<PAGE> 1
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, 1998
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)
DELAWARE 94-1668412
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of Incorporation)
1143 BORREGAS AVENUE, SUNNYVALE, CAIFORNIA 94089
- - ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 732-4000
--------------
- - --------------------------------------------------------------------------------
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.
Classes Outstanding at April 29, 1998
- - ------------------------------- -----------------------------
Common Stock $.10 Par Value 16,206,812
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<PAGE> 2
Part I. Financial Information
Item 1. Financial Statements
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 66,631 $ 58,559 $ 197,612 $ 183,090
Cost of products sold 44,062 40,197 131,074 134,080
--------- --------- --------- ---------
Gross margin 22,569 18,362 66,538 49,010
--------- --------- --------- ---------
Expenses:
Research and development 4,881 4,154 14,643 13,426
Marketing and administration 11,630 9,659 36,605 33,180
Amortization of intangible assets 344 373 1,032 1,063
--------- --------- --------- ---------
Total expenses 16,855 14,186 52,280 47,669
--------- --------- --------- ---------
Operating income 5,714 4,176 14,258 1,341
Interest expense (1,315) (1,409) (3,476) (4,142)
Interest income 435 3 590 82
Gain on sale of subsidiary -- -- -- 2,744
--------- --------- --------- ---------
Income from continuing operations
before income taxes 4,834 2,770 11,372 25
Provision for income taxes 1,729 915 4,083 8
--------- --------- --------- ---------
Income from continuing operations 3,105 1,855 7,289 17
Loss from discontinued operations (12,500) (7,859) (12,500) (33,289)
--------- --------- --------- ---------
Net income (loss) $ (9,395) $ (6,004) $ (5,211) $ (33,272)
========= ========= ========= =========
Income (loss) per share (basic):
Continuing operations $ .19 $ .11 $ .44 $ .00
Discontinued operations (.76) (.48) (.76) (2.06)
--------- --------- --------- ---------
Net income (loss) $ (.57) $ (.37) $ (.32) $ (2.06)
========= ========= ========= =========
Average shares 16,505 16,273 16,509 16,182
Income (loss) per share (diluted):
Continuing operations $ .19 $ .11 $ .44 $ .00
Discontinued operations (.75) (.48) (.75) (2.04)
--------- --------- --------- ---------
Net income (loss) $ (.56) $ (.37) $ (.31) $ (2.04)
========= ========= ========= =========
Average shares and equivalents 16,780 16,407 16,753 16,300
</TABLE>
See accompanying notes.
-2-
<PAGE> 3
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31 June 30
1998 1997
----------- -----------
Assets (unaudited) (A)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,265 $ 4,974
Short-term investments 2,838 2,097
Refundable income taxes -- 10,085
Accounts receivable 55,159 35,701
Inventories 50,819 50,353
Deferred tax assets 21,242 18,359
Prepaid expenses 2,589 1,391
Net current assets of discontinued operations 39,342 60,604
--------- ---------
Total current assets 175,254 183,564
--------- ---------
Net property, plant and equipment 23,696 22,812
Deferred tax assets 7,411 7,411
Intangible and other assets 32,832 33,534
Net long-term assets of discontinued operations 8,143 19,052
--------- ---------
$ 247,336 $ 266,373
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 340 $ 333
Accounts payable 20,738 26,681
Accrued income taxes 3,343 3,211
Other accrued liabilities 52,874 41,833
--------- ---------
Total current liabilities 77,295 72,058
--------- ---------
Long-term liabilities:
Long-term debt 2,985 9,101
Convertible subordinated notes 57,500 63,200
Other long-term liabilities 2,000 3,990
--------- ---------
Total long-term liabilities 62,485 76,291
========= =========
Stockholders' equity:
