<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 quarter ended September 30, 1998 Commission File Number 0-26858
BLUE WAVE SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1425902
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2410 Luna Road 75006
Carrollton, Texas (Zip Code)
(Address of principal executive offices)
(972) 277-4600
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------------- -------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class November 6,1998
Common Stock, par value $0.01 per share 13,014,038
<PAGE>
BLUE WAVE SYSTEMS INC.
Form 10-Q
For the Quarter Ended September 30, 1998
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets
September 30, 1998 and June 30, 1998 3
Statements of Operations
for the three months ended September 30, 1998 and 1997 4
Statements of Cash Flows
for the three months ended September 30, 1998 and 1997 5
Notes to Interim Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE 14
2
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BLUE WAVE SYSTEMS INC.
BALANCE SHEETS
(in thousands, except par value per share)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
-------------- ---------
<S> <C> <C>
(unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 2,730 $ 1,060
Restricted cash 850 835
Marketable securities, at fair value 1,093 3,062
Accounts receivable, net of allowances of $229 and $336, respectively 5,757 4,975
Inventories, net 3,704 4,156
Prepaid expenses and other 622 612
Deferred tax asset 903 903
-------- --------
Total current assets 15,659 15,603
-------- --------
Plant and equipment:
Machinery and equipment 7,310 7,320
Furniture and fixtures 3,027 2,876
-------- --------
10,337 10,196
Less accumulated depreciation (6,183) (5,838)
-------- --------
Plant and equipment, net 4,154 4,358
-------- --------
Deferred tax asset-noncurrent 484 478
Other assets 103 105
-------- --------
Total assets $ 20,400 $ 20,544
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 2,970 $ 2,402
Accrued compensation 488 706
Other current liabilities 3,545 3,991
Line of credit 2,884 2,302
Current maturities of debt and capital lease obligations - -
-------- --------
Total current liabilities 9,887 9,401
-------- --------
Deferred income taxes 885 870
Long-term debt and capital lease obligations, net of current maturities 857 835
-------- --------
Total liabilities 11,629 11,106
-------- --------
Stockholders' equity:
Preference stock, $.01 par value; 1,000 shares authorized; no shares
issued and outstanding at September 30 and June 30, 1998 - -
Common stock, $.01 par value; 50,000 shares authorized; 13,537 shares issued;
12,791 shares outstanding at September 30 and June 30, 1998 135 135
Additional paid-in capital 22,973 22,973
Net unrealized gain on marketable securities 2 -
Retained earnings (12,985) (12,208)
Cumulative translation adjustment 47 (61)
-------- --------
10,172 10,839
-------- --------
Less -- treasury stock, at cost (1,401) (1,401)
-------- --------
Total stockholders' equity 8,771 9,438
-------- --------
Total liabilities and stockholders' equity $ 20,400 $ 20,544
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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BLUE WAVE SYSTEMS INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
------- -------
(restated)
<S> <C> <C>
Net sales $ 6,806 $10,286
Cost of sales 3,227 4,282
------- -------
Gross margin 3,579 6,004
Operating expenses:
Product development and engineering 1,455 1,832
Sales and marketing 2,059 1,980
General and administrative 825 1,163
------- -------
Total operating expenses 4,339 4,975
------- -------
Operating income (loss) (760) 1,029
------- -------
Other income (expense):
Interest income 46 148
Interest expense (60) 13
Other income 20 19
------- -------
Total other income 6 180
------- -------
Income (loss) from continuing operations before
provision for income taxes (754) 1,209
Provision for income taxes 23 193
------- -------
Income (loss) from continuing operations (777) 1,016
Loss from discontinued operations, net of tax
benefit of $0 and $62, respectively - (137)
------- -------
Net income (loss) (777) 879
------- -------
Preference share dividends, accretion and amortization
of issuance costs of preference shares - (437)
------- -------
Net income (loss) applicable to common stock $ (777) $ 442
======= =======
Basic net income (loss) per share:
Continuing operations $(0.06) $ 0.05
Discontinued operations - (0.01)
======= =======
$(0.06) $ 0.04
======= =======
Diluted net income (loss) per share:
Continuing operations $(0.06) $ 0.04
Discontinued operations - (0.01)
======= =======
$(0.06) $ 0.03
======= =======
Weighted average common shares outstanding:
Basic 13,014 10,366
