accounts receivable at March 31, 1995 and June
30, 1994 were $19.1 million and $21.3 million, respectively,
of unbilled receivables principally due to provisions
contained in certain export contracts and to a lesser degree
the billing provisions of a government contract.
The balance at March 31, 1995 is expected to be billed and
collected within one year.
NOTE 5 - STOCKHOLDERS' EQUITY
The change in capital in excess of par value for the nine
months ended March 31, 1995 consists principally of common stock
issuances and tax benefit of options exercised.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following table sets forth for the periods indicated (i)
percentages which certain items reflected in the financial data
bear to total sales of the Company and (ii) the change of such
items expressed as a percentage increase or decrease from the
indicated prior period. See Condensed Consolidated Statement of
Income and Note 1.
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<CAPTION>
Percent of Sales Period Increase (Decrease)
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
March 31 March 31 March 31 March 31
1995 1994 1995 1994 1995 vs 1994 1995 vs 1994
<S> <C> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0% 0.2% 24.4%
Gross margin 28.0 25.4 27.2 27.2 10.7 24.5
Research and
development expenses 6.0 4.0 5.3 4.0 51.1 65.8
Marketing and admin-
istration expenses 14.7 14.6 14.1 15.3 1.4 14.6
Amortization of
intangible assets 0.6 0.5 0.6 0.6 16.6 31.6
Operating income 6.7 6.3 7.3 7.4 6.3 22.2
Interest income
(expense), net (1.0) (0.8) (1.0) (0.6) 24.9 111.7
Income before
income taxes 5.7 5.5 6.3 6.8 3.6 14.5
Net income 4.0 3.7 4.1 4.3 7.7 18.2
</TABLE>
<PAGE>
SALES Sales were $310.7 million and $249.8 million for the nine
months ended March 31, 1995 and 1994, respectively, representing an
increase of 24%. Sales increased in each of CMI's three primary
product areas. Approximately 57% of the increase was in wireless
which includes the sales of TeleSciences Transmission Systems, Inc.
(TTS) from the date of acquisition in October 1993. Approximately
60% of the increase in wireless sales was due to the acquisition of
TTS. Wireless sales represented 41% of total sales in the first
three quarters of fiscal 1995 compared to 37% of total sales in the
prior year period. Satellite communications sales increased by 6%
and represented 41% of total sales. Most of the satellite
communications increase was in product sales rather than system
sales. Intelligence systems sales increased 51% and represented
18% of total sales. This increase was due to increased U.S.
government funding for the Airborne Reconnaissance Low program.
Sales also increased significantly in each major market sector
(international, U.S. commercial and U.S. government). International sales
continued to lead CMI's growth, rising by 22%. Approximately 38% of the
overall increase in sales was in the international sector. This increase
was due to the growing demand for wireless and satellite products in
expanding the worldwide telecommunications infrastructure, both within
and between countries. International sales represented 41% of total sales
in the period compared to 42% in the prior year period.
Another trend was the continuing increase in wireless and
satellite product sales relative to lower margin intelligence and
satellite system sales. Product sales were up 37% in the first
three quarters of fiscal 1995 while system sales were up 8%. Thus,
products represented 63% of total sales in the period, compared to
57% in the prior year period and accounted for 86% of the overall
increase in sales.
No single customer accounted for more than 10% of sales in either
period. However, CMI's total sales to all departments and agencies
of the U.S. government represented 28% of total sales in the
period. Because CMI is concentrating its investments in commercial
areas, the percentage of sales to the U.S. government is expected
to decline, while growing in actual dollars.
Sales for the three months ended March 31, 1995 were $104.9
million compared to $104.7 million for the three months ended March
31, 1994. Wireless sales accounted for 41% of total sales in the
third quarter compared to 43% in the third quarter of 1994.
