<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number: 0-15895
JUNE 30, 2000
-------------
DMC STRATEX NETWORKS, INC.
---------------------------
(Exact name of registrant specified in its charter)
DELAWARE 77-0016028
------------------------------------ -----------------------------
(State or other jurisdiction (IRS employer
of incorporation or organization) identification number)
170 Rose Orchard Way
SAN JOSE, CA 95134
----------------------------------------- ---------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-0777
---------------
Registrant's former name: Digital Microwave Corporation
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 number of outstanding shares of the Registrant's common stock, par value
$.01 per share, was 73,389,597 on August 04, 2000.
<PAGE>
INDEX
-----
<TABLE>
<CAPTION>
PAGE
----
<S> <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 6-11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
SIGNATURE 21
</TABLE>
2 of 21
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
DMC STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
------------------- --------------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 30,970 $ 58,339
Short-term investments 67,066 65,603
Accounts receivable, net 117,330 98,520
Inventories 69,993 48,547
Deferred tax asset 1,245 1,285
Other current assets 11,658 9,916
--------------- ----------------
TOTAL CURRENT ASSETS 298,262 282,210
PROPERTY AND EQUIPMENT, NET 44,818 43,801
OTHER ASSETS 10,300 11,430
--------------- ----------------
TOTAL ASSETS $ 353,380 $ 337,441
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of capital lease obligations 85 167
Accounts payable 45,497 39,582
Income taxes payable 3,537 2,330
Accrued liabilities 28,524 30,970
--------------- ----------------
TOTAL CURRENT LIABILITIES 77,643 73,049
STOCKHOLDERS' EQUITY:
Common stock and paid-in capital 378,041 373,477
Accumulated deficit (94,241) (103,288)
Accumulated other comprehensive loss (8,063) (5,797)
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 275,737 264,392
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 353,380 $ 337,441
=============== ================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3 of 21
<PAGE>
DMC STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
JUNE 30,
-------
2000 1999
---- ----
<S> <C> <C>
NET SALES $ 86,734 $ 65,954
Cost of sales 56,223 47,837
------------ ------------
GROSS PROFIT 30,511 18,117
------------ ------------
OPERATING EXPENSES:
Research and development 6,282 5,768
Selling, general and administrative 14,598 11,513
------------ ------------
TOTAL OPERATING EXPENSES 20,880 17,281
------------ ------------
OPERATING INCOME 9,631 836
OTHER INCOME (EXPENSE):
Interest income 1,820 247
Interest expense (16) (245)
Other expense (790) (638)
------------ ------------
OTHER INCOME (EXPENSE), NET 1,014 (636)
------------ ------------
INCOME BEFORE PROVISION 10,645 200
FOR INCOME TAXES
Provision for income taxes 1,597 40
------------ ------------
NET INCOME $ 9,048 $ 160
============ ============
BASIC EARNINGS PER SHARE $ 0.12 $ 0.00
============ ============
DILUTED EARNINGS PER SHARE $ 0.12 $ 0.00
============ ============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 72,867 62,886
Impact of diluted stock options and warrants 4,282 5,174
------------ ------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 77,149 68,060
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4 of 21
<PAGE>
DMC STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,048 $ 160
Adjustments to reconcile net income to net cash used for operating
activities:
Depreciation and amortization 4,231 4,874
Provision for uncollectable accounts 100 201
Provision for inventory reserves 345 270
Provision for warranty reserves 1,617 1,968
Changes in assets and liabilities
Increase in accounts receivable (19,919) (15,570)
Decrease (increase) in inventories (22,331) 3,325
Decrease (increase) in other assets (483) 5,844
Increase in accounts payable 6,195 4,574
Increase (decrease) in income tax payable 1,217 (11)
Decrease in other accrued liabilities (4,027) (6,576)
---------------- -----------------
NET CASH USED FOR OPERATING ACTIVITIES (24,007) (941)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (52,974) (1,142)
Proceeds from available-for-sale securities 51,511 964
Purchase of property and equipment (5,527) (4,694)
---------------- -----------------
NET CASH USED FOR INVESTING ACTIVITIES (6,990) (4,872)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (82) (210)
Proceeds from sales of Common Stock 4,558 2,126
---------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,476 1,916
---------------- -----------------
Effect of exchange rate changes in cash (848) (160)
-------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (27,369) (4,057)
Cash and cash equivalents at beginning of period 58,339 21,518
================ =================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,970 $ 17,461
================ =================
SUPPLEMENTAL DATA
Interest paid $ 17 $ 220
Income taxes paid $ 2 $ -
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5 of 21
<PAGE>
DMC STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
DMC Stratex Networks, Inc. and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated. Certain
prior years amounts have been reclassified to conform to current year
presentation.