Common stock 1,665 1,641
Capital in excess of par value 95,923 93,249
Retained earnings 18,366 23,577
Unamortized restricted stock plan expense (341) (443)
Treasury stock (8,057) --
--------- ---------
Total stockholders' equity 107,556 118,024
--------- ---------
$ 247,336 $ 266,373
========= =========
</TABLE>
A- The balance sheet at June 30, 1997, 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>
Nine Months Ended
March 31
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Income from continuing operations $ 7,289 $ 17
Adjustments to reconcile income from continuing operations
to net cash provided by (used in) operating activities
Gain from sale of subsidiary -- (2,744)
Depreciation and amortization 6,461 6,134
Amortization of intangible assets 1,032 1,063
Deferred taxes 4,147 (16,388)
Amortization of debt issuance costs 238 200
Other adjustments (575) --
Net effect of changes in:
Accounts receivable (19,458) 4,222
Refundable income taxes 10,085 --
Inventories (466) (294)
Prepaid expenses (1,198) (38)
Accounts payable (5,943) 2,275
Accrued income taxes 236 (607)
Other accrued liabilities and long-term liabilities 4,134 10,895
-------- --------
Net cash provided by continuing operations 5,982 4,735
Net cash (used in) discontinued operations (6,662) (6,597)
-------- --------
Net cash (used in) operating activities (680) (1,862)
-------- --------
Investing activities:
Capital expenditures (6,837) (6,310)
Proceeds from sale of subsidiary -- 3,501
Proceeds from sale of discontinued operations 27,000 --
Other (2,596) (976)
-------- --------
Net cash provided by (used in) continuing operations investing activities 17,567 (3,785)
Net cash (used in) discontinued operations investing activities (1,230) (1,219)
-------- --------
Net cash provided by (used in) investing activities 16,337 (5,004)
-------- --------
Financing activities:
Payments on long-term debt (109) (109)
Net borrowings (repayments) under bank credit facilities (6,000) 1,000
Repayment of convertible subordinated notes (5,700) --
Issuance of common stock 2,600 3,249
Purchases of treasury stock (8,057) --
-------- --------
Net cash provided by (used in) continuing operations financing activities (17,266) 4,140
Net cash (used in) discontinued operations financing activities (100) (200)
-------- --------
Net cash provided by (used in) financing activities (17,366) 3,940
-------- --------
Net (decrease) in cash and cash equivalents (1,709) (2,926)
Cash and cash equivalents at beginning of year (4,974) 4,560
-------- --------
Cash and cash equivalents at end of period $ 3,265 $ 1,634
======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 2,339 $ 3,475
Income taxes (300) 592
</TABLE>
See accompanying notes
-4-
<PAGE> 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - Basis of Presentation
The financial information at March 31, 1998, and for the three
and nine-month periods ended March 31, 1998 and 1997, 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 financial
statements for fiscal 1997 have been restated to reflect the
accounts of Microwave Networks (MN) and Satellite Transmission
Systems (STS) as discontinued operations. The consolidated
interim financial statements should be read in conjunction with
the audited consolidated financial statements for the year ended
June 30, 1997, included in the California Microwave, Inc. 1997
Annual Report to Stockholders.
Note 2 - Earnings Per Share
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per
Share. Statement 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings
per shares. Unlike primary earnings per share, basic earnings per
share exclude any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per
share. This restatement did not result in any material changes.
All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the
Statement 128 requirements.
