<PAGE> 1
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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 DECEMBER 31, 1996
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 (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NUMBER)
555 TWIN DOLPHIN DRIVE
REDWOOD CITY, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE 94065
OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (415) 596-9000
------------------------
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.
<TABLE>
<S> <C>
CLASSES OUTSTANDING AT JANUARY 31, 1997
COMMON STOCK $.10 PAR VALUE 16,182,842
</TABLE>
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales....................................... $117,089 $116,289 $220,781 $232,052
Cost of products sold........................... 124,992 82,159 202,101 163,149
-------- -------- -------- --------
Gross margin.................................... (7,903) 34,130 18,680 68,903
-------- -------- -------- --------
Expenses:
Research and development........................ 7,891 7,532 15,756 14,698
Marketing and administration.................... 22,723 19,255 42,476 37,293
Amortization of intangible assets............... 540 547 1,080 1,094
-------- -------- -------- --------
Total expenses................................ 31,154 27,334 59,312 53,085
-------- -------- -------- --------
Operating income (loss)......................... (39,057) 6,796 (40,632) 15,818
Interest expense................................ (1,486) (1,125) (2,890) (2,169)
Interest income................................. 27 31 79 32
Gain on sale of subsidiary...................... 2,744 -- 2,744 --
-------- -------- -------- --------
Income (loss) before income taxes............... (37,772) 5,702 (40,699) 13,681
Provision for (benefit from) income taxes....... (12,377) 2,054 (13,431) 4,926
-------- -------- -------- --------
Net income (loss)............................... $(25,395) $ 3,648 $(27,268) $ 8,755
======== ======== ======== ========
Net income (loss) per share..................... $ (1.57) $ .23 $ (1.69) $ .54
======== ======== ======== ========
Average shares and equivalents.................. 16,145 16,129 16,139 16,230
======== ======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 3
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED, SEE NOTE A)
ASSETS
<TABLE>
<CAPTION>
DECEMBER
31 JUNE 30
1996 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 5,695 $ 4,560
Short-term investments............................................... 1,968 1,504
Accounts receivable.................................................. 96,095 108,278
Inventories.......................................................... 76,590 103,456
Deferred tax assets.................................................. 23,311 10,387
Prepaid expenses..................................................... 2,446 2,314
-------- --------
Total current assets.............................................. 206,105 230,499
-------- --------
Net property, plant and equipment...................................... 47,708 48,762
Deferred tax assets.................................................... 1,973 1,973
Intangible and other assets............................................ 54,271 57,106
-------- --------
$310,057 $338,340
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable........................................................ $ 15,500 $ --
Current portion of long-term debt.................................... 329 525
Accounts payable..................................................... 32,750 46,566
Accrued income taxes................................................. 2,292 3,406
Other accrued liabilities............................................ 46,453 38,750
-------- --------
Total current liabilities......................................... 97,324 89,247
-------- --------
Long-term liabilities.................................................. 68,503 79,233
Stockholders' equity:
Common stock......................................................... 1,615 1,603
Capital in excess of par value....................................... 90,210 88,788
Retained earnings.................................................... 53,075 80,343
Unamortized restricted stock plan expense............................ (548) (722)
Cumulative translation adjustment.................................... (122) (152)
-------- --------
Total stockholders' equity........................................ 144,230 169,860
-------- --------
$310,057 $338,340
======== ========
</TABLE>
- ---------------
(A) The balance sheet at June 30, 1996 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.