======= =======
Diluted 13,014 12,719
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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BLUE WAVE SYSTEMS INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
-------- ---------
(restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (777) $ 879
Adjustments to reconcile net income to net cash
provided (used) by operating activities -
Depreciation 354 274
Changes in assets and liabilities -
Accounts receivable, net (782) (484)
Inventories, net 452 (769)
Prepaid expenses and other (8) (581)
Accounts payable and accrued liabilities (68) 685
------ ------
Net cash provided (used) by operating activities (829) 4
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery, equipment, furniture and fixtures (145) (196)
Proceeds from dispositions of fixed assets held for sale 35 -
Purchases of marketable securities - -
Proceeds from maturities of marketable securities 1,970 684
------ ------
Net cash provided by investing activities 1,860 488
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock warrants and options - 361
Purchase of treasury stock - (573)
Proceeds from debt borrowings 582 -
Net payments on capital lease obligations - (139)
------ ------
Net cash provided (used) by financing activities 582 (351)
------ ------
Effect of translation rates on cash 57 148
Net decrease in cash attributable to overlapping period - (562)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,670 (273)
CASH AND CASH EQUIVALENTS, beginning of period 1,060 2,406
------ ------
CASH AND CASH EQUIVALENTS, end of period $2,730 $2,133
====== ======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for income taxes $ - $ 584
Cash paid for interest 57 20
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
BLUE WAVE SYSTEMS INC.
Notes to Interim Consolidated Financial Statements
1. Basis of Presentation
While the accompanying interim consolidated financial statements are
unaudited, they have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, all material adjustments and disclosures necessary to fairly present
the results of such periods have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended June 30,
1998, as included in the Form 10-K, as amended, previously filed. The interim
results of operations for the period ended September 30, 1998, are not
necessarily indicative of results to be expected for the year ending June 30,
1999.
The accompanying consolidated financial statements for periods presented for
fiscal year 1998 have been prepared to give retroactive effect to the
combination with Loughborough Sound Images Limited ("Sub") on April 27, 1998,
which has been accounted for as a pooling of interests. The accompanying
restated consolidated statements of operations and cash flows for the three
months ended September 30, 1997, combine Blue Wave's historical statements of
operations and cash flows with the corresponding Sub historical statements of
operations and cash flows for the same time period.
The table below presents a reconciliation of revenues and net income for the
three months ended September 30, 1997, as reported in the consolidated
statements of operations with those previously reported by the Company. The
references to Blue Wave in this table are to the Company's historical operating
results prior to the acquisition of Sub (in thousands):
Three months ended
September 30, 1997
------------------
REVENUES:
Blue Wave $ 3,203
Sub 7,083
-------
Total consolidated revenue $10,286
=======
NET INCOME:
Blue Wave $ 315
Sub 127
-------
Total consolidated net income $ 442
=======
Included in the net income of Sub for the three months ended September 30,
1997, was a loss from discontinued operations of $137,000, which was net of an
income tax benefit of $62,000.
2. Marketable Securities
The Company has determined that all of its marketable securities should be
classified as available for sale and reflected in the accompanying balance sheet
at their respective market values. The Company's results of operations include
earnings from such securities as calculated on a yield-to-maturity basis.
Unrealized gains and losses from the changes in fair value are excluded from
income and are reported as an adjustment to stockholders' equity, net of the
deferred tax effect. The Company's marketable securities consist of direct and
implied obligations of the U. S. Government and investment grade corporate debt
securities.
The Company does not invest in or use derivative financial instruments other
than currency hedging transactions. The Company did not enter into any hedging
transactions during the periods presented.
6
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BLUE WAVE SYSTEMS INC.