-5-
<PAGE> 6
Computation of Per Share Income (Loss)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31 March 31
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC - EPS:
- - ------------
Income from continuing operations $ 3,105 $ 1,855 $ 7,289 $ 17
Loss from discontinued operations (12,500) (7,859) (12,500) (33,289)
-------- -------- -------- --------
Net income (loss) $ (9,395) $ (6,004) $ (5,211) $(33,272)
======== ======== ======== ========
Average shares outstanding 16,505 16,273 16,509 16,182
======== ======== ======== ========
Income (loss) per share:
Continuing operations $ .19 $ .11 $ .44 $ .00
Discontinued operations (.76) (.48) (.76) (2.06)
-------- -------- -------- --------
Net income (loss) $ (.57) $ (.37) $ (.32) $ (2.06)
======== ======== ======== ========
DILUTED - EPS:
- - --------------
Income from continuing operations $ 3,105 $ 1,855 $ 7,289 $ 17
Add back interest, net of taxes (a) (a) (a) (a)
-------- -------- -------- --------
Income from continuing operations $ 3,105 $ 1,855 $ 7,289 $ 17
Loss from discontinued operations (12,500) (7,859) (12,500) (33,289)
-------- -------- -------- --------
Net income (loss) $ (9,395) $ (6,004) $ (5,211) $(33,272)
======== ======== ======== ========
Average shares and equivalents - basic 16,505 16,273 16,509 16,182
Add - additional common stock equivalents of
the Company's stock options 275 134 244 118
Add - shares to be issued at conversion of
convertible debentures (a) (a) (a) (a)
-------- -------- -------- --------
Average shares and equivalents 16,780 16,407 16,753 16,300
======== ======== ======== ========
Income (loss) per share
Continuing operations $ .19 $ .11 $ .44 $ .00
Discontinued operations (.75) (.48) (.75) (2.04)
-------- -------- -------- --------
Net income (loss) $ (.56) $ (.37) $ (.31) $ (2.04)
======== ======== ======== ========
</TABLE>
(a) Anti-dilutive as to convertible subordinated debentures in fiscal 1998 and
1997.
Note 3 - Discontinued Operations
In June 1997, the Company's Board of Directors adopted a formal
plan to sell the Microwave Networks (MN) and Satellite
Transmission Systems (STS) divisions. At that time, the operating
results and financial position of these divisions were classified
separately as discontinued operations in the Company's financial
statements and a provision of $8.4 million (after related tax
benefit of $3.8 million) was made for expected losses until the
units could be sold and for the then expected losses on their
eventual sale. STS was sold to L-3 Communications Corporation on
February 5, 1998, for $27 million cash. MN was sold to Tadiran
Ltd on April 21, 1998, for approximately $31.5 million cash.
During the quarter ended March 31, 1998, the Company recorded an
additional provision for $12.5 million (after related tax benefit
of $7.0 million) in losses on discontinuance of these units.
-6-
<PAGE> 7
For the three and nine-month periods ended March 31, 1997, these
discontinued units incurred losses from operations of $7.9
million (after related tax benefits of $3.9 million) and $33.3
million (after related tax benefits of $16.4 million) on revenues
(not shown in the condensed consolidated statements of
operations) of $34 million and $131 million, respectively. The
losses for the March 31, 1997, quarter included restructuring
charges of approximately $8 million before tax benefits. The
losses for the nine months ended March 31, 1997, include the $8
million in restructuring charges plus an additional amount of
approximately $32 million recorded in the quarter ended December
31, 1996, for inventory, warranty and contract provisions, all
before related tax benefits. The operating losses of these
discontinued units in the current fiscal year and the anticipated
loss on sale of MN assets were charged against the provision for
loss on discontinuance established at June 30, 1997, and
increased in the quarter ended March 31, 1998.
Note 4 - Litigation Settlement
The Company announced in November 1995, that a shareholders'
class action lawsuit had been filed in the United States District
Court for the Northern District of California against it and
certain of its former officers on behalf of persons who purchased
shares of the company's common stock between September 6, 1994,
and June 29, 1995. The complaint filed in the lawsuit alleged
certain violations of the federal securities laws by the company
and certain of its former officers and sought damages in an
unspecified amount. Although California Microwave did not believe
that it or its former officers committed any securities law
violations and considered the allegations made in the class
action suit to be without merit, in order to avoid the expense
and distraction of protracted litigation, the Company reached an
agreement to settle the lawsuit. The net expense of the
settlement (including defense costs) to the Company, recorded as
an expense in California Microwave's fiscal 1998 second quarter,
was $1.9 million, before taxes, or approximately $.07 per share.