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 DMC Stratex Networks, Inc. financial statements included in the
Company's annual report and Form 10-K for the fiscal year ended March 31,
2000.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid debt instruments with an original maturity of
three months or less to be cash equivalents.
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 (in thousands):
<TABLE>
<CAPTION>
JUNE 30,2000 MARCH 31, 2000
-------------------- ----------------
(Unaudited)
<S> <C> <C>
Raw materials $ 34,943 $ 22,558
Work in process 18,265 13,833
Finished goods 16,785 12,156
==================== ================
$ 69,993 $ 48,547
==================== ================
</TABLE>
OTHER ASSETS
Included in other assets are goodwill and other intangibles which are
being amortized on a straight line basis over their useful lives
ranging from 5 to 10 years, as well as minority investments accounted
for using the cost method of accounting.
6 of 21
<PAGE>
ACCRUED LIABILITIES
Accrued liabilities included the following:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
(Unaudited)
------------------------------------
(in thousands)
<S> <C> <C>
Customer deposits $ 578 $ 770
Accrued payroll and benefits 4,784 4,703
Accrued commissions 841 1,929
Accrued warranty 5,443 5,533
Accrued restructuring 154 892
Accrued inventory purchase order
cancellation and other costs 4,508 5,296
Other 12,216 11,847
------------------------------------
$ 28,524 $ 30,970
------------------------------------
</TABLE>
CURRENCY TRANSLATION
The functional currency of the Company's subsidiaries located in the
United Kingdom and Latin America is the U.S. dollar. Accordingly, all
of the monetary assets and liabilities of these subsidiaries are
remeasured into U.S. dollars at the current exchange rate as of the
applicable balance sheet date, and all non-monetary assets and
liabilities are remeasured at historical rates. Sales and expenses are
remeasured at the average exchange rate prevailing during the period.
Gains and losses resulting from the remeasurement of the subsidiaries'
financial statements are included in the Consolidated Statements of
Operations. The Company's other international subsidiaries use their
local currency as their functional currency. Assets and liabilities of
these subsidiaries are translated at the exchange rates in effect at
the balance sheet date, and income and expense accounts are translated
at the average exchange rates during the year. The resulting
translation adjustments are recorded directly to a separate component
of stockholders' equity.
FINANCIAL INSTRUMENTS
The Company enters into forward foreign exchange contracts to hedge
some of its firm committed backlog, open purchase orders and certain
assets and liabilities denominated in foreign currencies. At June 30,
2000, the Company had forward foreign exchange contracts to exchange
various foreign currencies for U.S. dollars in the gross amount of
$45.3 million. Market value gains and losses on forward foreign
exchange contracts are recognized as offsets to the exchange gains or
losses on the hedged transactions.
7 of 21
<PAGE>
NET INCOME PER SHARE
The Financial Accounting Standards Board (the "FASB") issued Statement
on Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." Under SFAS 128, basic earnings per share are computed by
dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share are computed
by dividing net income by the weighted average number of common shares
and potentially dilutive securities outstanding during the period.
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.