3
<PAGE> 4
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED DECEMBER 31
---------------------
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................................................... $(27,268) $ 8,755
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization........................................ 7,634 5,743
Amortization of intangible assets.................................... 1,080 1,094
Amortization of debt issuance costs.................................. 105 105
Deferred tax assets.................................................. (12,924)
Net effect of changes in:
Accounts receivable.................................................. 12,183 (1,844)
Inventories.......................................................... 26,866 9,375
Prepaid expenses..................................................... (132) (475)
Accounts payable..................................................... (13,816) (2,398)
Accrued income taxes................................................. (1,128) 2,515
Other accrued liabilities............................................ 7,703 (8,618)
-------- --------
Net cash provided by (used in) operating activities.................... 303 14,252
-------- --------
INVESTING ACTIVITIES:
Capital expenditures................................................. (6,461) (10,552)
Other................................................................ 1,085 (1,155)
-------- --------
Net cash provided by (used in) investing activities.................... (5,376) (11,707)
-------- --------
FINANCING ACTIVITIES:
Proceeds from (payments on) long-term debt........................... (265) (111)
Proceeds from issuance of common stock............................... 1,473 1,879
Proceeds from bank credit facilities................................. 5,000 --
-------- --------
Net cash provided by (used in) financing activities.................... 6,208 1,768
-------- --------
Net increase (decrease) in cash and cash equivalents................... 1,135 4,313
Cash and cash equivalents at beginning of year......................... 4,560 1,983
-------- --------
Cash and cash equivalents at end of period............................. $ 5,695 $ 6,296
======== ========
Cash paid during the period for:
Interest............................................................. $ 2,139 $ 1,855
Income taxes......................................................... 592 2,647
</TABLE>
See accompanying notes.
4
<PAGE> 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The financial information at December 31, 1996, and for the threeand
six-month periods ended December 31, 1996 and 1995, is unaudited, but includes
all adjustments (consisting only of normal recurring adjustments) which the
management of California Microwave, Inc. believes are necessary for a 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, 1996 included in the California
Microwave, Inc. 1996 Annual Report to Stockholders.
NOTE 2 -- FISCAL PERIODS
During the first quarter of fiscal 1997, the Company changed its fiscal
periods to end on the last day of each calendar quarter. Previously, each
quarter ended on the Saturday closest to the calendar month-end. The impact of
this change is not material to the condensed consolidated financial statements
NOTE 3 -- RESTRUCTURING AND OTHER CHARGES
As a result of continued disappointing operating performance by the
Microwave Network Systems (MNS) division and the Satellite Transmission Systems
(STS) division, during December 1996 and January 1997, the Company performed a
comprehensive review of these and certain other of the Company's operations,
including a review of inventory levels, product development and migration plans,
and facility and personnel needs. It was determined to focus MNS on products
that have potentially higher margins and STS will focus on selected strategic
customers and network opportunities that utilize the Company's products. This
resulted in the write-off of certain inventories, the restructuring of MNS' and
STS' operations, and the taking of charges relating to warranty and contract
issues that arose at MNS and STS during the second quarter. Inventory, warranty
and contract, and other charges of approximately $39 million were reflected in
the results of operations for the second quarter. Restructuring charges of
approximately $8 million will be reflected in the results of operations in the
third quarter. See Management's Discussion and Analysis of Financial Condition
and Results of Operations for further information.
NOTE 4 -- CONTINGENT LIABILITIES
On November 9, 1995, and December 12, 1995, two putative class action
lawsuits were filed in the United States District Court for the Northern
District of California. The plaintiffs in these two cases, which have been
consolidated, purport to represent a class of all persons who purchased common
stock of the Company between September 6, 1994, and June 29, 1995 (the class
period). Named as defendants are the Company and certain of its former executive
officers. The Complaints allege that defendants violated various federal
securities laws through material misrepresentations and omissions during the
class period. Defendants filed motions to dismiss the complaints, which the
court granted on April 19, 1996, with leave to amend. Plaintiffs filed an
amended consolidated complaint and in August 1996 defendants filed a motion to
dismiss that complaint. On November 1, 1996, the motion to dismiss was denied.
Although the ultimate outcome of these proceedings cannot be determined, the
Company believes that it has meritorious defenses to the claims alleged in these
lawsuits and intends to defend the actions vigorously.
The Company is subject to other legal proceedings and claims that arise in
the normal course of its business. The Company believes these proceedings will
not have a material adverse effect on the financial position or results of
operations of the Company.
