<PAGE> 1
================================================================================
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 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 No. 0-14805
MICROCOM, INC.
(Exact name of registrant as specified in its charter)
------------------
MASSACHUSETTS 04-2710644
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 RIVER RIDGE DRIVE 02062-5028
NORWOOD, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 551-1000
------------------
Indicate by check (X) 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: As of September 30, 1996,
16,012,780.
- --------------------------------------------------------------------------------
<PAGE> 2
MICROCOM, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS ............................................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS ..................................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS ..................................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................ 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ............................................................. 7
PART II. OTHER INFORMATION
SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS........................ 10
EXHIBITS AND REPORTS ON FORM 8-K........................................... 10
SIGNATURES ................................................................ 11
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
MICROCOM, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
(In thousands)
SEPTEMBER 30, 1996 MARCH 31, 1996
------------------ --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents .................................................... $ 7,326 $ 27,336
Accounts receivable, less reserves of $305 and $283 at
September 30, 1996 and March 31, 1996, respectively ................... 45,291 41,811
Inventories ............................................................. 51,872 37,391
Prepaid expenses and other current assets ............................... 1,929 1,695
-------- --------
Total current assets .................................................. 106,418 108,233
Property and equipment, net ................................................ 10,535 7,703
Other assets, net .......................................................... 17,649 13,263
-------- --------
$134,602 $129,199
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized leases and short-term debt ............... $ 9,905 $ 1,073
Accounts payable ........................................................ 13,513 19,483
Accrued expenses ........................................................ 2,487 3,348
-------- --------
Total current liabilities ............................................. 25,905 23,904
-------- --------
Long-term portion of capitalized leases .................................... 3,057 2,186
-------- --------
Stockholders' equity:
Common stock, $.01 par value, authorized - 30,000 shares, issued - 16,994
shares at September 30, 1996, and 16,772 shares
at March 31, 1996 ..................................................... 170 168
Capital in excess of par value .......................................... 118,622 116,747
Stock loans - related parties ........................................... (2,209) (2,209)
Accumulated deficit ..................................................... (8,170) (9,099)
Treasury stock, at cost, 981 shares ..................................... (2,613) (2,613)
Cumulative translation adjustment ....................................... (160) 115
-------- --------
Total stockholders' equity ............................................ 105,640 103,109
-------- --------
$134,602 $129,199
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
MICROCOM, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<CAPTION>
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
-------------------- --------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales ................................... $42,433 $32,809 $84,210 $61,364
Cost of sales ............................... 27,330 18,651 54,815 34,453
------- ------- ------- -------
Gross margin ................................ 15,103 14,158 29,395 26,911
------- ------- ------- -------
Operating expenses:
Research and development ................. 4,648 3,524 9,244 6,902
Sales and marketing ...................... 7,371 6,062 14,721 11,236
General and administrative ............... 2,030 1,205 3,806 2,334
------- ------- ------- -------
Total operating expenses ............... 14,049 10,791 27,771 20,472
------- ------- ------- -------
Income from operations ...................... 1,054 3,367 1,624 6,439
Interest income ............................. 1 535 54 539
Interest and other expense, net ............. (293) (269) (585) (857)
------- ------- ------- -------
Income before income taxes .................. 762 3,633 1,093 6,121
Provision for income taxes .................. 114 545 164 918
------- ------- ------- -------
Net income .................................. $ 648 $ 3,088 $ 929 $ 5,203
======= ======= ======= =======
Net income per share ........................ $ .04 $ .19 $ .06 $ .36
======= ======= ======= =======
Weighted average number of shares outstanding 16,548 16,523 16,795 14,614
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
MICROCOM, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<CAPTION>
(In thousands)
SIX MONTHS ENDED
----------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................. $ 929 $ 5,203
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization ............................................ 4,876 3,655
Changes in assets and liabilities:
Accounts receivable, net ............................................... (4,230) (4,949)
Inventories ............................................................ (14,481) (4,326)
Prepaid expenses and other current assets .............................. (234) (239)
Accounts payable and accrued expenses .................................. (6,831) 3,650
-------- --------
Net cash (used in) provided by operating activities ................... (19,971) 2,994
-------- --------
Cash flows used in investing activities:
Capitalized software development costs and purchased technology .......... (4,081) (2,607)
Purchase of property and equipment ....................................... (4,803) (1,778)
Other assets and equity investments ...................................... (1,900) (122)
-------- --------
Net cash used in investing activities ................................ (10,784) (4,507)
-------- --------
Cash flows provided by financing activities:
Borrowings (payments) under the revolving credit line, net ................. 8,268 (12,020)
Exercise of stock options and employee stock purchase plan ................. 1,317 2,005
Borrowings on capitalized leases ........................................... 1,435 1,189
Proceeds from public offering, net ......................................... -- 50,418
Repayment of stock loans ................................................... -- 147
Banker acceptance on inventory purchases ................................... -- (195)
-------- --------
Net cash provided by financing activities ............................. 11,020 41,544
-------- --------
Effect of exchange rates on cash .............................................. (275) --
-------- --------
Net (decrease) increase in cash and equivalents ............................... (20,010) 40,031
Cash and equivalents at beginning of period ................................... 27,336 863
-------- --------
Cash and equivalents at end of period ......................................... $ 7,326 $ 40,894
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
MICROCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
NOTE 1. BASIS FOR PRESENTATION
The consolidated balance sheet as of September 30, 1996, and the related
consolidated statements of operations and cash flows for the three and six
months ended September 30, 1996 and 1995, are unaudited. In the opinion of
management, all adjustments necessary for the fair presentation of such
financial statements have been included, such adjustments consisted only of
normal recurring items. Interim results are not necessarily indicative of
results for a full fiscal year.
