<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
FOR QUARTER ENDED COMMISSION FILE NUMBER:
DECEMBER 31, 1996 0-15895
</TABLE>
------------------------
DIGITAL MICROWAVE CORPORATION
(Exact name of registrant specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0016028
(State or other jurisdiction (IRS employer
of incorporation or organization) identification
number)
170 ROSE ORCHARD WAY 95134
SAN JOSE, CA
(Address of Principal Executive (Zip Code)
Offices)
</TABLE>
Registrant's telephone number, including area code: (408) 943-0777
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ____
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT DECEMBER 31,
CLASS 1996
- ------------------------------- -------------------------------
<S> <C>
Common Stock -- $0.01 par value 16,135,175
</TABLE>
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
-------
<S> <C> <C> <C> <C>
COVER PAGE................................................................ 1
INDEX..................................................................... 2
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Condensed Consolidated Balance Sheets............. 3
Condensed Consolidated Statements of Operations... 4
Condensed Consolidated Statements of Cash Flows... 5
Notes to Condensed Consolidated Financial
Statements........................................ 6-7
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 8-12
PART II -- OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K.................. 13 & 15
SIGNATURE................................................................. 14
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM I -- FINANCIAL STATEMENTS
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
03/31/96
12/31/96 ---------
-----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 6,489 $ 8,299
Restricted cash......................................................................... 1,558 719
Accounts receivable, net................................................................ 37,241 33,398
Inventories............................................................................. 44,110 35,347
Other current assets.................................................................... 2,870 2,973
----------- ---------
Total current assets.................................................................... 92,268 80,736
PROPERTY AND EQUIPMENT, NET............................................................... 14,841 15,061
----------- ---------
Total assets............................................................................ $ 107,109 $ 95,797
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.......................................................................... $ 2,022 $ 3,106
Current maturities of note payable...................................................... -- 3,334
Current maturities of capital lease obligations......................................... 796 1,025
Accounts payable........................................................................ 17,235 16,252
Income taxes payable.................................................................... 1,444 973
Other accrued liabilities............................................................... 25,913 18,590
----------- ---------
Total current liabilities............................................................. 47,410 43,280
LONG-TERM LIABILITIES:
Note payable, net of current maturities................................................. -- 1,944
Capital lease obligations, net of current maturities.................................... 280 838
----------- ---------
Total liabilities..................................................................... 47,690 46,062
STOCKHOLDERS' EQUITY...................................................................... 59,419 49,735
----------- ---------
Total liabilities and stockholders' equity.............................................. $ 107,109 $ 95,797
----------- ---------
----------- ---------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ----------------------
1996 1995 1996 1995
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales.......................................................... $ 47,760 $ 32,698 $ 126,092 $ 114,183
Cost of sales...................................................... 31,862 32,329 84,547 93,581
--------- --------- ---------- ----------
Gross profit....................................................... 15,898 369 41,545 20,602
--------- --------- ---------- ----------
Operating Expenses:
Research and development......................................... 2,505 2,731 7,433 8,567
Selling, general and administrative.............................. 9,076 6,936 25,705 20,279
--------- --------- ---------- ----------
Total operating expenses....................................... 11,581 9,667 33,138 28,846
--------- --------- ---------- ----------
Operating income (loss)............................................ 4,317 (9,298) 8,407 (8,244)
Other income (expense):
Interest and other income, net..................................... 305 853 401 1,609
Interest expense................................................... (263) (287) (844) (1,528)
--------- --------- ---------- ----------
Income (loss) before provision for income taxes.................... 4,359 (8,732) 7,964 (8,163)
Provision (credit) for income taxes................................ 436 (2,010) 796 (1,953)
--------- --------- ---------- ----------
Net income (loss).................................................. $ 3,923 $ (6,722) $ 7,168 $ (6,210)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Net income (loss) per share........................................ $ 0.23 $ (0.43) $ 0.43 $ (0.43)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Weighted average number of common & common equivalent shares
outstanding....................................................... 17,060 15,772 16,678 14,592
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................................ $ 7,168 $ (6,210)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization.............................................................. 4,200 5,095
Provision for uncollectible accounts....................................................... 1,400 677
Provision for inventory reserves........................................................... 3,187 8,393
Provision for warranty reserves............................................................ 1,505 1,017
Changes in assets and liabilities:
Decrease (increase) in restricted cash................................................... (839) 387
Decrease (increase) in accounts receivable............................................... (5,248) 1,112
Decrease (increase) in inventories....................................................... (11,955) 115