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 -- INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1996 1996
----------- --------
(IN THOUSANDS)
------------------------
<S> <C> <C>
Projects in process.................................................. $19,549 $ 23,948
Less progress billings............................................... 5,491 11,750
------- --------
14,058 12,198
Work-in-process and finished goods................................... 22,759 43,161
Raw materials and parts.............................................. 39,773 48,097
------- --------
$76,590 $103,456
======= ========
</TABLE>
NOTE 6 -- UNBILLED ACCOUNTS RECEIVABLE
Included in accounts receivable at December 31, 1996 and June 30, 1996 is
approximately $7.6 million and $7.5 million, respectively, of unbilled
receivables resulting from provisions contained in certain export contracts.
The remaining amount of unbilled receivables at December 31, 1996 is
expected to be billed and collected within one year.
NOTE 7 -- STOCKHOLDERS' EQUITY
The change in capital in excess of par value for the six months ended
December 31, 1996, consists principally of common stock issuances and tax
benefit of options exercised.
NOTE 8 -- RECLASSIFICATIONS
Certain fiscal year 1996 amounts have been reclassified to conform to the
fiscal year 1997 presentation.
NOTE 9 -- INCOME TAXES
At December 31, 1996, the Company had a cumulative net deferred tax asset
of $25.3 million that will be available to reduce payments on future tax
liabilities. Management of the Company believes it is more likely than not that
the asset will be realized through refunds of previously paid income taxes,
future profitable operations, and tax planning strategies.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements made below and elsewhere in this Form 10-Q that are not
historical facts, including any statements about expectations for fiscal year
1997 and beyond, involve certain risks and uncertainties. Factors that could
cause the Company's actual results to differ materially from management's
projections, estimates and expectations include, but are not limited to, delays
in the receipt of orders or in the shipment of products, delays in implementing
the Company's restructuring plan, delays in transitioning from older to newer
products, and other factors referred to under "Information Regarding Forward
Looking Statements" in the Company's Form 10-K Annual Report for its fiscal year
ended June 30, 1996, and in the Company's Consolidated Financial Statements and
Notes to Financial Statements contained in its 1996 Annual Report to
Stockholders. The Condensed Consolidated Financial Statements and Notes to
Condensed Consolidated Financial Statements should be read in conjunction with
this Managements' Discussion and Analysis of Financial Condition and Results of
Operations.
The following table sets forth for the periods indicated (i) certain income
and expense items expressed as a percentage of the Company's total sales and
(ii) the percentage change of such items for the three and six months ended
December 31, 1996 compared to the three and six months ended December 31, 1995.
See Condensed Consolidated Statements of Operations.
<TABLE>
<CAPTION>
PERIOD TO PERIOD
PERCENT OF SALES INCREASE (DECREASE)
----------------------------------- -------------------------------
THREE MONTHS THREE MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
--------------- --------------- ------------- -------------
1996 1995 1996 1995 1996 VS. 1995 1996 VS 1996
----- ----- ----- ----- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales............................................ 100.0% 100.0% 100.0% 100.0% 0.7% (4.9)%
Gross margin..................................... NM 29.3 8.5 29.7 NM (72.9)
Research and development expenses................ 6.7 6.5 7.1 6.3 4.8 7.2
Marketing and administration expenses............ 19.4 16.6 19.2 16.1 18.0 13.9
Amortization of intangible assets................ 0.5 0.5 0.5 0.5 (1.3) (1.3)
Operating income................................. NM 5.8 NM 6.8 NM NM
Interest (expense) net........................... (1.2) (0.9) (1.3) (0.9) 33.4 31.5
Income before income taxes....................... NM 4.9 NM 5.9 NM NM
Net income....................................... NM 3.1 NM 3.8 NM NM
</TABLE>
- ---------------
NM -- Not meaningful
The following table sets forth sales by product class and by market sector
for the three and six months ended December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
SALES
-----------------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Satellite Communications................ $ 43,642 $ 56,630 $ 77,115 $112,562
Wireless................................ 50,322 42,180 94,944 83,721
Intelligence and other.................. 23,125 17,479 48,722 35,769
-------- -------- -------- --------
$117,089 $116,289 $220,781 $232,052
