<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) or the Securities Exchange
- --- Act of 1934 for the fiscal year ended June 30, 1999.
Transition report pursuant to section 13 or 15(d) of the Securities
- --- Exchange Act of 1934.
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 I.R.S. Employer
incorporation or organization) Identification Number)
2410 Luna Road, Carrollton, TX 75006
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (972) 277-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on September
20, 1999 as reported on the Nasdaq National Market, was approximately
$55,660,000.
As of September 20, 1999, Registrant had outstanding 14,341,980 shares of Common
Stock.
Documents Incorporated by Reference
Portions of the Proxy Statement for Registrant's 1999 Annual Meeting of
Stockholders to be held November 16, 1999 are incorporated by
reference in Part III.
<PAGE>
Part I
Item 1. Business
General
Blue Wave Systems Inc. (the "Company" or "Blue Wave Systems") designs,
develops and markets programmable digital signal processing ("DSP") computing
sub-systems that are used in telecommunications, communications analysis,
medical imaging, radar, sonar and other systems. The Company's products
typically consist of open standards based DSP computing boards (utilizing
commercially available DSP microprocessors) optimized for different application
groups (e.g. telecommunications, wireless communications, or medical imaging)
together with the Company's own software that simplifies the use of those
platforms and enables customers to integrate the platform with their own
software. The Company specializes in products that have a high processing
density and are scalable to fit the processing demands of a given system. The
Company's products are typically sold to original equipment manufacturers
("OEMs"), systems integrators, research organizations, and military/aerospace
contractors who integrate the Company's products into their own products or
equipment. The Company was formed in April 1998 upon the combination of Mizar,
Inc. ("Mizar") and Loughborough Sound Images Ltd. ("LSI"), a company based in
the United Kingdom.
Products and Markets
Historically, the Company's products have been designed as DSP-based
technology platforms for a broad range of applications. In fiscal 1999, the
majority of the product development expenditure was for products intended
primarily for communications systems. The Company believes more than a third of
its orders in 1999 were for telecommunications or government communications
applications. A further third of its orders in 1999 were for defense electronics
and the remainder of its orders spanned a broad range of applications including
medical electronics and acoustic test systems. The Company expects, in line with
its strategy described below, to increase the proportion of its business
represented by communications applications and is concentrating its new product
development activities on those applications. The Company's products use
commercially available DSP microprocessors and general-purpose microprocessors
to create DSP computing platforms that contain multiple DSP microprocessors. The
Company's products are designed to address those applications that require
either many signals to be processed (as is typical in many speech and data
applications) or require those applications to impart a large amount of
processing power on the signals (as is typical in many new wireless
applications). The market for high performance DSP-based sub-systems and
components has traditionally experienced rapid technological change, which
requires high levels of expenditures for research and development. The Company
must continue to introduce DSP-based products in order to retain its competitive
position and will be required to constantly enhance its existing products and
successfully develop new products.
Communications Products. The Company produces a range of products that are
part of the ComStruct(TM) family and include open standards platforms described
below and a software product, FACT(TM), that is designed to operate in
conjunction with those platforms. These products are designed to meet the needs
of customers producing equipment for the telecommunications infrastructure.
Specific application areas include the following: voice over internet gateways
that interconnect the public telephone network to the internet; high capacity
voice archival systems that monitor calls and record them for later reference;
wireless transcoders that interface cellular and other wireless systems to the
public telephone network; modem pools that require specific non-standard modems
to be interfaced to a data network; wireless internet gateways that interconnect
cellular wireless systems directly to the internet; telecommunications test
equipment and network simulators; 3rd generation wireless systems including
demodulation, modulation, and vocoder functions, and; enhanced services
platforms that provide value added services to voice networks including hands
free dialing, email reading, and voice mail.
The FACT Framework Architecture for Communication Technologies is a software
product that is designed to operate with the Comstruct communications processing
platforms. The FACT software runs on both the Comstruct platforms and the host
computing system that is controlling those platforms. The FACT software supports
a range of operating systems including Sun Microsystems(TM) Solaris Operating
Environment(TM), Microsoft(R) Windows NT(R), and Wind River(R) Systems'
VxWorks(R). The main benefit of the FACT software is its management of the DSP
sub-system and
2
<PAGE>
its ability to dynamically allocate DSP resources within the sub-system to tasks
determined by the customer's application. The FACT software is portable
across operating environments and is designed to be rapidly and readily adapted
to individual customer's systems through a series of open interfaces. The
software also provides the customer with an open interface for the DSP
algorithms enabling the customer to easily integrate DSP functions supplied by
Blue Wave Systems, other 3rd parties, or integrate their own proprietary
algorithms and intellectual property. FACT is a key part of the
ComStruct product range and not only reduces the customer's time to market
but provides a high reliability software framework that is used in deployment to
manage the DSP sub-system. Additional versions of the product will continue to
be developed, adding to its capabilities and increasing the support for a
variety of applications.
The first platforms in the ComStruct range, the PCI6400 and CPCI6400, were
launched in January 1999. These platforms provide for between 80 and 120
channels which can be processed in applications requiring some form of speech
coding (such as voice over internet, voice archival). The second generation of
these products is now being developed that significantly increase (more than
double) the number of channels that can be processed by the platform. These will
be released during fiscal year 2000.
The second platform in the ComStruct range is the VME6420. This product
provides a high density of processing power and, by virtue of its design and
architecture, high bandwidth interconnection between the processor nodes and
external systems. This product was designed to target wireless communication
applications and during 1999 had been designed into multiple systems that are
being used to trial 3rd generation wireless systems.
Other products. The Company has a range of general-purpose DSP board products
that use open standard interfaces such as PCI and VME to interface to the
customer's systems. These products generally contain multiple DSP
microprocessors. These products are designed to be general purpose and are
applicable to many applications. The Company has design-wins for these products
in a variety of applications including government communications, communications
test equipment, medical imaging, medical instrumentation, acoustic test
equipment, industrial inspection and military/aerospace applications such as
radar and sonar. In addition, the Company has variants of these products that
are designed to operate in harsh environments where shock, vibration and
temperature extremes are present. These products are used in a number of
military/aerospace applications. DSP technology moves rapidly and most of these
products use earlier generations of DSP microprocessors. During the fiscal year
ended June 1999, the PCI/C6600 product development was completed. This product,
using the latest generation DSP microprocessors (and the same generation as used
in the ComStruct range) is intended to provide a next generation general-purpose
DSP solution.
Strategy
Blue Wave Systems' has been supplying open standards DSP platforms to a broad
range of customers in the communications, defense, industrial and medical
industries. The strategy is to build upon its position and skills as a leading
supplier of DSP platforms to become the leading supplier of high-density DSP
sub-systems for the communications industry. The Company has been using its
knowledge of designing and manufacturing high density DSP platforms, and its
knowledge of the software architectures of high density DSP sub-systems within
telecommunication systems to develop a new product range called Comstruct. The
Company intends to continue to exploit the increasing adoption of open standards
and the increasing performance of commercially available DSP chips to enhance
and expand its solutions for telecommunications, in particular targeting high
value applications. The key elements of the Company's strategy include the
following:
3
<PAGE>
Target applications within the Telecommunications Industry. Many of the
Company's latest generation of products are designed to address the demands of
specific application areas such as call recording and screening, speech
transcoding, and voice over packet (or VoIP), and 3rd generation wireless. The
Company's strategy is to address applications within telecommunications by
incorporating relatively unique value-added design and software features that
optimize performance for a specific application type. According to third party
studies the market for standards-based board level telecommunications products
is expected to experience an annual growth rate of approximately 40% during each
of the next several years.
Provide Enabling Technology. The Company has focused its product line on those
applications where high performance, product quality, and reliability are the
customer's most important product considerations. The Company's products permit
customers to decrease the time required developing their products, with the
benefit of reduced risk and time to market. The Company will continue to provide
solutions that enable its customers to gain the benefits of the latest
commercially available DSP technology.
Partnership with Key Technology Providers. The Company's products use DSP
chips supplied by the major semiconductor manufacturers. The ComStruct
products use DSP chips exclusively from Texas Instruments chosen because of
their suitability to the high-density communications applications targeted by
the Company. The Company believes that these applications are significant to
Texas Instruments and that they will continue to develop their DSP chip product
range allowing Blue Wave Systems to further enhance the performance of its
products. The Company also builds partnerships with other technology providers
that target the same customer base as the Company and have complementary
technology to those of the Company.
Global Support. The Company's primary customer base consists of large
companies that have operations throughout the world. The Company believes that
it has the ability to provide global life cycle support for its customers. For
example, a customer may have an application software development group in France
which requires intensive local assistance during early portions of the
customer's product development cycle. As that product is deployed the Company is
capable of providing logistics to supply the DSP sub-system to production
facilities throughout the world.
Provide Professional Services. The Company's customers on occasion require
modifications or small additions to the standard product in order to integrate
it into their own product. The Company believes that the ability to make such
modifications rapidly and assist customers with systems integration is a key
factor in maintaining a competitive advantage.
DSP Products
The Company's product line spans a wide variety of processor families,
computer bus architectures, and customization and scalability options.
Processor Families. Certain of Blue Wave Systems' products utilize a variety
-------------------
of DSP and RISC (Reduced Instruction Set Computing) microprocessors available
from the leading suppliers in the industry including Texas Instruments ("TI"),
Analog Devices, Lucent and Motorola. These suppliers offer varying types of
microprocessors that are differentiated based on feature sets, interoperability,
performance and cost. The majority of the Company's product shipments
incorporate DSPs from TI.
Texas Instruments. According to published industry studies, TI is the
largest provider of DSP microprocessors. Blue Wave Systems products utilize
TI's C6x, C4x, C3x, and C8x. The C6x, and C4x families include a range of
processors that are targeted for applications such as wireless or wireline
communications, or dense multiprocessor radar systems. The Company believes that
it was first to market with a subsystem based on TI's new C6x family.
Additionally, the Company believes that the C6x family will achieve widespread
acceptance and be "designed-in" to a number of new applications. As a result,
the Company's product line now includes variants of approximately 16 products
based on TI's C6x family. There are a number of existing applications that
continue to utilize other processors, such as the C4x, in existing systems. The
majority of the Company's revenues are comprised of products based on TI DSPs.
4
<PAGE>
Motorola. The Power PC RISC processor has been in numerous signal
processing applications in the defense and commercial markets for several years.
This has resulted in a large body of third party support for the processor
family including real-time operating systems, standard algorithms, debuggers,
compilers and other development tools. While the Power PC has been primarily
used in single board computer-type applications within the VMEbus environment,
the execution speed of the chip, which is now in excess of 300 MHz, has reached
the point where its floating point capability is such that it can service
certain types of signal processing applications.
Computer Bus Architectures. All of the Company's products are considered
---------------------------
"open architecture" compliant as it relates to computer bus structures.
Industry standard setting organizations, such as the IEEE (The Institute of
Electrical and Electronics Engineers, Inc.), VITA (VMEbus International Trade
Association), and PICMG (PCI Industrial Computer Manufacturers Group), garner
consensus for a particular type of computing architecture and then publish
compatibility design specifications that can be used by suppliers such as Blue
Wave Systems. This ensures that system designers can incorporate computing
modules from a variety of potential suppliers in order to achieve a desired
performance/cost metric. Each bus contains differing performance specifications
which enable system designers to choose the appropriate bus structure for their
system.
VME (Versa Module Eurocard). The VME bus is typically used in the most
demanding real-time systems. It is also used extensively in ruggedized systems.
Examples include radar, sonar, and signal intelligence.
CPCI (Compact PCI). This bus is relatively new as compared to the VME bus
and is generally viewed as a lower cost alternative to the VME bus. The Company
believes that many new communications and test and measurement applications have
chosen the CPCI bus for their next generation systems.
PCI (Peripheral Component Interconnect). This architecture is used in the
more cost sensitive and relatively less complex systems. It is the computer bus
that is used in many of today's personal computers.
Scalability and Customization Options. Many of the Company's products are
--------------------------------------
scalable as it relates to the number of DSPs, memory modules, I/O (input/output)
devices, and level of ruggedization. The Company believes that the scalability
and compatibility of its products is key to its strategy of enabling its
customers to speed their product to market. For example, the customer's
application software development can begin early by using a first generation
off-the-shelf design from the Company. As the customer refines its system
design for mass deployment it may be desirable to change the DSP sub-system.
This can vary from relatively minor changes to memory modules or more ambitious
changes designed to significantly reduce system costs or significantly improve
system throughput. These adaptations occur often and enable the Company's
customers to achieve a desired performance/cost metric and feature set, as well
as recoup their initial application software development investment.
The prices for the Company's DSP sub-systems can range from approximately
$2,000 for a single DSP PCI board to well over $20,000 for dense multi-processor
designs.
Non-DSP Products
The Company continues to sell its prior generation of non-DSP computing sub-
systems, primarily to existing commercial customers who have previously designed
these products into their equipment which they continue to market for industrial
automation applications. The Company does not actively market these products
and is not currently designing any new non-DSP products. Sales of these
products declined to approximately $1,118,000 in 1999 as compared to $3,064,000
and $3,806,000 in 1998 and 1997, respectively. This downward trend is expected
to continue.
Sales and Marketing
The Company uses its own direct sales force and, to a lesser extent,
independent manufacturer's representatives and distributors to market its
products. The Company's customers frequently require that a product be tailored
to their particular requirements. The Company believes that it is advantageous
to have its own employees interacting directly with customers on a world-wide
basis in order to fully understand their requirements. Blue Wave Systems' sales
personnel generally have engineering or technical backgrounds which the Company
believes enhances their ability to create relationships with their customer
counterparts, who are typically design and systems engineers. The
5
<PAGE>
Company maintains its Corporate and North American headquarters in a suburb of
Dallas, Texas, USA, and a European headquarters in Loughborough, Leicestershire,
England. Regional sales and support staffs are located in Paris, France; Munich,
Germany; and Helsinki, Finland; as well as the East Coast, West Coast, and
central region of the USA.
Customers
The Company's customer base consists primarily of OEMs, defense contractors
and research organizations which incorporate the Company's products as a part
of their systems. Typically, these customers initially purchase a small volume
of products for development testing and comparison to competitive products. If
upon completion of testing the customer elects to incorporate the Company's
product into its design, it frequently purchases the Company's standard or
customized products in higher volumes. Many global companies are users of the
Company's DSP sub-systems including:
Motorola Sun Microsystems
The Boeing Company Government of Israel
Ericsson GDE Systems
GE Medical Systems IBM
Lockheed Martin Lucent Technologies
Nokia Northrop Grumman
Panasonic Raytheon
Schlumberger Siemens AG
During the three years in the period ended June 30, 1999, the Company had two
customers that comprised at least 10% of its annual revenue in a given year.
Raytheon Company represented approximately 13% of the Company's revenues in
fiscal 1998. As governed under the terms of a distribution and manufacturing
agreement, Spectrum Signal Processing Inc. represented approximately 14% of the
Company's revenues in fiscal 1997. During 1999, no customer individually
accounted for more than 10% of revenues.
Backlog
The Company's backlog includes bookings based upon the receipt of a written
purchase order. It generally does not include options in contracts for
additional quantities not covered by a current purchase order. The Company's
backlog for product expected to be delivered within 12 months at June 30, 1999,
was $17,000,000 as compared to $11,298,000 as of the end of fiscal 1998. The
Company cautions readers 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 cancellation and/or delivery
schedule revision.
Product Development
Blue Wave Systems has made a significant investment in its engineering group.
The Company's current internal design strengths exist in areas such as DSP
computing, software for the deployment of DSP sub-systems in telecommunications
equipment, architectures for multiprocessor computing, high speed digital
circuit design, application software development tools, harsh environment
designs, device driver, and customization of designs.
Over the past year, the most significant investments have been targeted at
telecommunications. The telecommunications product development team includes
professionals with expertise in telecommunication system architectures,
telecommunications application software, algorithms, and radio technology.
A small portion of the Company's investment in new product development is for
general purpose DSP sub-systems suitable for a variety of applications and the
completion of military/aerospace product development efforts that were started
during fiscal 1998.
Blue Wave Systems incurred approximately $5,590,000, $6,991,000, and
$6,959,000, in fiscal years 1999, 1998 and 1997, respectively, for product
development and engineering expenses, exclusive of amounts categorized as
6
<PAGE>
discontinued operations in 1997. The reduction in spending for new product
development in 1999 is a direct result of merger related synergies created by
combining Mizar's and LSI's development teams.
Manufacturing and Quality Control
The quality and reliability of its products are fundamental to the Company's
strategy. The Company's quality control systems have been awarded ISO9001
certification. In addition, most of the Company's software development
processes have achieved certification under the internationally recognized Tick-
IT standard.
The Company relies exclusively upon subcontractors to assemble its products.
The Company believes that this enhances its flexibility in product development,
as it is not required to invest in specialized capital equipment that may have
limited use, but instead can choose subcontractors based upon their capabilities
for particular manufacturing tasks. The existence of these outsourcing
relationships allows the Company to absorb varying production levels without
incurring the costs normally attendant to such fluctuations. The Company has
relationships with several contract manufacturers but has no long-term contracts
with any of them. The Company believes there are a number of contract
manufacturers equipped to meet its needs although there is no assurance of this
in the future. Blue Wave Systems' internal manufacturing operations consist
primarily of test engineering, material purchasing, incoming inspection, and
acceptance testing. The Company's subcontractors perform quality control at
their facilities. Blue Wave Systems undertakes subsequent additional quality
control procedures.
All of the Company's products incorporate electronic components available from
a limited number of sources and in certain instances from a single source. The
Company believes that electronic component availability is sufficient to meet
the demand for its products. The Company's revenues in its third and fourth
quarters of fiscal 1999 were adversely effected by production delays at several
of its suppliers and subcontractors.
Competition
The industries and markets in which the Company operates are highly
competitive, and the Company believes that competition is likely to intensify.
Many of the Company's competitors have substantially greater financial
resources, larger engineering and sales staffs, as well as greater name
recognition than the Company. The Company has direct competitors which use DSP
technology similar to that of the Company. The Company also has competitors
offering technologies other than programmable DSPs for signal/image processing
applications. These technologies include application-specific integrated
circuits ("ASICs"), fixed program DSPs, and programmable non-DSP processors.