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. There
was one customer in Mexico that accounted for approximately 15% of the
total Accounts Receivable balance at the end of the first quarter of
Fiscal 2001. The Company expects to collect most of this amount during
the second fiscal quarter of Fiscal 2001. 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,
although sales to Asia, Eastern Europe, and the Middle East are
primarily paid through letters of credit.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement on Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income
and its components (revenue, expenses, gains and losses) in a full set
of general-purpose financial statements. The following table reconciles
comprehensive income under the provisions of SFAS 130 (in thousands)
for:
<TABLE>
<CAPTION>
Three Months Ended
JUNE 30,
--------
2000 1999
---- ----
<S> <C> <C>
Net income $ 9,048 $ 160
Other comprehensive income (loss) net of tax:
Unrealized currency loss (1,033) (257)
Unrealized holding loss on investments (1,233) (9)
---------------- ----------------------
Comprehensive income (loss) $ 6,782 $ (106)
================ ======================
</TABLE>
8 of 21
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which establishes standards for the reporting and display
of comprehensive income and its components in general purpose financial
statements. SFAS 133 is effective for companies with fiscal years
beginning after June 15, 2000. SFAS 133 requires the Company to
recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities or
firm commitments through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings. The Company
believes that the adoption of this new pronouncement will not have a
material effect on the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in
financial statements. The Company expects to adopt the accounting
change in the fourth quarter of Fiscal 2001 and has not yet determined
the effect SAB 101 will have on its consolidated financial position,
results of operations or cash flows.
OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
The Company is organized into two operating segments: Products and
Services. The Chief Executive Officer has been identified as the Chief
Operating Decision-Maker as defined by SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." Resources are
allocated to each of these groups using information on their revenues
and operating profits before interest and taxes.
The products operating segment includes the SPECTRUM II, XP4, DART,
Altium and DXR digital microwave systems for digital transmission
markets. The Company designs, develops, and manufactures these products
in Seattle, Washington; San Jose, California; and Wellington, New
Zealand. The Services operating segment includes, but is not limited
to, installation, repair, network design, path surveys, integration,
and other services. The Company maintains regional service centers in
San Jose, California; Lanarkshire, Scotland; and Clark Field, Pampanga,
Philippines.
9 of 21
<PAGE>
The following table sets forth revenues and operating income by operating
segments (in thousands) for:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Products:
Revenues $ 80,310 $ 62,641
Operating income 9,059 796
Services:
Revenues 6,424 3,313
Operating income 572 40
Total:
Revenues $ 86,734 $ 65,954
Operating income 9,631 836
</TABLE>
The following table sets forth revenues from unaffiliated customers by product
(in thousands) for:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------
2000 1999
---- ----
<S> <C> <C>
SPECTRUM II $ 24,631 $ 29,520
XP4 16,712 13,074
DXR 10,198 11,008
Altium 23,750 5,242
Other Products 5,019 3,797
------------ -----------
Total Products 80,310 62,641
Total Services 6,424 3,313
------------ -----------
Total Revenue $ 86,734 $ 65,954
============ ===========
</TABLE>
10 of 21
<PAGE>
The following table sets forth revenues from unaffiliated customers by
geographic region (in thousands) for:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
United States $ 14,126 $ 11,855
Mexico 25,818 3,294
Other Americas 6,587 4,273
Europe 26,520 18,739
Africa 3,875 7,263
China 3,261 11,435
Other Asia/Pacific 6,547 9,095
----------- -----------
Total Revenue $ 86,734 $ 65,954
=========== ===========
</TABLE>
Long-lived assets by country and consisting of net property and equipment was as
follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
<S> <C> <C>
United States $ 30,522 $ 29,423
United Kingdom 9,677 9,719
Other foreign countries 4,619 4,659
------------- --------------
Total property and equipment, net $ 44,818 $ 43,801
============= ==============
</TABLE>
SUBSEQUENT EVENTS
Following stockholder approval, on August 8, 2000 the Company formally
changed its name to: DMC Stratex Networks, Inc.