The court approved the settlement on March 23, 1998.
<TABLE>
<CAPTION>
Note 5 - Inventories (in thousands)
-----------
March 31 June 30
1998 1997
--------- --------
<S> <C> <C>
Projects in process $ 14,751 $ 7,795
Less progress billings 1,804 1,938
--------- --------
12,947 5,857
Work-in-process and finished goods 18,267 21,915
Raw materials and parts 19,605 22,581
--------- --------
$ 50,819 $ 50,353
========= ========
</TABLE>
Note 6 - Stockholders' Equity
On February 12, 1998, the Company's Board of Directors authorized
the repurchase for the treasury of up to 3,000,000 shares of its
common stock. During the three months ended March 31, 1998, the
Company acquired 398,000 treasury shares for $8,057,181. The
change in capital in excess of par value for the nine months
ended March 31, 1998, consists principally of common stock
issuances and related tax benefit of options exercised.
Note 7 - Income Taxes
At March 31, 1998, the Company had a cumulative net deferred tax
asset of $28.7 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.
-7-
<PAGE> 8
Note 8 - Segment Reporting
During the period ended March 31, 1998, the Company reorganized
its six continuing operating divisions into three divisions, and
elected to early adoption of segment reporting for the
reorganized divisions in accordance with the provisions of
Statement 131 of the Financial Accounting Standards Board (FASB).
California Microwave's reportable segments are business units
that develop, manufacture and distribute different products for
specific industry customers. These reportable segments are each
managed separately, because they each provide distinct products
for different industry customers.
California Microwave has three reportable segments:
1) Satellite Communications Division consists of the EFData
business unit which provides products and services to
telecommunications carriers, companies and organizations. These
products enable customers to provide voice, video and data
services via satellite.
2) Terrestrial Microwave Division represents the combination of
Microwave Radio Communications (MRC) and Microwave Data Systems
(MDS) which provide products and services mainly to the
television broadcast, oil, gas and utility industries. The
products of both of these operations are based on microwave radio
technology and although currently manufactured separately, are
produced and tested with similar equipment and techniques.
3) Government includes the Government Electronics Division (GED),
Airborne Systems Integrated Division (ASID) and the Services
Division (SD). These operations contract principally with the
United States Department of Defense and provides products and
services principally in the areas of communications,
reconnaissance and surveillance systems.
Intersegment sales are recorded at negotiated sales prices, which
approximate market and the related intercompany profit is
eliminated in the Company's consolidation process. Cost transfers
are minimal and are recorded at cost. Intersegment sales are not
material in fiscal 1997 and 1998.