Often, the Company competes with the in-house design department of its
customers. The Company believes that the increasing adoption of open standards
by telecommunication equipment manufacturers and other customers is expanding
the market for the Company's products.
New or improved products can be expected from competitors in the future.
Market participants must compete on many fronts, including processing capacity,
ease of use, product quality, performance, reliability, price, name recognition,
financial stability, customer support, development time, engineering expertise,
and access to distribution channels.
Intellectual Property
The Company determined that trademark protection for the ComStruct range of
telecommunications products, the FACT range of telecommunications software
products and the SoftBand(TM) software radio was desirable, however, the
majority of its products are referred to by their part numbers rather than by
their specific names. The Company believes that due to the rapid pace of
innovation within its industry, factors such as product quality, performance and
reliability are more important in establishing and maintaining customer
relationships than are the various protections afforded by patents.
In January 1997, the Company (LSI) entered into a distribution and
manufacturing agreement with Spectrum Signal Processing, whereby Spectrum was
appointed a distributor (non-exclusive from May 1, 1997) of certain of the
Company's (LSI) products in North America. In addition, Spectrum was granted
non-exclusive rights to manufacture certain of the Company's (LSI's) older DSP
products in such territory for a period ending December 31, 2003. In return,
Spectrum pays the Company at a rate based upon the selling price of the
product(s) manufactured
7
<PAGE>
under this agreement. The Company retains ownership of its intellectual property
rights associated with the products covered by the agreement.
Employees
As of June 30, 1999, the Company employed 131 full-time employees, including
36 in product development; 51 in sales, sales support, application engineering,
and marketing; 23 in operations; and 21 in finance, IT, general management, and
administration. The Company's continued success will depend in large measure on
its ability to attract and retain highly skilled employees. None of the
Company's employees is represented by a labor union.
Combination of Mizar and LSI, and the Formation of Blue Wave Systems Inc.
Blue Wave Systems was formed as a result of the combination between Mizar and
LSI that occurred in April 1998. 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. Contemporaneous with completion of the
combination, Mizar, Inc. amended its articles of incorporation and changed its
name to Blue Wave Systems Inc. The Company's common stock now trades on The
Nasdaq Stock Market(R) under the symbol BWSI. Mizar's former trading symbol was
MIZR.
The combination was accounted for as a pooling of interests and all historical
financial information has been retroactively restated to reflect the
combination. The Company's fiscal year end remains June, however, the
consolidation of LSI's results during fiscal 1997 (and prior) reflect LSI's
September fiscal year end. Therefore, the reported results for fiscal 1997 (and
prior) reflect a June year end for Mizar and a September year end for LSI.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995.
Certain matters discussed in this Form 10-K, other printed material and in
oral presentations are forward-looking statements that involve risks and
uncertainties. The following risk factors could affect the Company's actual
results and cause actual results to differ materially from those projected in
forward-looking statements. The following risk factors should not be construed
as exhaustive and the Company disclaims any obligation subsequently to revise
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Technological Change. The market for high performance computer sub-systems
and components has traditionally experienced short product life cycles and rapid
technological change, requiring high levels of expenditures for research and
development. The Company continues to introduce DSP-based products in order to
retain its competitive position and will be required to continually enhance its
existing products and successfully develop new products. In the event the
Company does not continue to incorporate new advances in DSP technology into its
products, the Company's business will be adversely affected. To the extent that
technologies, other than those offered by the Company, prove to be superior for
the high performance applications required by the Company's customers, the
Company's business would be significantly impaired.
Quarterly Fluctuations. The Company's quarterly financial results may vary
significantly depending upon factors such as the timing of significant orders,
the timing and success of new product introductions by the Company and its
competitors, and subcontractor delays. In the most recent fiscal years, the
Company's business has been increasingly dominated by longer and larger customer
contracts. Therefore, the procurement or loss of a single contract, or the
change in delivery schedules thereunder, can significantly affect quarterly and
annual financial results, including cash flow. Factors such as quarterly
variations in financial results could cause the market price of the Company's
common stock to fluctuate substantially and cause violations of the Company's
debt agreements thereby impacting liquidity.
Dependence upon Suppliers and Subcontractors. All of the Company's products
incorporate electronic components available from a limited number of sources
and, in certain instances, from a single source. In the event of shortages of
any of the single source components, the Company would be severely impacted.
8
<PAGE>
Delays on the part of certain key suppliers and subcontractors had a significant
adverse effect on the Company's revenues during 1999. In addition, the Company
has no internal manufacturing capability. In the event that one or more of the
several qualified subcontractors currently used by the Company should cease
operations or become unable or unwilling to handle the Company's requirements,
the Company's relations with its customer may be adversely affected. In many
cases, the Company's contracts with its key customers contain remedial and
penalty clauses that could be triggered as a result of non-performance by the
Company or one of the Company's suppliers or subcontractors.
Integration of Mizar's and LSI's Operations. The Company may not be able to
successfully continue to integrate the operations, facilities and management of
Mizar and LSI. Such integration could also have an adverse effect upon the
Company's respective relationships with customers, suppliers, and key employees.
The diversion of management time towards such integration may also adversely
affect customer support of existing products and the development of new
products.
Defense Industry Customer Concentration. The Company's largest single
concentration of customers is prime contractors in the United States military
and aerospace industry. For several years the United States federal government
has significantly reduced overall defense spending and, in certain cases,
delayed or deferred funding for defense applications which in turn has, in
certain occasions, adversely affected the Company's revenues. The Company
believes, however, that reduced defense spending has increased the demand for
efficiency and for upgraded electronics in new and existing defense electronics
systems. There can be no assurance that continued defense cutbacks would not
adversely affect the Company's customers and its business. Additionally, there
has been extensive consolidation of companies in the defense industry, and
further consolidation is possible in the future. There can be no assurance that
such consolidation will not adversely affect the Company. The combination
between Mizar and LSI lessened this customer concentration. The Company's
strategy to increase its revenues from the telecommunications sector should
further reduce the effects of this concentration.
Dependence on Key Personnel. The Company is highly dependent on their key
sales and technical personnel. There is a well-published acute market shortage
of skilled technical personnel that are critical to the Company's success. The
Company's future success will depend on its ability to attract and retain highly
qualified personnel, which are in high demand in the job marketplace. There can
be no assurance that the Company will be successful in hiring or retaining
qualified personnel. The loss of key personnel, or inability to hire and retain
qualified personnel, could have an adverse effect on the Company's business,
financial condition and results of operations. The Company does not have key-
person life insurance on any of its personnel. Mr. Yates, the Company's CEO, is
currently on medical leave and is expected to return near the end of calendar
1999.
Competition. The Company participates in a highly competitive industry, which
is subject to rapid and innovative technological change. There can be no
assurance that future technological changes or the development of new or
competitive products by others will not render the Company's current or planned
products less competitive or obsolete. Additionally, many of the companies with
which the Company competes have significantly greater financial, and other
resources, than the Company.
Historical and Potential Future Operating Losses. Recently, the Company has
incurred a net loss of $2,023,000 and $9,942,000 (including a non-recurring
provision of $8,426,000 for merger and realignment expenses) in fiscal 1999 and
1998, respectively. The loss incurred in fiscal 1999 is primarily the result of
production related problems involving the Company's military/aerospace product
line. The loss incurred in 1998 is due primarily to a decrease in the Company's
revenues and, to a lesser extent, increased spending for product and market
development. Refer to risks identified in "Risk Factors", specifically
"Technological Change", "Quarterly Fluctuations", "Dependence upon Suppliers and
Subcontractors", and "Defense Industry Concentration." Many of the Company's
potential customers, including those involved in the telecommunications and
military/aerospace industries, are evaluating new DSP microprocessor technology
for their next generation products, which appear to have dramatic performance
enhancements as compared to current, widely available DSP microprocessors. Since
many customers are in an evaluation stage, and availability of certain new DSP
microprocessors is quite limited, the Company's ability to generate significant
revenues from new DSP products is currently limited. If demand for the Company's
new products is below that currently forecasted, or supply of new DSP
microprocessors is less than forecasted, or the Company continues to experience
production problems the Company could incur an operating loss
9
<PAGE>
during fiscal 2000. In the event the Company experiences continued operating
losses in 2000 and, continues to consume working capital the financial
institutions which currently provide the Company with credit facilities might
alter such facilities. In this situation, the Company may seek alternative
sources of working capital. Management believes that the Company will
have adequate working capital to fund its operations throughout fiscal year
2000.
Year 2000 Compliance. Currently, there is a significant uncertainty in the
software industry and among software users regarding the impact of the year 2000
on installed software. Software database modifications, and/or implementation
modifications, will be required to enable such software to distinguish between
21st and 20th century dates. 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. The Company uses third-party system software which will
need to be modified or replaced in order to be considered Year 2000 compliant.
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 or customer of the
Company fails to be Y2K compliant, the Company could suffer a material loss of
business or incur significant additional expenses or consume additional working
capital. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000 Initiatives".
Item 2. Properties
The Company's general corporate offices and North American headquarters are
located in Carrollton, Texas (a suburb of Dallas) where it leases approximately
21,000 square feet at an annual rate of approximately $135,000. This lease
expires in 2004 and contains a 5 year renewal option. In North America, the
Company also leases offices for regional sales operations on the East Coast,
West Coast, and central region of the USA. The Company's European headquarters
are located in Loughborough, Leicestershire, England. This 44,000 square foot
facility is leased at an annual rate of approximately $860,000.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters
The Company's common stock trades on The Nasdaq Stock Market (R) under the
symbol BWSI. Prior to the combination and name change in April 1998, it traded
under the symbol MIZR. The following table lists the high and low price for each
quarter.
Fiscal Year 1999 High Low
---------------- ---- ---
First quarter 3 5/8 2 5/8
Second quarter 3 1/2 2 1/4
Third quarter 4 3/4 3 3/8
Fourth quarter 4 18/32 3 1/4
Fiscal Year 1998
----------------
First quarter 7 1/8 3 3/8
Second quarter 6 3/4 5 3/4
Third quarter 6 4 1/8
Fourth quarter 5 3/4 3 19/64
On August 24, 1999, the Company completed a private placement of common stock
and warrants for consideration of $3,000,000. An existing institutional
shareholder purchased 1,200,000 new common shares from the Company and also
received warrants for an additional 1,000,000 shares. The first warrant is for
500,000 common shares and has an exercise price of $3.50 per share. The second
warrant is also for 500,000 common shares and has an exercise price of $4.50 per
share. Both options are callable by the Company if its common stock trades (as
defined) above $5.50 per share and $6.50 per share, respectively, for a period
of 10 consecutive days. The agreements governing the placement contain anti-
dilution and registration rights requirements.
As of September 21, 1999, the approximate number of beneficial stockholders
was 1,300.
The Company has not declared or paid any dividends on its common stock, and
does not anticipate paying any dividends in the foreseeable future.
In May 1997, the Company announced a plan to repurchase up to $1,000,000 worth
of its common stock outstanding. In August 1997, the Company announced a
$1,000,000 expansion to its repurchase plan. Through September 1997, 281,900
shares had been repurchased for a total of $1,081,000. The repurchase program
was cancelled in December 1997.
In conjunction with the combination between Mizar and LSI, the Company
redeemed all of the mandatorily redeemable preference shares of LSI that were
owned by Boston Holdings, Ltd. The aggregate amount of the redemption was
(Pounds)5,971,394 (including accrued dividends) (or approximately $10,023,000).
Also, contemporaneous with the combination, Boston Holdings, Ltd. exercised for
(Pounds)3,318,975 (or approximately $5,571,000), a warrant for common shares of
LSI which, upon the share exchange, were converted into 1,903,522 common shares
of Blue Wave Systems Inc.
11
<PAGE>
Item 6. Selected Financial Data (Fiscal Years 1995-1997 have been restated to
give effect to the combination)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
-------------------------------------------------------------------------
1999 1998 1997 (1) 1996 (1) 1995 (1)
------------- ------------- ------------- ------------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales $27,351 $ 32,679 $ 34,388 $ 35,194 $ 32,043
Cost of sales 12,583 15,395 15,599 16,070 14,302
------- -------- -------- -------- --------
Gross margin 14,768 17,284 18,789 19,124 17,741
------- -------- -------- -------- --------
Operating expenses:
Product development & engineering 5,590 6,991 6,959 5,466 5,735
Sales and marketing 7,959 8,065 6,315 5,591 5,092
General and administrative 3,375 3,938 5,309 2,952 2,353
Merger and realignment costs (277) 8,426 -- -- --
Loss on assets held for sale -- -- -- -- 204
------- -------- -------- -------- --------
Total operating expenses 16,647 27,420 18,583 14,009 13,384
------- -------- -------- -------- --------
Operating income (loss) (1,879) (10,136) 206 5,115 4,357
Interest and other (expense) (38) 586 483 140 209
------- -------- -------- -------- --------
Income (loss) from continuing operations
before provision for income taxes (1,917) (9,550) 689 5,255 4,566
Provision for income taxes 106 255 397 291 899
------- -------- -------- -------- --------
Income (loss) from continuing operations (2,023) (9,805) 292 4,964 3,667
Loss from discontinued operations -- (137) (1,248) (1,341) (1,179)
------- -------- -------- -------- --------
Net income (loss) (2,023) (9,942) (956) 3,623 2,488
------- -------- -------- -------- --------
Preference share dividends, accretion and amortiza-
tion of issuance costs of preference shares -- (1,512) (874) -- --
------- -------- -------- -------- --------
Net income (loss) applicable to common stock $(2,023) $(11,454) $ (1,830) $ 3,623 $ 2,488
======= ======== ======== ======== ========
Basic net income (loss) per share:
Continuing operations $ (0.15) $ (0.89) $ (0.05) $ 0.48 $ 0.40
Discontinued operations -- (0.01) (0.12) (0.13) (0.13)
------- -------- -------- -------- --------
$ (0.15) $ (0.90) $ (0.17) $ 0.35 $ 0.27
======= ======== ======== ======== ========
Diluted net income (loss) per share:
Continuing operations $ (0.15) $ (0.89) $ (0.05) $ 0.41 $ 0.33
Discontinued operations -- (0.01) (0.12) (0.11) (0.11)
------- -------- -------- -------- --------
$ (0.15) $ (0.90) $ (0.17) $ 0.30 $ 0.22
======= ======== ======== ======== ========
Weighted average shares outstanding:
Basic 13,076 12,684 10,594 10,457 9,118
======= ======== ======== ======== ========
Diluted 13,076 12,684 10,594 12,218 11,204
======= ======== ======== ======== ========
June 30,
------------
1999 1998 1997 (1) 1996 (1) 1995 (1)
------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and restricted cash $ 1,339 $ 1,895 $ 3,216 $ 1,745 $ 4,015
Marketable securities -- 3,062 8,598 10,286 76
Working capital 4,618 5,936 18,389 14,550 4,650
Total assets 17,978 20,544 31,555 27,993 19,560
Total debt and capital leases 2,495 3,137 1,094 3,934 5,758
Stockholders' equity 7,347 9,438 13,376 17,607 6,224
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The accompanying restated consolidated statements of operations,
stockholders' equity and cash flows combine Blue Wave's historical statements of
operations, stockholders' equity and cash flows for the periods ended June 30,
1997, 1996 and 1995 with the corresponding Loughborough Sound Images Ltd.
("Sub") historical statements of operations, stockholders' equity and cash flows
for the periods ended September 30, 1997, 1996 and 1995. The restated
consolidated statements of stockholders' equity for the periods ended June
30,1997, 1996 and 1995 reflect the exchange of each Sub common share for 94.632
shares of Blue Wave common stock (see Note 3 to the Consolidated Financial
Statements).
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
Net Sales. Net sales in 1999 were $27,351,000, a decrease of $5,328,000, or
16%, from the $32,679,000 reported in 1998. This decline in revenue is
attributable to 1) production delays on three large military/aerospace programs
and, 2) the technology transition created by the introduction of a revolutionary
new family of DSP microprocessors from Texas Instruments. Historically, the
Company has supplied complex products to the military/aerospace industry. This
complexity is necessitated by environmental conditions, space and weight
constraints, and processing demands. Products of this nature inherently involve
greater production risks since many components are only available from one
supplier and relatively few subcontractors are available for final assembly.
Specifically, during the second half of 1999 the Company experienced supplier
delays from vendors of printed circuit boards and memory devices. Additionally,
production scheduled at one assembly contractor was also delayed by factors
outside the Company's immediate control. All of these factors contributed to
approximately $3 million of shipment delays which impacted net sales in 1999.
The Company's focus on telecommunications products, which were not impacted by
these production delays, will greatly reduce the Company's dependence on complex
military/aerospace product sales. As mentioned above, the second factor that led
to the decline in net sales was the introduction in 1997 of the C6000 family of
DSP microprocessors from Texas Instruments (TI). Historically, the majority of
the Company's products incorporate DSP's from TI. The Company believes the first
release of the C6000 DSP represented a 10x improvement in performance over the
existing widely available DSP's. Commercial OEMs and defense contractors are now
developing products that utilize these next generation DSPs which, in turn,
creates tremendous opportunities for the Company in a number of emerging
application areas such as wireless communications and internet telephony. In the
second half of 1999, the Company experienced a significant increase in customer
orders for its C6000-based ComStruct line of telecommunications products.
Published reports also indicate broad industry adoption of the C6000 DSP in a
wide variety of next generation telecommunication products. The Company's strong
order flow from customers in the second half of 1999 coupled with the deferment
of the delayed product shipments into 2000 led to a 50% annual increase in order
backlog as of June 30, 1999. Order backlog as of June 30, 1999, was $17,000,000
as compared to $11,298,000 as of June 30, 1998. On a geographic basis net sales
in North America were $9,667,000 in 1999 as compared to $13,332,000 in 1998. Net
sales to customers outside North America were $17,684,000 in 1999 as compared to
$19,347,000 in 1998. The decline in North American sales is mostly attributable
to the production delays described above and, to a lesser extent, the technology
transition. The decline in sales to customers outside North America can be
attributed to the technology transition. Net sales from the Company's non-DSP
products have continued to decline steadily and represented $1,118,000, or 4% of
net sales in 1999, as compared to $3,064,000, or 9% of net sales in 1998.