Also following stockholder approval on August 8, 2000 the Company increased
the authorized number of shares of common stock from 95 million to 150
million.
11 of 21
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In May 2000 Sam Smookler replaced Charles Kissner as Chief Executive Officer of
the Company and was named to the Board of Directors, which was increased to
eight members. Mr. Kissner continues to serve as the Chairman of the Board. Mr.
Smookler, who formerly held the title of President and Chief Operating Officer,
is now the President and Chief Executive Officer.
The following table sets forth the percentage relationships of certain items
from the Company's Condensed Consolidated Statements of Operations as
percentages of net sales:
<TABLE>
<CAPTION>
Three Months Ended
JUNE 30
-------
2000 1999
---- ----
<S> <C> <C>
Net sales 100.0 % 100.0 %
Cost of sales 64.8 72.5
Inventory valuation charges - -
-------------- ---------------
Gross profit 35.2 27.5
Research & development 7.3 8.7
Selling, general & administrative 16.8 17.5
Restructuring costs - -
-------------- ---------------
Operating income 11.1 1.3
Other income (expense), net 1.2 (1.0)
-------------- ---------------
Income before provision for income taxes 12.3 0.3
Provision for income taxes 1.9 0.1
-------------- ---------------
Net income 10.4 % 0.2 %
============== ===============
</TABLE>
NET SALES
Net sales for the first quarter of Fiscal 2001 increased to $86.7 million,
compared to $66.0 million reported in the same quarter of Fiscal 2000 due to
increased customer demand. Altium product line net sales increased significantly
to $23.8 million in the first quarter of Fiscal 2001, from $5.2 million in the
comparable first quarter of Fiscal 2000, and the XP4 product line net sales
increased to $16.7 million from $13.1 million. These increases were partially
offset by a $4.9 million decrease in Spectrum II net sales and a $0.8 million
decrease in the DXR product line net sales. Net sales for other products
amounted to $5.0 million in the first quarter of Fiscal 2001 compared to $3.8
million in the first quarter of Fiscal 2000. Increases in the DART product line
were partially offset by decreases in older product lines. Service revenue was
$6.4 million in the first quarter of Fiscal 2001 compared to $3.3 million in the
first quarter of Fiscal 2000.
12 of 21
<PAGE>
Net sales increased significantly in the Americas to $46.5 million in the first
quarter of Fiscal 2001 compared to $19.4 million in the first quarter of Fiscal
2000. Net sales to U.S. customers, included in the Americas region, amounted to
$14.1 million in the first quarter of Fiscal 2001 compared to $11.9 million in
the first quarter of Fiscal 2000. Net sales to customers in Mexico, which also
is included in the Americas region, amounted to $25.8 million in the first
quarter of Fiscal 2001 compared to $3.3 million in the first quarter of Fiscal
2000. In addition, net sales to European customers increased to $26.5 million in
the first quarter of Fiscal 2001 compared to $18.7 million in the first quarter
of Fiscal 2000. Offsetting these increases was a decrease in net sales in the
Asia/Pacific region to $9.8 million in the first quarter of Fiscal 2001 compared
to $20.5 million in the same quarter of Fiscal 2000. Net sales to China,
included in the Asia/Pacific region, decreased to $3.3 million in the first
quarter of Fiscal 2001 compared to $11.4 million in the comparable quarter of
the prior year.
During the first quarter of Fiscal 2001, the Company received $126.0 million in
new orders shippable over the next twelve months, compared to $67.8 million in
the first quarter of Fiscal 2000, an increase of 86%. The backlog at June 30,
2000 was $151.2 million, compared to $111.8 million at March 31, 2000.
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
Gross profit as a percentage of net sales for the first quarter of Fiscal 2001
was 35.2% compared to 27.5% in the same quarter of Fiscal 2000. The Company's
gross margin in the first quarter of Fiscal 2001 increased due to the Company's
shift in revenue to the Altium product lines, as well as a focused effort to
reduce manufacturing product cost.