In April 1995, TTS was informed by a contractor for which TTS
supplies short haul radios under a multi-year master contract that
the contractor had been notified of its customer's intention not to
purchase additional short haul radio links. Revenues under this
contract were approximately $11.0 million in fiscal 1994 and
approximately $13.0 million during the nine months ended March 31,
1995, with low margins realized in each period. Accounts
receivable of approximately $14.0 million are due from this
contractor (approximately $10.0 million of which is unbilled).
GROSS MARGIN Gross margin was $84.6 million and $68.0 million
for the nine months ended March 31, 1995 and 1994, respectively,
representing an increase of 25%. Gross margin as a percentage of
total sales was 27.2% for each period.
Gross margins as a percentage of sales for products are
generally in the 35% to 45% range, while turnkey satellite earth
station and intelligence systems typically yield gross margins in
the 10% to 20% range. System sales include a relatively high
percentage of large subcontracted items to which CMI adds less value
and upon which customers allow minimal markup. In addition, engineering
costs in turnkey satellite earth stations and intelligence systems are
customer funded and are included in costs of products sold. CMI's
strategy includes increasing the proportion of product sales.
Gross margins were 28.0% and 25.4% for the three months ended
March 31, 1995 and 1994, respectively. This increase was due to
increased sales of relatively higher margin satellite and wireless
products. Product sales increased to 64% of total sales as
compared to 60% in the comparable prior year period.
RESEARCH AND DEVELOPMENT Research and development expenses were
$16.5 million and $10.0 million for the nine months ended March 31,
1995 and 1994, respectively, representing an increase of 66%.
Research and development expenses as a percentage of total sales
were 5.3% and 4.0%, respectively, for such periods. CMI
anticipates that research and development expenses will continue to
increase at a faster rate than sales as wireless and satellite
product sales represent an increasingly higher percentage of total
sales. In general, engineering expenditures in turnkey satellite
earth stations and intelligence systems are customer funded and are
included in cost of product sold.
<PAGE>
Research and development expenses during the three months ended
March 31, 1995, increased 51% to $6.3 million from $4.2 million in
the comparable prior year period due primarily to new product
development in the satellite communications and wireless areas.
MARKETING AND ADMINISTRATION Marketing and administration
expenses were $43.7 million and $38.1 million for the nine months
ended March 31, 1995 and 1994, respectively, representing an
increase of 15%. Marketing and administration expenses as a
percentage of total sales were 14.1% and 15.3%, respectively, for
such periods. The percentage decrease is due to increased sales,
particularly in the satellite communications business area, without
a corresponding increase in marketing and administration expenses.
AMORTIZATION OF INTANGIBLE ASSETS Amortization expenses
associated with intangible assets were $1.9 million and $1.4
million for the nine months ended March 31, 1995 and 1994,
respectively, representing an increase of 32%. The increase was
due to the amortization of purchased intangible assets recorded in
the acquisitions of TTS and MRC.
OPERATING INCOME Operating income was $22.5 million and $18.5
million for the nine months ended March 31, 1995 and 1994,
respectively, representing an increase of 22%. Operating income as
a percentage of total sales was comparable at 7.3% and 7.4% for the
periods, respectively.
INTEREST EXPENSE (NET) Net interest expense was $3.1 million
and $1.5 million for the nine months ended March 31, 1995 and 1994,
respectively. In the second quarter of fiscal 1994, CMI issued
$65,200,000 of convertible subordinated notes and used the proceeds
principally to finance the acquisition of TTS. Interest expense
also increased due to the impact of the final $9.6 million cash
payment to the former stockholders of MRC and extended payment
terms on certain international system contracts.
PROVISION FOR INCOME TAXES The provision for income taxes was
$6.8 million and $6.3 million for the nine months ended March 31,
1994 and 1993, respectively. During the three months ended March
31, 1995 the estimated annual tax rate was adjusted from 37% to
35%, reflecting anticipated increase in U.S. tax benefits from the
Company's Foreign Sales Corporation of approximately $390,000. Fiscal
1994's estimated annual tax rate had been similarly reduced in the third
quarter of 1994 to reflect anticipated additional research and
development tax credits of $340,000.