Gross Margin. Gross margin as a percentage of revenues was 54.0% in 1999, as
compared to 52.9% in fiscal 1998. The increase in 1999 is the result of
inventory provisions taken in 1998 related to product scrap and obsolescence. A
significant portion of the provision for product obsolescence in 1998 is related
to the technology transition discussed above. The Company's gross margin
percentage has varied each year, and each quarter, in both a positive and
negative fashion due to factors mentioned above, and changes in customer and
specific product mix. Such variations will continue to impact gross margin
percentages in future reporting periods.
Product Development and Engineering. Engineering expenses decreased 20% to
$5,590,000, or 20% of net sales in 1999, as compared to $6,991,000, or 21% of
net sales in 1998. The decline in absolute spending is the result of
implementing the Company's post-merger organization plan immediately after the
merger between Mizar and Loughborough Sound Images was completed in April 1998.
Duplicate development efforts were eliminated and the use of external
contractors was reduced. The post-merger plan for the Company also reflected a
reduced level of new product development for the military/aerospace industry and
more stringent cost controls for discretionary spending items. The Company's
telecommunications product development efforts now comprise over one-half of the
Company's new product development effort. The Company believes that the focus on
this vertical market will greatly expand its available served market during 2000
and beyond.
13
<PAGE>
Sales and Marketing. Sales and marketing expenses decreased 1% to $7,959,000,
or 29% of net sales, in 1999, as compared to $8,065,000, or 25% of net sales, in
1998. The Company has continued to invest in new market development for its
ComStruct line of telecommunications products and for related application and
technical support personnel. The Company has also employed additional sales
personnel in the United States during 1999.
General and Administrative. General and administrative expenses decreased 14%
to $3,375,000, or 12% of net sales, in 1999, as compared to $3,938,000, or 12%
of net sales, in 1998. The reduction in absolute spending is the result of
implementing the Company's post-merger organization plan immediately after the
merger was closed in April 1998. The implementation of this plan included the
elimination of duplicate functions and activities as well as stringent cost
controls. Exclusive of a nonrecurring charge for separation agreements in 1999,
general and administrative expenses were reduced by 17% from fiscal 1998.
Merger and Realignment Expenses. In 1998, the Company provided for estimated
costs and expenses associated with completing the merger and implementing the
post-merger organization plan. As of the end of fiscal 1999 the Company
evaluated the adequacy of the original provision and determined that the
estimate of the original provision was overstated by $277,000, or 3% of merger
and realignment expenses. Accordingly, this revision in estimate, primarily
related to non-cash charges, was reflected as a nonrecurring reduction in
operating expenses in 1999.
Interest Income. Interest income decreased to $84,000 in fiscal 1999, as
compared to $506,000 in 1998. Cash reserves available for investment were
greatly reduced near the end of 1998 and throughout 1999 as a result of the
merger and realignment expenses and operating losses incurred in 1999. With
respect to the merger, nonrecurring merger and realignment related expenses and
the net cash used to redeem outstanding preference shares consumed over $8
million in cash. Operating losses incurred in 1999 also contributed to the
decline in the level of cash available for investment. Only an immaterial amount
of cash payments related to the merger will be required in 2000.
Interest Expense. Interest expense increased to $199,000 in fiscal 1999, as
compared to $109,000 in 1998. The increase in interest expense is the result of
increased borrowings during 1999. The credit facilities utilized were with a
commercial bank in the United Kingdom and a commercial bank in the United
States. The increase in the average borrowing level was necessitated by the cash
consumed by merger related expenses and transactions as well as the operating
loss incurred in 1999.
Provision for Income Taxes. The provision for income taxes was $106,000 in
1999, as compared to $255,000 in 1998. Despite reported net losses the Company
did incur income related taxes in 1999 for state tax due in the U.S. and federal
tax due in France. The 1998 provision relates to state tax due in the US and tax
due in the UK. The Company recorded a valuation allowance on 100% of the losses
in 1999 due to the recent unfavorable operating results. As a result of the
significant net losses incurred in previous years, the Company has accumulated a
net operating loss ("NOL") carryforward, a portion of which was used to reduce
the Company's US federal income tax liability in fiscal years 1992 through 1997.
Pursuant to Section 382 of the Internal Revenue Code, a change in ownership of
the Company greater than 50%, as defined, within a three-year period occurred
twice, once in 1995 and once due to the merger with LSI in 1998. The Company's
US annual utilization limitation related to its NOL carryforward is now
$1,373,000.
The Company believes it is more likely than not that it will realize the net
deferred tax asset of $545,000 recorded in the balance sheet as of June 30, 1999
and accordingly no valuation allowance has been provided on this portion of the
asset. This conclusion is based on (1) changes in operations that have recently
occurred, including the acquisition of LSI, which management believes will
expand its product capabilities and customer base, (2) cost reductions or
synergies 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 the C6x
technology, (5) limitation of the net operating loss carryforwards, as described
above, related to the LSI merger, and (6) projections of sufficient taxable US
income to fully realize the net recognized 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.
14
<PAGE>
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
Net Sales. Net sales in 1998 were $32,679,000, a decrease of $1,709,000, or
5%, from the $34,388,000 reported in 1997. The decline in revenues is directly
attributable to the technology transition created by the advent of the
revolutionary new C6000 family of DSP's from TI. The majority of the Company's
products incorporate DSP's from TI. The first release of the C6000 DSP
represented a 10x improvement in performance over the existing widely available
DSP's. Commercial OEMs and defense contractors are now developing products that
utilize these next generation DSPs which, in turn, creates tremendous
opportunities for the Company in a number of emerging application areas such as
wireless communications and internet telephony. However, many of these
opportunities are at the expense of existing technologies that are available in
plentiful supply. Published reports also indicate broad industry adoption of the
C6000 DSP in a wide variety of next generation telecommunication products. On a
geographic basis revenues in North America were $13,332,000 in 1998 as compared
to $11,307,000 in 1997. Revenues to customers outside North America were
$19,347,000 in 1998 as compared to $23,081,000 in 1997. Revenues from the
Company's non-DSP products have continued to decline steadily and represented
$3,064,000, or 9% of net sales in 1998, as compared to $3,806,000, or 11% of net
sales in 1997.
Gross Margin. Gross margin as a percentage of net sales was 52.9% in fiscal
1998, as compared to 54.6% in 1997. The decline in gross margin percentage is
the result of inventory provisions taken in 1998 related to product scrap and
obsolescence. A significant portion of the provision for product obsolescence is
related to the technology transition discussed above. The Company's gross margin
percentage has varied each year, and each quarter, in both a positive and
negative fashion due to factors mentioned above, and changes in customer and
specific product mix. Such variations will continue to impact gross margin
percentages in future reporting periods.
Product Development and Engineering. Engineering expenses increased less than
1% to $6,991,000, or 21% of net sales in 1998, as compared to $6,959,000, or 20%
of net sales in 1997. Absolute spending did not change appreciably during this
timeframe as the Company continued to invest in new telecommunications and
military/aerospace products.
Sales and Marketing. Sales and marketing expenses increased 28% to
$8,065,000, or 25% of net sales in 1998, as compared to $6,315,000, or 18% of
net sales in 1997. This increase is due to the Company significantly expanding
its geographic sales and support coverage in Germany and the United States as
well as initial marketing expenditures to support the Company's
telecommunications market development efforts.
General and Administrative. General and administrative expenses decreased 26%
to $3,938,000, or 12% of net sales in 1998, as compared to $5,309,000, or 15% of
net sales in 1997. The decrease is due to the presence of several non-recurring
expenses in 1997 including settlement expenses aggregating $677,000 associated
with a dispute with LSI's former German distributor; and the recognition of
$340,000 of expenses associated with the employment agreement of David Irwin,
former President and CEO of Mizar and the executive search fees for his
successor. Other expenses incurred in 1997 related to IT and facility expansion.
Merger and Realignment Expenses. The Company incurred significant costs and
expenses to consummate the complex, cross-border transaction with LSI. Also, in
conjunction with the merger, the Company realigned its business operations in
order to better meet the needs of its customers, capitalize on the synergy
between Blue Wave and LSI and to strategically focus the Company on the growing
telecommunications market. In fiscal 1998, the Company recorded an $8,426,000
nonrecurring charge for merger and strategic realignment related costs and
expenses. In broad terms this provision includes all professional and statutory
fees relating to the combination, a non-cash charge related to LSI stock
options, and the cost necessary to execute the plan to streamline operations and
reduce the Company's cost base from that of two independent companies.
Approximately $4,800,000 of the total charge will result in a cash outlay and
approximately $3,600,000 of the fiscal 1998 charge was non-cash. In fiscal 1999,
the $277,000 reduction of the fiscal 1998 estimate reduced the total non-cash
charge to $3,300,000. Professional and statutory fees included legal,
accounting, investment banking, and printing fees for both companies as well as
a statutory transaction based tax in the UK, and SEC expenses in the US totaling
approximately $2,500,000. Other cash outlays, which include travel, excess lease
space, and employment severance, aggregated approximately $2,300,000. Of the
total provision that will result in cash outlay, approximately $2,700,000 was
paid in fiscal 1998 and an additional $1,700,000 was paid in fiscal 1999.
15
<PAGE>
The $3,300,000 non-cash portion provided for the vesting of stock options at
LSI as well as duplicate and excess assets that occurred as a result of merging
the two companies. The amount associated with the stock option provision was
approximately $2,700,000 and relates to the establishment of a vesting date for
LSI options as a result of the combination. Although reflected as a charge
against income this provision had no net impact on shareholders' equity since it
also increased paid-in-capital. See Note 3 to the Consolidated Financial
Statements.
Interest Income. Interest income declined to $506,000 in 1998, as compared to
$611,000 in 1997. In 1998, interest income declined due to a lower level of cash
available for investment attributable to cash payments associated with the
merger.
Interest expense. Interest expense declined to $109,000 in 1998, as compared
to $205,000 in 1997. The decrease in interest expense is due to debt reductions
made possible by utilizing the (Pounds)5,500,000 proceeds from the issuance of
the LSI preference shares in April 1997.
Provision for Income Taxes. The provision for income taxes was $255,000 in
1998. This provision relates to state tax due in the U.S. and tax due in the
U.K. The Company recorded a valuation allowance on 100% of the tax losses in
1998 due to the recent unfavorable operating results. As a result of the
significant net losses incurred in previous years, the Company has accumulated a
net operating loss ("NOL") carryforward, a portion of which was used to reduce
the Company's US federal income tax liability in fiscal years 1992 through 1997.
Pursuant to Section 382 of the Internal Revenue Code, a change in ownership of
the Company greater than 50%, as defined, within a three-year period occurred
twice, once in 1995 and once due to the merger with LSI in 1998. The Company's
US annual utilization limitation related to its NOL carryforward is now
$1,373,000.
Discontinued Operations. The Company provided $137,000 and $1,248,000 in 1998
and 1997, respectively, related to the discontinuance of a videoconferencing
product line being developed at LSI.
Liquidity and Capital Resources
The Company's cash flow used in operations was $2,423,000, $2,655,000 and
$262,000 in fiscal 1999, 1998 and 1997, respectively. Net working capital was
$4,618,000, $5,936,000 and $18,389,000 as of the end of fiscal 1999, 1998 and
1997, respectively. Merger related transactions have had a significant negative
impact upon the Company's working capital and cash flow from operations during
1998 and 1999 as did the Company's operating losses. The redemption of the
preference shares, net of a warrant exercise, consumed approximately $4,500,000
in cash in 1998. Merger and realignment related expenses consumed an additional
$1,700,000 and $2,700,000 of cash during 1999 and 1998, respectively.
Approximately $200,000 will be paid in fiscal year 2000 for merger related
expenses. The merger and realignment provision also included approximately
$700,000 of a non-cash provision for inventory and duplicate and excess assets.
These non-cash provisions further reduced reported working capital by
approximately $500,000. Approximately $1,200,000 was spent in 1998 for capital
additions and $280,000 was consumed for debt service. Additionally, a common
stock repurchase program at Mizar consumed $573,000 of cash during fiscal 1998.
This program was cancelled in December 1997.
The Company's investment in capital equipment was $701,000, $1,233,000 and
$1,842,000 in fiscal 1999, 1998 and 1997, respectively. Capital equipment
generally consists of production test equipment, design engineering tools, and
computers for general use. The Company's capital expenditure requirements have
declined in large part due to merger related synergies that also resulted in a
17% reduction in operating expenses.
The Company utilizes credit facilities to support its operations. As of June
30, 1999, $1,299,000 was outstanding under a facility with a commercial bank in
the United Kingdom. This facility is collateralized by the assets of the
Company's European operations, guaranteed by the U.S. parent company, bears
interest at the bank's base rate plus 1.75% and is due on demand. As of June 30,
1999, $408,000 was outstanding under a facility with a commercial bank in the
United States. This facility is collateralized by the assets of the Company's
U.S. operations, bears interest at the bank's base rate plus 1% and contains
financial covenants. As of June 30, 1999, the Company was in violation of all
its financial covenants under its agreement with the U.S. bank. In September
1999, all such violations were waived by the financial institution.
16
<PAGE>
On August 24, 1999, the Company completed a private placement of common stock
and warrants for consideration of $3,000,000 with an existing institutional
shareholder of the Company. The Company issued 1,200,000 common shares of stock
and two warrants for a total of 1,000,000 common shares. The first warrant is
for 500,000 common shares and has an exercise price of $3.50 per share. The
second warrant, also for 500,000 common shares, has an exercise price of $4.50
per share. Both warrants are callable by the Company if its common stock trades
above $5.50 per share and $6.50 per share, respectively, for a period of 10
consecutive days. The agreements governing the placement contain anti-dilution
and SEC registration requirements, as defined. The anti-dilution provisions
generally are triggered if the Company completes a financing or warrant issuance
below the price levels of this placement within defined time periods. The
Company will use the proceeds of the placement for general working capital
purposes including reducing current borrowing levels.
In connection with the establishment of an employee stock ownership plan
("ESOP"), which provides for the issuance of stock options for the benefit of
employees of Sub, 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.
Management believes that through its current cash resources, including
proceeds from the private placement, and currently available debt facilities it
will have adequate resources to fund the Company's 2000 operating plan. If the
Company incurs significant losses during fiscal year 2000, liquidity could be
significantly impaired if the Company's debt facilities are materially altered
or cancelled. In the event this occurred, the Company may find it necessary to
secure other sources of working capital.
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 is in the final stages of completing a detailed assessment of its
products and internal systems. The status of testing on the Company's product
range is available for customers on the Company's web site and this details the
Year 2000 conformity status of individual products. Specific customer requests
for Year 2000 information are dealt with on an individual basis. While the
Company is working closely with its suppliers of third party products to
ascertain their status, the Company cannot offer any assurances that these are
Year 2000 compliant and customers are advised to check with the appropriate
third party. The Company's customers are informed that, in the majority of
cases, Blue Wave products form only one component in a customer's system. The
Company therefore advises its customers that it is their responsibility to
ensure that their whole system is itself Y2K compliant.
From the Company's detailed assessment of its internal systems, the Company
has instigated a replacement program for those limited portions of software used
internally which were not Year 2000 compliant. The Company believes this program
will be complete in sufficient time before December 31, 1999 so that computer
systems will function properly with respect to dates beginning in 2000, and
thereafter. Year 2000 compliance questionnaires have been sent to key suppliers
and a monitoring process has been established to ensure the suppliers respond
and comply with the requirements.
Compliance testing of a substantial portion of the areas covered by the
Company's Y2K Plan was completed by March 31, 1999 and areas tested required
limited corrective action. Compliance testing of the remaining areas is
scheduled for completion by October 31, 1999. Any necessary corrective actions
are scheduled for completion by
17
<PAGE>
November 30, 1999. The total Year 2000 project cost is not expected to be
material in relation to the Company's financial position or results of
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 or customer of the
Company fails to be Y2K compliant, the Company could suffer a material loss of
business or incur significant additional expenses or consume additional working
capital.
Recently Issued Accounting Pronouncements
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
utilized derivative financial instruments.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Pursuant to the General Instructions to Item 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by Item 7A of Form 10-K and
by Item 305 of Regulation S-K does not require additional disclosure of the
Company at this time.
Item 8. Financial Statements and Supplementary Data
See Financial Statements beginning on page F-1.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
18
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Simon Yates 36 Chief Executive Officer and Director
Rob N. Shaddock 41 Executive Vice President, Director and Interim Chief Executive Officer
Sam K. Smith 67 Chairman of the Board of Directors (1) (2)
John L. Rynearson 52 Director (1) (2)
John R. Forrest 55 Director (1) (2)
Charles D. Brockenbush 39 Vice President Finance, and Chief Financial Officer
M. Keith Burgess 37 Chief Technology Officer
Julian S. Jenkins 34 President - Europe
Kevin Parslow 40 Vice President Worldwide Sales
</TABLE>
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Simon Yates became Chief Executive Officer and a director on the date of
combination, and prior to the combination, had served as Managing Director of
LSI since 1995. Mr. Yates joined LSI in 1984 and became a board member in 1988.
Mr. Yates was appointed LSI's Technical Director in 1990 and Director of PC
Products in 1992. Mr. Yates is currently on medical leave and is expected to
return near the end of calendar 1999.
Rob N. Shaddock joined LSI in October 1992 as Technical Director, when LSI
merged with Data Beta Ltd. He served as Marketing Director of LSI from 1997
until the time of the combination. In April 1998, he was named as Executive
Vice President and a director of Blue Wave Systems. Due to the current medical
leave of Mr. Yates, Mr. Shaddock was appointed Interim Chief Executive
Officer in July 1999.
Sam K. Smith has been a director since 1994, and interim Chief Executive
Officer of Mizar from June 1997 until April 1998. From 1984 until 1993, Mr.
Smith was a special partner of Sevin-Rosen Management Co., a venture capital
firm. In June 1997, Mr. Smith was named Chairman of the Board of Directors of
Mizar and continues to serve in that capacity for Blue Wave Systems. He serves
as a director of Hart Graphics, TD Technologies, and Fastsoft, Inc. and as
Interim CEO of Input/Output, Inc.