======== ======== ======== ========
International........................... $ 57,761 $ 61,024 $100,666 $122,660
U.S. Commercial......................... 32,360 30,942 64,839 61,871
U.S. Government......................... 26,968 24,323 55,276 47,521
-------- -------- -------- --------
$117,089 $116,289 $220,781 $232,052
======== ======== ======== ========
</TABLE>
7
<PAGE> 8
OVERVIEW
As a result of continued disappointing operating performance by the
Microwave Network Systems (MNS) division and the Satellite Transmission Systems
(STS) division, during December 1996 and January 1997 management of the Company
performed a comprehensive review of these and certain other of the Company's
operations. MNS represents the merged operations of TeleSciences Transmission
Systems (TTS), acquired in October 1993, Microwave Networks Incorporated,
acquired in May 1995, and certain operations of Microwave Radio Corporation,
acquired in April 1992. This comprehensive review included a review of inventory
levels, product development and migration plans, facility and personnel needs,
and other matters. As a result of these reviews, it was determined that MNS will
focus on a smaller number of potentially higher-margin products, including
several recently introduced products, and STS will focus on selected stategic
customers and networking opportunities that utilize the Company's products. As a
result of this product strategy, the operations of MNS will be reorganized into
two segments, one focused on the international cellular market and the other
focused on the domestic Personal Communications Services (PCS) relocation
market. MNS will immediately discontinue the sale of certain products and will
phase-out other products over the next 6 to 18 months. STS will also eliminate
certain products and will transfer others to the Company's EFData subsidiary
(EFD). Accordingly, management determined that certain quantities of inventory
on-hand or subject to firm purchase commitments at MNS and STS, and to a lesser
extent at certain other divisions, were in excess of reforecasted demand.
Accordingly, as a result of such review, including the decision to discontinue
or phase-out certain products, the Company recorded a provision of $31.2 million
during the quarter ended December 31, 1996 to write-down certain inventories to
their estimated net realizable value.
In addition, certain customers of MNS have experienced quality problems
with a specific product (now discontinued) which was sold in significant
quantities during 1993 to 1995. After determining the scope of the quality
problem, the Company recently offered to retrofit the affected products at no
cost to the customer. Accordingly, the Company has recorded a provision for the
estimated costs of this program. The Company also determined that warranty and
other provisions should be made for other discontinued products and for certain
loss contracts. Warranty and contract loss provisions recorded in the quarter
ended December 31, 1996 amounted to $6.5 million.
Primarily as a result of the above, during the second quarter of fiscal
1997 the Company recorded $38.0 million to cost of products sold and $1.3
million to marketing and administration expense for the write-down of
inventories to amounts expected to be realized, the recognition of unusual
warranty and contract costs, and other expenses. Only approximately $7.0 million
of the total of $39.3 million will result in future cash outlays. The
comprehensive review of operations also resulted in the decision to reduce
future operating expenses through the closure of certain facilities at MNS and
the termination of approximately 175 employees at MNS and STS. The Company
intends to recognize approximately $7.8 million of restructuring charges, of
which $6.9 million relates to facility closures ($3.5 million for facilities
closed in 1995) and the remainder to severance charges. As required by generally
accepted accounting principles, these restructuring charges will be recorded in
the quarter ended March 31, 1997. The Company also expects costs of
approximately $2 million to $3 million during the third and fourth quarters of
fiscal 1997 and the first quarter of fiscal 1998 for retention and relocation
costs for certain employees and other expenses to be incurred in connection with
the restructuring. These costs will be included in marketing and administration
expense and research and development expense in those periods.
As a part of the review process, and in accordance with its accounting
policies, the Company reviewed the $10 million carrying value of intangible
assets associated with the acquisition of TTS. The Company concluded that the
asset will be realized through the on-going domestic operations of MNS. However,
the remaining period over which this asset is to be realized has been shortened
to 13 years from 26 years.
