<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR TRANSITION PERIOD FROM TO
---------- ----------
Commission file number 0-13136
CINCINNATI MICROWAVE, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-0903863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Microwave Plaza, Cincinnati, Ohio 45249-8236
(Address of principal executive offices) (Zip Code)
(513) 489-5400
(Registrant's telephone number)
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
-------- -------
The only class of the registrant's common stock is its common shares, without
par value. As of October 27, 1996, there were 15,783,446 common shares
outstanding and 1,073,510 warrants outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CINCINNATI MICROWAVE, INC.
BALANCE SHEET
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
SEP. 29, 1996 DEC. 31, 1995
(UNAUDITED)
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $10 $11
Accounts receivable, net 6,235 10,923
Inventories, net 11,648 25,370
Other current assets 1,155 779
------- -------
TOTAL CURRENT ASSETS $19,048 $37,083
Restricted cash 881 429
Property, plant and equipment, net 12,765 14,649
Intangibles and other assets, net 1,422 2,035
------- -------
TOTAL ASSETS $34,116 $54,196
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 8,379 15,729
Current portion of long-term debt 4,509 6,934
Accrued expenses 3,659 4,293
Unearned revenue 511 684
Current lease obligations 1,038 1,075
------- -------
TOTAL CURRENT LIABILITIES $18,096 $28,715
Unearned revenue - noncurrent 211 350
Lease obligations 337 753
Long-term debt 3,542 0
Common shares, without par value ($.20 stated value);
20,000,000 shares authorized; 18,203,120 shares issued
in 1996 and 1995 3,641 3,641
Paid-in capital 23,551 24,182
Retained earnings 1,065 13,887
Treasury stock at cost, 2,420,924 shares-1996;
2,582,326 shares-1995 (16,327) (17,332)
------- -------
TOTAL SHAREHOLDERS' EQUITY $11,930 $24,378
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $34,116 $54,196
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
CINCINNATI MICROWAVE, INC.
STATEMENT OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- ---------------------
SEP. 29, OCT. 1, SEP. 29, OCT. 1,
1996 1995 1996 1995
-------- -------- --------- -------
<S> <C> <C> <C> <C>
Net sales $10,497 $22,117 $46,510 $54,782
Cost of sales 10,692 18,391 41,193 41,817
-------- -------- --------- --------
Gross (loss)/profit (195) 3,726 5,317 12,965
Operating expenses:
Research and development 1,571 2,029 4,331 5,631
Selling expenses 3,038 2,792 8,803 8,307
Administrative expenses 1,341 1,293 4,377 3,575
-------- -------- --------- --------
5,950 6,114 17,511 17,513
-------- -------- --------- --------
Operating loss (6,145) (2,388) (12,194) (4,548)
Interest expense (221) (279) (577) (838)
Other income/(expense), net 2 30 (51) (54)
-------- -------- --------- --------
Loss before income taxes (6,364) (2,637) (12,822) (5,440)
Income tax benefit 0 0 0 (1,438)
-------- -------- --------- --------
Net loss ($6,364) ($2,637) ($12,822) ($4,002)
======== ======== ========= ========
Loss per share ($0.40) ($0.18) ($0.81) ($0.28)
Weighted average shares outstanding 15,762 14,672 15,736 14,175
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
CINCINNATI MICROWAVE, INC.
STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEP. 29, 1996 OCT. 1, 1995
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (12,822) (4,002)
-------- --------
Adjustments to reconcile net loss to net
cash provided by (used in) operations:
Depreciation 3,265 2,894
Amortization 613 613
Other non-cash 0 72
Changes in operating assets and liabilities:
Accounts receivable 4,688 (11,363)
Inventories 13,722 (10,705)
Other current assets (376) (53)
Accounts payable (7,350) 982
Accrued expenses (634) (1,406)
Unearned revenue (312) (101)
Other current liabilities 0 (43)
Other noncurrent operating assets and liabilities 146 0
Total adjustments/changes 13,762 (19,110)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 940 (23,112)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (1,527) (2,545)
Increase in restricted cash (452) 197
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,979) (2,348)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 8,346 9,097
Payments on notes payable (7,229) (12,615)
Proceeds from lease obligations 398 0
Payment of lease obligations (851) (866)
Issuance of warrants 0 1,631
Exercise of stock options 374 366
Net proceeds from units and stock offerings 0 28,421
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,038 26,034
-------- --------
NET INCREASE (DECREASE) IN CASH AND INVESTMENTS ($1) $574
CASH AT BEGINNING OF PERIOD 11 40
-------- --------
CASH AT END OF PERIOD $10 $614
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
CINCINNATI MICROWAVE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's fiscal year is comprised of 52 or 53 weeks, ending on the last
Sunday in the calendar year. The nine months ended September 29, 1996,
included 39 weeks and the nine months ended October 1, 1995, included 40 weeks.
