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 June 30, 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 July 28, 1996, there were
15,745,672 common shares outstanding and 1,073,610 warrants
outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CINCINNATI MICROWAVE, INC.
BALANCE SHEET
(Amounts in thousands except share data)
Jun. 30, 1996 Dec. 31, 1995
(unaudited)
ASSETS
Cash and cash equivalents $11 $11
Accounts receivable, net 5,638 10,923
Inventories, net 15,509 25,370
Other current assets 1,131 779
------- -------
TOTAL CURRENT ASSETS $22,289 $37,083
Restricted cash 903 429
Property, plant and equipment, net 13,266 14,649
Intangibles and other assets, net 1,626 2,035
------- -------
TOTAL ASSETS $38,084 $54,196
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 10,613 15,729
Current portion of long-term debt 3,024 6,934
Unearned revenue 555 684
Current lease obligations 1,168 1,075
Accrued taxes 25 81
Other 3,685 4,212
------- -------
TOTAL CURRENT LIABILITIES $19,070 $28,715
Unearned revenue - noncurrent 260 350
Lease obligations 497 753
Common shares, without par value
($.20 stated value); 20,000,000
shares authorized; 18,203,120
shares issued in 1996 and 1995 3,641 3,641
Paid-in capital 23,665 24,182
Retained earnings 7,429 13,887
Treasury stock at cost, 2,452,823
shares-1996; 2,582,326 shares-1995 (16,478) (17,332)
------- -------
TOTAL SHAREHOLDERS' EQUITY $18,257 $24,378
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $38,084 $54,196
The accompanying notes are an integral part of these financial
statements.
CINCINNATI MICROWAVE, INC.
STATEMENT OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
Three months ended Six months ended
Jun. 30, Jul. 2, Jun. 30, Jul. 2,
1996 1995 1996 1995
Net sales $15,460 $19,017 $36,013 $32,665
Cost of sales 13,871 13,869 30,501 23,426
------- ------- ------- --------
Gross profit 1,589 5,148 5,512 9,239
Operating expenses:
Research and development 1,180 1,770 2,760 3,602
Selling expenses 2,595 2,692 5,765 5,515
Administrative expenses 1,457 1,142 3,036 2,282
------- ------- ------- -------
5,232 5,604 11,561 11,399
------- ------- ------- -------
Operating loss (3,643) (456) (6,049) (2,160)
Interest expense (157) (283) (365) (559)
Other expense, net (27) (44) (44) (84)
------- ------- ------- -------
Loss before income taxes (3,827) (783) (6,458) (2,803)
Income tax benefit 0 0 0 (1,438)
------- ------- ------- -------
Net loss ($3,827) ($783) ($6,458) ($1,365)
Loss per share ($0.24) ($0.06) ($0.41) ($0.10)
Weighted average shares outstanding 15,749 14,010 15,722 13,936
The accompanying notes are an integral part of these financial
statements.
CINCINNATI MICROWAVE, INC.
STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six months ended
Jun. 30, 1996 Jul. 2, 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (6,458) (1,365)
Adjustments to reconcile net loss to net
cash provided by (used in) operations:
Depreciation 2,228 1,959
Amortization 409 409
Changes in operating assets and liabilities:
Accounts receivable 5,285 (2,592)
Inventories 9,861 (3,417)
Other current assets (352) 220
Accounts payable (5,116) (2,598)
Accrued taxes (56) (1,385)
Unearned revenue (219) (40)
Other current liabilities (527) (550)
Other noncurrent operating assets and liabilities 146 0
------- -------
Total adjustments/changes 11,659 (7,994)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 5,201 (9,359)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (991) (1,003)
Increase in restricted cash (474) (357)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,465) (1,360)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 191 10,501
Payments on notes payable (4,101) (8,857)
Proceeds from lease obligations 398 0
Payment of lease obligations (561) (566)
Issuance of warrants 0 413
Issuance of treasury stock 337 326
Stock offering 0 9,283
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,736) 11,100
NET INCREASE IN CASH AND INVESTMENTS $0 $381
CASH AT BEGINNING OF PERIOD 11 40
------- -------
CASH AT END OF PERIOD $11 $421
The accompanying notes are an integral part of these financial
statements.