Decrease (increase) in other current assets.............................................. 109 2,669
(Decrease) increase in accounts payable.................................................. 984 (8,693)
(Decrease) increase in other accrued liabilities......................................... 6,291 (3,009)
--------- ---------
Net cash provided by operating activities.................................................... 6,802 1,553
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment........................................................ (4,116) (3,810)
--------- ---------
Cash flows from financing activities:
Borrowings from (repayments to) bank, net.................................................. (6,362) (12,474)
Payment of capital lease obligations....................................................... (787) (726)
Sale of common stock....................................................................... 2,514 15,627
--------- ---------
Net cash (used for) provided by financing activities......................................... (4,635) 2,427
--------- ---------
Effect of exchange rate changes on cash.................................................... 139 87
--------- ---------
Net increase (decrease) in cash and cash equivalents......................................... (1,810) 257
Cash and cash equivalents at beginning of period............................................. 8,299 1,919
--------- ---------
Cash and cash equivalents at end of period................................................... $ 6,489 $ 2,176
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
DIGITAL MICROWAVE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Digital Microwave Corporation and its wholly owned subsidiaries. Intercompany
accounts and transactions have been eliminated.
While the financial information furnished is unaudited, the financial
statements included in this report reflect all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for a fair
presentation of the results of operations for the interim periods covered and of
the financial condition of the Company at the date of the interim balance sheet.
The results for interim periods are not necessarily indicative of the results
for the entire year. The condensed consolidated financial statements should be
read in connection with the Digital Microwave Corporation financial statements
included in the Company's annual report and Form 10-K for the year ended March
31, 1996.
CASH AND CASH EQUIVALENTS
For purposes of the condensed consolidated statements of cash flows, the
Company considers all highly liquid debt instruments with an original maturity
of three months or less to be cash equivalents.
RESTRICTED CASH
The Company is required to segregate and maintain certain cash balances as
security for letters of credit provided to secure performance or bid bonds under
some of the Company's revenue contracts. As of December 31, 1996, the Company
was required to segregate and maintain $1.6 million which is included as
restricted cash in the accompanying balance sheet.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
where cost includes material, labor and manufacturing overhead. Inventories
consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1996
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
(UNAUDITED)
Raw materials............................................. $ 14,191 $ 11,840
Work in process........................................... 14,634 16,342
Finished goods............................................ 15,285 7,165
------- -------
$ 44,110 $ 35,347
------- -------
------- -------
</TABLE>
NET INCOME (LOSS) PER SHARE
Net income per share is computed using the weighted average number of common
and common equivalent shares outstanding during the period. Net loss per share
is computed using only the weighted average number of common shares outstanding
during the period, as the inclusion of common equivalent shares would be
antidilutive.
LITIGATION AND CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in the
normal course of its business. In the opinion of management, these proceedings
will not have a material adverse effect on the financial position and results of
operations of the Company.
6
<PAGE>
DIGITAL MICROWAVE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONCENTRATION OF CREDIT RISK
Trade receivables concentrated with certain customers primarily in the
telecommunications industry and in certain geographic locations potentially
subject the Company to concentration of credit risk. In addition to sales in
Western Europe and North America, the Company actively markets and sells
products in Asia, Eastern Europe, South America, the Middle East and Africa. The
Company performs on-going credit evaluations of its customers' financial
conditions and generally requires no collateral.
7
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth items from the Condensed Consolidated
Statements of Operations as percentages of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.............................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................................... 66.7 98.9 67.0 82.0
----- ----- ----- -----
Gross profit........................................................... 33.3 1.1 33.0 18.0
Research & development................................................. 5.3 8.3 5.9 7.5
Selling, general & administrative...................................... 19.0 21.2 20.4 17.7
----- ----- ----- -----
Operating income (loss)................................................ 9.0 (28.4) 6.7 (7.2)
Other income (expense):
Interest and other income, net....................................... 0.7 2.6 0.3 1.4
Interest expense..................................................... (0.6) (0.9) (0.7) (1.3)
----- ----- ----- -----
Income (loss) before provision for income taxes........................ 9.1 (26.7) 6.3 (7.1)
Provision (credit) for income taxes.................................... 0.9 (6.1) 0.6 (1.7)
----- ----- ----- -----
Net income (loss)...................................................... 8.2% (20.6)% 5.7% (5.4)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Net sales for the third quarter of fiscal year 1997 were $47.8 million,
compared to $32.7 million reported in the same quarter of fiscal year 1996. Net
sales for the first nine months of fiscal 1997 were $126.1 million, compared to
net sales of $114.2 million for the same period in fiscal 1996. The increase in
net sales was due to higher sales in all regions. For the first nine months of
fiscal 1997, net sales were $36.9 million in the Asia/Pacific region, $58.8
million in Europe and $30.4 million in the Americas, compared to $28.8 million,
$55.7 million and $29.7 million, respectively, in the same period in fiscal
1996.