The financial statements are presented as permitted by Form 10-Q and do not
contain certain information included in the Company's annual consolidated
financial statements.
<TABLE>
NOTE 2. INVENTORIES
<CAPTION>
SEPTEMBER 30, 1996 MARCH 31, 1996
------------------ --------------
<S> <C> <C>
Raw materials........................................ $12,730 $ 9,601
Finished goods....................................... 39,142 27,790
------- -------
$51,872 $37,391
======= =======
</TABLE>
<TABLE>
NOTE 3. PROPERTY AND EQUIPMENT
<CAPTION>
Depreciable Life
SEPTEMBER 30, 1996 MARCH 31, 1996 in Years
------------------ -------------- ----------------
<S> <C> <C> <C>
Computer equipment and software...................... $ 13,163 $ 11,029 2-3
Machinery and equipment.............................. 4,006 3,090 3-7
Furniture and fixtures............................... 2,144 1,659 8
Leasehold improvements............................... 2,492 2,327 Life of Lease
-------- --------
21,805 18,105
Accumulated depreciation and amortization............ (11,270) (10,402)
-------- --------
$ 10,535 $ 7,703
======== ========
</TABLE>
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales - Net sales for the three and six month periods ended September 30,
1996, were $42,433,000 and $84,210,000, respectively, a 29% and 37% increase
from the same periods in fiscal year 1996. These increases were primarily
attributable to increased sales of central site, customized 4 and 12 port V.34
modem boards. These products were introduced in the last half of the previous
fiscal year and for the three and six month periods ended September 30, 1996,
accounted for approximately 28% and 34%, of net sales, respectively. These
increases in sales were offset by a decrease in net sales of central site access
products particularly the High Density Management Systems products (HDMS), in
the telecommunications market, coupled with competitive pricing pressures on
remote site V.34 modem products. International sales for the three and six month
periods of fiscal 1997 were $17,262,000 and $32,914,000 as compared to
$9,092,000 and $23,401,000 for the same periods last year. These increases in
international sales were primarily due to increased sales of remote site V.34
modem products, especially in the Asia Pacific, Japanese and South African
markets. In the second quarter of fiscal year 1997, sales made to one original
equipment manufacturer (OEM) customer, accounted for 30% of net sales.
Gross Margin - Gross margins for the three and six month periods ended September
30, 1996, were 36% and 35%, respectively, of net sales as compared to 43% and
44% for the same periods last year. The decrease was primarily due to increased
unit volume of lower margin customized modem boards and remote site V.34 modem
products, coupled with the decline in sales of higher margin HDMS products. Due
to the change in product mix the Company expects continued pressure on gross
margins.
Research and Development - During the three and six month periods ended
September 30, 1996, research and development expenses increased $1,124,000 and
$2,342,000, respectively, or 32% and 34% from the same periods last year. These
increases reflect the Company's continued investment in new and existing
technologies and were principally due to the hiring of additional engineering
personnel and increased consulting and contract professional fees.
Sales and Marketing - In the three and six month periods ended September 30,
1996, sales and marketing expenses increased by $1,309,000 and $3,485,000,
respectively, or 22% and 31% from the same periods last year. The increases were
directly related to the expansion of the Company's international distribution
channels and marketing programs.