Notes to Interim Consolidated Financial Statements
3. Inventories
Inventories at September 30 and June 30, 1998, consisted of the following
(in thousands):
September 30, 1998 June 30, 1998
------------------ -------------
Raw materials $ 1,876 $ 1,908
Work-in-process 1,787 1,969
Finished goods 1,758 1,893
Reserves (1,717) (1,614)
------- -------
Inventories, net $ 3,704 $ 4,156
======= =======
4. Debt
Line of Credit
The Company makes short-term borrowings under a credit facility made
available by a commercial bank in the United Kingdom. At September 30, 1998, the
Company had $2,884,000 outstanding, and had approximately $3,000,000 in
aggregate availability under such credit facility. The credit facility bears
interest at the bank's reference rate, plus 1.75% (7.50% at September 30, 1998)
and is due on demand. The credit facility agreement contains warranties and
covenants. At September 30, 1998, the Company was in breach of one of the
covenants, however the Company and the bank are substantially complete
negotiating to extend the credit facility under terms agreeable to both parties.
Management believes that the parties will reach mutually agreeable terms, and
thus the breach of this covenant will have no significant impact on the company.
Long-term Debt
Long-term debt consists primarily of a note payable to a commercial bank
with interest at the bank's base rate plus 1.50% (7.50% at September 30, 1998).
The note is payable in 2002, and is secured by escrow of cash in the same amount
as the note. The debt agreements related to this note contain warranties and
covenants and require maintenance of certain financial ratios. Default on any
warranty or covenant could, if not waived or corrected, accelerate the maturity
of any borrowings outstanding. Management believes the Company is in compliance
with such warranties and covenants.
5. Income Taxes
At fiscal year-end 1998, Blue Wave had federal and foreign net operating
loss (NOL) carryforwards of approximately $8,300,000 and $2,000,000,
respectively, which begin to expire in 2002. Research and development tax credit
carryforwards of approximately $41,000 at fiscal year end 1998, were also
available to reduce future federal income taxes. Pursuant to Section 382 of the
Internal Revenue Code, a change in ownership occurred with the initial public
offering of Blue Wave in 1995. As a result, Blue Wave was subject to a
$2,300,000 annual net operating loss utilization limitation. A change in
ownership pursuant to Section 382 also occurred with the combination. As a
result, Blue Wave will be subject to a $1,373,000 annual net federal operating
loss utilization limitation.
Blue Wave had net deferred tax assets of $511,000 at fiscal year end 1998
and September 30, 1998, which is reflected in the accompanying balance sheets.
These deferred tax assets are reflected net of a valuation allowance. In
accordance with the criteria contained in SFAS No. 109, "Accounting for Income
Taxes," the Company has recorded a valuation allowance against a portion of its
total NOL. Blue Wave believes it is more likely than not that it will be able to
realize the benefit of this net deferred tax asset. Among the factors the
Company considers when making this evaluation are the (1) potential changes in
operations which management believes will expand its product capabilities and
customer base, (2) cost reduction or synergies to be gained from the combination
of Mizar and LSI, (3) the realignment of the Company including its strategy to
expand its markets in the telecommunications industry, (4) the introduction of
systems based upon new DSP microprocessors, (5) limitation of the net operating
loss carryforwards, as described above, related to the LSI merger, (6) and
projections of sufficient taxable US income to fully realize the net realized
deferred tax asset by the end of calendar year 2000. Management continually
evaluates the realizability of the net deferred tax assets and the need for a
valuation allowance on such assets.
7
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BLUE WAVE SYSTEMS INC.
Notes to Interim Consolidated Financial Statements
6. Income Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share. The Statement establishes standards for computing and
reporting earnings per share ("EPS"). It replaces the presentation of primary
EPS with a presentation of basic earnings per share. Additionally, it requires
presentation of diluted EPS which is similar to fully diluted EPS, as defined in
APB Opinion No. 15. The net income per share information for the three months
ended September 30, 1997, has been restated to reflect the new standard.