John L. Rynearson has been a director since 1982. Mr. Rynearson co-founded
Mizar in 1982 and held a variety of technical and managerial positions with
Mizar until 1991. He has served as the Technical Director of VITA (VME
International Trade Association) since 1993. From 1992 to 1993, he served as
President of Rystar, Inc., a VME training company. He is a director of Open
Systems Service Corporation, a subsidiary of VITA.
John R. Forrest, a director of LSI since 1996, was elected as a director of
the Company on the date of the combination. He was a Professor of Electronic
Engineering from 1970 to 1984 at University College London, following which he
joined Marconi Defense Systems as Technical Director. Between 1986 and 1991, he
was Director of Engineering at the Independent Broadcasting Authority. In 1991,
he was appointed Chief Executive of National Transcommunications Limited ("NTL")
from which he resigned in 1994. Since leaving NTL, Mr. Forrest has been engaged
in the management of investments and continues to serve as director of several
entities based in the United Kingdom.
Charles D. Brockenbush joined Mizar in January 1996 as Vice President-Finance
and Chief Financial Officer. From February 1995 to January 1996, he served as
Vice-President and Chief Financial Officer of TeKnowlogy, Inc. From 1988 to
1995, he served as Corporate Controller and Assistant Treasurer of Interphase
Corporation. In April 1998, he was named Vice President Finance, and Chief
Financial Officer of the Company.
19
<PAGE>
M. Keith Burgess joined Mizar in September 1989 and has served in a variety of
engineering and technical marketing management positions. He was named Vice
President-Advanced Technology of Mizar in January 1997, and in April 1998, was
named Chief Technology Officer for the Company.
Julian S. Jenkins joined LSI in September 1995 as Finance Director. At the
time of the combination, he was appointed as President - Europe, with
responsibility for all European operations. Prior to joining LSI, he was a
senior manager with a leading international accounting firm.
Kevin Parslow joined LSI in October 1992 when LSI merged with Data Beta, where
he was Sales and Marketing Director. In 1994, he was appointed as Sales
Director of LSI, and in April 1998, was named the Vice President of Worldwide
Sales for the Company.
Each of the Company's directors holds office until the next annual meeting of
stockholders and until their respective successors shall have been elected and
qualified or until their earlier death, resignation or removal. The Company's
officers are elected annually by, and serve at the discretion of, the Board of
Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the Annual Meeting of Stockholders' which will be
filed on or before October 28, 1999.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the Annual Meeting of Stockholders' which will be
filed on or before October 28, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the Annual Meeting of Stockholders' which will be
filed on or before October 28, 1999.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the Annual Meeting of Stockholders' which will be
filed on or before October 28, 1999.
20
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. and 2. Financial Statements and Financial Statement Schedules
These documents are filed with this report and are listed in the Index
to Financial Statements on page F-1.
3. Exhibits
A list of exhibits required to be filed as a part of this 10-K is set
forth in the Exhibit Index.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated September 7, 1999 related to
the private placement of common stock.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: September 24, 1999 By: /s/ Charles D. Brockenbush
------------------------------
Charles D. Brockenbush, Vice President and
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
By: /s/ Rob N. Shaddock Interim President and Chief Dated: September 24, 1999
- ------------------------------------- Executive Officer and Director
Rob N. Shaddock (Principal Executive Officer)
By: /s/ Simon Yates Director Dated: September 24, 1999
- -------------------------------------
Simon Yates
By: /s/ Charles D. Brockenbush Vice President, Finance Dated: September 24, 1999
- ------------------------------------ and Chief Financial
Charles D. Brockenbush Officer (Principal Financial
and Accounting Officer)
By: /s/ Sam K. Smith Chairman of the Dated: September 24, 1999
- ------------------------------------ Board of Directors
Sam K. Smith
By: /s/ John R. Forrest Director Dated: September 24, 1999
- ------------------------------------
John R. Forrest
By: /s/ John L. Rynearson Director Dated: September 24, 1999
- ------------------------------------
John L. Rynearson
</TABLE>
22
<PAGE>
BLUE WAVE SYSTEMS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of June 30, 1999 and 1998 F-3
Consolidated Statements of Operations For the Years Ended June 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Changes in Stockholders' Equity For the Years Ended June 30, 1999,
1998 and 1997 F-5
Consolidated Statements of Cash Flows For the Years Ended June 30, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts F-22
Report of Independent Accountants F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Blue Wave Systems Inc.:
We have audited the accompanying consolidated balance sheets of Blue Wave
Systems Inc. (formerly Mizar, Inc.) and subsidiaries (the "Company") as of June
30, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1999. The consolidated financial statements give
retroactive effect to the merger with Blue Wave Systems Ltd. (formerly
Loughborough Sound Images Limited) on April 27, 1998, which has been accounted
for as a pooling of interests as described in Note 1. These consolidated
financial statements and Supplemental Schedule II are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We did not audit the consolidated financial statements of Blue Wave Systems Ltd.
included in the restated consolidated financial statements of the Company for
fiscal year 1997, which statements reflect total revenues constituting 67% of
the related consolidated total. Those statements were audited by other auditors
whose report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Blue Wave Systems Ltd., is
based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of June 30, 1999 and
1998, and the results of its operations and its cash flows for each of the years
in the three-year period ended June 30, 1999, after giving retroactive effect to
the merger with Blue Wave Systems Ltd. as described in Note 1, all in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II listed in the
index to consolidated financial statements is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not a part
of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
August 24, 1999
(except with respect to
the matter discussed in
Note 8, as to which the
date is September 17, 1999)
F-2
<PAGE>
Blue Wave Systems Inc.
Consolidated Balance Sheets
As of June 30, 1999 and 1998
(in thousands, except par value per share)
<TABLE>
<CAPTION>
As of June 30,
1999 1998
ASSETS --------- --------
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 551 $ 1,060
Restricted cash 788 835
Marketable securities, at fair value -- 3,062
Accounts receivable, net of allowances of $198 and $336, respectively 6,266 4,975
Inventories, net 5,119 4,156
Prepaid expenses and other 541 612
Deferred tax asset 271 271
-------- --------
Total current assets 13,536 14,971
-------- --------
Plant and equipment:
Machinery and equipment 7,211 7,320
Furniture and fixtures 2,643 2,876
-------- --------
9,854 10,196
Less accumulated depreciation (6,584) (5,838)
-------- --------
Plant and equipment, net 3,270 4,358
-------- --------
Deferred tax asset-noncurrent 1,095 1,110
Other assets 77 105
-------- --------
Total assets $ 17,978 $ 20,544
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 5,071 $ 2,402
Accrued compensation 437 706
Other current liabilities 1,703 3,625
Lines of credit 1,707 2,302
-------- --------
Total current liabilities 8,918 9,035
-------- --------
Deferred income taxes 821 870
Noncurrent liabilities 104 366
Long-term debt, net of current maturities 788 835
-------- --------
Total liabilities 10,631 11,106
-------- --------
Stockholders' equity:
Preference stock, $.01 par value; 1,000 shares authorized; no shares
issued and outstanding at June 30, 1999 and 1998, respectively -- --
Common stock, $.01 par value; 50,000 shares authorized; 13,665 and 13,537
shares issued; 12,919 and 12,791 shares outstanding at June 30, 1999
and 1998, respectively 137 135
Additional paid-in capital 23,103 22,973
Accumulated deficit (14,231) (12,208)
Accumulated other comprehensive loss (261) (61)
-------- --------
8,748 10,839
-------- --------
Less -- treasury stock, at cost (1,401) (1,401)
-------- --------
Total stockholders' equity 7,347 9,438
-------- --------
Total liabilities and stockholders' equity $ 17,978 $ 20,544
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
Blue Wave Systems Inc.
Consolidated Statements of Operations
For the Fiscal Years Ended June 30, 1999, 1998, and 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Fiscal Years
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 27,351 $ 32,679 $ 34,388
Cost of sales 12,583 15,395 15,599
-------- -------- --------
Gross margin 14,768 17,284 18,789
Operating expenses:
Product development and engineering 5,590 6,991 6,959
Sales and marketing 7,959 8,065 6,315
General and administrative 3,375 3,938 5,309
Merger and realignment costs (277) 8,426 --
-------- -------- --------
Total operating expenses 16,647 27,420 18,583
-------- -------- --------
Operating income (loss) (1,879) (10,136) 206
-------- -------- --------
Other income (expense):
Interest expense (199) (109) (205)
Interest income 84 506 611
Other, net 77 189 77
-------- -------- --------
Total other income (expense) (38) 586 483
-------- -------- --------
Income (loss) from continuing operations before provision for income taxes (1,917) (9,550) 689
-------- -------- --------
Provision for income taxes 106 255 397
Income (loss) from continuing operations (2,023) (9,805) 292
Loss from discontinued operations, net of tax benefit of $0, $62,
and $560, respectively -- (137) (1,248)
-------- -------- --------
Net loss (2,023) (9,942) (956)
Preference share dividends, accretion and amortization of issuance costs
of preference shares -- (1,512) (874)
-------- -------- --------
Net loss applicable to common stock $ (2,023) $(11,454) $ (1,830)
======== ======== ========
Basic net loss per share:
Continuing operations $ (0.15) $ (0.89) $ (0.05)
Discontinued operations -- (0.01) (0.12)
-------- -------- --------
$ (0.15) $ (0.90) $ (0.17)
======== ======== ========
Diluted net loss per share:
Continuing operations $ (0.15) $ (0.89) $ (0.05)
Discontinued operations -- (0.01) (0.12)
-------- -------- --------
$ (0.15) $ (0.90) $ (0.17)
======== ======== ========
Weighted average common shares outstanding:
Basic 13,076 12,684 10,594
======== ======== ========
Diluted 13,076 12,684 10,594
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
Blue Wave Systems Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the Fiscal Years Ended 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Other Retained
Common Stock Paid-In Treasury Comprehensive Earnings
Shares Par Value Capital Stock Income (Loss) (Deficit) Total
------ --------- ------- -------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, beginning of fiscal 11,383 $ 114 $13,696 $ (586) $ 60 $ 4,323 $ 17,607
year 1997
Issuance of common shares 57 1 204 -- -- -- 205
Issuance of warrants -- -- 583 -- -- -- 583
Issuance of common shares
for exercise of stock options 5 -- 11 -- -- -- 11
Purchase of treasury stock,
at cost (625) (7) (3) (514) -- (2,258) (2,782)
Purchase of shares for ESOP -- -- -- (810) -- -- (810)
Payments on employee loans
for exercise of stock options -- -- 4 -- -- -- 4
Dividend, accretion and amorti-
zation of issuance costs -- -- -- -- -- (874) (874)
Tax effect of disqualifying
dispositions -- -- 263 -- -- -- 263
Net loss -- -- -- -- -- (956) (956)
Other comprehensive income:
Unrealized gain on
marketable securities -- -- -- -- 50 -- 50
Foreign currency translation -- -- -- -- 75 -- 75
--------
Comprehensive loss -- -- -- -- -- -- (831)
-------- -------- -------- -------- -------- -------- --------
BALANCE, end of fiscal year 1997 10,820 108 14,758 (1,910) 185 235 13,376
Issuance of common shares
and treasury stock for
exercise of stock options 814 8 371 220 -- -- 599
Loss on issuance of treasury
shares for option exercises -- -- -- 862 -- (862) --
Issuance of common shares
for exercise of warrants 1,903 19 5,552 -- -- -- 5,571
Purchase of treasury stock,
at cost -- -- -- (573) -- -- (573)
Variable stock option expense -- -- 2,741 -- -- -- 2,741
Write-off of preference share
issuance costs -- -- (449) -- -- -- (449)
Dividend, accretion and amorti-
zation of issuance costs -- -- -- -- -- (1,512) (1,512)
Net income from overlapping period
- LSI quarter ended 9/30/97 -- -- -- -- -- (564) (564)
Dividend, accretion and amorti-
zation of issuance costs of over-
lapping period -- -- -- -- -- 437 437
Net loss -- -- -- -- -- (9,942) (9,942)
Other comprehensive loss:
Unrealized gain on
marketable securities -- -- -- -- 16 -- 16
Foreign currency translation -- -- -- -- (262) -- (262)
--------
Comprehensive loss -- -- -- -- -- -- (10,188)
-------- -------- -------- -------- -------- -------- --------
BALANCE, June 30, 1998 13,537 135 22,973 (1,401) (61) (12,208) 9,438
Issuance of common shares
for exercise of stock options 128 2 99 -- -- -- 101
Payments on employee loans
for exercise of stock options -- -- 31 -- -- -- 31
Net loss -- -- -- -- -- (2,023) (2,023)
Other comprehensive loss:
Foreign currency translation -- -- -- -- (200) -- (200)
--------
Comprehensive loss -- -- -- -- -- -- (2,223)
-------- -------- -------- -------- -------- -------- --------
BALANCE, June 30, 1999 13,665 $ 137 $ 23,103 $ (1,401) $ (261) $(14,231) $ 7,347
======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
Blue Wave Systems Inc.
Consolidated Statements of Cash Flows
For the Fiscal Years Ended 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
For the Fiscal Years
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,023) $ (9,942) $ (956)
Adjustments to reconcile net loss to net cash
used by operating activities -
Depreciation 1,345 1,391 1,256
Loss on disposal of fixed assets 19 151 --
Variable stock option charge -- 2,741 --
Deferred tax provision (benefit) (34) (42) (230)
Changes in assets and liabilities -
Accounts receivable, net (1,291) 2,867 (2,069)
Inventories, net (963) 446 (253)
Prepaid expenses and other 99 914 (651)
Accounts payable and accrued liabilities 425 (1,181) 2,641
-------- -------- --------
Net cash used by operating activities (2,423) (2,655) (262)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery and equipment (701) (1,233) (1,842)
Proceeds from dispositions of machinery and equipment
and assets held for sale 53 -- 98
Purchases of marketable securities -- -- (3,398)
Proceeds from maturities of marketable securities 3,062 5,561 3,903
Proceeds from sales of marketable securities before maturity -- -- 1,360
-------- -------- --------
Net cash provided by investing activities 2,414 4,328 121
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of preference shares -- -- 8,914
Payment of preference shares issuance costs -- -- (827)
Purchase of ESOP shares -- -- (810)
Redemption of preference shares -- (10,023) --
Exercise of stock warrants and options (net of employee loans) 132 6,170 15
Net proceeds (net reductions) associated with bank borrowings (595) 2,302 810
Restricted cash in escrow -- -- (810)
Purchase of treasury stock -- (573) (2,782)
Net payments on long-term debt and capital lease obligations -- (284) (3,796)
-------- -------- --------
Net cash (used) provided by financing activities (463) (2,408) 714
-------- -------- --------
Effect of translation rates on cash (37) (47) 88
Effect of overlapping period -- (564) --
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (509) (1,346) 661
CASH AND CASH EQUIVALENTS, beginning of year 1,060 2,406 1,745
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 551 $ 1,060 $ 2,406
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 208 $ 130 $ 206
Cash paid for income taxes -- 263 1,090
Tax effect of disqualifying dispositions on stock options -- -- 263
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
BLUE WAVE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FISCAL YEARS 1999, 1998, AND 1997
---------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Blue Wave Systems Inc. (formerly Mizar, Inc.) (a Delaware corporation) (the
"Company", "Blue Wave" or "BWS Inc.") designs, develops and markets programmable
Digital Signal Processing ("DSP") computing sub-systems that are used in
telecommunications, communications analysis, medical imaging, radar, sonar and
other systems. The Company's products are typically sold to original equipment
manufacturers, systems integrators, research organizations, and
military/aerospace contractors who integrate the Company's products into their
own products or equipment. The Company continues to sell its prior generation of
non-DSP computing sub-systems primarily to existing commercial customers for
industrial automation applications. The Company was formed in April 1998 upon
the combination of Mizar, Inc. ("Mizar") and Loughborough Sound Images Limited
("LSI"), a company based in the United Kingdom.
Blue Wave Systems Limited ("Blue Wave Sub" or "Sub") (formerly Loughborough
Sound Images Limited or "LSI") was incorporated in England in 1983 and is
registered as a private limited company. Blue Wave Sub, and its wholly owned
subsidiaries, are collectively referred to herein as "Sub" or "LSI."
Certain previously reported amounts have been reclassified to conform with
current year presentation.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with United States generally accepted accounting
principles. They give retroactive effect, for all periods presented, to the
combination with Sub on April 27, 1998, which has been accounted for as a
pooling of interests (see Note 3). The financial statements presented for fiscal
year 1997 have been restated to reflect the business combination.
The accompanying restated consolidated statements of operations, stockholders'
equity and cash flows combine Blue Wave's historical statements of operations,
stockholders' equity and cash flows for the period ended June 30, 1997, with the
corresponding Sub historical statements of operations, stockholders' equity and
cash flows for the period ended September 30, 1997 (as combined, the "fiscal
year 1997"). The restated consolidated statement of stockholders' equity for
the year ended June 30, 1997 reflects the exchange of each Sub common share for
94.632 shares of Blue Wave common stock (see Note 3).
Foreign Currency Translation
The functional currency of Sub is the United Kingdom pound sterling ("pound
sterling") and the functional currency of BWS Inc. is the US dollar.
The historical financial statements of Sub have been translated into US
dollars ("$") from pound sterling ("Pounds" or "(Pounds)") using the exchange
rate at each balance sheet date for assets and liabilities, average exchange
rate for each period for net sales, costs, expenses and other income and
expenses, and at historical rates for stockholders' equity. Translation
adjustments have been recorded as a component of other accumulated comprehensive
income in the accompanying consolidated statement of stockholders' equity.
F-7
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents include cash placed in money market funds or
investments in highly liquid securities with original maturities of three months
or less.
Restricted Cash
In connection with the establishment of an employee stock ownership plan
("ESOP"), Sub has guaranteed the debt of the ESOP. The guarantee required Sub
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 (see Note 14).
Marketable Securities
The Company has determined that all of its marketable securities should be
classified as available for sale and reflected in the accompanying consolidated
balance sheets 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 US Government, certificates of deposit,
and investment grade corporate debt securities.
The Company did not invest in or use derivative financial instruments during
the periods presented.
Inventories
Inventories are stated at the lower of cost (including direct materials,
labor, and applied overhead) or market using the first-in, first-out method
(FIFO). The Company periodically reviews inventory items on hand and provides
allowances, if necessary, to reduce inventory to its estimated realizable value.