General and Administrative - During the three and six month periods ended
September 30, 1996, general and administrative expenses were $2,030,000 and
$3,806,000, respectively, as compared to $1,205,000 and $2,334,000,
respectively, in the previous fiscal year. The Company's goal is to maintain
general and administrative spending at 4% of net sales.
Interest Income and Expense - In the three and six month periods ended September
30, 1996, interest income decreased $534,000 and $485,000, respectively.
Additionally, interest and other expense increased to $293,000 and $585,000 for
the same periods of this fiscal year. Both the decrease in interest income and
the increase in interest and other expense were primarily a result of the
increased borrowings under the Company's revolving credit facility during the
first six months of fiscal 1997.
Income Taxes - The Company's effective tax rate was 15% for both periods
reported. The difference between the statutory rate and the effective tax rate
reflects the utilization of a portion of the Company's net operating loss carry
forwards. At June 30, 1996, the Company had available $16,817,000 in net
operating loss carry forwards, which may be used to offset future taxable
income, and $4,169,000 in research and development and other tax credit carry
forwards, which may be used to offset future taxes payable. These carry forwards
expire through 2009 and are subject to review and possible adjustment by the
Internal Revenue Service.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and equivalents decreased by $20,010,000 in the first six
months of fiscal 1997. The decrease from the beginning of fiscal 1997 was
primarily due to the use of $19,971,000 in cash in operating activities,
specifically, increases in accounts receivable of $4,230,000, inventories of
$14,481,000, and a decrease in accounts payable and accrued expenses of
$6,831,000. The increase in accounts receivable is a combination of a 37%
increase in net sales in the first half of fiscal 1997, coupled with the growth
in international net sales where payment cycles are longer. The increase in
inventory reflects an anticipated increase in net sales associated with new
product offerings in the central site product line and delayed buying decisions
in the first six months of fiscal 1997 by a few major customers. Cash flows used
in investing activities in the first six months of fiscal 1997 included
continued investments in software development costs of $4,081,000, and purchases
of property and equipment of $4,803,000, in both instances to support the
development of new products and growth of the Company. In addition, issuance of
additional shares of common stock under the Company's stock plans resulted in
proceeds of $1,317,000.
As of September 30, 1996, the Company had $7,326,000 in cash and equivalents. In
addition, the Company had a bank revolving credit facility which allowed the
Company to borrow up to an amount (the "Maximum Borrowing Amount") equal to the
lesser of (i) $45,000,000 or (ii) an amount based on the Company's eligible
accounts receivable. The Maximum Borrowing Amount is reduced by amounts which
may be drawn on outstanding letters of credit. Under the terms of the credit
facility, interest is at the bank's prime rate (8 1/4% at September 30, 1996)
and the Company is required to comply with certain covenants. At September 30,
1996, the Company was contingently liable with respect to $7,000,000 in
outstanding letters of credit and its bank credit availability was approximately
$7,519,000. At September 30, 1996, there were $8,268,000 in borrowings under the
credit facility and the Company was in compliance with all covenants.
Since its inception, the Company has met its liquidity requirements through cash
provided by operations, product line dispositions, public and private stock
offerings, lease arrangements for facilities and equipment and short-term
borrowings from banks. Management believes that its cash and equivalents, line
of credit availability, and cash provided by operations will be adequate to meet
the Company's liquidity requirements for the immediate future.
FOREIGN CURRENCY HEDGING
To date, all of the Company's transactions (including customer sales and
purchases from vendors) have been denominated in U.S. dollars, except for
transactions in Japan and an immaterial amount of transactions in the U.K. The
Company's policy is to hedge the currency risk by entering into forward
contracts. The gains or losses on such contracts are deferred until the
contracts are settled and are then recognized as other income or expense. As of
September 30, 1996, the Company had $1,374,000 in foreign currency contracts
outstanding. The Company had no material unrealized gains or losses on these
contracts.
INDUSTRY TRENDS
In July, 1996 one of the Company's major OEM customers, Cisco Systems, Inc.,
announced the acquisition of a company which competes in certain areas with the
Company's modem technology business. This acquisition is reflective of a
continuing trend toward consolidation in the industry which makes products for
distributed enterprise-wide computing networks ("intranets") and online services
supporting access to the Internet. Although the Company's relationship with
Cisco remains strong and management believes that the Company's focus on
expanding its OEM relationships is a sound strategy for growth, there can be no
assurance that such consolidations of customers with competitors will not
materially and adversely affect its OEM business, results of operations or
financial condition.
