<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999 Commission File Number 0-26858
BLUE WAVE SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1425902
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2410 Luna Road 75006
Carrollton, Texas (Zip Code)
(Address of principal executive offices)
(972) 277-4600
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------------- --------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class May 12, 1999
----- ------------
Common Stock, par value $0.01 per share 13,141,980
<PAGE>
Blue Wave Systems Inc.
Form 10-Q
For the Quarter Ended March 31, 1999
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets
March 31, 1999 and June 30, 1998 3
Statements of Operations
for the three and the nine months ended March 31, 1999 and 1998 4
Statements of Cash Flows
for the nine months ended March 31, 1999 and 1998 5
Notes to Interim Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
2
<PAGE>
Blue Wave Systems Inc.
Consolidated Balance Sheets
(in thousands, except par value per share)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,136 $ 1,060
Restricted cash 807 835
Marketable securities, at fair value - 3,062
Accounts receivable, net of allowances of $184 and $336, respectively 6,196 4,975
Inventories, net 3,890 4,156
Prepaid expenses and other 609 612
Deferred tax asset 903 903
-------- --------
Total current assets 13,541 15,603
-------- --------
Plant and equipment:
Machinery and equipment 6,842 7,320
Furniture and fixtures 3,409 2,876
-------- --------
10,251 10,196
Less accumulated depreciation (6,665) (5,838)
-------- --------
Plant and equipment, net 3,586 4,358
-------- --------
Deferred tax asset-noncurrent 469 478
Other assets 87 105
-------- --------
Total assets $ 17,683 $ 20,544
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 4,178 $ 2,402
Accrued compensation 147 706
Other current liabilities 1,888 3,625
Credit facilities 1,411 2,302
-------- --------
Total current liabilities 7,624 9,035
-------- --------
Deferred income taxes 841 870
Noncurrent liabilities - other 223 366
Long-term debt 807 835
-------- --------
Total liabilities 9,495 11,106
-------- --------
Stockholders' equity:
Preference stock, $.01 par value; 1,000 shares authorized; no shares
issued and outstanding at March 31, 1999 and June 30, 1998 - -
Common stock, $.01 par value; 50,000 shares authorized; 13,665 and 13,537
shares issued; 12,919 and 12,791 shares outstanding, at March 31, 1999 and
June 30, 1998, respectively 136 135
Additional paid-in capital 23,103 22,973
Net unrealized gain on marketable securities - -
Retained earnings (13,405) (12,208)
Cumulative translation adjustment (245) (61)
-------- --------
9,589 10,839
-------- --------
Less -- treasury stock, at cost (1,401) (1,401)
-------- --------
Total stockholders' equity 8,188 9,438
-------- --------
Total liabilities and stockholders' equity $ 17,683 $ 20,544
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
Blue Wave Systems Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 6,700 $ 8,004 Net sales $21,303 $25,661
3,028 3,628 Cost of sales 9,756 11,389
- ------- ------- ------- -------
3,672 4,376 Gross margin 11,547 14,272
Operating expenses:
1,328 1,918 Product development and engineering 4,184 5,543
1,944 1,883 Sales and marketing 6,071 5,942
833 886 General and administrative 2,418 3,153
- ------- ------- ------- -------
4,105 4,687 Total operating expenses 12,673 14,638
- ------- ------- ------- -------
(433) (311) Operating income (loss) (1,126) (366)
- ------- ------- ------- -------
Other income (expense):
9 135 Interest income 77 427
(41) (45) Interest expense (163) (75)
18 61 Other income 59 131
- ------- ------- ------- -------
(14) 151 Total other income (expense) (27) 483
- ------- ------- ------- -------
Income (loss) from continuing operations before
(447) (160) provision (benefit) for income taxes (1,153) 117
9 (113) Provision (benefit) for income taxes 44 (154)
- ------- ------- ------- -------
(456) (47) Income (loss) from continuing operations (1,197) 271
Loss from discontinued operations (first quarter of
- - fiscal 1998), net of tax benefit of $62 - (137)
- ------- ------- ------- -------
(456) (47) Net income (loss) (1,197) 134
- ------- ------- ------- -------
Preference share dividends, accretion and amortization
- (464) of issuance costs of preference shares - (1,369)
- ------- ------- ------- -------
$ (456) $ (511) Net income (loss) applicable to common stock $(1,197) $(1,235)
======= ======= ======= =======
Basic net income (loss) per share:
$ (0.03) $ (0.05) Continuing operations $ (0.09) $ (0.11)
- - Discontinued operations - (0.01)
- ------- ------- ------- -------
$ (0.03) $ (0.05) $ (0.09) $ (0.12)
======= ======= ======= =======
Diluted net income (loss) per share:
$ (0.03) $ (0.05) Continuing operations $ (0.09) $ (0.11)
- - Discontinued operations - (0.01)
- ------- ------- ------- -------
$ (0.03) $ (0.05) $ (0.09) $ (0.12)
======= ======= ======= =======
Weighted average common shares outstanding:
13,120 11,075 Basic 13,053 10,674
======= ======= ======= =======
13,120 11,075 Diluted 13,053 10,674
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
4
<PAGE>
Blue Wave Systems Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,197) $ 134