Basic and diluted net loss per share for the three months ended September
30, 1998, was computed by dividing net loss by the weighted average number of
shares of common stock outstanding during the period. Other dilutive securities
outstanding during this period were anti-dilutive to the net loss per share, and
were not used to calculate diluted loss per share. Basic net income per share
for the three months ended September 30, 1997, was computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the period, as adjusted, on a historical basis, for the exchange ratio
applied in the combination. Diluted net income per share for the three months
ended September 30, 1997, was computed by dividing net income by the weighted
average number of shares of common stock, as adjusted for the exchange ratio
used in the combination, and other potentially dilutive securities outstanding
during the period. Dilutive securities included in diluted net income per share
are stock options calculated under the treasury stock method using the
prevailing average market price for the period presented. Options for 106,250
underlying shares were not included in calculating diluted net income per share
for the three months ended September 30, 1997, because these options would have
been anti-dilutive. Shares used in basic and diluted net income (loss) per share
calculations are presented below (in thousands):
Three Months Ended
September 30,
1998 1997
Basic: ---- ----
- - ------
Weighted average common stock outstanding
during the period 13,014 10,366
====== ======
Diluted:
- - --------
Weighted average common stock outstanding
during the period 13,014 10,366
Other dilutive securities of stock option/warrant programs N/A 2,353
------ ------
Shares used in net income (loss) per share calculation 13,014 12,719
====== ======
Dilutive securities equivalent to approximately 807,000 shares of common
stock were outstanding during the three months ended September 30, 1998, but
were not included in the computation of diluted EPS because the Company incurred
a net loss. The inclusion of these options would have been anti-dilutive to
diluted EPS. Stock options scheduled to expire within the five years following
September 30, 1998, aggregate 608,201 underlying shares, exercisable for a total
of $226,460, and begin to expire in 2002. Additional disclosures regarding the
stock option plan activity during the past three fiscal years is disclosed in
Note 13 to the consolidated financial statements in the Company's Form 10-K for
the year ended June 30, 1998.
7. Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, in
fiscal 1999. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the total of net
income and all other non-owner changes in equity. The Company currently has
two types of non-owner changes in equity, excluding net income, including
foreign currency translation gains and losses and unrealized gains and losses on
investments. The computation of comprehensive income for the three months ended
September 30, 1998 and 1997 follows (in thousands):
8
<PAGE>
BLUE WAVE SYSTEMS INC.
Notes to Interim Consolidated Financial Statements
Three Months Ended
September 30,
1998 1997
----- -----
Net income (loss) $(777) $ 442
Foreign currency translation adjustment 108 --
Net unrealized gain on marketable securities 2 11
----- -----
Total comprehensive income (loss) $(667) $ 453
===== =====
8. Recently Issued Accounting Pronouncements
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, in
fiscal 1999. See Note 6 for the Company's disclosure of this pronouncement.
The Company has adopted SFAS No. 131, Disclosure about Segments of An
Enterprise and Related Information, in fiscal 1999. This pronouncement changes
requirements under which public businesses must report segment information. The
objective of the pronouncement is to provide information about a company's
different types of business activities and different economic environments.
SFAS No. 131 requires companies to select segments based on their internal
reporting system. The adoption of SFAS No. 131 is required for fiscal years
beginning after December 15, 1997, however application is not required for
interim periods in the initial year of its application. The Company is
currently evaluating the impact that the adoption of SFAS 131 will have on the
Company's financial statement disclosures.
The Company has adopted SFAS No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits, in fiscal 1999. This pronouncement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans, however, it does
require additional information on changes in the benefit obligations and fair
values of plan assets in order to facilitate financial analysis. The adoption
of SFAS No. 132 is required for fiscal years beginning after December 15, 1997.
The Company currently does not have any pension or postretirement benefit plans.
The Financial Accounting Standards Board has issued SFAS No. 133,
Accounting for Derivative and Similar Financial Instruments For Hedging
Activities. This pronouncement revises the accounting for derivative financial
instruments. It requires entities to recognize all derivatives as either assets
or liabilities in the balance sheet and measure those instruments at fair value.
The adoption of this statement is required for all quarters of fiscal years
beginning after June 15, 1999. Historically, the Company has not invested in
derivatives nor hedged any significant risks with the use of derivative
financial instruments.
The Financial Accounting Standards Board has issued SFAS No. 134,
Accounting for Mortgaged-Backed Securities Retained After the Securitization of
Mortage Loans Held for sale by a Mortgage Banking Enterprise. The Company is not
a mortgage banking enterprise, thus this statement will not impact the Company's
financial condition or results of operations.
9. Stockholders' Equity
Common Stock
During 1997, the Company announced plans to repurchase up to $2,000,000
worth of its common stock outstanding. Through September 30, 1997, a total of
281,900 shares had been repurchased at a total cost of $1,081,000. In the second
quarter of fiscal 1998, the Board of Directors canceled the stock repurchase
plan.
The combination was completed via a share exchange whereby Mizar issued
7,876,964 common shares in exchange for all of the outstanding capital stock of
LSI.