LIQUIDITY AND CAPITAL RESOURCES At March 31, 1995, CMI had
working capital of $129.1 million,including $7.1 million of cash and
cash equivalents, compared with working capital of $120.8 million,
including cash and cash equivalents of $13.7 million, at March 31, 1994.
This increase in working capital was the result of profitable operations
and the impact of the $63.2 million proceeds from CMI's sale of long-term
convertible subordinated notes in December 1993. Net cash from
operating activities was $6.3 million in the nine months ended
March 31, 1995 compared to net cash used in operating activities of
$27.8 million in the nine months ended March 31, 1994. The
improved operating cash flow in the current period was due to the
impact of collections on certain international system contracts
booked in fiscal 1994, while the negative operating cash flow in
the prior period was due to the need to fund the post-acquisition
working capital requirements of TTS.
During the first three quarters of fiscal 1995, funds were
generated from operating income (including depreciation and
amortization) and were used to finance increased receivable and
inventories balances and payments of June 30, 1994 payables and
accruals, principally payments under incentive agreements and
employee benefit plans. The net result was operational cash
provided of $6.3 million. CMI's investing activities during the
first three quarters of fiscal 1995, including a payment, under the
April 1992 MRC acquisition agreement, to MRC's stockholders of $9.6
million and payments for capital equipment additions of $6.8
million. Total cash outflow for investing activities was $16.9
million. Sale of CMI common stock to CMI employees under on-going
CMI stock option and stock purchase plans resulted in a cash inflow
of $4.6 million. The above activity was responsible for a net
decrease in cash of $6.2 million for the first three quarters of
fiscal 1995.
CMI has available two unsecured committed credit facilities,
totaling $33.5 million, $25 million of which expires in October
1995 and $8.5 million of which expires in October 1996. At March
31, 1995, there were no borrowings and $11.4 million of standby
letters of credit outstanding under these credit lines, leaving
$22.1 million of available credit lines.
CMI believes that its current cash position, funds generated from
operations and funds available from its credit facilities will be
adequate to meet CMI's requirements for working capital, capital
expenditures, debt service and external investments for the
foreseeable future.
<PAGE>
OTHER FINANCIAL INFORMATION
NEW ORDERS BOOKED AND BACKLOG Bookings were $342.2 million and
$309.7 million for the nine months ended March 31, 1995 and 1994,
respectively, representing an increase of 11%. Bookings were up in
all three of the Company's principal product areas. Approximately
72% of this increase was in satellite communications due to receipt
of several large international orders. Approximately 28% of the
increase was in the wireless area. Substantially all of the
increase was in the international market sector where orders
increased 25% over the prior year period.
New orders booked during the quarter ended March 31, 1995, were
$102.6 million compared to $86.3 million for the same quarter last
year, representing an increase of 16%.
Backlog was $255.9 million and $248.9 million at March 31, 1995
and 1994, respectively, representing an increase of 3%. Included
in backlog at March 31, 1995 is approximately $4.1 million of
service contracts acquired as part of CMI's acquisition from GE
Capital Spacenet Satellite Services of its Equatorial and EDB 1000
very small aperture terminal (VSAT) product lines and related
assets and its VSAT satellite hub operations. Essentially no
consideration was paid for the business except for the assumption
of liabilities under certain contracts being assumed. The
percentage of backlog expected to be delivered during the next
twelve months was approximately 80% at March 31, 1995 and March 31,
1994.
ACQUISITION OF TTS CMI acquired substantially all of the
assets and certain of the liabilities of TTS on October 23, 1993.
TTS's product line consists of digital microwave radios for the
cellular, personal communications network and private network
markets. CMI paid $28.7 million for those net assets at closing,
consisting of $23.7 million in cash and a $5 million, five-year 5%
convertible subordinated note, convertible at the option of the
holder into Common Stock of CMI at a conversion price of $28.50 per
share. Of the $5 million note, $3 million was offset against
advances from TTS to its parent during the period prior to the
closing of the acquisition and is no longer payable.