Property, Plant, and Equipment
Property, plant and equipment, including assets under capital lease, are
carried at cost and depreciated using the straight-line method over the
estimated economic lives of the assets as follows:
Buildings/leasehold improvements 7 - 25 years
Equipment 3 - 5 years
Furniture and fixtures 2 - 5 years
Software 1 - 3 years
Repair and maintenance expenditures are charged to expense as incurred, and
expenditures for major renewals and betterments are capitalized.
When property, plant and equipment are sold or otherwise retired, the cost and
accumulated depreciation applicable to such assets are eliminated from the
accounts, and any resulting gain or loss is reflected in current operations.
The Company assesses the realizability of long-lived assets in accordance with
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Revenue Recognition
Revenue from product sales is recorded only when the earnings process is
completed, which is principally when the product is shipped.
F-8
<PAGE>
Research and Development
Research and development costs are included in and inseparable from product
development and engineering expenses and are charged to expense as incurred. No
research and development costs are capitalized.
Income Taxes
The Company uses the liability method to determine deferred taxes. Deferred
tax assets and liabilities are based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of enacted tax law. Management continually
evaluates the realizability of the net deferred tax assets and the need for
additional valuation allowances on such assets.
Net Income (Loss) Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share" (SFAS No. 128). This statement established a new methodology for
calculating earnings per share ("EPS"). All periods presented in the
accompanying consolidated financial statements have been restated to conform
with the requirements of SFAS No. 128. Basic net income (loss) per share is
computed by dividing net income (loss) available to common shareholders by the
weighted average common shares outstanding. Diluted net income (loss) per share
is computed by dividing net income (loss) available to common shareholders by
the weighted average common shares outstanding, including dilutive securities if
net income exists.
The Company has elected to follow the proforma disclosure requirements
promulgated by SFAS No. 123, "Accounting for Stock-based Compensation", and has
opted to continue to account for the stock option plan under APB Opinion No. 25,
under which no compensation cost has been recognized in the accompanying
consolidated statements of operations. The proforma disclosure can be found in
Note 14 to the consolidated financial statements.
Warrant
On September 28, 1995, the Company completed an initial public offering
("IPO") of 918,000 shares of common stock. The Company sold John G. Kinnard and
Company, Incorporated, as an underwriter of the IPO, a five-year warrant to
purchase up to 15,000 shares of the Company's common stock, exercisable at
$10.20 per share. As of June 30, 1999, this warrant had not been exercised.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
Management believes the recorded values of financial instruments approximate
their current fair values as such items are current in nature and/or generally
bear variable interest rates which adjust yield to derive current market value.
Recently Issued Accounting Pronouncements
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
utilized derivative financial instruments.
F-9
<PAGE>
2. HISTORICAL OPERATING LOSSES AND OPERATING ENVIRONMENT:
During the last two years, the Company has incurred net losses of $2,023,000
and $9,942,000 (inclusive of a $8,426,000 merger and realignment provision) in
fiscal 1999 and 1998, respectively. The loss in 1999 is primarily the result of
production related problems involving the Company's military/aerospace product
line, and technological changes impacting the Company's served markets which
have, in the near term, decreased the Company's revenues. These losses have
negatively impacted the Company's working capital.
Should these production related problems continue or the Company's new
products do not achieve an acceptable level of market penetration the Company
would likely incur quarterly and annual operating losses during fiscal 2000
which would consume additional working capital. At June 30, 1999, the Company
had working capital of $4,618,000 which, on a proforma basis, increases to
approximately $7,560,000 after consideration of the Company's $3 million private
placement of common stock which closed on August 24, 1999 (see Note 16).
In the event the Company experiences continued operating losses in 2000 and,
continues to consume working capital the financial institutions which currently
provide the Company with credit facilities might alter such facilities. In this
circumstance, the Company may seek alternative sources of working capital.
However, if such events occur management believes that the Company will have
adequate working capital to fund its operations throughout fiscal year 2000.
3. COMBINATION WITH SUB:
On April 27, 1998, Mizar, Inc. and Sub completed the combination announced in
November 1997. The combination was completed via a share exchange with the
Company issuing 7,876,964 common shares of the Company (the "Common Stock") to
Sub shareholders in exchange for all outstanding Sub shares. BWS Inc. also
issued options exercisable for approximately 564,000 shares of Common Stock in
exchange for the outstanding Sub options. The foregoing issuances were based
upon the exchange ratio of 94.632 shares of Common Stock for each ordinary share
of Sub transferred to the Company, including shares issuable under options. The
Company incurred significant costs and expenses to consummate this complex,
cross-border transaction. Also, in conjunction with the merger, the Company
realigned its business operations in order to better meet the needs of its
customers, capitalize on the synergy between Blue Wave and LSI and to
strategically focus the Company on the growing telecommunications market.
In fiscal 1998, the Company recorded an $8,426,000 nonrecurring charge for
merger and strategic realignment related costs and expenses. In broad terms this
provision includes all professional and statutory fees relating to the
combination, a non-cash charge related to LSI stock options, and the cost
necessary to execute the plan to streamline operations and reduce the Company's
cost base from that of two independent companies. Approximately $4,800,000 of
the total charge will result in a cash outlay and approximately $3,600,000 of
the charge was non-cash. The $3,600,000 non-cash portion provided for the
vesting of stock options at LSI as well as duplicate and excess assets that
occurred as a result of merging the two companies. The amount associated with
the stock option provision was approximately $2,700,000 and relates to the
establishment of a vesting date for LSI options as a result of the combination.
Although reflected as a charge against income this provision had no net impact
on shareholders' equity since it also increased paid-in-capital. Professional
and statutory fees included legal, accounting, investment banking, and printing
fees for both companies as well as a statutory transaction based tax in the UK,
and SEC expenses in the US totaling approximately $2,500,000. Other cash
outlays, which
F-10
<PAGE>
include travel, excess lease space, and employment severance, aggregated
approximately $2,300,000. Of the total provision that will result in cash
outlay, approximately $2,700,000 was paid in fiscal 1998 and an additional
$1,700,000 was paid in fiscal 1999. Approximately $200,000 will be paid in
fiscal year 2000.
In fiscal 1999, the Company revised its estimate of certain merger and
realignment charges. This resulted in a reduction of certain accruals. This
change in estimate is reflected as a reduction to the merger and realignment
costs of $277,000, primarily consisting of noncash charges, in the accompanying
consolidated statement of operations. As of June 30, 1999, approximately
$353,000 of reserves, primarily for excess facilities and assets, is recorded in
the accompanying consolidated balance sheet. The following table presents a
summary of the remaining reserves for these expenses, as of June 30, 1999 and
1998, respectively.
<TABLE>
<CAPTION>
Balance Sheet Classification 1999 1998
---------------------------- ---------- -----------
<S> <C> <C>
Inventory, net $ -- $ 566,000
Accumulated depreciation -- 170,000
Reserves included in other current liabilities 249,000 1,536,000
Reserves included in noncurrent liabilities 104,000 366,000
Accrued compensation -- 438,000
</TABLE>
In conjunction with completion of the business combination, there was a
redemption, in cash, of redeemable preference shares of Sub owned by Boston
Holdings Limited as well as an exercise of warrants for common stock of Sub,
also owned by Boston Holdings Limited, which were then exchanged into 1,903,522
shares of Common Stock. The preference shares and warrants of Sub were
mandatorily redeemable on the sale or merger of Sub (see Note 16). The resultant
net impact of these transactions with Boston Holdings Limited on cash in fiscal
1998 to the combined companies was a net outlay of approximately $4,500,000.
The table below presents a reconciliation of revenues and net income, as
reported in the consolidated statements of income 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 (amounts in table
are in thousands).
Fiscal Years Ended
---------------------------
1998 1997
--------- ----------
REVENUES:
Blue Wave $ 12,111 $ 11,507
Sub 20,568 22,881
--------- ----------
Total consolidated revenues $ 32,679 $ 34,388
========= ==========
NET LOSS:
Blue Wave $ (5,677) $ 179
Sub (4,265) (1,135)
--------- ----------
Total consolidated net loss $ (9,942) $ (956)
========= ===========
Included in the net loss of Sub for fiscal years 1998 and 1997 are losses
from discontinued operations of $137,000 and $1,248,000, respectively (net of
income tax benefits of $62,000 and $560,000, respectively). See Note 11.
4. INVENTORIES:
Net inventories at fiscal year-end 1999 and 1998, consisted of the
following (in thousands):
1999 1998
------- -------
Raw materials $ 2,326 $ 1,908
Work-in-process 2,185 1,969
Finished goods 1,705 1,893
Reserves (1,097) (1,614)
------- -------
Inventories, net $ 5,119 $ 4,156
======= =======
F-11
<PAGE>
5. OTHER CURRENT LIABILITIES:
At fiscal year-end 1999 and 1998, other current liabilities consisted of the
following (in thousands):
1999 1998
------- -------
Sales representative commissions $ 383 $ 53
Property tax 38 43
Warranties 207 360
Accrued franchise tax and income tax payable 161 152
Professional services and other 185 233
Merger and realignment 249 1,536
Taxes payable, other than income 376 351
Other current liabilities 104 897
------ ------
$1,703 $3,625
====== ======
6. ROYALTIES:
During fiscal year 1999, the Company paid royalties of $90,000, which were
primarily related to an agreement with an engineering service provider which
provides for royalties to be paid upon sales of a specific product. During the
fiscal years 1998 and 1997, the Company paid royalties of $105,000 and $235,000,
respectively, which were primarily related to license agreements with Texas
Instruments Incorporated ("TI"). The license agreements allow the Company to use
certain products in its DSP sub-system business. The royalties due pursuant to
the majority of these licensing agreements were fully paid up in fiscal 1997. On
July 11, 1997, TI completed the sale of its DSEG group to Raytheon Company. TI
and the Company have executed an agreement whereby all of TI's rights and
interests in the licensing agreements have been assigned to Raytheon Company.
7. MARKETABLE SECURITIES:
There were no marketable securities held at June 30, 1999. A summary of the
amortized cost, unrealized gains and losses, and fair values of available for
sale marketable securities at fiscal year-end 1998 is shown in the table below
(in thousands):
1998
-----------------------------
Gross
Unrealized Holding
Amortized Gains Fair
Type of Security Cost (Losses) Value
------------------------ ---------- -------- -------
US government $1,840 $ 3 $1,843
Corporate bonds 1,221 (2) 1,219
Certificate of deposit
------ --- ------
Totals $3,061 $ 1 $3,062
====== === ======
A comparison of the amortized cost and fair value of the Company's available
for sale marketable securities at fiscal year-end 1998, all of which were due in
one year or less, approximated $3,061,000 and $3,062,000 at amortized cost and
fair value, respectively.
8. DEBT:
Line of Credit
The Company utilizes credit facilities to support its operations. As of June
30, 1999, $1,299,000 was outstanding under a facility with a commercial bank in
the United Kingdom, with approximately $1,600,000 in aggregate availability
under such credit facility. This facility is collateralized by the assets of the
Company's
F-12
<PAGE>
European operations, guaranteed by the U.S. parent company, bears interest at
the bank's base rate plus 1.75% and is due on demand. As of June 30, 1999,
$408,000 was outstanding under a facility with a commercial bank in the United
States. This facility is collateralized by the assets of the Company's U.S.
operations, bears interest at the bank's base rate plus 1% and contains
financial covenants. As of June 30, 1999, the Company was in violation of all
its financial covenants under its agreement with the U.S. bank. On September 17,
1999, all such violations were waived by the financial institution.
Long-term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following (in thousands):
1999 1998
---------- ----------
<S> <C> <C>
Note payable to a commercial bank, interest
at the bank's base rate, plus 1.5%
(total rate of 6.5% at fiscal year-end 1999);
renewed annually; secured by
escrow of cash in the same amount $ 788 $ 835
========= ==========
</TABLE>
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.
9. 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 presenting 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,
pursuant to APB Opinion No. 15. The net loss per share information for fiscal
year 1997 has been restated to reflect the new standard.
Basic net loss per share for each of the three fiscal years ended 1999 were
computed by dividing net loss applicable to common stock by the weighted average
number of shares of common stock outstanding during the periods presented, as
adjusted, on a historical basis, for the exchange ratio in the combination (Note
3). Diluted net loss per share for each of the three fiscal years ended 1999,
were computed by dividing net loss applicable to common stock by the weighted
average number of shares of common stock outstanding. Other dilutive securities
outstanding during these periods were anti-dilutive to the net loss per share
calculation. Other 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. Shares used in basic
and diluted net loss per share calculations for the fiscal years 1999, 1998, and
1997 are presented below (in thousands):
<TABLE>
<CAPTION>
Basic
-----------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Weighted average common stock outstanding
during the period 13,076 12,684 10,594
====== ====== ======
Diluted
-----------------------
Weighted average common stock outstanding
during the period 13,076 12,684 10,594
Other dilutive securities of stock option/warrant programs N/A N/A N/A
------ ------ ------
Shares used in net loss per share calculation 13,076 12,684 10,594
====== ====== ======
</TABLE>
Dilutive securities equivalent to 646,000, 990,000 and 1,199,000 shares of
common stock were outstanding during 1999, 1998 and 1997, respectively, but were
not included in the computation of diluted EPS because the Company incurred net
losses attributable to common shareholders. The inclusion of these options would
have been anti-dilutive to diluted EPS.
F-13
<PAGE>
10. COMMITMENTS AND CONTINGENCIES:
The Company leases certain buildings and equipment under operating leases.
Rent expense applicable to operating leases was $1,316,000, $1,337,000 and
$1,093,000 for the fiscal years 1999, 1998 and 1997, respectively. At fiscal
year-end 1999, the future minimum lease payments required by operating leases
were as follows (in thousands):
2000 $ 1,245
2001 1,143
2002 1,113
2003 994
2004 970
Thereafter 13,499
In prior periods, the Company has been party to certain legal proceedings
incidental to its business. The Company accrues for claims that are both
probable and for which expected loss can be reasonably estimated. Currently,
there are no known claims pending against the Company.
11. DISCONTINUED OPERATIONS:
In April 1997, Sub adopted a plan to discontinue its Video Multimedia Group
("VMG") operations in order to focus resources on its digital signal processing
products. The VMG operations principally designed, manufactured, and sold
products for the video conferencing industry. These activities operated as a
distinct business segment, the results of which have been separately disclosed
as discontinued operations in the accompanying consolidated statements of
operations. The VMG operations were fully abandoned by September 30, 1997. There
were no sales of VMG in fiscal 1999 or 1998, and $277,000 of sales of VMG for
fiscal year 1997.
12. SIGNIFICANT CUSTOMERS, RECEIVABLES, AND CONCENTRATION OF CREDIT RISK:
The following table summarizes sales by major customer group and gross
accounts receivable by major customer group for the fiscal years 1999, 1998 and
1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
SALES BY CUSTOMER GROUP:
Commercial and other $20,327 $25,135 $27,433
Prime contractors to the US government 7,024 7,544 6,955
------- ------- --------
$27,351 $32,679 $34,388
======= ======= ========
1999 1998
------- -------
ACCOUNTS RECEIVABLE BY CUSTOMER GROUP:
Commercial and other $ 4,751 $ 4,090
Prime contractors to the US government 1,713 1,221
------- -------
$ 6,464 $ 5,311
======= =======
</TABLE>
During 1999, no customer individually accounted for more than 10% of net
sales. During 1998, one customer accounted for 13% of net sales. During 1997,
one customer accounted for 14% of net sales.
13. OPERATING SEGMENTS:
Effective July 1, 1998, the Company adopted SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." SFAS 131 requires companies
to identify their operating segments based upon the internal financial
information reported to the company's chief operating decision maker. Financial
information is reported to the CEO by geographical region and reflects two
business segments: North America and Outside of North America. The CEO evaluates
the
F-14
<PAGE>
performance of these segments based upon operating income. The accounting
policies of these segments are the same as those described in Note 1 to the
consolidated financial statements.
Revenues in North America are derived from all of the Company's customer
groups. Revenues outside of North America are derived primarily from
telecommunications and other commercial customers.
The Company's net sales, merger and realignment costs, operating income,
capital expenditures, depreciation and identifiable assets by operating segment
were as follows (in thousands):
<TABLE>
<CAPTION>
North Outside of
America North America Total
-------- -------------- ---------
<S> <C> <C> <C>
1999
----
Net sales $ 9,667 $17,684 $ 27,351
Merger and realignment costs (127) (150) (277)
Operating income (loss) (3,045) 1,166 (1,879)
Capital expenditures 214 487 701
Depreciation 468 877 1,345
Identifiable assets 6,052 11,926 17,978
1998
----
Net sales 13,332 19,347 32,679
Merger and realignment costs 5,520 2,906 8,426
Operating income (loss) (7,217) (2,919) (10,136)
Capital expenditures 531 702 1,233
Depreciation 566 825 1,391
Identifiable assets 10,125 10,419 20,544
1997
----
Net sales 11,307 23,081 34,388
Operating income (loss) (822) 1,028 206
Capital expenditures 1,142 700 1,842
Depreciation 440 816 1,256
Identifiable assets 16,955 14,600 31,555
</TABLE>
The percentages of net sales by country of origination that were in excess of
10% of total net sales in fiscal 1999, 1998 and 1997 were: the United States
with 35%, 41% and 33%, respectively, and the United Kingdom with 51%, 47% and
58%, respectively.
F-15
<PAGE>
14. EMPLOYEE BENEFIT PLANS:
SFAS No. 123 Disclosure
The Company accounts for its stock option plan and its employee stock
ownership plan in accordance with APB Opinion No. 25, under which no
compensation cost has been recognized in the accompanying consolidated
statements of operations. Had compensation cost been determined pursuant to the
fair value recognition provisions of SFAS No. 123, the cost would have been
$195,000, $250,000 and $131,000 for fiscal 1999, 1998 and 1997, respectively.
The Company's proforma net loss applicable to common stock for fiscal 1999, 1998
and 1997 would have been $(2,218,000), $(11,704,000) and $(1,961,000)
respectively, resulting in a diluted net loss per share of $(0.17), $(0.92) and
$(0.19), respectively. The fair value of each option grant is estimated on the
date of grant using the Black Scholes option pricing model with the following
weighted-average assumptions used for options granted in fiscal 1999, 1998 and
1997: risk-free interest rate of 4.59%, 5.64%, and 6.14%, respectively; expected
volatility of 65.49%, 67.09%, and 69.3%, respectively; expected dividend yield
of zero and expected lives of 3 years.