9
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BLUE WAVE SYSTEMS INC.
Notes to Interim Consolidated Financial Statements
Preferred Stock
On April 10, 1997, Sub entered into an agreement with Boston Holdings
Limited ("BHL"), a subsidiary of BancBoston Capital Limited, to sell to BHL at a
subscription price of (Pounds)5,500,000 (approximately $8,914,000), 5,500,000
preference shares, one "B" ordinary share, and warrants to acquire an additional
20,115 "B" ordinary shares. Under the terms of Sub's Articles of Association,
any proceeds resulting from the exercises of the warrants was to be used to
redeem the preference shares. Contemporaneously with the combination, this
warrant was exercised for (Pounds)3,318,975 (or approximately $5,571,000) and
was converted into 1,903,522 common shares of Blue Wave Systems.
The preference shares and accrued dividends thereon ranked first in
liquidation priority over all other equity shares and accrued first preference
cumulative dividends of 6% per annum beginning on April 1, 1998, such dividends
being payable in cash biannually on March 31 and September 30. The preference
shares also accrued a second preference cumulative dividend of 8% per annum
until March 31, 1998, and 2% per annum thereafter, and such dividends were paid
as one additional preference share for each pound sterling 1 in dividends due on
March 31 and September 30. Dividends accrued between March 31, 1998 and the date
of redemption were paid in cash.
10
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
For the three months ended September 30, 1998, the Company reported net
sales of $6,806,000, as compared to $10,286,000 in the same period of the prior
year. This decline is attributed to a technology transition that has
significantly impacted industry purchasing patterns, especially for development
systems. Recently introduced next generation DSPs, including the C6000 family of
DSPs offered by Texas Instruments ("TI"), represent a 10x improvement in
performance over existing DSPs. DSPs comprise a key portion of the technology
content of the Company's products and the majority of the Company's DSP-based
revenues are derived from products that incorporate TI DSPs. Market interest in
recently introduced products that utilize next generation DSPs has been at the
expense of the Company's existing products that incorporate readily available
DSPs. The Company believes that its newer C6000-based products will be able to
serve a much larger market as new emerging applications utilize high-performance
DSP-based subsystems and, leverage the Company's signal processing design
expertise. When TI introduced their C4x family of DSPs in 1992, the Company
experienced a similar revenue trend for existing products followed by a
significant increase in revenue as the C4x family of DSPs were available in
plentiful supply. A significant portion of the Company's sales are to prime
contractors for the federal government and are used in defense, aviation and
intelligence applications. The Company believes that the trend of the federal
government is to emphasize the purchase of commercial off-the-shelf (COTS)
products versus proprietary designs dedicated to a specific application and
expects this trend will have a positive impact on revenues in the future. More
recently, the Company has also experienced a significant increase in bookings
for "ruggedized" DSP-based products that are designed for harsh environments.
The time lag between order booking and revenue recognition associated with
"ruggedized" products can be much longer due to engineering effort, component
ordering and manufacturing lead-times. Previously, a large portion of the
Company's DSP business was modest orders for relatively standard products which
were used to prove a concept or deploy a small number of prototypes or systems.
Customer orders for "ruggedized" products typically are quite large and result
in a high degree of variability in bookings during any given three month
measurement period. The customer order backlog was $12,247,000 at September 30,
1998, as compared to $11,924,000 at September 30, 1997. The backlog amount has
grown to its current level, in large part, due to programs that have progressed
to a production stage and utilize currently widely available DSPs.
Gross margin percent for the three months ended September 30, 1998, was 53%,
as compared to 58% for the same period in the prior year. The Company's
historical gross margin percentage has varied by quarter in both a positive and
negative fashion due to volume-related efficiencies, changes in product and
customer mix and provisions for manufacturing scrap and obsolescence.
During the three months ended September 30, 1998, operating expenses were
$4,339,000, or 64% of net sales, as compared to $4,975,000, during the same
period in the prior year. The implementation of the Company's post-merger cost
reduction plan has reduced the Company's operating expense base. These savings
have been generated by merger synergies, and actions to eliminate duplicate
functions, facilities and activities.