The accompanying unaudited condensed financial statements of Cincinnati
Microwave, Inc. (the "Company") have been prepared in accordance with Article
10-01 of Regulation S-X of the Securities and Exchange Commission and do not
include all information required by generally accepted accounting principles.
However, in the opinion of the Company, these financial statements contain all
adjustments necessary to present fairly the financial position as of September
29, 1996 and December 31, 1995, the results of operations for the three and
nine months ended September 29, 1996 and October 1, 1995 and the cash flows for
the nine months ended September 29, 1996 and October 1, 1995. For further
information regarding the accounting policies of the Company, refer to the
Financial Statements and Notes thereto, included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
NOTE 2 - INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
SEP. 29, 1996 DEC. 31, 1995
------------- -------------
<S> <C> <C>
Materials and supplies 6,212 8,363
Work in process 2,195 3,906
Finished goods 6,628 17,425
Inventory valuation reserve (3,387) (4,324)
------- -------
$11,648 $25,370
======= =======
</TABLE>
NOTE 3 - NOTES PAYABLE
On July 31, 1996, the Company secured a three-year, $15 million credit facility
from Foothill Capital Corporation. The new credit facility is comprised of a
$5 million term loan and a revolving credit facility of up to $15 million with
a combined availability of $15 million. The available borrowings under the
revolving credit facility are based on the level of the Company's accounts
receivable and finished goods inventory. Interest rates on the new facility
are prime plus 2% for the term loan and prime plus 1.5% for the revolving
credit facility. The new facility is secured by substantially all of the
Company's assets and is subject to the maintenance of certain financial
covenants. The initial $5 million of proceeds under the term loan were used to
pay off the existing facility and to fund working capital requirements.
NOTE 4 - LITIGATION
Four shareholder lawsuits were filed against the Company in October and
November 1995. On January 9, 1996, these lawsuits were consolidated, and, on
February 23, 1996, the plaintiffs filed an Amended Complaint asserting claims,
allegedly on behalf of all purchasers of the Company's common shares on the
open market between July 12, 1995 and October 13, 1995, and who suffered
damages, and on behalf of all persons who purchased the Company's common shares
from the defendants pursuant or traceable to an August 24, 1995 public offering
of 4,600,000 common shares between August 24, 1995 and October 13, 1995, and
who suffered damage as a result. Plaintiffs purport to assert claims against
the Company and other defendants for violations of various provisions of the
Securities Act of 1933 and the Securities Exchange Act of 1934 and for
violations of the common law of negligent misrepresentation and fraud. The
Company intends to vigorously defend itself. The failure to achieve a
favorable resolution of this lawsuit could materially adversely affect the
Company's business and financial condition, including working capital, and
results of operations. No accrual for loss has been recorded as the Company is
unable to estimate the range of loss, if any. However, based on damages
sought, management believes that the potential loss could be material and
adversely impact the Company's results of operations or financial condition.
5
<PAGE> 6
Pursuant to certain contractual obligations, the Company has agreed to
indemnify its directors and officers under certain circumstances against claims
arising from the lawsuit. The Company may be obligated to indemnify certain of
its directors and officers for the costs they may incur as a result of the
lawsuit. In addition, pursuant to certain contractual obligations, the Company
may be obligated to indemnify the underwriter defendants against claims and
expenses arising from the above litigation.