Stock Option Plan
The Company has a stock option plan, which includes nonqualified and incentive
stock options, for directors and employees. The total number of shares
underlying options is approximately 2,500,000 and the options are granted at
fair value as determined by the Board of Directors. Options are exercisable on a
schedule determined by the Board of Directors and expire 10 years after the date
of grant or earlier, in accordance with the terms of the plan.
All options are granted at fair value on the date of grant. There have been no
grants of equity instruments other than options in the periods presented. The
following summarizes the activity under the plan (number of shares in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ---------------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------- ------------- -------------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of the year 1,254 $2.17 2,173 $2.11 2,147 $2.18
Options granted 252 2.66 224 4.68 286 4.21
Options exercised (128) .78 (1,095) .55 (5) 2.21
Options forfeited (100) 4.77 (48) 5.37 (255) 5.12
------ ------- -----
Options outstanding,
end of year 1,278 2.19 1,254 2.17 2,173 2.11
====== ======= =====
Options exercisable,
end of year 838 1.52 864 1.18 1,170 1.16
====== ======= =====
</TABLE>
Exercise price range $.15 to $9.13 $.15 to $9.13 $.15 to $9.13
F-16
<PAGE>
The following table summarizes information about the outstanding and
exercisable stock options at fiscal year-end 1999 (number of shares in
thousands):
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
------------------------------------ -------------------------
Weighted
Weighted Average Weighted
Shares Average Remaining Shares Average
Range of at Fiscal Exercise Contractual at Fiscal Exercise
Exercise Prices Year-End 1999 Price Life Year-End 1999 Price
- ----------------- ------------- -------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ .15 to $2.89 872 $ .98 5.1 years 666 $ .46
$3.25 to $4.88 275 3.92 8.2 years 78 4.21
$5.00 to $6.75 91 5.82 7.3 years 62 5.88
$8.38 to $9.13 40 8.43 6.5 years 32 8.44
----- -----
1,278 838
===== =====
</TABLE>
Employee Stock Ownership Plan
In April 1997, Sub established an employee stock ownership plan (the "ESOP")
for the benefit of employees of Sub. The ESOP borrowed (Pounds)500,000
($788,000) from a commercial bank and used the proceeds to purchase 2,358 shares
(approximately 223,000 equivalent Blue Wave shares) of Sub's ordinary shares
from a director of Sub at (Pounds)212 (approximately $343) per share which was
estimated to be the fair value of Sub's ordinary shares. Sub has guaranteed the
debt of the ESOP and has placed in escrow cash in an amount equal to the debt.
Sub has reflected the guaranteed ESOP debt and a corresponding amount of
guaranteed ESOP obligations as a reduction of stockholders' equity in the
consolidated balance sheet at fiscal year-end 1999 and 1998. Interest payments
in 1999, 1998 and 1997 were $72,000, $76,000 and $35,000, respectively.
Under the terms of the ESOP, there are approximately 223,000 shares available
for the grant of stock options. The options are granted at fair value and are
exercisable on a schedule as determined by the Board of Directors. These options
expire 10 years after the date of grant or earlier, in accordance with the terms
of the stock option agreements. Substantially all of the shares acquired were
allocated as stock option grants to employees of Sub during fiscal 1999, as
shown in the table below (number of shares in thousands):
<TABLE>
<CAPTION>
1999
------------------------
Weighted
Average
Exercise
Options Price
----------- ------------
<S> <C> <C>
Options outstanding,
beginning of the year - $ -
Options granted 223 2.98
Options exercised - -
Options forfeited - -
----- --------------
Options outstanding,
end of year 223 $2.98
===== ==============
Options exercisable,
end of year 75 $3.69
===== ==============
Exercise price range $2.63 to $3.69
</TABLE>
Of the 223,000 options granted in fiscal 1999, there were 148,000 granted
at an exercise price of $2.63 per share. None of the 148,000 options granted
were exercisable at June 30, 1999, and the weighted average remaining
contractual life of these options was 9.3 years as of June 30, 1999. There were
75,000 options granted at an exercise
F-17
<PAGE>
price of $3.69 per share that were fully exercisable at June 30, 1999, and these
have a weighted average remaining contractual life of 3.6 years.
Bonus Plan
Key full-time employees of the Company are eligible to participate in a bonus
program in which yearly bonus amounts are calculated on a predetermined
performance formula. There were $0, $26,000 and $23,000 of bonuses earned in
1999, 1998 and 1997, respectively, related to this plan. Bonuses, if earned, are
included in accrued compensation in the accompanying consolidated financial
statements.
Defined Contribution Plan and Employee Savings Plan
The Company maintains a defined contribution profit sharing and retirement
plan for substantially all US employees. Participants may elect to contribute
up to the lesser of the statutory maximum or 20% of total compensation. The
Company made total contributions to this plan of $36,000, $35,000 and $15,000 in
1999, 1998 and 1997, respectively.
Other
Certain officers of the Company, including its Chief Executive Officer, have
entered into employment contracts with the Company. These agreements define,
among other items, the terms of employment, remuneration, and notice periods for
termination.
David Irwin, former President and CEO of the Company, who resigned in June
1997, had an employment agreement that provided for one year of compensation for
termination under certain circumstances. The Company accrued approximately
$250,000 in the fiscal year ended 1997, related to Mr. Irwin's resignation from
the aforementioned positions.
15. INCOME TAXES:
At fiscal year-end 1999, Blue Wave had federal and foreign net operating loss
(NOL) carryforwards of approximately $11,000,000 and $3,000,000, respectively,
which begin to expire in 2002. Research and development tax credit carryforwards
of approximately $41,000 at fiscal year ended 1998, were also available to
reduce future federal income taxes. Pursuant to Section 382 of the Internal
Revenue Code, a change in ownership occurred 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
in 1998. As a result, Blue Wave will be subject to a $1,373,000 annual net
operating loss utilization limitation. Blue Wave had net deferred tax assets of
$545,000 and $511,000 at fiscal year ended 1999 and 1998, respectively.
The components of the income tax provisions in the accompanying consolidated
statements of operations consisted of the following (in thousands):
<TABLE>
<CAPTION>
CONTINUING OPERATIONS: 1999 1998 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
State-
Current 14 $ 31 $ 70
Deferred 6 -- --
Federal-
Current -- -- 557
Deferred (518) (797) (182)
Foreign-
Current 106 224 --
Deferred (390) (96) --
Increase (decrease) in valuation allowance 908 893 (48)
----- ----- -----
Provision for income taxes 106 255 397
DISCONTINUED OPERATIONS Foreign current -- (62) (560)
----- ----- -----
$ 106 $ 193 $(163)
===== ===== =====
</TABLE>
F-18
<PAGE>
The US and foreign components of income (loss) from continuing operations
before income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
US $(1,789) $(5,646) $ 211
Foreign (128) (3,904) 478
------- ------- -------
Income (loss) from continuing operations $(1,917) $(9,550) $ 689
======= ======= =======
</TABLE>
The difference between the federal statutory tax rate and the effective tax
rate for continuing operations is reconciled as follows (in thousands):
<TABLE>
<CAPTION>
1999 % 1998 % 1997 %
------- --- ------- ---- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Income (loss) tax provision at statutory rate $ (651) (34)% $(3,247) (34)% $ 222 32%
Utilization of NOL -- -- -- -- (61) (9)
Deduction for state taxes 14 1 31 -- 70 10
Increase (reduction) in valuation allowance 555 29 443 5 (48) (7)
Unrecognized losses -- -- -- -- 332 48
Capital allowance on ineligible property -- -- -- -- (57) (8)
Foreign losses not tax benefited 105 6 1,317 14 -- --
Non-deductible merger costs -- -- 1,538 16 -- --
Other 83 4 173 2 (61) (8)
------- --- ------- ---- ------- ---
$ 106 6% $ 255 3% $ 397 58%
======= === ======= ==== ======= ===
</TABLE>
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial reporting and tax bases of assets and
liabilities given the provisions of the enacted tax laws. The net deferred tax
asset (liability) is comprised of the following (in thousands):
1999 Change 1998
------- ------- -------
DEFERRED TAX ASSET:
Current-
Merger related reserves $ -- $ (291) $ 291
Accruals/reserves 367 (41) 408
Other 181 (23) 204
Noncurrent-
Accruals/reserves -- -- --
Depreciation 71 -- 71
Net operating losses 4,753 1,248 3,505
------- ------- -------
5,372 893 4,479
Valuation allowance (4,006) (908) (3,098)
------- ------- -------
$ 1,366 $ (15) $ 1,381
------- ------- -------
DEFERRED TAX LIABILITY:
Noncurrent-
Noncurrent depreciation (821) 49 (870)
------- ------- -------
$ (821) $ 49 $ (870)
------- ------- -------
Net deferred tax asset $ 545 $ 34 $ 511
======= ======= =======
The Company believes it is more likely than not that it will realize
the net deferred tax asset of $545,000 recorded in the balance sheet as of June
30, 1999 and accordingly no valuation allowance has been provided on this
portion of the asset. This conclusion is based on (1) changes in operations that
have recently occurred, including the acquisition of LSI, 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 the
C6000 technology, (5) limitation of the net operating loss carryforwards, as
described above, related to the LSI merger, and (6) projections of sufficient
taxable US income to fully realize the net recognized deferred tax asset
F-19
<PAGE>
by the end of 2000. Management continually evaluates the realizability of the
net deferred tax assets and the need for a valuation allowance on such assets.
16. CAPITAL STOCK:
Common stock
In May 1997, Blue Wave announced a plan to repurchase up to $1,000,000 worth
of the common stock outstanding. As of fiscal year-end 1997, 144,400 shares had
been repurchased for a total of $509,000. In August 1997, Blue Wave announced a
$1,000,000 expansion to its common stock repurchase plan. As of September 12,
1997, a total of 281,900 shares had been repurchased for a total of $1,081,000
since the commencement of the program in May. 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.
On August 24, 1999, the Company completed a private placement of common stock
and warrants for consideration of $3,000,000 with an existing institutional
shareholder of the Company. The Company issued 1,200,000 common shares of
stock and two warrants for a total of 1,000,000 common shares. The first warrant
is for 500,000 common shares and has an exercise price of $3.50 per share. The
second warrant, also for 500,000 common shares, has an exercise price of $4.50
per share. Both warrants are callable by the Company if its common stock trades
above $5.50 per share and $6.50 per share, respectively, for a period of 10
consecutive days. The agreements governing the placement contain anti-dilution
and SEC registration requirements, as defined. The anti-dilution provisions
generally are triggered if the Company completes an offering or warrant issuance
below the price levels of this placement within defined time periods. The
Company will use the proceeds of the placement for general working capital
purposes including reducing current borrowing levels.
Preference Shares
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. The warrants were exercisable in whole or in part
through March 31, 2012, at a price determined by a formula, which at the time of
the combination was (Pounds)165 per share. 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; and the
preference shares were redeemed for approximately $10,023,000, inclusive of
accrued dividends.
Sub valued the warrants at (Pounds)360,000 (approximately $583,000) and
reflected such amount of the proceeds noted above as an increase to additional
paid-in capital. In addition, Sub incurred approximately $1,032,000 in costs
($827,000 cash and the issuance of 601 ordinary shares valued at $205,000) to
issue the preference shares. Such amount was reflected as a reduction of the
preference shares. Both the value of the warrants and the issuance costs were
amortized to retained earnings.
The preference shares 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 April 27, 1998, (the
date of redemption) were paid in cash.
F-20
<PAGE>
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
A summary of the unaudited quarterly results of operations follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
-------------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 6,806 $ 7,797 $6,700 $ 6,048
Gross margin 3,579 4,296 3,672 3,221
Income (loss) from continuing operations before provision
for income taxes (754) 48 (447) (764) (1)
Net income (loss) applicable to common stock (777) 36 (456) (826)
Diluted net income (loss) per share $ (0.06) $ -- $(0.03) $ (0.06)
Three Months Ended
------------------
September 30, December 31, March 31, June 30,
1997 1997 1998 1998
----------- ----------- -------- --------
Net sales $10,286 $ 7,371 $8,004 $ 7,018
Gross margin 6,004 3,892 4,376 3,012
Income (loss) from continuing operations before provision
(benefit) for income taxes 1,209 (932) (160) (9,667) (1)
Net income (loss) applicable to common stock 442 (1,166) (511) (10,219)
Diluted net income (loss) per share $ 0.03 $ (0.11) $(0.05) $ (0.79)
</TABLE>
(1) The loss from continuing operations before taxes includes a merger
and realignment provision (benefit) of ($277,000) in the quarter ended
June 30, 1999 and $8,426,000 in the quarter ended June 30, 1998.
F-21
<PAGE>
Schedule II
BLUE WAVE SYSTEMS INC.
VALUATION AND QUALIFYING ACCOUNTS
JUNE 30, 1999, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to
Beginning Costs and Balance at
Description Of Period Expenses Deductions End of Period
- ------------------------------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
1999
----
Allowance for doubtful accounts $ 210 $ 22 $ (56) $ 176
Allowance for excess and
obsolete inventory 1,614 - (517) 1,097
Allowance for product returns 126 - (104) 22
Merger and realignment costs (1) 2,340 (277) (1,710) 353
1998
----
Allowance for doubtful accounts 246 91 (127) 210
Allowance for excess and
obsolete inventory 1,068 1,092 (546) 1,614
Allowance for product returns 60 104 (38) 126
Merger and realignment costs (2) - 8,426 (6,086) 2,340
1997
----
Allowance for doubtful accounts 247 132 (133) 246
Allowance for excess and
obsolete inventory 514 1,007 (453) 1,068
Allowance for product returns 90 66 (96) 60
</TABLE>
(1) As of the end of fiscal 1999 the Company evaluated the adequacy of the
original provision for merger and realignment costs and determined that the
estimate of the original provision should be reduced by $277,000. Accordingly,
this revision in estimate was reflected as a nonrecurring reduction in operating
expenses in 1999.
(2) Merger and realignment expenses in fiscal 1998 include a $2,700,000 non-
cash charge related to variable stock options of LSI, other non-cash charges of
$900,000 and cash payments of $2,700,000.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Loughborough Sound Images Limited
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of changes in shareholders' deficit and of cash flows
(not presented separately herein), present fairly, in all material respects, the
financial position of Loughborough Sound Images Limited and its subsidiaries at
September 30, 1997 and the results of their operations and their cash flows for
the year ended September 30, 1997, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these financial statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of
Loughborough Sound Images Limited and its subsidiaries for any period subsequent
to September 30, 1997.
PricewaterhouseCoopers
Leicester, England
December 9, 1997
F-23
<PAGE>
EXHIBIT INDEX
2.1 Share Purchase Agreement, dated November 17, 1997, between the Company
and Loughborough Sound Images Limited (formerly Loughborough Sound Images
plc). (2)
2.2 Letter Agreement dated March 24, 1998, between the Company and
Loughborough Sound Images Limited. (2)
2.3 Securities Purchase Agreement, dated August 20, 1999, between the Company
and the each of the purchasers of common stock and warrants. (5)
3.1 Certificate of Incorporation of the Company, as amended. (1)
3.2 Bylaws, as amended, of the Company. (3)
10.1 Credit Agreement by and between Fleet National Bank and the Company dated
December 11, 1998. (4)
10.2 Advice of Borrowing Terms by and between National Westminster Bank plc
and the Company dated December 16, 1998. (4)
10.3 Advice of Borrowing Terms by and between National Westminster Bank plc
and the Company dated July 28, 1999. (6)
10.4 Form of Indemnification and Hold Harmless Agreement. (3)
10.5 Employment Agreement between the Company and Simon Yates. (6)
11 Computation of per share net loss. (6)
23.1 Consent of Arthur Andersen LLP. (6)
23.2 Consent of PricewaterhouseCoopers. (6)
27 Financial Data Schedule. (6)
(1) Incorporated by reference to Exhibits in the Company's Registration
Statement on Form S-3.
(2) Incorporated by reference to Exhibits in the Company's Current Report on
Form 8-K dated May 12, 1998.
(3) Incorporated by reference to Exhibits in the Company's Registration
Statement on Form S-1.
(4) Incorporated by reference to Exhibits filed with the Company's Form 10-Q
filed for the quarter ended December 31, 1998.
(5) Incorporated by reference to the Exhibit in the Company's Current Report
on Form 8-K dated September 7, 1999.
(6) Filed herewith.
<PAGE>
Exhibit 10.3
Corporate Banking
Services
Advice of Borrowing Terms
for
Blue Wave Systems Limited
From:
Leicester Corporate Business Centre
28 July 1999
NatWest
<PAGE>
Advice of Borrowing Terms
Relationship Office: Leicester Corporate Business Centre Date: 28 July 1999
Borrower(s) Registered Number:
Blue Wave Systems Limited 1751065
We intend that the facilities listed in Part 1 of the attached Facility Schedule
(the "on-demand facilities") should remain available to the borrower(s) until 28
January 2000 and all facilities should be reviewed on or before that date. The
facilities are, however, subject to the following:
. the terms and conditions below,
. the specific conditions applicable to an individual facility as detailed in
the Facility Schedule,
. the Security detailed in the attached Security Schedule, and
. the attached General Terms.
All amounts outstanding are repayable on demand which may be made by us at our
discretion at any time and the facilities may be withdrawn, reduced, made
subject to further conditions or otherwise varied by us giving notice in
writing.
Conditions:
The following conditions must be satisfied at all times while the facilities are
outstanding, but this will not affect our right to demand repayment at any time:
. Monthly management accounts to be provided to us within 28 days of the end
of the month to which they relate
. Audited accounts to be provided to us within 180 days of the financial year
end to which they relate.
. Month end overdraft utilisation to be covered 100% by a lending formula of
the following in total;
1. 50% of month end eligible debtors 90 days or under. Eligible debtors are
defined as those domiciled in Blue Wave Systems Ltd for UK and Export
customers, excluding those to associated companies.
2. 50% of month end net finished stock. Net finished stock is defined as to
total finished stock net of that not sold in the previous 6 months.
3. 30% of month end net WIP. Net WIP is defined as to total WIP less provision.