Interest income for the three months ended September 30, 1998, was $46,000,
as compared to $148,000 for the same period in the prior year. The decrease is
due primarily to the payment of merger related costs and the redemption of the
preference shares which resulted in a lower available balance for investing.
The Company reported a net loss of $777,000 for the three months ended
September 30, 1998, as compared to net income of $442,000 during the same period
in the prior year. The decrease in net income for the three months ended
September 30, 1998, as compared to the same period in the prior year, is
primarily due to the decrease in net sales as discussed above.
Liquidity and Capital Resources
The Company's total cash, cash equivalents and purchased marketable
securities were $4,673,000 at September 30, 1998, as compared to $4,957,000 at
June 30, 1998. Net working capital at September 30, 1998, was $5,772,000, as
compared to $6,202,000 at June 30, 1998, a decrease of $430,000. The decrease is
mainly attributable to the payment of merger related costs. Accounts receivable
at September 30, 1998, increased over the June 30, 1998 balance primarily due to
the timing of shipments during the quarter.
Expenditures for capital equipment were $145,000 for the three months ended
September 30, 1998, as compared to
11
<PAGE>
$196,000,000 in the prior year.
During 1997, the Company announced plans to repurchase up to $2,000,000
worth of its common stock outstanding. Through September 30, 1997, a total of
281,900 shares had been repurchased at a total cost of $1,081,000. In the second
quarter of fiscal 1998, the Board of Directors canceled the stock repurchase
plan.
The Company makes short-term borrowings under a credit facility made
available by a commercial bank in the United Kingdom. At September 30, 1998, the
Company had $2,884,000 outstanding, and had approximately $3,000,000 in
aggregate availability under such credit facility. The credit facility bears
interest at the bank's reference rate, plus 1.75% (7.50% at September 30, 1998)
and is due on demand. The credit facility agreement contains warranties and
covenants. At September 30, 1998, the Company was in breach of one of the
covenants, however the Company and the bank are substantially complete
negotiating to extend the credit facility under terms agreeable to both parties.
Management believes that the parties will reach mutually agreeable terms, and
thus the breach of this covenant will have no significant impact on the company.
In connection with the establishment of an employee stock ownership plan
("ESOP"), the Company has guaranteed the debt of the ESOP. The guarantee
required the Company to place cash in escrow in an amount equal to the debt.
Such cash has been reflected as restricted cash in the accompanying consolidated
financial statements. The guarantee is reflected as long-term debt in the
accompanying consolidated financial statements. This debt consists of a note
payable to a commercial bank with interest at the bank's base rate plus 1.50%
(7.50% at September 30, 1998). The note is payable in 2002. The debt agreements
related to this note contain warranties and covenants and require maintenance
of certain financial ratios. Default on any warranty or covenant could, if not
waived or corrected, accelerate the maturity of any borrowings outstanding.
Management believes the Company is in compliance with such warranties and
covenants.
Management believes that through its cash resources and currently available
debt facility it will have adequate resources to fund the Company's 1999
operating plan. In order to increase its available working capital the Company
does plan to augment its currently available debt facility. The Company will,
from time to time, evaluate potential strategic transaction opportunities
including acquisitions and joint ventures. In order to fund such a transaction
the Company may find it necessary to seek additional working capital via a
borrowing transaction or consider raising additional funds through an equity
offering.
YEAR 2000 INITIATIVES
The Company has implemented a plan ("Y2K Plan") to attempt to assess and
mitigate the potential impact of the Year 2000 problem throughout the Company.
This problem can arise when time-sensitive embedded software utilizes a two
digit year date field, sorting years beginning in 2000 ("00") before the year
1999 ("99"). Improper sorting can result in data corruption and processing
errors. This problem can be present in licensed software, software developed
for internal use, software developed for customer use, and technology equipment.
Additionally, Year 2000 problems resident with key business partners to the
Company must also be identified and addressed.
The Company has completed a detailed assessment of its internal systems and
will have to replace portions of software used internally so that its computer
systems will function properly with respect to dates beginning in 2000, and
thereafter. Year 2000 compliance questionnaires are being sent to key suppliers
and a monitoring process has been established to ensure the suppliers respond
and comply with the requirements. key customers will be questioned about their
Year 2000 plans to ensure that our products remain compatible with the
customer's requirements. Compliance testing of all areas covered by the
Company's Y2K Plan are scheduled for completion by, and any required corrective
action plans are scheduled to be established by, December 31, 1998. Any
required corrective actions are scheduled for completion by June 1, 1999, and
will be tested to insure they are Year 2000 compliant. The total Year 2000
project cost is not expected to be material in relation to the Company's
financial position or results operations.