The Company is involved in other legal proceedings arising from the normal
course of business, none of which, in management's opinion, is expected to have
a material adverse impact on the Company's results of operations or financial
condition.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
INTRODUCTION
Cincinnati Microwave designs, manufactures and markets ultrahigh frequency and
microwave wireless communications products. The Company's product lines
include radar warning devices, digital spread spectrum cordless telephones and
wireless data modems for use on the Cellular Digital Packet Data (CDPD)
network. The Company's products combine its experience in ultrahigh frequency
and microwave wireless technology, including digital signal processing, with
its high volume manufacturing capabilities.
The Company markets its products both under the ESCORT(R) brand name through
direct advertising and as an Original Equipment Manufacturer (OEM) supplier.
The Company's strategy for entering new markets is to align with companies that
have established sales leadership and market positions. This strategy is
designed to provide broader access to the end user. The Company produces
digital spread spectrum telephones for some leading marketers of consumer
telephones.
The following is a discussion and analysis of the financial condition and
results of operation of Cincinnati Microwave. The discussion and analysis
should be read in connection with the financial statements and the related
notes thereto of Cincinnati Microwave as of September 29, 1996 and October 1,
1995 (the "Financial Statements").
RESULTS OF OPERATIONS
The following table sets forth certain operational data of the Company
expressed as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEP. 29, 1996 OCT. 1, 1995 SEP. 29, 1996 OCT. 1, 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 101.9 83.2 88.6 76.3
------ ------ ------ ------
Gross (Loss)/Profit (1.9) 16.8 11.4 23.7
Research & development 15.0 9.2 9.3 10.3
Selling 28.9 12.6 18.9 15.2
Administrative 12.8 5.8 9.4 6.5
------ ------ ------ ------
Total operating expenses 56.7 27.6 37.6 32.0
------ ------ ------ ------
Operating loss (58.6)% (10.8)% (26.2)% (8.3)%
====== ====== ====== ======
</TABLE>
The following table shows net sales by product line for the Company, for the
periods indicated (in thousands and as a percentage of total net sales):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------------------------------- -------------------------------------
1996 1995 1996 1995
---------------- ---------------- ------------------ ---------------
PRODUCT LINE $$ % $$ % $$ % $$ %
- ------------ ------- ---- ------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Radar Detectors $4,502 42.9 $13,256 59.9 $24,432 52.6 $39,344 71.8
Cordless Telephones 5,131 48.9 8,552 38.7 20,526 44.1 14,430 26.3
Other 864 8.2 309 1.4 1,552 3.3 1,008 1.9
------- ------- ------- -------
Total $10,497 $22,117 $46,510 $54,782
======= ======= ======= =======
</TABLE>
7
<PAGE> 8
THIRD QUARTER OF 1996 AS COMPARED WITH THIRD QUARTER OF 1995
NET SALES
Net sales for the third quarter of 1996 were down 53% from the comparable prior
period primarily because of a 66% decline in sales of radar detectors. The
decline in detector unit sales was primarily due to weak retail sales, the loss
of a major customer, and the Company's focus on major retailers while reducing
its unprofitable activity as an OEM manufacturer. Midway through the quarter,
two marketing executives were added and a major account consultant was employed
to fill marketing positions which had been vacant since the beginning of the
year. While these marketing personnel are expected to have a positive impact on
future marketing efforts, their impact on the third quarter was minimal. Sales
of the Company's cordless telephones with SureLink(TM) technology fell 40% for
the third quarter with unit volume down 38% reflecting significant decreased
volume to OEM customers.
Other sales rose 180% to $864,000 due to an almost five-fold increase in the
number of cellular digital packet data (CDPD) modems sold. The market for CDPD
appears to be growing, albeit more slowly than market analysts had projected,
as cellular carriers continue deployment of digital capabilities in their
networks, and new applications reach the market.
For the first nine months of 1996, net sales were down 15% to $46.5 million
from $54.8 million reflecting a 38% decline in detector revenues partially
offset by the 42% increase in cordless telephone revenues.
GROSS MARGIN
The Company's gross loss was 2% for the third quarter compared with gross profit
of 17% for the comparable period in 1995 and 11% for the nine months ended
September 29, 1996 versus 24% for 1995. Margins were impacted by inventory
liquidation efforts, lower production volume, which impacts factory utilization
and efficiency, and continued high material costs due to the Company's inability
to make volume purchases because of the lower production volume, on hand
inventory, and cash flow constraints.