RESEARCH AND DEVELOPMENT
In the first quarter of Fiscal 2001, research and development expenses increased
to $6.3 million from $5.8 million in the first quarter of Fiscal 2000, as a
result of higher headcount to support new product rollouts. As a percentage of
net sales, research and development expenses decreased to 7.3% in the first
quarter of Fiscal 2001 compared to 8.7 % in the first quarter of Fiscal 2000 due
to an increase in net sales.
The Company expects to increase its R&D expenses during Fiscal 2001 as it rolls
out new high capacity products, as well as reduces the cost of current products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the first quarter of Fiscal 2001, selling, general and administrative
expenses increased to $14.6 million from $11.5 million in the first quarter of
Fiscal 2000. This increase was a result of higher depreciation and other costs
attributable to purchases of enterprise-wide business and manufacturing systems
and higher travel expenses related to increased sales volume. As a percentage of
net sales, selling, general and administrative expenses decreased to 16.8% in
the first quarter of Fiscal 2001 compared to 17.5% in the comparable quarter of
Fiscal 2000 due to an increase in net sales.
13 of 21
<PAGE>
OTHER INCOME (EXPENSE)
The increase in interest income in the first quarter of Fiscal 2001 of $1.6
million was primarily due to higher average cash balances compared to the same
quarter of the prior year. Interest expense decreased in the first quarter of
Fiscal 2001 compared in the first quarter of Fiscal 2000 primarily due to lower
average lease obligations. Other expense increased slightly to $0.8 million in
the first quarter of Fiscal 2001 from $0.6 million expense in the first quarter
of Fiscal 2000 primarily due to the increased cost of foreign exchange contracts
and foreign exchange gains and losses.
PROVISION FOR INCOME TAXES
In the first quarter of Fiscal 2001, the Company recorded a provision for income
taxes at less than the statutory rate primarily due to the anticipated
utilization of net operating loss carry forwards in Fiscal 2001. The Company did
not record a tax benefit in the first quarter of Fiscal 2001, as it could not be
certain of profitability in future periods.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities in the first quarter of Fiscal 2001 was
$24.0 million, compared to net cash used for operating activities of $0.9
million in the first quarter of Fiscal 2000. The increase in cash used for
operations was primarily the result of increased receivables related to higher
sales, and increased inventory due to component shortages for certain product
lines. Accounts receivable increased $19.9 million in the first quarter of
Fiscal 2001 due to some extended payment terms and the timing of shipments as
48% of the Company's Fiscal 2001 first quarter shipments occurred in the last
month of the period. Most of the decrease in other assets in the first quarter
of the prior fiscal year related to the receipt of an income tax refund.
Purchases of property and equipment increased to $5.5 million in the first
quarter of Fiscal 2001 from $4.7 million in the first quarter of Fiscal 2000.
The first quarter Fiscal 2001 activity was primarily attributable to purchases
of enterprise-wide business and manufacturing systems.
Proceeds from the sale of common stock are primarily derived from the exercise
of employee stock options and the employee stock purchase plan.
At June 30, 2000, the Company's principal sources of liquidity consisted of
$98.0 million in cash and cash equivalents and short-term investments. However,
depending on the growth of the Company's business, the Company may require
additional financing; there can be no assurance that the Company will be able to
obtain such additional financing in the required time frame on commercially
reasonable terms, or at all. The Company believes that it has the financial
resources needed to meet its business requirements for the foreseeable future.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software that
records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. Residual Year 2000 problems may
result in miscalculations, data corruption, system failures or disruption of
operations. To date the Company has not experienced any significant Year 2000
problems in its internal technology systems or with vendors of systems the
Company believes to be critical to its business. In addition, the Company
believes that it is unlikely it will experience any significant Year 2000
problems in the future. However, the Company's applications operate in complex
network environments and directly and indirectly interact with a number of other
14 of 21
<PAGE>
hardware and software systems. The Company cannot predict whether Year 2000
unknown errors or defects that affect the operation of software and systems that
it uses in operating its businesses will arise in the future. If residual Year
2000 problems cause the failure of any of the technology, software, or systems
necessary to operate its business, the Company could lose customers, suffer
significant disruptions in its business, lose revenues, and incur substantial
liabilities and expenses. The Company could also become involved in costly
litigation resulting from Year 2000 problems. This could seriously harm the
Company's business, financial condition and results of operations.