-8-
<PAGE> 9
CALIFORNIA MICROWAVE SEGMENT REPORTING
FOR THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
<TABLE>
<CAPTION>
1998 - 3 MOS.(1) TERRESTRIAL SATELLITE GOVERNMENT ALL OTHERS TOTAL
- - -------------------- ----------- --------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Net sales $ 21,318 $ 23,068 $ 22,291 $ (46) $ 66,631
Operating income 4,018 2,007 2,269 0 8,294
Bookings 20,712 22,146 25,836 855 69,549
International:
Sales 8,100 13,500 600 22,200
Bookings 8,400 12,000 2,600 23,000
- - ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 - 3 MOS.(1)
- - ----------------
<S> <C> <C> <C> <C> <C>
Net sales $ 17,578 $ 17,740 $ 23,610 $ (369) $ 58,559
Operating income 1,941 1,031 2,156 (164) 4,964
Bookings 21,134 21,839 33,092 (803) 75,262
International:
Sales 6,200 10,200 100 16,500
Bookings 11,400 9,600 400 21,400
- - ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three months ended
Reconciliation 3/31/98 3/31/97
------- -------
<S> <C> <C>
Operating profit from segments $ 8,294 $ 4,964
Corporate expenses (2,748) (1,278)
Amortization of intangible assets (344) (373)
Interest expense (880) (1,406)
Eliminations 510 863
------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $ 4,834 $ 2,770
======= =======
</TABLE>
(1) Includes DRT, sold in fiscal 1997, and Calnav, sold in fiscal 1998, and
eliminations with discontinued operations in both fiscal 1998 and 1997
-9-
<PAGE> 10
CALIFORNIA MICROWAVE SEGMENT REPORTING
FOR NINE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
<TABLE>
<CAPTION>
1998 - 9 MOS.(1) TERRESTRIAL SATELLITE GOVERNMENT ALL OTHERS TOTAL
- - -------------------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 62,112 $ 71,051 $ 68,059 $ (3,610) $ 197,612
Operating income 10,372 7,847 5,897 0 24,116
Operating assets -
period end 37,919 58,873 34,857 131,649
Bookings 63,630 71,491 77,240 (984) 211,377
International:
Sales 24,200 40,100 800 65,100
Bookings 24,000 40,300 2,900 67,200
- - ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 - 9 MOS.(1)
- - -----------------
<S> <C> <C> <C> <C> <C>
Net sales $ 54,183 56,059 76,844 $ (3,996) $ 183,090
Operating income 6,389 (1,542) 4,654 (1,054) 8,447
Operating assets -
period end 34,815 43,909 28,183 106,907
Bookings 57,306 65,436 86,807 (3,741) 205,808
International:
Sales 14,800 34,100 500 49,400
Bookings 21,400 36,800 400 58,600
- - ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
Reconciliation 3/31/98 3/31/97
-------- --------
<S> <C> <C>
Operating profit from segments $ 24,116 $ 8,447
Corporate expenses (7,437) (7,222)
Amortization of intangible assets (1,032) (1,063)
Litigation settlement (1,900)
Sale of subsidiary 2,744
Interest expense (2,886) (4,060)
Eliminations 511 1,179
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $ 11,372 $ 25
======== ========
</TABLE>
(1) Includes DRT, sold in fiscal 1997, and Calnav, sold in fiscal 1998, and
eliminations with discontinued operations in both fiscal 1998 and 1997
-10-
<PAGE> 11
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 1998 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, the Company's success in
implementing its strategic 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, 1997, and in the Company's Consolidated Financial Statements and
Notes to Financial Statements contained in its 1997 Annual Report to
Stockholders. The Condensed Consolidated Financial Statements and Notes to
Condensed Consolidated Financial Statements should be read in conjunction with
this Management's Discussion and Analysis of Financial Condition and Results of
Operations.
In June 1997, the Company decided to divest its Satellite Transmission Systems
(STS) and Microwave Networks (MN) business units and those business units were
sold in February, 1998 and April, 1998, respectively. The STS and MN businesses
have been accounted for as discontinued operations in the accompanying financial
statements. Accordingly, the discussion that follows concerns only the results
of continuing operations. The fiscal year 1997 accounts have been restated to
conform to this presentation.
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 nine months ended March
31, 1998, compared to the three and nine months ended March 31, 1997. See
Condensed Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Period to Period
Percent of Sales Increase (Decrease)
---------------- -------------------
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
March 31 March 31 March 31 March 31
1998 1997 1998 1997 1998 vs 1997 1998 vs 1997
------ ------ ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0% 13.8% 7.9%
Gross margin 33.9 31.4 33.7 26.8 22.9 35.8
Research and development expenses 7.3 7.1 7.4 7.3 17.5 9.1
Marketing and administration expenses 17.5 16.5 18.5 18.1 20.4 10.3
Amortization of intangible assets 0.5 0.6 0.5 0.6 -- --
Operating income 8.6 7.1 7.2 0.7 36.8 NM
Interest (expense) net (1.3) (2.4) 1.5 (2.2) (37.4) (29.0)
Income from continuing
operations before income taxes 7.3 4.7 5.8 0.0 74.5 NM
Income from continuing operations 4.7 3.2 3.7 0.0 67.4 NM
</TABLE>
NM - Not meaningful
-11-
<PAGE> 12
RESULTS OF OPERATIONS
Sales
Sales were $66.6 million and $58.6 million for the three months ended
March 31, 1998 and 1997, respectively, representing an increase of 14%.