Adjustments to reconcile net income to net cash
provided (used) by operating activities -
Depreciation 1,057 965
Deferred tax provision (benefit) - (436)
Changes in assets and liabilities -
Accounts receivable, net (1,221) 2,218
Inventories, net 266 (1,591)
Prepaid expenses and other 21 (1,060)
Accounts payable and accrued liabilities (530) (2,150)
------- -------
Net cash used by operating activities (1,604) (1,920)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery, equipment, furniture and fixtures (571) (927)
Proceeds from dispositions of fixed assets held for sale 53 -
Purchases of marketable securities - -
Proceeds from maturities of marketable securities 3,062 4,568
------- -------
Net cash provided by investing activities 2,544 3,641
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock warrants and options 131 592
Purchase of treasury stock - (573)
Net proceeds (net reductions) associated with bank borrowings (891) 1,954
Net payments on capital lease obligations - (242)
------- -------
Net cash provided (used) by financing activities (760) 1,731
------- -------
Effect of translation rates on cash (104) 62
Net decrease in cash attributable to overlapping period - (562)
NET INCREASE IN CASH AND CASH EQUIVALENTS 76 2,952
CASH AND CASH EQUIVALENTS, beginning of period 1,060 2,406
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,136 $ 5,358
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for income taxes $ - $ 596
Cash paid for interest 173 104
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
1. Basis of Presentation
While the accompanying interim consolidated financial statements are
unaudited, they have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, all material adjustments and disclosures necessary to fairly present
the results of such periods have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended June 30,
1998, as included in Form 10-K, previously filed. Certain previously reported
amounts have been reclassified to conform with the current year presentation.
The interim results of operations for the period ended March 31, 1999, are not
necessarily indicative of results to be expected for the year ending June 30,
1999.
The accompanying consolidated financial statements for periods presented
during fiscal year 1998 have been prepared to give retroactive effect to the
combination with Loughborough Sound Images Limited ("Sub" or "LSI") on April 27,
1998, which has been accounted for as a pooling of interests. The accompanying
restated consolidated statements of operations and cash flows for the three and
the nine months ended March 31, 1998, combine Blue Wave's historical statements
of operations and cash flows with the corresponding Sub historical statements of
operations and cash flows for the same time period.
The table below presents a reconciliation of revenues and net income (loss)
for the three and the nine months ended March 31, 1998, as reported in the
consolidated statements of operations with those previously reported by the
Company. The references to Blue Wave in this table are to the Company's
historical operating results prior to the acquisition of Sub (in thousands):
Three months ended Nine months ended
March 31, 1998 March 31, 1998
------------------ -----------------
REVENUES:
Blue Wave $ 3,414 $ 9,145
Sub 4,590 16,516
------- -------
Total consolidated revenue $ 8,004 $25,661
======= =======
NET INCOME (LOSS):
Blue Wave $ 218 $ 335
Sub (729) (1,570)
------- -------
Total consolidated net income (loss) $ (511) $(1,235)
======= =======
Included in the net income (loss) of Sub for the nine months ended March
31, 1998 was a loss from discontinued operations of $137,000, which was net of
an income tax benefit of $62,000.
2. Marketable Securities
The Company has determined that all of its marketable securities should be
classified as available for sale and reflected in the accompanying balance sheet
at their respective market values. The Company's results of operations include
earnings from such securities as calculated on a yield-to-maturity basis.
Unrealized gains and losses from the changes in fair value are excluded from
income and are reported as an adjustment to stockholders' equity, net of the
deferred tax effect. The Company's marketable securities consist of direct and
implied obligations of the U. S. Government and investment grade corporate debt
securities.
The Company did not invest in or use derivative financial instruments
during the periods presented.
6
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
3. Inventories
Inventories at March 31, 1999 and June 30, 1998, consisted of the following
(in thousands):
March 31, 1999 June 30, 1998
-------------- -------------
Raw materials $ 2,074 $ 1,908
Work-in-process 2,118 1,969
Finished goods 1,400 1,893
Reserves (1,702) (1,614)
------- -------
Inventories, net $ 3,890 $ 4,156
======= =======
4. Debt
Lines of Credit
In order to fund current operations and the payment of merger related
expenses the Company has in place credit facilities with a commercial bank in
the United States and a commercial bank in the United Kingdom. Following is a
description of these credit facilities:
Facility with U.S. Bank--In December 1998, the Company entered into a
$2,500,000 revolving line of credit agreement with a commercial bank (U.S.