Other Fees and Costs
The following fees are due, in addition to the specific Arrangement Fee(s)
detailed in the Facility Schedule:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Fee Type Amount Account to be debited Date to be debited
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Excess overdraft arrangement fee (pound)2,500 89286669 29.7.99
- ---------------------------------------------------------------------------------------------
</TABLE>
A T Dunlop
Corporate Manager
For and on behalf of
National Westminster Bank Plc
<PAGE>
Facility Schedule
Part 1 - Facilities Repayable on Demand:
<TABLE>
<CAPTION>
----------------------------------------
Composite Facility
- -------------------------------------------------------------------------------------------------------------
Name of Borrower(s): Blue Wave Systems Limited
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Limit: Gross (pound)1,000,000 plus Total between sterling and currency borrowing as
excess detailed below.
(pound)200,000 to 31.8.99
- -----------------------------------------------------
Limit: Net (pound)1,000,000 plus
excess
(pound)200,000 to 31.8.99
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The following Facilities are included within the Composite Facility Limit
arrangement, together with any allocated sub-limit(s):
<TABLE>
<CAPTION>
---------------------------------------------
Overdraft: - Base rate
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Account Number: 89286669
- -------------------------------------------------------------------------------------------------------------
Name of Borrower Blue Wave Systems Limited
- -------------------------------------------------------------------------------------------------------------
Limit: (pound)1,000,000 plus excess(pound)200,000 to 31.8.99
- -------------------------------------------------------------------------------------------------------------
Purpose: To finance working capital
- -------------------------------------------------------------------------------------------------------------
Repayment: Fully fluctuating with excess repayment from Blue Wave Systems Inc
- -------------------------------------------------------------------------------------------------------------
1st Debit Interest Rate: 1.75% above the Bank's Base rate
- -------------------------------------------------------------------------------------------------------------
2nd Debit Interest Rate: The Bank's unarranged borrowing rate on borrowing over(pound)1,500,000, or
in excess of agreed facilities
- -------------------------------------------------------------------------------------------------------------
Interest Payable: Quarterly
- -------------------------------------------------------------------------------------------------------------
Monitoring Fee: (pound)1,250 per quarter will be debited on 30.09.99 and quarterly
thereafter
- -------------------------------------------------------------------------------------------------------------
Excess Fees: We will be entitled to charge an
excess fee at the Bank's published rate for
each day any agreed limit is exceeded (see
our "Services & Charges for Business
Customers" brochure for details).
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------
Overdraft: - Currency
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Account Number: 02559846 Currency: US Dollars
- -------------------------------------------------------------------------------------------------------------
Name of Borrower Blue Wave Systems Limited
- -------------------------------------------------------------------------------------------------------------
Limit: (pound)1,000,000 plus excess(pound)200,000 to 31.8.99 (sterling equivalent)
- -------------------------------------------------------------------------------------------------------------
Purpose: To finance working capital
- -------------------------------------------------------------------------------------------------------------
Repayment: Fully fluctuating.
- -------------------------------------------------------------------------------------------------------------
1st Debit Interest Rate: 1.75% above the Bank's Currency Base rate.
- -------------------------------------------------------------------------------------------------------------
2nd Debit Interest Rate: We will be entitled to charge the Bank's unarranged
borrowing rate for the relevant currency for borrowing over $2,400,000,or
in excess of agreed facilities
- -------------------------------------------------------------------------------------------------------------
Interest Payable: Quarterly
- -------------------------------------------------------------------------------------------------------------
Excess Fees: We will be entitled to charge an excess fee at the Bank's published rate for
each day any agreed limit is exceeded.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Facilities not subject to a Composite Facility Limit:
<TABLE>
<CAPTION>
--------------------------------
Terminable Indemnities
<S> <C>
- -------------------------------------------------------------------------------------------------------
Name of Borrower: Blue Wave Systems Limited
- -------------------------------------------------------------------------------------------------------
Limit: (pound)100,000
- -------------------------------------------------------------------------------------------------------
Type and Purpose: Guarantee to H M Customs and Excise for the deferment of import duty
- -------------------------------------------------------------------------------------------------------
Basis of Expiry: 7 days notice
- -------------------------------------------------------------------------------------------------------
Indemnity Fee: 1% p.a. payable quarterly in advance, to be debited to account number
89286669 on pre-advised dates
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------
Terminable Indemnities
- -------------------------------------------------------------------------------------------------------
<S> <C>
Name of Borrower: Blue Wave Systems Limited
- -------------------------------------------------------------------------------------------------------
Limit: (pound)50,000
- -------------------------------------------------------------------------------------------------------
Type and Purpose: A T A Carnets
- -------------------------------------------------------------------------------------------------------
Basis of Expiry: 31 months after issue or upon release by Chamber of Commerce
- -------------------------------------------------------------------------------------------------------
Indemnity Fee: 1% p.a., minimum (pound)75 p a each payable quarterly in advance, to be
debited to account number 89286669 on 31.12.98 and quarterly
thereafter
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------
Cheque Negotiations
- -------------------------------------------------------------------------------------------------------
<S> <C>
Name of Borrower: Blue Wave Systems Limited
- -------------------------------------------------------------------------------------------------------
Limit: (pound)100,000
- -------------------------------------------------------------------------------------------------------
Purpose: Negotiation of Foreign Cheques with Recourse
- -------------------------------------------------------------------------------------------------------
Fees: Subject to separate tariff, calculated on sterling value of cheque.
Information available upon request or at the time the service is provided
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------
Forward Exchange
- -------------------------------------------------------------------------------------------------------
<S> <C>
Name of Borrower: Blue Wave Systems Limited
- -------------------------------------------------------------------------------------------------------
Notional Limit: (pound)300,000 gross contracts of 12 months or under where
utilisation is calculated in accordance with the Bank's Forward Exchange
Matrix from time to time, a copy of which is available from your Corporate
Manager.
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------
Settlement Risk
- -------------------------------------------------------------------------------------------------------
<S> <C>
Name of Borrower: Blue Wave Systems Limited
- -------------------------------------------------------------------------------------------------------
Limit/Frequency: (pound) 275,000 per month
- -------------------------------------------------------------------------------------------------------
Type and Purpose: Payments made via BACS
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Part 2 - Facilities Subject to Separate Documentation:
The following facilities are made available on the terms of the separate
documentation between us.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Name of Borrower Facility and Purpose Amount Date Agreement
(pound) Signed
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Wave Systems Limited Corporate Cards 315,000 November 1996
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Security Schedule
We rely on the security detailed below (and require additional security where
specified) to repay, on demand, all your current and future liabilities (both
actual and contingent) to us. These liabilities include, without limitation,
those incurred by you under the facility(ies) specified in the Facility
Schedule.
<TABLE>
<CAPTION>
Date Executed/New: Security: Given/to be given by:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
24.8.94 Mortgage Debenture Given by the Borrower
- ------------------------------------------------------------------------------------------------------------------------------
11.11.98 Guarantee Given by Blue Wave Systems Inc
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
General Terms
- --------------------------------------------------------------------------------
This section sets out in more detail the basis on which we make facilities
available to you. It covers issues such as how limits and interest are
calculated, how we can vary agreed terms and what we mean by "on demand".
- --------------------------------------------------------------------------------
These General Terms apply to all on demand facilities listed in the Advice of
Borrowing Terms (the "AOBT"), but do not apply to those facilities which are
subject to separate documentation, unless such documentation expressly
incorporates these General Terms. In cases where the expression "you" includes
more than one person (for example joint account holders) it shall be taken to
refer to all or any one or more of you, and your obligations shall be joint and
several.
. Independent Advice. Unless we expressly agree in writing to do so we do not
hold ourselves out as providing advice on or considering the general
suitability of facilities for your particular circumstances (including tax)
and neither we nor our employees shall be liable for any indications given
as to such suitability. We make no warranties or representations about the
advisability of any underlying transaction entered into by you. You should
obtain independent professional advice on such matters, and upon any
security or guarantee required by us.
. Acceptance. Any offer of a facility must be accepted within the time period
specified in the AOBT. We may, at our option, treat any usage of any of
these facilities as acceptance (without amendment) of the terms and
conditions of the AOBT.
. Availability. Our normal practice is to review all credit facilities
periodically. Any references in the AOBT to a review of, or availability
until a future date are merely indicative of our current intention, and we
may, at our discretion, review on demand facilities at an earlier date.
Facilities which are not loans or overdrafts are offered on the basis that
there is no commitment on our part to enter into any such facility with you.
We may, at our absolute discretion, decide whether a utilisation may be made
and any conditions subject to which utilisations may be made.
. Repayment. Notwithstanding any reference to review or availability or
repayment term in the AOBT, all facilities are repayable on demand which we
may make at our sole discretion at any time and may by notice be withdrawn
reduced or made subject to (further) conditions or otherwise varied. You
must ensure that we receive by way of repayment, the full amount of any
indebtedness irrespective of any taxes, duties or charges, in immediately
available funds in the currency in which the facility is outstanding at the
branch or office where the facilities are provided.
. Variation and waiver. We may vary these General Terms by giving one month's
written notice to you. If a change in any currency of the United Kingdom
occurs (including introduction of the euro), the AOBT and these General
Terms will be amended to the extent we specify to reflect the change in
currency and put us in the same position, so far as possible, that we would
have been in if no change in currency had occurred. If we refrain from
exercising any of our rights this shall not preclude us from exercising any
rights at a later date.
. Limits. The limits specified in the AOBT or the Facility Schedule for each
facility and/or each account (including any Group or Composite Facility
limits) must not at any time be exceeded. In addition, the aggregate
utilisation of any Composite and/or Group Limit specified for any group of
accounts and/or facilities must not be exceeded notwithstanding the total of
any individual or sub limits allocated. If we have agreed that there will be
a gross limit for one or more facilities, this means that the aggregate
utilisation of those facilities must not at any time exceed the gross limit.
If we have agreed that there will be a net limit for one or more facilities,
this means that the aggregate utilisation of those facilities, less the
aggregate amount of the cleared credit balances on the accounts specified by
us in the AOBT, will not exceed the net limit (if no accounts are specified
we may determine which accounts are utilised for this purpose). We are not
obliged to allow or continue to allow any borrowing in excess of agreed
facilities. Any reference to a particular account will include any successor
account.
. Interest. All interest rates are variable. Interest is payable monthly or
quarterly (as detailed in the AOBT) on our usual charging days and on final
repayment of the indebtedness. Interest accrues on the daily cleared debit
balance on the account(s) concerned at the annual rate or rates shown in the
AOBT (both before and after demand and/or judgement). It is calculated on
the basis of a 365 day year for sterling (and either a 365 or 360 day year
for currencies other than sterling or on such other basis as we may from
time to time specify) and the actual number of days elapsed and is
compounded monthly or quarterly. Our variable unarranged borrowing rate for
the relevant currency will apply to any indebtedness from time to time (i)
in excess of agreed facilities or (ii) outstanding after the expiry date of
agreed facilities or, in respect of (i) only, such other interest rate as we
may specify.
. Changes to interest. We may alter the basis on which interest is calculated
including the size of the interest margin charged over our Base Rate or
other published rate and/or the amount of any regular repayments of
facilities which are repayable on demand by providing you with one month's
written notice. As a change in our Base Rate or other variable rate is not
an alteration of the basis upon which interest is calculated, no written
notice need be given of such a change. Changes in our Base Rate or other
published rates take effect when made. Details of current rates are
available from any branch or office, and are published in selected national
newspapers. Omission to publish details of any change in a newspaper shall
not stop the change from taking effect. For a currency account, written
notice of changes to the relevant Currency Base Rate will normally be given,
although failure to do so will not stop the change taking effect when made.
. Fees. Fees quoted exclude charges for money transmission or similar services
which are either advised (i) separately, or (ii) at the time a facility is
used. All costs, charges and expenses incurred or suffered by us, including
legal costs and our internal management costs, arising at any time in
connection with any facility or with any related security or guarantee are
payable by you on demand.
. Uncovered Payments. An "uncovered payment:" is a payment where the cleared
credit balance or agreed credit facility is insufficient to meet that
payment and all other payments requested, disregarding uncleared credits to
that account. We do not accept any obligation to make uncovered payments to
third parties unless we have agreed to do so in writing. We need not make
any uncovered payment which is in excess of any settlement risk limit.
. Set Off. We may, without notice, set-off against any credit balances on any
of your account(s) (in any currency), your liability in respect of any
facilities (including any uncovered payment) and may combine accounts. We
are authorised to use all or any such credit balances to buy such other
currencies as may be necessary in order to exercise any rights of set-off to
which we may be entitled.
. Appropriation and Lien. Where more than one debt is owing to us we may use
the whole or any part of any repayment to reduce or discharge the principal
amount of your indebtedness as we may select, to meet any accrued interest
or to discharge any other liabilities to us. We shall
<PAGE>
have a lien over securities of any kind and other items deposited by or on
your behalf with us (including, without limitation, cheques given to us for
collection).
. Security. Unless the AOBT expressly provides otherwise, any mortgage,
charge or debenture must be a first legal mortgage, charge or debenture
over the unencumbered title of the property in question. You may not grant
(or allow to be created) without our prior written consent any other
security interest in the property in question or part with possession of
it. We may, at our sole discretion, require from time to time additional
valuations (at your expense) by such valuer as we may approve, of any or
all of the assets held by us as security.
. Environment. You represent and warrant (both now and in the future) that
you have and will comply in all material respects with any applicable
environmental law, regulation or code of practice ("environmental law") and
with the terms and conditions of any applicable environmental licences or
other consents or approvals required by environmental law ("environmental
licences").
. Information. You must provide us with any information which we may at any
time reasonably require, and must inform us of any material change of facts
or circumstances. You authorise us to disclose to your auditors any such
information concerning your accounts with us as they may from time to time
require.
. Currency Accounts. If in our opinion deposits in a currency are unavailable
to us at any time to fund a currency drawing then we will not make a
drawing available in that currency. All payments (including interest)
required to be made by you under a facility in a currency other than
sterling must be made in the currency of the drawing (The "Agreed
Currency") and by credit to our account with such banking office as we may
require.
Any amount payable by you which is received by us in a currency other than
the Agreed Currency, will be calculated by converting (at the prevailing
spot rate of exchange on such date and in such market as we shall determine
as being most appropriate) the Currency so received into the Agreed
Currency. If the amount received is less than the relevant amount of the
Agreed Currency then you will indemnify us for the deficiency and for any
losses we may sustain as a result. You will in addition pay the costs of
such conversion. All payments shall be deemed to have been made on such
date as we shall determine in accordance with our normal practice from time
to time.
. Currency Equivalents. The Sterling/Currency Equivalent of any amount
denominated in another currency shall be calculated by reference to the
Bank's then current spot rate of exchange for the purchase of the relevant
currency with the currency in which the facility is denominated. We may
calculate the aggregate Sterling/Currency Equivalents of all drawings
outstanding/proposed at any time to determine compliance or otherwise with
the relevant facility limit.
. Contingent Liabilities. You will, on demand, pay to us an amount equal to
the full face value of any contingent or future liabilities incurred by us
at your request (such as letters of credit, bonds or guarantees). We may
hold any such payment in our own name and may use it to meet such
liabilities. You must in any event indemnify us against such liabilities
and we will require you to execute a formal counter-indemnity in our
standard form.
. Negotiations. You agree that all foreign cheques submitted to us for
negotiation and/or collection will be dealt with on the basis that you have
good title to all cheques and that you agree to indemnify us against all
liabilities claims losses costs and expenses including exchange
fluctuations and agents' charges which may be imposed upon, asserted
against or incurred by us in any way relating to or arising out of the
negotiation and/or collection of cheques on your behalf. If the cheque is
subsequently returned unpaid you authorise us to debit your account with
the amount credited to your account plus any losses, costs, expenses or
charges which we may have incurred.
. Forward Exchange. Where we make a forward exchange facility available to
you, you confirm and understand that no forward purchase or sale of foreign
currency shall be made for investment purposes (see paragraph 8 of Schedule
1 of the Financial Services Act 1986) without our prior written consent.
. General.
a) Whenever facilities are subject to Part V of the Consumer Credit Act
1974 additional documents and procedures may be necessary before
facilities can be drawn.
b) If we consider that any proposed payment or use of a facility might be
made for an unlawful purpose, then we may refuse to make such a payment
or allow such use.
c) We may give written notice or make demand by post or by hand or by
facsimile machine or by other form of electronic communication. A notice
or demand may be addressed to you at your Registered Office or address
or the place of business last known to us and shall be deemed to have
been received when transmitted or (if posted) on the business day after
posting. We may use the facsimile number or electronic address last
known to us.
d) The relationship between us, these General Terms and the AOBT are
governed by English law and the English courts shall have jurisdiction
in respect thereof. However when we consider it appropriate we may take
proceedings against you in any other court of competent jurisdiction
(whether concurrently or not with any other proceedings). These terms
are in addition to the usual terms which apply to the relationship
between a bank and its customer and to the operation of bank accounts
(whether in credit or debit) and to the terms of your mandate with us
and to all other consistent terms which may be implied by law.
e) You must maintain a current account with us throughout the life of any
facilities and we may charge to your current account all amounts,
including interest, due in respect of any facility.
<PAGE>
Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT (The "Agreement") is made, entered into and executed as of this
1st day of January, 1999, by and between Simon Yates (hereinafter referred to as
the "Executive"), and Blue Wave Systems, a Delaware corporation (herein referred
to as the "Employer").
WITNESSETH
WHEREAS, Employer desires to employ Executive as President and Chief Executive
Officer;
WHEREAS, Executive desires to accept such employment on the terms and conditions
herein set forth;
NOW THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, Employer and Executive agree as follows:
ARTICLE I
AGREEMENT
Employment
----------
1.01 Subject to the terms and conditions of this Agreement, Employer agrees to
employ Executive as President and Chief Executive Officer, and
Executive hereby accepts such employment with Employer.
Term
----
1.02 The initial term ("Initial Term") of Executive's employment hereunder
shall commence on April 30, 1998 (hereunder referred to as the
"Effective Date") and shall continue thereafter through April 30,
2002, unless earlier terminated as provided herein.