Satellite communications sales increased by 30%, as new modem and transceiver
products were successfully introduced and sold. Terrestrial microwave (radio
products) sales increased by 21% due to a substantial increase in sales of
multiport data radios into Latin America. Government sales declined by 6%, as
certain U.S. government projects matured, resulting in lower sales.
U.S. commercial sales and international sales increased 18% and 35%,
respectively. The increase in international sales is consistent with the
increase in satellite communications product sales and terrestrial microwave
(radio products) sales mentioned above. Sales to the U.S. government declined in
the three months ended March 31, 1998, as sales were unusually strong in fiscal
1997 due to a large project to add sensors to existing Airborne Reconnaissance
Low program platforms. This project was completed in early fiscal 1998.
Sales were $197.6 million and $183.1 million for the nine months ended
March 31, 1998, and 1997, respectively, representing an increase of 8%.
Satellite communications and terrestrial microwave (radio products) sales
increased 27% and 15%, respectively, substantially offsetting an 11% decrease in
government sales. International and U.S. commercial sales increased 32% and 12%,
respectively.
Gross Margin
Gross margin was $22.6 million and $18.4 million for the three months
ended March 31, 1998, and 1997, respectively, representing an increase of 23%.
Gross margin as a percentage of total sales was 33.9% and 31.4% for such
periods, respectively. The increase in gross margin in dollars and as a
percentage of sales was due largely to higher sales of satellite communications
and terrestrial microwave products, which have higher gross margins, and to
lower sales to the U.S. government, which have lower gross margins.
Gross margin was $66.5 million and $49.0 million for the nine months ended
March 31, 1998, and 1997, respectively, representing an increase of 36%. Gross
margin as a percentage of sales was 33.7% and 26.8% for such periods,
respectively. In December 1996, charges of $6 million were recorded to cost of
sales as a result of a comprehensive review of all Companies' operations. In
addition, as described above, fiscal 1997 included a higher proportion of lower
margin government sales.
Research and Development
Research and development expenses were $4.9 million and $4.2 million for
the three months ended March 31, 1998 and 1997, respectively, representing an
increase of 18%. Research and development expenses as a percentage of sales were
7.3% and 7.1% 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 microwave radio products.
Research and development expenses were $14.6 million and $13.4 million for
the nine months ended March 31, 1998 and 1997, respectively, representing an
increase of 9%. Research and development expenses as a percentage of sales were
7.4% and 7.3% for such periods, respectively.
Marketing and Administration
Marketing and administration expenses were $11.6 million and $9.7 million
for the three months ended March 31, 1998 and 1997, respectively, representing
an increase of 20%. Marketing and administration expenses as a percentage of
total sales were 17.5% and 16.5% for such periods, respectively. The Company has
experienced some increase in costs in this area as a result of hiring and
relocation of several key members of the new management team.
-12-
<PAGE> 13
Marketing and administration expenses were $36.6 million and $33.2 million
for the nine months ended March 31, 1998 and 1997, respectively, representing an
increase of 10%. Included in the three months ended December 31, 1997, was a
charge for $1.9 million for the settlement of a lawsuit (including defense
costs) and included in the three months ended December 31, 1996, was a charge
for $1.3 million for severance charges for the Company's former chief executive
officer. Marketing and administration expenses as a percentage of sales were
18.5% and 18.1% for such periods, respectively.