8
<PAGE> 9
CAUTIONARY STATEMENT
When used anywhere in this Form 10-Q, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer of the
Company, the words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimated", "project", or "outlook" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any such forward
looking statements, which speak only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. Certain of such risks and uncertainties are described above and in
the risk factors set forth in Part I of the Company's Form 10K for the fiscal
year ended March 31, 1996 filed with the Securities and Exchange Commission,
including, among others, the risks associated with (i) the Company's focus on
expanding its OEM relationships as described above in Industry Trends and the
Company's reliance on indirect distribution channels generally, (ii) the need to
develop new products and respond to rapid changes in technology, (iii) the
highly competitive markets in which the Company participates, (iv) the Company's
efforts to generate and maintain sales to telecommunications carriers, (v) the
Company's dependence on suppliers and subcontractors, (vi) the Company's
dependence on and the need to protect its proprietary technology, (vii) the
Company's dependence on international operations, and (viii) the Company's focus
on central site and remote access markets. The Company specifically declines any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
9
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
<TABLE>
The Company's Annual Meeting of Stockholders was held on July 18,
1996. At the meeting, the following matters were voted upon:
1a. Election of John C. Rutherford as director of the Company.
<CAPTION>
For Against Withheld Abstain Broker Non-Votes
---------- ------- -------- ------- ----------------
<S> <C> <C> <C> <C>
11,920,482 0 660,714 0 0
1b. Election of Michael I. Schneider as a director of the Company.
<CAPTION>
For Against Withheld Abstain Broker Non-Votes
---------- ------- -------- ------- ----------------
<S> <C> <C> <C> <C>
12,017,682 0 563,514 0 0
2. Approval of an amendment to the Company's 1982 Stock Option And
Stock Purchase Plan increasing the number of shares issuable
thereunder by 700,000 shares.
<CAPTION>
For Against Abstain Broker Non-Votes
--------- --------- ------- ----------------
<S> <C> <C> <C>
8,567,462 3,691,073 50,203 272,458
3. Approve the selection by the Board of Arthur Andersen LLP as the Company's independent auditors.
<CAPTION>
For Against Abstain Broker Non-Votes
---------------- ------ ------- ----------------
<S> <C> <C> <C>
12,523,894 33,865 23,437 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
Exhibit 11.0 - Calculation of net income per share Exhibit
Exhibit 27.0 - Financial Data Schedule
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the period
covered by this report.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 14, 1996 BY: /s/ Roland D. Pampel
---------------------------- -------------------------------------------
Roland D. Pampel, President
Chief Executive Officer and Director
DATE: November 14, 1996 BY: /s/ Peter J. Minihane
---------------------------- -------------------------------------------
Peter J. Minihane, Executive Vice President
Chief Financial Officer and Treasurer
11
<PAGE> 1
EXHIBIT 11.0
MICROCOM, INC.
<TABLE>
CALCULATION OF NET INCOME PER SHARE
FOR THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<CAPTION>
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income ................................................................. $ 648 $ 3,088 $ 929 $ 5,203
======= ======= ======= =======
Reconciliation of average number of shares outstanding to amount used in net
income per share computation:
Weighted average number of shares outstanding ......................... 15,997 15,225 15,917 13,409
Assumed exercise of stock options ..................................... 551 1,298 878 1,205
------- ------- ------- -------
Weighted average number of shares outstanding,
as adjusted ......................................................... 16,548 16,523 16,795 14,614
======= ======= ======= =======
Net income per share ....................................................... $ .04 $ .19 $ .06 $ .36
======= ======= ======= =======
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,325
<SECURITIES> 1
<RECEIVABLES> 45,291
<ALLOWANCES> 305
<INVENTORY> 51,872
<CURRENT-ASSETS> 106,418
<PP&E> 21,805
<DEPRECIATION> 11,270
<TOTAL-ASSETS> 134,602
<CURRENT-LIABILITIES> 25,905
<BONDS> 0
<COMMON> 170
0
0
<OTHER-SE> 105,470
<TOTAL-LIABILITY-AND-EQUITY> 134,602
<SALES> 84,210
<TOTAL-REVENUES> 84,210
<CGS> 54,815
<TOTAL-COSTS> 54,815
<OTHER-EXPENSES> 27,771
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 531
<INCOME-PRETAX> 1,093
<INCOME-TAX> 164
<INCOME-CONTINUING> 929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 929
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