Although the Company believes that its Y2K Plan will adequately address the
potential impact caused by the Year 2000 problem, there can be no assurance that
the Company's Y2K Plan will be sufficiently comprehensive or that it will be
completed on a timely basis. In addition, there can be no assurance that the
systems of other companies on which the Company's systems rely will be Y2K
compliant, or that a failure to convert by a supplier or customer, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse affect on the Company. If a key supplier of the Company fails
to be Y2K compliant, the Company could suffer a material loss of business or
incur significant additional expenses. The Company has developed the framework
for contingency plans in the event it or third parties are unable to complete
system modification to address the Year 2000 issue.
Certain matters contained or incorporated by reference in this Form 10-Q, as
well as statements which are based on expectations of the Company, are forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These matters and statements involve a number of risks and
uncertainties including, but not limited to, technological change, quarterly
fluctuations, integration of Mizar and Loughborough Sound Images, dependence on
the defense industry, dependence upon key suppliers and employees, competition,
and Year 2000 compliance. The foregoing list should not be construed as
exhaustive and the Company disclaims any obligation subsequently to revise
forward-looking statements to reflect unanticipated events. For a further
explanation of risk factors, please see the Company's most recent SEC filings.
The Company further cautions users who may utilize published bookings and
backlog information as tools to forecast the Company's revenue during a given
timeframe since certain purchase orders may be subject to 1) cancellation and,
2) revision to delivery schedules.
12
<PAGE>
BLUE WAVE SYSTEMS INC.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation S-K)
11(a) Computation of Per Share Income for the three months ended September
30, 1998 and 1997.
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K
None.
13
<PAGE>
BLUE WAVE SYSTEMS INC.
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.
Blue Wave Systems Inc.
Date: November 13, 1998 By /s/ Charles D. Brockenbush
---------------------- ------------------------------------
Charles D. Brockenbush
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<PAGE>
EXHIBIT INDEX
Exhibit
No. DESCRIPTION
- - ------- -----------------------------
11 (a) Computation of Per Share Income for the three months ended September
30, 1998 and 1997.
27 Financial Data Schedule (filed electronically only).
<PAGE>
Exhibit 11(a)
BLUE WAVE SYSTEMS INC.
COMPUTATION OF PER SHARE INCOME (LOSS)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
-------------- ---------------
(restated)
<S> <C> <C>
Basic Income (Loss) Per Share:
Net income (loss) applicable to common stock $ (777) $ 442
======= =======
Weighted average shares outstanding 13,014 10,366
Basic income (loss) per share $ (0.06) $ 0.04
======= =======
Diluted Income (Loss) Per Share:
Weighted average shares outstanding 13,014 10,366
Effect of common stock equivalents:
Options granted N/A 3,511
Weighted average exercised options outstanding for portion of period,
net of equivalent shares purchased at average fair market value N/A 162
Effect of using option proceeds to repurchase common stock at
average fair market value N/A (1,320)
------- -------
Total common stock equivalents - 2,353
------- -------
13,014 12,719
------- -------
Diluted income (loss) per share $ (0.06) $ 0.03
======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BLUE WAVE SYSTEMS INC. AS OF SEPTEMBER 30, 1998 AND FOR
THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,580
<SECURITIES> 1,093
<RECEIVABLES> 5,986
<ALLOWANCES> 229
<INVENTORY> 3,704
<CURRENT-ASSETS> 15,659
<PP&E> 10,337
<DEPRECIATION> 6,183
<TOTAL-ASSETS> 20,400
<CURRENT-LIABILITIES> 9,887
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 8,636
<TOTAL-LIABILITY-AND-EQUITY> 20,400
<SALES> 6,806
<TOTAL-REVENUES> 6,806
<CGS> 3,227
<TOTAL-COSTS> 3,227
<OTHER-EXPENSES> 4,339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60
<INCOME-PRETAX> (754)
<INCOME-TAX> 23
<INCOME-CONTINUING> (777)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (777)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