The combining of the MRC and MDS businesses may lead to restructure
charges in the three months ended June 30, 1998. These charges, if any, have not
been determined at this time.
Amortization of Intangible Assets
Amortization expenses associated with intangible assets remained constant
at approximately $344,000 per quarter for the three months and nine months ended
March 31, 1998.
Interest Expense, Net
Net interest expense was $0.9 million and $1.4 million for the three
months ended March 31, 1998 and 1997, respectively, representing a 37% decrease.
Net interest expense was $2.9 million and $4.1 million for the nine months ended
March 31, 1998 and 1997, respectively, representing a 29% decrease. The decrease
in net interest expense for the three months and nine months ended March 31,
1998, reflects the collection of refundable income taxes in September, 1997 and
the use of proceeds from the STS sale in February, 1998 to retire the Motorola
subordinated debt of $5.7 million and the reduction in borrowings on credit
lines.
Provision for Income Taxes
For the three months ended March 31, 1998, the Company provided for $1.7
million of taxes on income from continuing operations compared to $0.9 million
for the three months ended March 31, 1997. During the three months ended March
1998 and 1997, the Company recorded tax benefits on losses of discontinued
operations of $7.0 million and $3.9 million, respectively. The effective tax
rates were 36% and 33% for the nine months ended March 31, 1998 and 1997,
respectively. The variation in tax rates is principally due to the loss, in
fiscal 1997, in certain states of benefits from loss carry forwards.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $98.0 million,
including $3.3 million of cash and cash equivalents, compared with working
capital of $111.5 million, including cash and cash equivalents of $5.0 million,
at June 30, 1997. This decline is due principally to retirement of $11.8 million
of long-term debt and the purchase of $8.1 million of treasury stock in the nine
months ended March 31, 1998.
Net cash provided by continuing operations was $6.0 million and $4.7
million for the nine months ended March 31, 1998 and 1997, respectively. During
the first nine months of fiscal 1998, the Company obtained $10.1 million from
income tax refunds, which was offset by an increase in accounts receivable of
$19.5 million. Days receivable increased to 75 days at March 31, 1998, from 46
days at June 30, 1997, due to; (a) U.S. government collections were
extraordinarily large in June 1997 and returned to normal levels in fiscal 1998
and, (b) an increase in international sales and related receivables, which have
extended terms in certain cases. The Company has established a new bank discount
facility and has resumed selling certain export receivables, which are covered
by trade credit insurance. Receivables sold to a bank at March 31, 1998, were
$4.4 million compared to $7.0 million at June 30, 1997. Operating income
adjusted for non-cash items provided cash of $14.4 million and $7.4 million in
the nine months ended March 31, 1998 and 1997, respectively. Cash (used in)
discontinued operations was ($6.7) million and ($6.6) million during the nine
months ended March 31, 1998 and 1997, respectively.
-13-
<PAGE> 14
The Company's investing activities during the first nine months of fiscal
1998 include the receipt of $27.0 million from the sale of STS offset by capital
expenditures of $6.8 million. Total cash provided by investing activities was
$17.6 million. Net cash used for investing activities during the first nine
months of fiscal 1997 was $3.8 million, which included $6.3 million of capital
expenditures and cash proceeds of $3.5 million from the sale of a subsidiary.
During the first nine months of fiscal 1998, cash and cash equivalents of
$17.3 million were used in financing activities, including stock repurchases of
$8.1 million, net repayment of $6.0 million under the Company's credit lines and
repayment of $5.7 million of convertible subordinated notes, offset by sales of
$2.6 million of common stock to employees under on-going stock option and
purchase plans. During the first nine months of fiscal 1997, the Company
borrowed $1.0 million under its credit lines and sold $3.2 million of common
stock to its employees.
On February 12, 1998, the Company's Board of Directors authorized the
repurchase of up to 3,000,000 shares of the Company's outstanding stock over the
next six to twelve months. During the three months ended March 31, 1998, the
Company acquired 398,000 treasury shares for $8,057,181.