OPERATING EXPENSES
Operating expenses for the third quarter of 1996 declined 3% to $6 million
although they increased to 57% of net sales from 28% in the comparable period
in 1995.
A 23% decline in research and development expense for the third quarter
resulted from lower labor costs. Selling expenses increased 9% from last year
primarily due to the rise in telephone and recruiting expenses. Administrative
expenses were relatively unchanged from last year.
Total operating expenses for the first nine months of 1996 remained relatively
unchanged as compared to the corresponding period in 1995. However, as a
percent of sales, operating expenses increased to 38% in the first nine months
of 1996 from 32% in 1995. A 23% decrease in research and development costs
reflects the reduction in labor costs and the use of an engineering development
credit from a customer and was primarily offset by a 22% increase in
administrative expenses caused by an increase in professional fees.
Net interest expense for the quarter declined to $221,000 from $279,000 because
of lower average outstanding balances on the Company's credit facility. In the
1995 first quarter, the Company recorded a nonoperating gain of $1.4 million
reflecting the release of certain tax reserves to income as a result of the
closure of the Company's 1991 Federal income tax return.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1996, the Company generated cash from operating
activities of $940,000 as compared to the utilization of cash of $23.1 million
in the prior year period. The primary source of cash was the $13.7 million
reduction in inventory and the $4.7 million decline in accounts receivable
during the period. Available cash was used to fund the current $12.8 million
loss from operations and reduce accounts payable by $7.4 million between
year-end and September 29, 1996.
The $13.7 million reduction in inventory included a $3.9 million decrease in
raw materials and work in process and a $10.8 million decrease in finished
goods inventory. The $4.7 million decrease in accounts receivable was due to
lower third quarter sales to OEM and major account customers.
On July 31, 1996, the Company secured a three-year, $15 million credit facility
from Foothill Capital Corporation. The new credit facility is comprised of a
$5 million term loan and a revolving credit facility of up to $15 million with
a combined availability of $15 million. The available borrowings under the
revolving credit facility are based on the level of the company's accounts
receivable and finished goods inventory. Interest rates on the new facility
are prime plus 2% for the term loan and prime plus 1.5% for the revolving
credit facility. The new facility is secured by substantially all of the
Company's assets and is subject to the maintenance of certain financial
covenants. At September 29, 1996 the Company was in compliance with the
financial covenants. The initial $5 million of proceeds under the term loan
were used to pay off the existing facility and to fund working capital
requirements.
The recent significant decline in sales performance combined with the
disadvantageous mechanics of the credit facility have severely restricted the
amount of credit available to the Company. The amount of available borrowings
under the credit facility are based primarily upon the Company's accounts
receivable balances, with additional borrowings against inventory based upon a
multiple of that available against accounts receivable. The Company has
traditionally reached the consumer market via its highly successful direct
marketing cash-on-delivery approach. In recent years the Company has sought to
expand the market for its products through OEMs and major retailers who buy on
terms, resulting in accounts receivable balances. Unless the Company
experiences significant sales to OEM and major retailers with corresponding
accounts receivable balances, the available borrowings under the current
facility will continue to decline. During the third quarter, the Company
increased its focus on major retailers while reducing its unprofitable activity
as an OEM manufacturer. Midway through the third quarter, two marketing
executives were added and a major account consultant was employed to fill
positions which had been vacant since the beginning of the year. Although the
opportunity to market the Company's products has been well received by several
major retailers, their buying for the Christmas season had been largely
completed prior to the Company's initiative. Consequently, although some major
retailer volume is anticipated for the first quarter of next year, very little
volume is expected for the fourth quarter of 1996. At September 29, 1996 total
borrowings under the revolving credit facility were $3.3 million and the amount
of available incremental borrowings was $300,000.
Due to the severity of the Company's cash shortage, which has worsened during
October and early November, the Company has been unable to meet the payment
plans previously established with its vendors and the corresponding pressure
from its vendors is increasing. As a result, the Company is required by many
of its vendors to pay in advance for its production requirements and, in some
instances, to pay additional amounts on past due balances. This has caused
periodic scheduling and downtime problems in manufacturing and increases in the
related expenses.