EUROPEAN MONETARY UNION
In January 1999, a new currency called the "euro" was introduced in certain
Economic and Monetary Union ("EMU") countries. During 2002, all EMU countries
are expected to be operating with the euro as their single currency. Uncertainty
exists as to the effect the euro currency will have on the marketplace.
Additionally, all of the rules and regulations have not yet been defined and
finalized by the European Commission with regard to the euro currency. The
Company has assessed the effect the euro formation will have on its internal
systems and the sale of its products. The Company's European sales and operating
transactions are based primarily in U.S. dollars or U.K. pounds sterling,
neither of which are subject to the euro conversion. While the Company does have
some sales denominated in the European Currency Unit, this currency is
successfully being converted in the market to the new European Monetary Unit at
parity. In addition, the Company upgraded its internal computer systems to
convert the European currency to the euro. The cost of upgrading the Company's
systems in connection with the euro conversion was not material and no material
adverse effect on the Company's business, financial condition, and results of
operations is expected due to the upgrade.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
It is the Company's policy not to enter into derivative financial instruments
except for hedging of foreign currency exposures. The Company hedges certain
portions of its exposure to foreign currency fluctuations through the use of
forward foreign exchange contracts. The Company enters into forward foreign
exchange contracts for purposes other than trading; however, the Company does
not engage in any foreign currency speculation. Forward foreign exchange
contracts represent agreements to buy or sell a specified amount of foreign
currency at a specified price in the future. These contracts generally have
maturities that do not exceed one month. At June 30, 2000, the Company had
forward foreign exchange contracts to exchange various foreign currencies for
U.S. dollars in the aggregate amount of $45.3 million, primarily in New Zealand
dollars, British pounds, and euros. Gains and losses associated with currency
rate changes on forward foreign exchange contracts are recorded currently in
income as they offset corresponding gains and losses on the foreign
currency-denominated assets and liabilities being hedged. Therefore, the
carrying value of forward foreign exchange contracts approximates their fair
value. The Company believes that the credit risk with respect to its forward
foreign exchange contracts is minimal because the Company enters into contracts
with major financial institutions. Market risk with respect to forward foreign
exchange contracts is offset by the corresponding exposure related to the
underlying assets and liabilities.
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<PAGE>
FOREIGN CURRENCY RATE RISK
Although nearly all of the Company's sales and expenses are denominated in U.S.
dollars, the Company has experienced some foreign exchange gains and losses to
date, and expects to incur additional gains and losses in Fiscal 2000. The
Company did engage in foreign currency hedging activities during the quarter
ended June 30, 2000, as explained above, and intends to continue doing so as
needed.
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS
The statements in this Form 10-Q concerning the Company's future products,
expenses, revenues, gross margins, liquidity and cash needs, as well as the
Company's plans and strategies, 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. These
forward-looking statements are based on current expectations and the Company
assumes no obligation to update this information. Numerous factors, such as
economic and competitive conditions, timing and volume of incoming orders,
shipment volumes, product margins, and foreign exchange rates, could cause
actual results to differ materially from those described in these statements,
and prospective investors and stockholders should carefully consider the factors
set forth in the Company's Registration Statement on Form 10-K, filed on June
29, 2000, and those set forth below in evaluating these forward-looking
statements.
Sales of the Company's products are concentrated in a small number of customers.
For the first quarter of Fiscal 2001 ended June 30, 2000, the top three
customers accounted for 33% of the net sales. As of June 30, 2000, three of the
Company's customers accounted for 49% of the backlog. The worldwide
telecommunications industry is dominated by a small number of large
corporations, and the Company expects that a significant portion of its future
product sales will continue to be concentrated in a limited number of customers.