In June 1995, the Company recorded restructuring charges of approximately
$20.9 million and other charges of approximately $15.5 million , for a total of
approximately $36.4 million in connection with a program to reduce costs and
improve operating efficiencies. Substantially all of the $15.5 million of other
charges were reflected in costs of products sold. The program included, among
other things: the integration of certain of the Company's wireless operations
and the exit by TTS from the short-haul radio market, which included certain
short-haul radio contracts and the shifting of short-haul radio sales to MRC;
the recording of
8
<PAGE> 9
certain contract costs at STS; the elimination of excess facilities; the
reduction of employees at STS; the write-off of excess inventory and capital
equipment; and the write down of intangible assets. During fiscal 1996, the
program was expanded, without a net charge to operations, to include merging the
operations of TTS and MNI with certain operations of MRC into a new unit, MNS,
resulting in the write-off of additional excess inventories and other assets and
reducing the number of employees at MNS. Through December 31, 1996, asset
writedowns and payments in connection with the 1995 charges totaled
approximately $31.4 million leaving approximately $5.0 million to be paid.
RESULTS OF OPERATIONS
Sales. Sales were $117.1 million and $116.3 million for the three months
ended December 31, 1996 and 1995, respectively, representing an increase of 1%.
Wireless products and intelligence systems and other sales increased 19% and
32%, respectively, offsetting a decrease of 23% in satellite communication
sales. The increase in wireless sales was due primarily to increased sales of
low margin products by MNS. The increase in intelligence systems and other sales
reflects the continued expansion of the intelligence programs in which the
Company participates. The rate of growth of intelligence systems sales for the
remainder of the year is expected to be lower than the 32% experienced in the
second quarter of fiscal 1997. The decrease in satellite communications sales
was principally due to continued delays in completing the financing of certain
large satellite earth station projects and the decrease in sales for a
telecommunications project in Saudi Arabia as this project was substantially
completed in fiscal 1996 and has not been replaced by similar projects in fiscal
1997. The Company expects that satellite communications sales for the remainder
of the fiscal year will be significantly below satellite communications sales
recorded in the second half of fiscal 1996.
U.S. commercial sales and sales to the U.S. Government increased 5% and
11%, respectively, offsetting a decrease of 5% in international sales. Products
represented 64% of sales in the second quarter of 1997 compared to 66% in the
second quarter of 1996, with the balance represented by system sales.
Sales were $220.8 million and $232.1 million for the six months ended
December 31, 1996 and 1995, respectively, representing a decrease of 5%.
Wireless sales and intelligence systems and other sales increased 13% and 36%,
respectively, substantially offsetting a 31% decrease in satellite
communications sales. U.S. commercial sales and sales to the U.S. government
increased 5% and 16%, respectively, while international sales decreased 18%. The
principal reason for the decline in satellite communications and international
sales was the inability to replace the Saudi Arabia project.
Gross Margin. Gross margin was $(7.9) million and $34.1 million for the
three months ended December 31, 1996 and 1995, respectively. As described in the
overview, during the second quarter of fiscal 1997, the Company recorded
inventory and unusual warranty charges to costs of products sold of $38.0
million. Absent these charges, gross margin as a percentage of sales would have
been 25.7% compared to 29.4% for the second quarter of fiscal 1996. The decline
in gross margin percentage was due principally to delays in completion of
certain new lower cost products at EFD and MNS, to competitive pricing pressures
on certain MNS and EFD product lines, to the change in mix to lower margin
products at EFD and to continued overhead absorption issues at MNS.
Gross margin was $18.7 million and $68.9 million for the six months ended
December 31, 1996 and 1995, respectively, representing a decrease of 73%. Gross
margin as a percentage of sales was 25.7% (excluding the charges discussed
above) and 29.7% for such periods, respectively.
Research and Development. Research and development expenses were $7.9
million and $7.5 million for the three months ended December 31, 1996 and 1995,
respectively, representing an increase of 5%. Research and development expenses
as a percentage of sales were 6.7% and 6.5% for such periods, respectively. The
Company continues to focus its research and development efforts primarily on the
development of new satellite networking products and software and wireless
products.