During the third quarter of fiscal 1997, the Company received $48.6 million
in new orders shippable over the next twelve months, compared to $40.6 million
in the third quarter of fiscal 1996. The Americas reported new orders of $13.0
million, or an increase of 60%, as compared to $8.1 million in the same period
in fiscal 1996. Europe reported $20.8 million in new orders, or a 28% increase,
as compared to $16.2 million in the same period in fiscal 1996. These increases
were partially offset by a $1.5 million decrease in new orders in the
Asia/Pacific region, which reported $14.8 million in new orders as compared to
$16.3 million in the same period in fiscal 1996. Backlog at December 31, 1996
was $85 million, which was the same as at September 30, 1996.
The Company includes in its backlog purchase orders with respect to which a
delivery schedule has been specified for product shipment within one year.
Orders in the Company's current backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser without significant
penalty. Accordingly, although useful for scheduling production, backlog as of
any particular date may not be a reliable measure of sales for any future
period.
Gross profit in the third quarter and first nine months of fiscal 1997 was
higher than the gross profit in the same periods in fiscal 1996 primarily due to
the Company's SPECTRUM II-TM- product line which began shipping in July 1995 and
accounted for 45% of net sales in the third quarter of fiscal 1997 compared to
18% of net sales in the third quarter of fiscal 1996. Also contributing to
higher gross profit were lower manufacturing expenses due to lower component
material costs and improved manufacturing efficiency resulting in less overtime
and lower expediting costs. In addition, the first three quarters of fiscal 1996
were negatively impacted by the shipments of M Series and other products to
E-Plus at no margin due to delays in completion of the SPECTRUM II-TM- product.
The third quarter of fiscal 1996 also included provisions for
8
<PAGE>
excess and obsolete inventory of approximately $7.0 million, unabsorbed
manufacturing expenses due to lower production volume, rework expenses and other
costs related to the startup of SPECTRUM II-TM- production. Net sales for the
first nine months of fiscal 1997 of SPECTRUM II-TM- increased to $51.2 million
from $11.6 million for the same period of fiscal 1996. Net sales for the first
nine months of fiscal 1997 of QUANTUM product increased to $17.1 million from
$8.7 million for the same period of fiscal 1996. Net sales for the first nine
months of fiscal 1997 of the M Series product line, which has been largely
replaced by the SPECTRUM II-TM- product line, decreased to $25.9 million from
$51.7 million for the same period in fiscal 1996. Net sales for other products
and services for the first nine months of fiscal 1997 amounted to $31.9 million
compared to $42.2 million in the same period of fiscal 1996.
The Company has seen its gross profit improve recently. However, there can
be no assurance that the Company will be able to maintain its gross profit at
current levels because of factors mentioned below in this Management's
Discussion and Analysis of Financial Conditions and Results of Operations. Of
particular concern is the intense competitive price pressure of the
telecommunications market which will result in downward pricing pressure on the
Company's products.
Research and development expenses decreased to $2.5 million in the third
quarter of fiscal 1997 from $2.7 million in the same period in fiscal 1996. For
the first nine months of fiscal 1997, research and development expenses of $7.4
million were $1.2 million lower than the $8.6 million reported in the same
period of fiscal 1996. This decrease was primarily attributable to lower project
material costs in connection with the SPECTRUM II-TM- product as it transitioned
from its initial development stage to production. The Company will continue to
invest in the development of new products and features in order to maintain and
enhance its competitive position and expects research and development spending
to increase in connection with the development of new products.