The above activity resulted in a net decrease in cash and cash equivalents
of $1.7 million and $2.9 million for the first nine months of fiscal 1998 and
1997, respectively.
The Company has a $30 million committed asset-based bank credit facility,
which expires in June 2000. As of March 31, 1998, there were no borrowings and
there were $1.7 million of standby letters of credit and guarantees outstanding
under this credit facility. At March 31, 1998, the Company was not in compliance
with certain covenants required by its industrial development bond agreements.
The lenders have waived such non-compliance.
The Company believes that its current cash position, funds generated from
operations, funds from the sale of divested operations, and funds it believes
will be available from its credit facilities will be adequate to meet the
Company's requirements for working capital, capital expenditures and debt
service for at least the next 12 months.
OTHER FINANCIAL INFORMATION
Bookings
Orders booked were $69.5 million and $75.3 million for the three months
ended March 31, 1998 and 1997, respectively, representing a decrease of 8%.
Bookings for government systems during the third quarter of fiscal 1998
decreased 22%. Terrestrial microwave and satellite communications product
bookings decreased by 2% and increased by 1%, respectively. International
bookings increased by 7% for the three months ended March 31, 1998, compared to
the same period of the prior fiscal year. International bookings totaled $23
million and represent 33% of total bookings. The receipt of new orders in the
government systems area tend to be uneven, as they are program or project based.
For the nine months ended March 31, 1998, bookings increased in the
terrestrial microwave and satellite communications segments by 11% and 9%,
respectively, and decreased by 11% in the government segment, compared to the
same period of the prior fiscal year. International bookings for the nine months
increased by 15% over the bookings for the comparable period of the prior fiscal
year and represent 32% of total bookings. Latin America bookings remained strong
during the period.
Backlog
Backlog was $104.8 million and $119.8 million at March 31, 1998 and 1997,
respectively, representing a decrease of 12%. Substantially all of the March 31,
1998, backlog is expected to be delivered within twelve months.
-14-
<PAGE> 15
Part II - Other Information
Item 1. Legal Proceedings
On November 9, 1995, and December 12, 1995, putative class-action
lawsuits entitled Rick Fairchild v. California Microwave, Inc. et al.
and Mark E. McKinney v. California Microwave, Inc., et al. were filed
in the United States District Court for the Northern District of
California. The Plaintiffs in these two cases, which were
consolidated, alleged that the Company and certain of its former
executive officers violated various Federal securities laws through
material misrepresentations and omissions during the period between
September 6, 1994 and June 29, 1995. Although the Company did not
believe that it or its former officers committed any securities law
violations, and considered the allegations made in the class-action
suit to be without merit, in order to avoid the expense and
distraction of protracted litigation, the Company reached an
agreement to settle the lawsuit with the Plaintiffs. The net expense
of the settlement (including defense costs) to the Company, recorded
as an expense in California Microwave's fiscal 1998 second quarter,
was $1.9 million, before taxes, or approximately $0.7 cents per
share. The United States District Court for the Northern District of
California approved the settlement on March 23, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
February 13, 1998, reporting under Item 2- Disposition of
assets
Announcement of completion of sale of STS division
February 19, 1998 reporting under Item 5 - Other events
Announcement of intention to purchase company shares
March 4, 1998 reporting under Item 5 - Other events
Announcement of agreement to sell MN division
Announcement of additional charge for loss on disposition of
discontinued operations
-15-
<PAGE> 16
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.
May 8, 1998 BY /s/ Frederick D. Lawrence
- - ----------------------------- --------------------------------------
Date Frederick D. Lawrence
Chairman of the Board
President and Chief Executive Officer
May 8, 1998 BY /s/ Donna S. Birks
- - ----------------------------- --------------------------------------
Date Donna S. Birks
Executive Vice President
Chief Financial Officer
-16-
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