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 six months ended
June 30, 1996, included 26 weeks and the six months ended July
2, 1995, included 27 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 March 31, 1996 and
December 31, 1995, the results of operations for the three
months ended March 31, 1996 and April 2, 1995 and the cash flows
for the six months ended June 30, 1996 and July 2, 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):
Jun. 30, 1996 Dec. 31, 1995
Materials and supplies 6,111 8,363
Work in process 1,391 3,906
Finished goods 11,719 17,425
Inventory valuation reserve (3,712) (4,324)
------- -------
$15,509 $25,370
Note 3 - Notes Payable
At June 30, 1996, the Company had borrowed $3.0 million (term
loan balance of $2.2 million and $.8 million on the revolving
credit facility) against its credit facility due June 30, 1996.
Prior to the expiration of the credit facility, the Company
received an extension from its lender until August 31, 1996 for
both the term loan and the revolving credit facility.
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 companys
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 is
presently evaluating the allegations contained in this lawsuit
and 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 managements
opinion, is expected to have a material adverse impact on the
Company's results of operations or financial condition.
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 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
several 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 June 30, 1996 and July 2, 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:
Three Months Ended Six Months Ended
Jun. 30, Jul. 2, Jun. 30, Jul. 2,
1996 1995 1996 1995
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.7 72.9 84.7 71.7
------ ------ ------ ------
Gross Profit 10.3 27.1 15.3 28.3
Research & development 7.6 9.3 7.7 11.0
Selling 16.8 14.2 16.0 16.9
Administrative 9.4 6.0 8.4 7.0
------ ------ ------ ------
Total operating expenses 33.8 29.5 32.1 34.9
------ ------ ------ ------
Operating loss (23.5)% (2.4)% (16.8)% (6.6)%
====== ====== ====== ======
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):
Q2 Six Months
1996 1995 1996 1995
Product Line $$ % $$ % $$ % $$ %
Radar Detectors 8,222 53.2 15,778 83.0 19,930 55.3 26,089 79.9
Cordless Telephones 6,751 43.7 3,088 16.2 15,395 42.7 5,878 18.0
Other 487 3.1 151 8.0 688 2.0 698 2.1
------ ---- ------- ---- ------ ---- ------ ----
Total 15,460 19,017 36,013 32,665
SECOND QUARTER OF 1996 AS COMPARED WITH SECOND QUARTER OF 1995
Net Sales
Net sales for the second quarter of 1996 were down 19% from the
comparable prior period primarily because of a 48 decline in
sales of radar detectors. Detector unit sales, which
were weak in both retail and OEM/reseller channels, declined 42%,
reflecting reduced demand in the market. The 9% decline in the
average unit price reflected the growing significance of major
customers, which generally receive volume discounts.
Sales of the Company's cordless telephones with SureLinkTM
technology rose 119% for the second quarter with unit volume up
213%. Market acceptance of the product line remains strong,
however, the average unit price declined 30% compared with
last year due to a significantly greater percentage of OEM/reseller
sales as well as reductions in selling prices that were made by the
Company during the second quarter to improve inventory turnover,
generate cash and improve liquidity.
Other sales rose 223% to $487,000 due to an almost six-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 six months of 1996, net sales were up 10%
to $36.0 million from $32.7 million reflecting a 162% increase
in cordless telephone revenues partially offset by the 24%
decline in detector sales.
Gross Margin
The Company's gross profit margin was 10% for the second quarter
compared with 27% for the comparable period in 1995 and 15% for
the six months ended June 30, 1996 versus 28% for 1995. In
addition to the sales price reductions previously discussed,
margins were impacted by inventory liquidation efforts; lower
production volume, which impacts factory utilization and
efficiency; and, continued high material costs due to the
Companys inability to make volume purchases because of the lower
production volume and on hand inventory.