Selling, general and administrative expenses of $9.1 million in the third
quarter of fiscal 1997 increased by $2.2 million as compared to $6.9 million in
the third quarter of fiscal 1996. For the first nine months of fiscal 1997,
selling, general and administrative expenses increased by $5.4 million to $25.7
million from $20.3 million in the same period of fiscal 1996. These increases
were mostly attributable to an increase in personnel, sales office and related
travel expenses, as the Company continued to increase its worldwide sales and
customer support structure. Also, contributing to the increase were profit
sharing and management bonus expenses due to the improved profitability of the
Company during the period. In addition, the Company accrued consulting fees
related to the company-wide process improvement program and increased reserves
for accounts receivable in fiscal 1997.
Interest and other income, net was $0.3 million in the third quarter of
fiscal 1997 compared to $0.9 million in the third quarter of fiscal 1996. For
the first nine months of fiscal 1997, interest and other income, net was $0.4
million compared to $1.6 million in the same period of fiscal 1996. The third
quarter of fiscal 1996 included interest income related to income tax refunds of
$0.4 million and gain on the sale of investments of $0.3 million. There were no
similar items in fiscal 1997. In addition, in the first nine months of fiscal
1997, the Company recorded foreign exchange gains of $0.2 million primarily
related to receivables denominated in foreign currencies, compared to foreign
exchange gains of $0.5 million in the same period of fiscal 1996.
Interest expense in the third quarter of fiscal 1997 of $0.3 million was
slightly lower than the comparable period in fiscal 1996. For the first nine
months of fiscal 1997, interest expense was $0.8 million compared to $1.5
million in the same period in fiscal 1996. The decrease in interest expense was
primarily attributable to lower average principal balances outstanding on the
Company's line of credit and note payable in fiscal 1997.
The Company recorded an income tax provision in the third quarter and first
nine months of fiscal year 1997 at an effective rate of 10%. This was less than
the statutory rate primarily due to the utilization of the net operating loss
and tax credit carry forwards. For the first nine months of fiscal 1996, the
Company recorded a tax benefit of $2.0 million after the completion of an IRS
audit of the fiscal years
9
<PAGE>
ended March 31, 1990 through 1994 and the receipt of tax refunds resulting from
a favorable IRS letter ruling. The ruling allowed the Company to carryback and
obtain a refund for certain net tax operating losses incurred in fiscal 1995.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The statements in this Form 10-Q concerning the Company's expenses, revenue,
liquidity and cash needs contain forward-looking statements concerning the
Company's future operations and financial results within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. The Company
cautions investors that its business is subject to significant risks and
uncertainties. Throughout this Form 10-Q, the Company has made certain estimates
and projections relating to, among other things, new orders, backlog and the
Company's process improvement programs. These forward-looking statements are
based on current expectations and the Company assumes no obligation to update
this information. Numerous factors set forth in the following five paragraphs
and more general risks, such as economic and competitive conditions, incoming
order levels, shipment volumes, product margins, and foreign exchange rates,
could cause actual results to differ from those described in these statements,
and prospective investors and stockholders should carefully consider the factors
set forth below in evaluating these forward-looking statements.
The Company's quarterly operating results vary significantly depending on
several factors, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. In
particular, the Company's quarterly results of operations can vary due to the
volume and timing of product orders received and delivered during the quarter,
the ability of the Company and its key suppliers to respond to changes made by
customers in their orders, and the timing of new product introductions by the
Company and its competitors. The Company's quarterly operating results may also
vary significantly depending on other factors, including the mix of products
sold; the cost and availability of components and subsystems; relative prices of
the Company's products; adoption of new technologies and industry standards;
competition; fluctuations in foreign currency exchange rates; regulatory
developments; and general economic conditions. In addition, wireless
infrastructure suppliers are experiencing, and are likely to continue to
experience, intense price pressure, which has resulted, and is expected to
continue to result, in downward pricing pressure on the Company's products. As a
result, the Company has experienced, and expects to continue to experience,
declining average sales prices for its products. The Company's ability to
maintain its gross profit margins depends upon its ability to continue to
improve manufacturing efficiencies, lower material costs of products and to
continue to introduce new products and product enhancements. Any inability of
the Company to respond to increased price competition would have a material
adverse effect on the Company's business, financial condition and results of
operations. Since the Company's customers frequently negotiate supply
arrangements far in advance of delivery dates, the Company often must commit to
price reductions for its products before it is aware of how, or if, such cost
reductions can be obtained. As a result, such current or future price reduction
commitments could have, and any inability of the Company to respond to increased
price competition would have, a material adverse effect on the Company's
business, financial condition and results of operations.