Research and development expenses were $15.8 million and $14.7 million for
the six months ended December 31, 1996 and 1995, respectively, representing an
increase of 7%. Research and development expenses as a percentage of sales were
7.1% and 6.3% for such periods, respectively.
9
<PAGE> 10
Marketing and Administration. Marketing and administration expenses were
$22.7 million and $19.3 million for the three months ended December 31, 1996 and
1995, respectively, representing an increase of 18%. Marketing and
administration expenses as a percentage of sales were 19.4% and 16.6% for such
periods, respectively. Included in marketing and administration expenses for the
second quarter of fiscal 1997 is approximately $1.3 million of severance charges
for the Company's former chief executive officer and the $1.3 million of
marketing and administration charges discussed in the overview.
Marketing and administration expenses were $42.5 million and $37.3 million
for the six months ended December 31, 1996 and 1995, respectively, representing
an increase of 14%. Marketing and administration expenses as a percentage of
sales were 19.2% and 16.1% for such periods, respectively.
Amortization of Intangible Assets. Amortization expenses associated with
intangible assets remained constant at $.5 million for the three months ended
December 31, 1996 and 1995. The Company expects amortization expense to increase
approximately $0.1 million per quarter starting with the third quarter of fiscal
1997 in connection with the change in amortization period for the TTS intangible
asset discussed above.
Interest Expense, Net. Net interest expense was $1.5 million and $1.1
million for the three months ended December 31, 1996 and 1995, respectively,
representing a 33% increase. Net interest expense was $2.8 million and $2.1
million for the six months ended December 31, 1996 and 1995, respectively,
representing a 32% increase. The increase in net interest expense reflects the
need for the Company to borrow against its credit lines to fund operations and
capital expenditures.
Gain on Sale of Subsidiary. During the second quarter of fiscal 1997, the
Company recognized a $2.7 million gain from the sale of its Digital Radio
Technology subsidiary.
Provision for (Benefit from) Income Taxes. The provision for (benefit from)
income taxes was ($12.4) million and $2.1 million for the three months ended
December 31, 1996 and 1995, respectively, and ($13.4) million and $4.9 million
for the six months ended December 31, 1996 and 1995, respectively. The effective
tax rate benefit of 33% for fiscal 1997 represents the federal statutory rate of
35% reduced for the effect of non-deductible amortization of goodwill (for tax
purposes).
At December 31, 1996, the Company had a cumulative net deferred tax asset
of $25.3 million that will be available to reduce payments on future tax
liabilities. Management of the Company believes it is more likely than not that
the asset will be realized through refunds of previously paid income taxes,
future profitable operations, and tax planning strategies.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $108.8 million,
including $5.7 million of cash and cash equivalents, compared with working
capital of $141.3 million, including cash and cash equivalents of $4.6 million,
at June 30, 1996.
During the first six months of fiscal 1997, cash and cash equivalents were
provided by operations (after adjusting the operating loss for depreciation and
amortization and the charges discussed in the overview) and decreases in
accounts receivable, offset by reductions of accounts payable and accrued income
taxes. Cash and cash equivalents were used to pay year-end accrued liabilities,
including payments under incentive agreements and employee benefit plans and
certain restructuring payments. The net result was cash and cash equivalents
provided by operations of $0.3 million. During the first six months of fiscal
1996, cash and cash equivalents were provided by operating income (including
depreciation and amortization ) and decreases in inventories, and were used to
fund an increase in accounts receivable and to reduce accounts payable and to
pay year-end accrued liabilities. The net result was cash and cash equivalents
provided by operating activities of $14.3 million.
The Company's investing activities during the first six months of fiscal
1997 included capital expenditures of $6.5 million. Total cash used for
investing activities was $5.4 million. Net cash used for investing activities
during the first six months of fiscal 1996 was $11.7 million, which included
$10.6 million of capital expenditures.