Operating Expenses
Operating expenses for the second quarter of 1996 declined 7%
to $5.2 million although they increased to 34% of net sales
from 29% in the comparable prior period.
A 33% decline in research and development expense for the
second quarter reflected the use of an engineering development
credit from a customer as well as tight cost controls. Selling
expenses were relatively unchanged from last year even though
the Company increased its level of normal advertising and direct
mail efforts to stimulate retail sales. Administrative expenses
rose 28% for the quarter because of an increase in legal and
professional expenses, due in part to the Company's need to
defend itself against shareholder lawsuits filed in 1995.
Total operating expenses for the first six months of 1996
remained relatively unchanged as compared to the corresponding
period in 1995. However, as a percent of sales, operating
expenses decreased to 32% in the first six months of 1996 from
35% in 1995. The 24% decrease in research and development costs
reflect the use of the engineering credit referred to above and
tighter cost controls and was partially offset by the 33%
increase in administrative expenses caused by an increase in
fees for consultants.
The net loss for the second quarter was $3.8 million compared
with $.8 million in 1995 due to the lower sales volume and
higher cost of sales previously discussed. Net interest expense
for the quarter declined to $157,000 from $283,000 because of
lower average outstanding balances on the Companys credit
facility, partially offset by increased interest rates. The net
loss for the first six months increased to $6.5 million from
$1.4 million in 1995. 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.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1996, the Company generated cash
from operating activities of $5.2 million as compared to the
utilization of cash of $9.4 million in the prior year period.
The primary source of cash was the $9.9 million reduction in
inventory and the $5.3 million decline in accounts receivable
during the period. Available cash was used to reduce accounts
payable by $5.1 million between year-end and June 30, 1996.
The $9.9 million reduction in inventory included a $4.8 million
decrease in raw materials and work in process and a $5.7 million
decrease in finished goods inventory. The $5.2 million decrease
in accounts receivable was due to lower second quarter sales as
well as aggressive management of accounts receivable.
At June 30, 1996, the Company had borrowed $3.0 million (term
loan balance of $2.2 million and $.8 million on the revolving
credit facility) against its credit facility due June 30, 1996.
Prior to the expiration of the credit facility, the Company
received an extension from its lender until August 31, 1996 for
both the term loan and the revolving credit facility.
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.
At June 30, 1996, shareholders' equity was $18.3 million and the
ratio of debt-to-equity was 1.19:1 versus equity of $24.4
million and a debt-to-equity ratio of 1.33:1 at December31,
1995. The Company believes that its working capital and
refinanced credit facilities, along with cash generated from
operations, will be sufficient to fund its operations for the
foreseeable future.
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 is
presently evaluating the allegations contained in this lawsuit
and 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 managements
opinion, is expected to have a material adverse impact on the
Companys results of operations or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b)(1) A current report on Form 8-K, dated June 6, 1996, was
filed announcing the appointment of Erika Williams as President and Chief
Executive Officer of the Company.
(b)(2) A current report on Form 8-K, dated June 26, 1996,
was filed announcing the extension of the Company's credit facility to
August 31, 1996.
(b)(3) A current report on Form 8-K, dated July 3, 1996, was
filed announcing the appointment of Kurt H. Stump as Chief Financial
Officer of the Company.
(b)(4) A current report on Form 8-K, dated August 1, 1996,
was filed announcing the results for the Second Quarter and the Company's
new credit facility.
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.
August 09, 1996
CINCINNATI MICROWAVE, INC.
By:/ss/ Kurt H. Stump
Kurt H. Stump
Vice President
Chief Financial Officer
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THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BALANCE SHEET AND
RELATED STATEMENT OF OPERATIONS OF CINCINNATI MICROWAVE, INC., FOR THE PERIOD
ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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