ARTICLE II
TITLE AND AUTHORITY
-------------------
General
-------
2.01 Executive shall render such services as are normally delegated to the
position for which Executive is being hired. In performing such
duties hereunder, shall give employer the benefit of his special
knowledge, skills, contacts and business experience and shall devote
substantially all of his business time, attention, ability and
energy to the business of the Employer. Executive may not serve as a
Director of other companies without the prior approval of the Board
of Directors.
ARTICLE III
COMPENSATION
------------
General
-------
3.01 As compensation for services rendered under this Agreement, Executive
shall be entitled to receive from Employer the Base Salary, Short
Term Incentive Bonus, Stock Options and other Benefits, described
hereinafter.
1
<PAGE>
Base Salary
-----------
3.02 Executive shall receive an aggregate Base Salary at the rate of $12,500
Dollars (per month), to be paid in accordance with the employer's
general salary policy in effect from time to time. Said Base Salary
shall be adjusted annually on the anniversary date of the Effective
Date of this Agreement in a percentage not less than the average
annual increase for like positions as reported in the Annual
Compensation Survey of the American Electronics Association (AEA),
or similar survey.
Short Term Incentive Bonus
--------------------------
3.03 Employer and Executive shall agree, on an annual basis, on a Short-Term
Incentive Bonus ("Bonus") plan for Executive. The intent of the
parties is that the Bonus Plan will result in total cash
compensation, including Base Salary and Bonus, which is consistent
with compensation practices of similar companies with similar
performance.
Employer and Executive agree that the Bonus Plan will be tied to survey
data published by the American Electronics Association (AEA), which
provides survey information regarding the performance of companies
based on various measures, for example but not limited to, return on
assets or return on capital, as well as survey information regarding
executive compensation practices. Employer and Executive will agree
each year on the method of measuring Employer's performance which
will be used in the Bonus Plan for that year. For example, if
Employee and Executive agree in a given year that return on assets
will be the appropriate measure of Employer's performance for that
year, and if the AEA survey indicates that Employer's return on
assets would fall in the 50th percentile of companies similar to
Employer, then the Bonus Plan would result in total compensation to
President and Chief Executive Officer that would at least equal that
of the total compensation of executives who rank in the 50th
percentile of total compensation for similar companies according to
the AEA survey.
As such compensation survey data records actual compensation practices in
prior years and will be used to establish compensation for the
Executive in future years, survey data will be adjusted for
inflation in executive cash compensation over time. This survey data
will be based upon current information no more than six (6) months
to one year aged.
The Employer and Executive shall agree on a Bonus Plan by the first Board
Meeting following the end of the prior Financial Year of the
Company. In the absence of an agreed upon Bonus Plan, the annual
Bonus shall be equal to 5% of the Net Income Before Interest and
Taxes.
Said Bonus shall be paid to Executive within sixty (60) days of the end of
the Financial Year of the Company.
Executive and Employer agree that the basis of future Bonuses may be
altered by the mutual consent of both parties.
Other Benefits
--------------
3.04 Employer shall provide Executive with Medical Insurance, Dental Insurance,
Life Insurance and other such benefits that are the same or
substantially similar to, coverage provided from time to time to
other Officers of Employer. Executive shall be allowed twenty-five
(25) business days of vacation per calendar year.
1999 Short term Incentive Bonus
-------------------------------
3.05 Based on the financial performance of Employer during FY 1999, Employer
shall pay to Executive a FY99 on target Bonus of $15,000 for the
period January 1, 1999 to June 30, 1999.
2
<PAGE>
ARTICLE IV
TERMINATION
General
-------
4.01 Employer and Executive shall have the right to terminate the employment of
Executive as set forth in this Article IV.
Inability of Executive to Perform
---------------------------------
4.02 If Executive shall become unable to carry out and perform fully his duties
hereunder, and such inability shall continue for a period of ninety
(90) consecutive days, the Board of Directors may, at any time
thereafter, by giving Executive written notice of such termination,
fully and finally terminate this Agreement. Termination under this
Section 4.02 shall become effective as of the date provided in such
notice. Upon such termination, Executive shall receive only such
amounts as are earned under and due to him under this Agreement.
including any unpaid Base Salary and a prorate share of any Bonus
earned as a result of his activities prior to termination, and
thereafter no further consideration or compensation shall be owed by
Employer to Executive. Since the Bonus for the current Company
Financial Fiscal Year can not be calculated until the end of the
Company Financial Fiscal Year, the prorata Bonus shall be paid out
at the end of the Company Financial Fiscal Year at the same time it
would have been paid had Executive remained employed through the end
of the Company Financial Fiscal Year. The Company will pay
reasonable relocation expenses to the UK, if at time of termination,
the executive has not received a visa entitling him to permanent
residency in the USA. The remedy described in this paragraph shall
be in addition to, and not to the exclusion of, the other remedies
of termination rights set forth in this Agreement.
Death of Executive
------------------
4.03 The employment of Executive shall automatically terminate upon the death
of Executive. Upon such termination, Executives estate shall receive
only such amounts as are earned under and due to him under this
Agreement including any unpaid Base Salary and a prorata share of
any Bonus earned as a result of his activities prior to termination
plus any Life Insurance benefits, and thereafter no further
consideration or compensation shall be owed by Employer to Executive
or to his estate. Since the Bonus for the current Company Financial
Fiscal Year can not be calculated until the end of the Company
Financial Fiscal Year, the prorata Bonus shall be paid out at the
end of the Company Financial Fiscal Year at the same time it would
have been paid had Executive remained employed through the end of
the Company Financial Fiscal Year. The Company will pay reasonable
relocation expenses to the UK, if at time of termination, the
executive has not received a visa entitling him to permanent
residency in the USA.
3
<PAGE>
Termination for Cause
---------------------
4.04 In addition to any other remedies that Employer may have at law or in
equity, the Board of Directors may immediately terminate Executive's
employment under this Agreement by giving Executive written notice
of such termination upon occurrence of any of the following events:
A. Failure of Executive to present for work or duties set forth herein for
three (3) or more consecutive business days, except during
vacations, periods of illness or other personal emergencies without
giving notice to Employer and receiving approval of Employer of such
absence, which approval shall not be unreasonably withheld.
B. Executive's conviction of a felony offense or commission by Executive of
any act materially damaging to the reputation of Employer.
C. Dishonesty, fraud, unlawful discrimination or theft on the part of
Executive.
D. Executive's using any confidential or proprietary information of the
employer, or divulging any such information to third parties in a
manner clearly opposed to the best interests of Employer.
E. Executive has materially breached any of the terms, provisions, covenants
or representations set forth in this Agreement.
Upon termination for any of the reasons described above, Executive shall
receive only such amounts as are earned under and due to him under
this Agreement including any unpaid Base Salary earned as a result
of his activities prior to termination, and thereafter no further
consideration or compensation shall be owed by Employer to
Executive. In particular, Executive shall not be entitled to any
severance or benefits of any sort, nor any Bonus. Employer may
deduct from Executive's paycheck any unauthorized expenses, charges
or misappropriations for which Employer may be responsible as result
of Executive's conduct.
Before Employer may terminate this Agreement under Subparagraphs 4.04 E or
F, Employer must give Executive thirty (30) days written notice of
the specific acts or omissions complained of and must allow
Executive to cure engaging in such conduct during the thirty day
notice period. Employer and Executive specifically agree that
failure to meet performance expectations shall not be grounds for
termination under this paragraph.
Termination by Employer Without Good Cause or Poor Performance
--------------------------------------------------------------
4.05 The Board of Directors may terminate Executive's employment under this
Agreement without any cause whatsoever by giving written notice of
such termination to Executive, specifically including termination
for poor performance. Upon such notice of termination Employer shall
pay Executive a total of current annual salary in twelve (12) equal
monthly installments, with the first installment to be paid no later
than 30 days after the effective date of termination.
Termination by Executive
------------------------
4.06 Executive may, with or without cause, terminate his employment under this
Agreement by giving Employer at least ninety (90) days notice of
such termination. Upon such termination, Executive shall receive
only such amounts as owed to him under this Agreement as a result of
his activities prior to the termination date. Upon receipt of such
notice, Employer may elect to terminate Executive's employment at
any time upon the payment of the prorata Base Salary through the end
of the ninety day notice period.
4
<PAGE>
In the event Executive gives such notice prior to the end of any Financial
Year of the Company no Bonus shall be earned for that Financial Year
of the Company. In the event Executive gives such notice after the
end of Financial Year of the Company but prior to the payment of any
earned Bonus said Bonus shall continue to be due and payable on the
required payment date.
4.07 Executive agrees that after employment with the Employer terminates, he
will not directly or indirectly use or disclose to any person or
business entity any financial information involving Blue Wave
Systems or proprietary information involving its products,
manufacturing processes, marketing, sales, and operations. Executive
agrees that all financial information involving Blue Wave Systems
and information involving Blue Wave Systems products, manufacturing
processes, marketing, sales, and operations are the exclusive
property of Blue Wave Systems and that he shall not retain any
records, materials or other documents involving the above designated
matters.
4.08 Executive agrees that during the one-year period following the termination
of his employment by Blue Wave Systems, he will not, directly or
indirectly, either as an employee, employer, consultant, agent,
principal, partner, stockholder, corporate officer, director, or in
any other individual or representative capacity, engage or
participate in any business or activity that is of the type
conducted, authorized, offered, or provided by Blue Wave Systems.
Further, during this same period Executive agrees that he will not,
directly or indirectly, recruit or hire or attempt to recruit or
hire any person who is employed by Blue Wave Systems during the
twelve-month period subsequent to the termination of his employment.
During this same period, Executive agrees that he shall not contact,
directly or indirectly, any vendor or customer of Blue Wave Systems
for the purpose of encouraging the vendor or customer to alter in
any way its business relationship with Blue Wave Systems. Executive
represents to Blue Wave Systems that the enforcement of the
restrictions contained in this paragraph will not be unduly
burdensome to him because, among other things, Executive will
receive the Severance Payment referenced herein and, in order to
induce Blue Wave Systems to enter into this Agreement, Executive
further represents and acknowledges that he will be willing and able
to work and earn a livelihood not prohibited by this paragraph.
Multiple Causes of Termination
------------------------------
If Executive's employment is terminated in a fashion that would qualify
him for severance payments and benefits under more than one
provision of this Agreement, Executive will be entitled to select
among the severance packages for which he qualifies, at his sole
option, the severance package that he will accept. In no event shall
Executive be entitled to receive more than one of the severance
packages described herein.
ARTICLE V
EXPENSE REIMBURSEMENT
---------------------
General
-------
5.01 Executive is authorized to incur reasonable business expenses in promoting
the business of Employer, including expenditures and travel in
accordance with Employer's standard procedures in effect from time
to time.
5
<PAGE>
ARTICLE VI
MISCELLANEIOUS
--------------
Notices
-------
6.01 Any notices to be given hereunder by either party to the other may be
effected either by personal delivery or by mail, registered or
certified, postage prepaid with return receipt requested. Mailed
notices shall be addressed to the parties at the following
addresses:
If to Employer: Blue Wave Systems Inc.
2410 Luna Road
Carrollton, TX 75006
If to Executive: Simon Yates
1307 Red Maple
Carrollton, TX 75006
Any party may change his or its address by written notice in accordance
with this section. Notices delivered personally shall be deemed
communicated as of the actual receipt, mailed notices shall be
deemed communicated as of three (3) days after proper mailing.
Inclusion of Entire Agreement Herein
------------------------------------
6.02 This Agreement supersedes any and all other agreements either oral or in
writing, between the parties hereto with respect to the employment
of Executive by Employer and contains all of the covenants and
agreements between the parties with respect to such employment in
any manner whatsoever.
Law Governing Agreement
-----------------------
6.03 This Agreement shall be governed by and constructed in accordance with the
laws of the State of Texas.
Attorney's Fees and Costs
-------------------------
6.04 If any action at law or in equity is necessary to enforce or interpret the
terms of this Agreement, the prevailing party shall be entitled to
reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
Waiver
------
6.05 No term or condition of this Agreement shall be deemed to have been waived
nor shall there be any estoppel to enforce any of the terms or
provisions of this Agreement except by written instrument of he
party charged with such waiver or estoppel. Further, it is agreed
that no waiver at any time of any of the terms or provisions of this
Agreement shall be construed as a waiver at any of the other terms
of provision of this Agreement and that a waiver at time of any of
the terms or provisions of the Agreement shall be constructed as a
waiver at any subsequent time of the same terms or provisions.
Amendments
----------
6.06 Except as otherwise provided in Section 6.07, no amendment or modification
of this Agreement shall be deemed effective unless and until
executed in writing by all of the parties hereto.
6
<PAGE>
Severability and Limitation
---------------------------
6.07 All agreements and convenants contained herein are severable and, in the
event any of them shall be held to be invalid by any competent
court, this Agreement shall be interpreted as if such invalid
agreements or covenants were not contained herein. Should any court
or other legally constituted authority determined that for any such
agreement or covenant to be modified to limit its duration or scope,
the parties hereto shall consider such agreement or covenant to be
amended or modified with respect to duration and scope so as to
comply with the orders of any such court or other legally
constituted authority, and as to all other portions of such
agreement or covenants they shall remain in full force and effect as
originally written.
Headings
--------
6.08 All heading set forth in this Agreement are intended for convenience only
and shall not control or affect the meaning, construction or effect
of this Agreement or of any of the provisions thereof.
Assignment
----------
6.09 Executive agrees that his representations, warranties, covenants,
promises and obligations contained herein may be assigned by
Employer to any person, partnership, firm, association, corporation
or other business entity to which Employer may transfer its business
and assets or any portion thereof, but without prejudice to
Executive's rights against Employer hereunder.
Executed as of this day year first above written.
EMPLOYER:
Blue Wave Systems:
By:
----------------------------------
Its: Director and Member, Compensation Committee
EXECUTIVE:
----------------------------------------
Simon Yates
7
<PAGE>
Arbitration Agreement
---------------------
Executive and Employer agree to use binding arbitration for any dispute or
disagreement that Executive may have with Employer or that Employer may have
with Executive that arises in any way from Executive's employment or from
Executive's Employment Agreement, whether over hiring, termination, pay,
benefits, discrimination, or any other topic, and whether arising in contract,
tort, under statute or otherwise. Employer and Executive understand that by
means of this Agreement, they are both substituting the binding arbitration
process for their rights to access a court and/or jury, and they further agree
that each party to this Agreement is entitled to rely on the existence of this
Agreement in all matters related to Executive's employment. The parties agree
that the arbitration will be governed by the rules of the American Arbitration
Association except as otherwise set forth in this Agreement. Employer and
Executive will agree upon an arbitrator to hear any dispute. If they can not
agree, they will select the arbitrator pursuant to the rules of the American
Arbitration Association. The arbitrator may not grant any award or relief to
either Employer or Executive that exceeds, in amount or form, that allowed by
applicable law. The prevailing party shall be entitled to reasonable attorney's
fees, cost, expert witness fees and necessary disbursements in addition to any
other relief to which such party may be entitled. The arbitrator will hear each
side's arguments and will reach a decision that binds both parties. Either
party may have that judgment entered on the arbitrator's award in any court of
competent jurisdiction and it will be binding, final and unappealable.
Arbitration shall occur in Dallas County, Texas unless otherwise agreed in
writing by the parties.
EMPLOYER:
Blue Wave Systems:
By:________________________________________
Its: Director and Member, Compensation Committee
Date:______________________________________
EXECUTIVE:
_____________________________________
Simon Yates
Date:________________________________
<PAGE>
Exhibit 11
Blue Wave Systems Inc.
Computation of Per Share Net Loss
For the Years Ended June 30, 1999, 1998 and 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Basic Net Loss Per Share:
Net loss applicable to common stock $ (2,023) $ (11,454) $ (1,830)
========== ========= ========
Weighted average shares outstanding 13,076 12,684 10,594
Basic net loss per share $ (0.15) $ (0.90) $ (0.17)
========== ========= ========
Diluted Net Loss Per Share:
Total weighted average shares from above 13,076 12,684 10,594
Weighted average of options outstanding N/A N/A N/A
Weighted average exercised options outstanding for portion of period,
net of equivalent shares purchased at average fair market value N/A N/A N/A
Effect of using option proceeds to repurchase common stock at average
fair market value N/A N/A N/A
---------- --------- --------
Other dilutive securities -- -- --
---------- --------- --------
Weighted average diluted shares outstanding 13,076 12,684 10,594
---------- --------- --------
Net loss $ (2,023) $ (11,454) $ (1,830)
========== ========= ========
Diluted net loss per share $ (0.15) $ (0.90) $ (0.17)
========== ========= ========
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference into the Company's previously filed Form S-3 and S-8 Registration
Statements, File Nos. 333-63173 and 333-430, respectively, of our report dated
August 24, 1999, except with respect to the matter discussed in Note 8, as to
which the date is September 17, 1999, included in this Form 10-K for the year
ended June 30, 1999 and to all references to our firm included in these
registration statements.
ARTHUR ANDERSEN LLP
Dallas, Texas
September 24, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 No. 333-430 and Form S-3 No. 333-63173 of Blue Wave
Systems Inc. of our report dated December 9, 1997 relating to the consolidated
financial statements of Loughborough Sound Images Limited (n/k/a Blue Wave
Systems Ltd.) appearing in this Form 10-K.
PricewaterhouseCoopers
Leicester, England
September 24, 1999
<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 JUNE 30, 1999 AND FOR
THE TWELVE MONTHS THEN ENDED, AND IS QUALIFED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,339
<SECURITIES> 0
<RECEIVABLES> 6,464
<ALLOWANCES> 198
<INVENTORY> 5,119
<CURRENT-ASSETS> 13,536
<PP&E> 9,854
<DEPRECIATION> 6,584
<TOTAL-ASSETS> 17,978
<CURRENT-LIABILITIES> 8,918
<BONDS> 0
0
0
<COMMON> 137
<OTHER-SE> 7,210
<TOTAL-LIABILITY-AND-EQUITY> 17,978
<SALES> 27,351
<TOTAL-REVENUES> 27,351
<CGS> 12,583
<TOTAL-COSTS> 12,583
<OTHER-EXPENSES> 16,647
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199
<INCOME-PRETAX> (1,917)
<INCOME-TAX> 106
<INCOME-CONTINUING> (2,023)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,023)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