10
<PAGE> 11
During the first six months of fiscal 1997, cash and cash equivalents of
$6.2 million were provided by financing activities, including borrowing of $5
million under the Company's credit lines and sales of $1.5 million of common
stock to employees under on-going stock option and purchase plans. During the
first six months of 1996, the Company sold $1.9 million of common stock to
employees.
The above activity resulted in a net increase in cash and cash equivalents
of $1.1 million for the first six months of fiscal 1997 compared to a net
increase in cash and cash equivalents of $4.3 million for the first six months
of fiscal 1996.
In December 1996, the Company amended its principal credit facility. The
facility was reduced to $30 million and is secured by the Company's current
assets. The amended facility expires in March 1998. As of December 31, 1996,
there were $15.5 million of borrowings and $5.8 million of standby letters of
credit outstanding under the facility, leaving $8.7 million of available credit.
At December 31, 1996, the Company was not in compliance with certain covenants
of its debt agreements. The lenders have waived such non-compliance and amended
such covenants as necessary to bring the Company into compliance at December 31,
1996.
The Company believes that its current cash position, funds generated from
operations and funds available from its credit facilities will be adequate to
meet the Company's requirements for working capital, capital expenditures, debt
service and external investments for at least the next 12 months.
OTHER FINANCIAL INFORMATION
Bookings. Orders booked were $106.2 million and $114.9 million for the
three months ended December 31, 1996 and 1995, respectively, representing a
decrease of 8%. Satellite communications and wireless products bookings
decreased 28% to 34% of total bookings and 18% to 37% of total bookings,
respectively. Bookings for intelligence systems and other increased 83% to 29%
of total bookings.
Backlog. Backlog was $158.9 million and $215.7 million at December 31, 1996
and 1995, respectively, representing a decrease of 26%. Substantially all of the
December 31, 1996 backlog is expected to be delivered within twelve months.
11
<PAGE> 12
PART II -- OTHER INFORMATION
ITEM 1.-5. INAPPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 -- Statement re computation of per share earnings.
Exhibit 27 -- Financial Data Schedule.
(b) Reports on Form 8-K.
None
12
<PAGE> 13
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.
<TABLE>
<CAPTION>
<S> <C>
February 13, 1997 BY /s/ GILBERT F. JOHNSON
- ------------------- ----------------------------------------
Dated Gilbert F. Johnson
President
February 13, 1997 BY /s/ DENNIS R. RANEY
- ------------------- ----------------------------------------
Date Dennis R. Raney
Executive Vice President
Chief Financial Officer
</TABLE>
13
<PAGE> 1
EXHIBIT 11
CALIFORNIA MICROWAVE, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------------
1996 1995
-------- -------
<S> <C> <C>
PRIMARY - EPS:
Net income (loss), as reported...................... $(25,395) $ 3,648
======== =======
Average shares outstanding.......................... 16,145 15,852
Add -- Common stock equivalents of Company's stock
options using the treasury stock method........... -- 277
-------- -------
Average shares and equivalents -- Primary........... 16,145 16,129
======== =======
Net income per share -- Primary..................... $ (1.57) $ .23
======== =======
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 5,695
<SECURITIES> 1,968
<RECEIVABLES> 96,095
<ALLOWANCES> 3,835
<INVENTORY> 76,590
<CURRENT-ASSETS> 206,105
<PP&E> 113,456
<DEPRECIATION> (65,748)
<TOTAL-ASSETS> 310,057
<CURRENT-LIABILITIES> 97,324
<BONDS> 68,503
0
0
<COMMON> 1,615
<OTHER-SE> 142,615
<TOTAL-LIABILITY-AND-EQUITY> 310,057
<SALES> 220,781
<TOTAL-REVENUES> 220,781
<CGS> 202,101
<TOTAL-COSTS> 202,101
<OTHER-EXPENSES> 59,312
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,890
<INCOME-PRETAX> (40,699)
<INCOME-TAX> (13,431)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,268)
<EPS-PRIMARY> (1.69)
<EPS-DILUTED> (1.69)
</TABLE>