During any quarter, sales of the Company's products are concentrated in a
small number of customers. For example, during the three months ended December
31, 1996, the Company's top five customers accounted for 35% of the Company's
net sales. Comparatively, during the three months ended December 31, 1995, the
Company's top five customers accounted for 40% of the Company's net sales. There
can be no assurance that the Company's current customers will continue to place
orders with the Company, that orders by existing customers will continue to be
at levels of previous periods, or that the Company will be able to obtain orders
from new customers. The Company's customers typically are not contractually
obligated to purchase any quantity of products in any particular period and
product sales to major customers have varied widely from period to period. The
loss of any existing customer, a significant reduction in the level of sales to
any existing customer, or the failure of the Company to gain additional
10
<PAGE>
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
The microwave interconnection and access business is a specialized segment
of the wireless telecommunications industry and is extremely competitive. The
Company expects such competition to increase in the future. Several established
and emerging companies offer a variety of microwave, fiber optic and other
connectivity products for applications similar to those of the Company's
products. Many of the Company's competitors have more extensive engineering,
manufacturing and marketing capabilities and substantially greater financial,
technical and personnel resources than the Company. In addition, many of the
Company's competitors have greater name recognition, a larger installed base of
products and longer-standing customer relationships. The Company considers its
primary competitors to be L.M. Ericsson, Siemens AG, California Microwave, Inc.,
P-COM, Inc., and the Farinon Division of Harris Corporation. In addition, other
existing competitors include Alcatel, Nokia, SIAE, NEC, and NERA. Both L.M.
Ericsson and Siemens AG have product lines that compete with those of the
Company, and are also OEMs through which the Company markets and sells its
products. Some of the Company's largest customers could develop the capability
to manufacture products similar to those manufactured by the Company. The
Company believes that competition in its markets is based primarily on customer
service and support, breadth of product line, price, performance, rapid
delivery, and reliability. The Company's future success will depend upon its
ability to address the increasingly sophisticated needs of its customers by
enhancing its current products, by developing and introducing new products in a
timely manner that keep pace with technological developments and emerging
wireless telecommunications services, and by providing such products at
competitive prices. The Company's major contractual awards are often subject to
the receipt of firm orders, which, in turn, may be subject to many conditions,
including that the equipment purchased be competitive in the wireless
telecommunications marketplace with respect to technology, price, quantity, and
other commercial concerns. In addition, because the Company's major orders often
require deliveries for periods over 12 months, such products are subject to
risks associated with obsolescence due to rapidly changing technology. There can
be no assurance that the Company will have the financial resources, technical
expertise, or marketing, sales, distribution, and customer service and support
capabilities to compete successfully.
In fiscal year 1995, fiscal year 1996 and the nine-months ended December 31,
1996, sales to international customers accounted for 88%, 87% and 95%,
respectively, of the Company's net sales. The Company expects that international
sales will continue to account for the majority of its net sales for the
foreseeable future. As a result, the Company is subject to the risks of doing
business internationally, including unexpected changes in regulatory
requirements; fluctuations in foreign currency exchange rates; imposition of
tariffs and other trade barriers and restrictions; the burdens of complying with
a variety of foreign laws; and general economic conditions, including inflation.
The Company is also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with its international operations. Potential markets for the
Company's products exist in developing countries that may deploy wireless
communications networks. Such countries may decline to construct wireless
communications networks, experience delays in the construction of such networks
or use the products of a competitor of the Company to construct such networks.
As a result, any demand for the Company's products in such countries will be
similarly limited or delayed. In addition, the Company may experience more
volatile political, economic and foreign currency fluctuations in developing
countries. There can be no assurance that currency fluctuations, changes in the
rate of inflation or any of the aforementioned factors will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's manufacturing operations are highly dependent upon the
delivery of materials by outside suppliers in a timely manner. In addition, the
Company depends, in part, upon subcontractors to assemble major components and
subsystems used in its products in a timely and satisfactory manner. For
example, the Company has an agreement with one of its suppliers,
Microelectronics Technology, Inc.