PENDING ACQUISITION OF MICROWAVE NETWORKS INCORPORATED Under an
Agreement and Plan of Reorganization and Merger, as amended, among
CMI, Microwave Networks Incorporated, a Texas corporation ("MNI"),
and CMI Acquisition Corporation, a Texas corporation wholly owned
by CMI ("Acquisition Corp."), (i) Acquisition Corp. will be merged
into MNI, (ii) MNI will be the surviving corporation and a wholly
owned subsidiary of CMI, (iii) each outstanding share of MNI Common
Stock and MNI Preferred Stock (together, the "MNI Capital Stock")
(other than shares, if any, as to which dissenters' rights have
been exercised pursuant to Texas Law) will be converted into that
number of shares of CMI Common Stock determined by dividing
3,475,000 (the "Numerator") by the total number of shares of MNI
Capital Stock outstanding immediately prior to the closing
(including for this purpose any MNI Capital Stock issuable under
then outstanding options, warrants or other convertible securities)
and rounding the quotient off to the nearest ten-thousandth
(.0001); and (iv) CMI will assume all outstanding options of MNI.
The transaction is subject to obtaining the approval of the
shareholders of CMI and MNI at special shareholders meetings that
will be held on May 30, 1995, and it is contemplated that the
transaction will be consumated immediately after obtaining such
approvals.
Included in prepaid expenses at March 31, 1995 is approximately
$650,000 of merger-related expenses. This amount along with
additional expenses incurred in connection with the merger will be
charged to operations in the period in which the merger closes.
<PAGE>
PART II - OTHER FINANCIAL INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - Computation of Per Share Earnings for
periods ended March 31, 1995 and 1994.
(b) A current report on Form 8-K was filed February 13, 1995,
reporting information under Item 5.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CALIFORNIA MICROWAVE, INC.
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May 12, 1995 BY /s/ Philip F. Otto
Date Philip F. Otto
President and Chief
Executive Officer
Chairman of the Board
May 12, 1995 BY /s/ Garrett E. Pierce
Date Garrett E. Pierce
Executive Vice President
Chief Financial Officer
</TABLE>
<PAGE>
CALIFORNIA MICROWAVE, INC.,
COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11
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<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
1995 1994 1995 1994
<S> <C> <C> <C> <C>
PRIMARY
Net income, as reported $4,162,000$ 3,865,000 $12,658,000$10,710,000
Average shares outstanding 12,324,000 11,989,000 12,223,000 11,892,000
Add - Common stock equivalents of Company's stock options
using the treasury stock method 628,000 543,000 578,000 562,000
Add - Contingent shares based upon Microwave Radio Corporation
earnings exceeding target levels -0- 296,000 -0- 171,000
Average shares and
equivalents 12,952,000 12,828,000 12,801,000 12,625,000
Net income per share $.32 $.30 $.99 $.85
FULLY-DILUTED
Net income as reported $4,162,000 $3,865,000 $12,658,000 $10,710,000
Add back interest charges,
net of taxes 605,000 570,000 1,729,000 740,000
Net income, for fully diluted $4,767,000 $4,435,000 $14,387,000 $11,450,000
Average shares and equivalent-
primary 12,952,000 12,828,000 12,801,000 12,625,000
Add-additional common stock equivalents
of the Company's stock options -0- -0- 74,000 42,000
Add-shares to be issued at conversion
of Convertible Debentures 2,222,000 2,292,000 2,245,000 966,000
Total shares for fully
diluted 15,174,000 15,120,000 15,120,000 13,633,000
Net income per share $.31 $.29 $.95 $.84
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit 11 Statement re computation of per share earnings.
Exhibit 27 Financial Data Schedule
<PAGE>