The Company continues to reduce its cost of business and, in mid-November,
reduced its work force by 26% which, when combined with the 54% reduction in
employees in June, has resulted in a 70% overall reduction since December 1995.
As a result of the cash shortage, and the prospect of lower than anticipated
sales through the fourth quarter, the Company may not have sufficient resources
to finance its operations. Since the Company is at, or close to, its maximum
borrowing limit under the current facility, it has liquidated some finished
goods inventories at or below cost. In addition, the Company is considering
additional equity offerings and is also exploring various strategic alliances,
including potential mergers, sales of all or a portion of its
9
<PAGE> 10
business, as well as possibly filing for reorganization pursuant to Chapter 11
of the Bankruptcy Reform Act of 1978. Based upon results through mid-November,
the Company is considering reorganizing its business and product lines which may
necessitate reducing the carrying values of some assets based upon their
estimated net realizable values. The resulting charge to operating results
could be significant.
10
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
Four shareholder lawsuits were filed against the Company in October and
November 1995. On January 9, 1996, these lawsuits were consolidated, and, on
February 23, 1996, the plaintiffs filed an Amended Complaint asserting claims,
allegedly on behalf of all purchasers of the Company's common shares on the
open market between July 12, 1995 and October 13, 1995, and who suffered
damages, and on behalf of all persons who purchased the Company's common shares
from the defendants pursuant or traceable to an August 24, 1995 public offering
of 4,600,000 common shares between August 24, 1995 and October 13, 1995, and
who suffered damage as a result. Plaintiffs purport to assert claims against
the Company and other defendants for violations of various provisions of the
Securities Act of 1933 and the Securities Exchange Act of 1934 and for
violations of the common law of negligent misrepresentation and fraud. The
Company intends to vigorously defend itself. The failure to achieve a
favorable resolution of this lawsuit could materially adversely affect the
Company's business and financial condition, including working capital, and
results of operations. No accrual for loss has been recorded as the Company is
unable to estimate the range of loss, if any. However, based on damages
sought, management believes that the potential loss could be material and
adversely impact the Company's results of operations or financial condition.
Pursuant to certain contractual obligations, the Company has agreed to
indemnify its directors and officers under certain circumstances against claims
arising from the lawsuit. The Company may be obligated to indemnify certain of
its directors and officers for the costs they may incur as a result of the
lawsuit. In addition, pursuant to certain contractual obligations, the Company
may be obligated to indemnify the underwriter defendants against claims and
expenses arising from the above litigation.
The Company is involved in other legal proceedings arising from the normal
course of business, none of which, in management's opinion, is expected to have
a material adverse impact on the Company's results of operations or financial
condition.
11
<PAGE> 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b)(1) A current report on Form 8-K, dated October 17, 1996, was filed
announcing the resignation of James L. Jaeger as Chairman of the Board.
(b)(2) A current report on Form 8-K/A, dated October 17, 1996, was filed
announcing the resignation of James L. Jaeger as Chairman of the Board and
the appointment of Erika Williams as the acting chairman.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Cincinnati
Microwave, Inc. has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 13, 1996
CINCINNATI MICROWAVE, INC.
By: /s/ Kurt H. Stump
-----------------------------
Kurt H. Stump
Vice President
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
<CIK> 0000729583
<NAME> CINCINNATI MICROWAVE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 1,026
<SECURITIES> 0
<RECEIVABLES> 7,236
<ALLOWANCES> (1,001)
<INVENTORY> 11,648
<CURRENT-ASSETS> 19,048
<PP&E> 41,387
<DEPRECIATION> 28,622
<TOTAL-ASSETS> 34,116
<CURRENT-LIABILITIES> 18,096
<BONDS> 0
0
0
<COMMON> 3,641
<OTHER-SE> 8,289
<TOTAL-LIABILITY-AND-EQUITY> 34,116
<SALES> 46,510
<TOTAL-REVENUES> 46,510
<CGS> 41,193
<TOTAL-COSTS> 41,193
<OTHER-EXPENSES> 18,139
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 577
<INCOME-PRETAX> (12,822)
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