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
customers could harm the Company's business, financial condition and results of
operations. In addition, a substantial portion of shipments may occur near the
end of each quarter. Accordingly, the Company's results are difficult to predict
and delays in product delivery or closing of a sale can cause revenues and net
income to fluctuate significantly from anticipated levels and from quarter to
quarter.
Wireless infrastructure suppliers are experiencing, and will likely continue to
experience, 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 in the past 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 is dependent upon its ability to continue to
introduce new products and product enhancements. Any inability of the Company to
respond to increased price competition would harm the Company's business,
financial condition and results of operations.
The markets for the Company's products are extremely competitive, and the
Company expects that competition will increase. The Company's existing and
potential competitors include established and emerging companies, such as L. M.
Ericsson, Siemens AG, Sagem, Microwave Communications Division of Harris
Corporation, Alcatel, Nokia, Nera, NEC, and SIAE, many of which have more
extensive engineering, manufacturing, and marketing capabilities and
significantly greater financial, technical, and personnel resources than the
Company. The
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<PAGE>
Company believes that its ability to compete successfully will depend on a
number of factors, both within and outside its control, including price,
quality, availability, customer service and support, breadth of product line,
product performance and features, rapid time-to-market delivery capabilities,
reliability, timing of new product introductions by the Company, its customers
and its competitors, and the ability of its customers to obtain financing.
The Company expects that international sales will continue to account for the
majority of its net product 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 barriers and restrictions, the
burdens of complying with a variety of foreign laws, and general economic and
geopolitical conditions, including inflation and trade relationships. There can
be no assurance that currency fluctuations, changes in the rate of inflation or
any of the factors mentioned above will not harm 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. While the Company
enters into long-term or volume purchase agreements with a few of its suppliers,
no assurance can be given that 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 which could harm the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will not experience material supply problems or
component or subsystem delays in the future.
The Company has pursued, and will continue to pursue, growth opportunities
through internal development and acquisitions of complementary businesses and
technologies. Acquisitions may involve difficulties in the retention of
personnel, diversion of management's attention, unexpected legal liabilities,
and tax and accounting issues. There can be no assurance that the Company will
be able to successfully identify suitable acquisition candidates, complete
acquisitions, integrate acquired businesses into its operations, or expand into
new markets. Once integrated, acquired businesses may not achieve comparable
levels of revenues, profitability, or productivity as the existing business of
the Company or otherwise perform as expected. The Company's failure to manage
its growth effectively could harm the Company's business, financial condition
and results of operations.
SUBSEQUENT EVENTS
Following stockholder approval, on August 8, 2000 the Company formally changed
its name to: DMC Stratex Networks, Inc.
Also following stockholder approval on August 8, 2000 the Company increased the
authorized number of shares of common stock from 95 million to 150 million.
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a description of the Company's market risks, see page 15, "Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Quantitative and Qualitative Disclosures About Market Risk."
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<PAGE>
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
For a list of exhibits to this Form 10-Q, see the exhibit index located
on page 20.
(b) Reports on Form 8-K
None
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---------------------------------------
<S> <C>
2.1 Certificate of Ownership and Merger Merging Stratex Networks, Inc. into
Digital Microwave Corporation, filed August 9, 2000.
3.1 Certificate of Amendment of Certificate of Incorporation of DMC Stratex
Networks, Inc., filed August 9, 2000.
3.2 Amended and Restated Bylaws (Amended and Restated as of May 9, 2000).
27.1 Financial Data Schedule for the quarter ended June 30, 2000.
</TABLE>
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<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.
DMC STRATEX NETWORKS, INC.
Date: AUGUST 11, 2000 By /s/ CARL A. THOMSEN
----------------------- -----------------------------------
Carl A. Thomsen
Senior Vice President, Chief Financial
Officer and Secretary
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