11
<PAGE>
("MTI"), which provides MTI with certain preferential rights to manufacture
certain of the Company's integrated circuits. The failure of an outside supplier
or subcontractor to deliver such materials, components or subsystems in a timely
and satisfactory manner could have a material adverse effect on the Company's
business, financial condition and results of operations. In the future, the
Company may increase its reliance on outside suppliers and subcontractors to
provide materials, components and subsystems. The Company does not generally
enter into long-term or volume purchase agreements with any of these suppliers,
and no assurance can be given that such materials, components and subsystems
will be available in the quantities required by the Company, if at all. The
inability of the Company to develop alternative sources of supply quickly and on
a cost-effective basis could materially impair the Company's ability to
manufacture and deliver its products in a timely manner. There can be no
assurance that the Company will not experience material supply problems or
component or subsystem delays in the future.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in the first nine months of fiscal
1997 was $6.8 million, compared to net cash provided by operating activities of
$1.6 million in the similar period of fiscal 1996. The increase in cash provided
by operating activities was primarily due to increases in customer advances and
improved accounts receivable collections. Total assets at December 31, 1996
increased by $11.3 million to $107.1 million from $95.8 million at March 31,
1996, principally due to the increases in inventory and accounts receivable.
Inventories increased primarily to support a higher volume of net sales, and due
to an increase in finished goods shipped to customers for which net sales have
been deferred pending installation. The increase in accounts receivable was
primarily due to the higher net sales of $47.8 million, in the third quarter of
fiscal 1997 compared to $36.2 million in the fourth quarter of fiscal 1996.
Total liabilities at December 31, 1996 of $47.7 million were $1.6 million
higher than the $46.1 million in total liabilities at March 31, 1996. The
increase was primarily due to the increase in other accrued liabilities for
payments received in advance from customers. This increase was offset by payment
in full of the note payable and a reduction in the balance outstanding under the
line of credit.
At December 31, 1996, the Company's principal sources of liquidity consisted
of $6.5 million in cash and cash equivalents and a revolving bank credit
facility that expires in June 1997. At December 31, 1996, $2.0 million was
outstanding under the credit facility with $17.0 million remaining available at
such time.
The Company's line of credit requires the Company to meet certain financial
covenants, including minimum tangible net worth and profitability requirements.
As of December 31, 1996, the Company was in compliance with the covenants.
The Company believes that the liquidity provided by existing cash balances,
anticipated future cash flows from operations, and the Company's existing
borrowing arrangements will be sufficient to meet both working capital and
capital expenditure requirements for the remainder of fiscal 1997.
12
<PAGE>
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
For a list of exhibits to this Form 10-Q, see exhibit index located on page
15.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K for the three-month period
ended December 31, 1996.
13
<PAGE>
SIGNATURE
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.
DIGITAL MICROWAVE CORPORATION
Date: January 16, 1997 By /s/ CARL A. THOMSEN
-----------------------------------------
Carl A. Thomsen
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND SECRETARY
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 33-13431)).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1993).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1988).
4.2 Rights Agreement dated as of October 24, 1991, between the Company and Manufacturers Hanover Trust
Company of California, including the Certificate of Designations for the Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 1 of the Company's Current Report on 8-K filed on
November 5, 1991).
10.38 Amendment to Loan Agreement dated June 24, 1996, between the Company and CoastFed Business Credit
Corporation (incorporated by reference to Exhibit 10.38 of the Company's Quarterly Report on Form 10-Q
filed on August 14, 1996).
10.39 Amendment to Loan Agreement effective as of June 25, 1996, between the Company and CoastFed Business
Credit Corporation (incorporated by reference to Exhibit 10.39 of the Company's Quarterly Report on
Form 10-Q filed on November 14, 1996).
27.1 Financial data schedule
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL QUARTER ENDED
DECEMBER 31, 1996. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
QUARTERLY REPORT ON FORM 10Q FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 6,489
<SECURITIES> 0
<RECEIVABLES> 37,241
<ALLOWANCES> 0
<INVENTORY> 44,110
<CURRENT-ASSETS> 92,268
<PP&E> 14,841
<DEPRECIATION> 0
<TOTAL-ASSETS> 107,109
<CURRENT-LIABILITIES> 47,410
<BONDS> 0
0
0
<COMMON> 16,135,175
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 107,109
<SALES> 47,760
<TOTAL-REVENUES> 47,760
<CGS> 31,862
<TOTAL-COSTS> 31,862
<OTHER-EXPENSES> 11,581
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (263)
<INCOME-PRETAX> 4,359
<INCOME-TAX> (436)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,923
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0
</TABLE>