Agreement) which expires December 31, 1999. Loans made pursuant to the U.S.
Agreement are secured by all assets in the United States and bear interest at
varying rates, as defined. The rate for borrowings at March 31, 1999 was prime
(7.75%) plus 1.0%, for a total rate of 8.75%. Borrowings are limited to a
lending formula which is based on eligible trade accounts receivable, as
defined. At March 31, 1999 the balance outstanding was $473,000. The U.S.
Agreement contains a number of covenants including the maintenance of certain
financial ratios and the prohibition of certain transactions, as defined. The
failure of the Company to meet each covenant could be considered an event of
default which would enable the lender to demand immediate acceleration of the
loan. As a result of the loss incurred in the quarter ended March 31, 1999, the
Company violated one of the financial covenants of the U. S. Agreement. The
Bank issued a written waiver of this violation.
Facility with U.K. Bank--In December 1998, the Company finalized a renewal
agreement for (Pounds)1,000,000 (approximately $1,610,000) with a commercial
bank (U.K. Renewal Agreement) which is due upon demand. Loans made pursuant to
the U.K. Renewal Agreement are secured by all assets in the United Kingdom and
bear interest at the bank's base rate (5.5% at March 31, 1999) plus 1.75%, for a
total rate of 7.25% at March 31, 1999. The lending formula is calculated based
on eligible accounts receivable and inventory, as defined. At March 31, 1999
the balance outstanding was (Pounds)581,000 (approximately $938,000).
Long-term Debt
In connection with the establishment of an employee stock ownership plan
("ESOP"), the Company has guaranteed the debt of the ESOP. The guarantee
required the Company to place cash in escrow in an amount equal to the debt.
Such cash has been reflected as restricted cash in the accompanying consolidated
balance sheets. The guarantee is reflected as long-term debt in the accompanying
consolidated balance sheets. This debt consists of a note payable to a
commercial bank with interest at the bank's base rate (5.5% at March 31, 1999)
plus 1.50%, for a total rate of 7.0% at March 31, 1999. The note is payable in
2002. The debt agreements related to this note contain warranties and covenants
and require maintenance of certain financial ratios. Default on any warranty or
covenant could, if not waived or corrected, accelerate the maturity of any
borrowings outstanding. Management believes the Company is in compliance with
such warranties and covenants.
7
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
5. Income Taxes
At fiscal year-end 1998, Blue Wave had federal and foreign net operating
loss (NOL) carryforwards of approximately $8,300,000 and $2,000,000,
respectively, which begin to expire in 2002. Research and development tax credit
carryforwards of approximately $41,000 at fiscal year end 1998, were also
available to reduce future federal income taxes. Pursuant to Section 382 of the
Internal Revenue Code, a change in ownership occurred with the initial public
offering of Blue Wave in 1995. As a result, Blue Wave was subject to a
$2,300,000 annual net operating loss utilization limitation. A change in
ownership pursuant to Section 382 also occurred with the combination. As a
result, Blue Wave will be subject to a $1,373,000 annual net federal operating
loss utilization limitation.
Blue Wave had net deferred tax assets of approximately $500,000 at fiscal
year end 1998 and March 31, 1999, which is reflected in the accompanying balance
sheets. These deferred tax assets are reflected net of a valuation allowance. In
accordance with the criteria contained in SFAS No. 109, "Accounting for Income
Taxes," the Company has recorded a valuation allowance against a portion of its
total NOL. Blue Wave believes it is more likely than not that it will be able to
realize the benefit of this net deferred tax asset. Among the factors the
Company considers when making this evaluation are the (1) potential changes in
operations which management believes will expand its product capabilities and
customer base, (2) cost reduction or synergies to be gained from the combination
of Mizar and LSI, (3) the realignment of the Company including its strategy to
expand its markets in the telecommunications industry, (4) the introduction of
systems based upon new DSP microprocessors, (5) limitation of the net operating
loss carryforwards, as described above, related to the LSI merger, (6) and
projections of sufficient taxable US income to fully realize the net realized
deferred tax asset by the end of calendar year 2000. Management continually
evaluates the realizability of the net deferred tax assets and the need for a
valuation allowance on such assets.
6. Income (Loss) Per Share
Basic and diluted net loss per share for the three and the nine months
ended March 31, 1999 were computed by dividing net loss attributable to common
stock by the weighted average number of shares of common stock outstanding
during the period. Basic and diluted net loss per share for the three and the
nine months ended March 31, 1998 were computed by dividing net loss by the
weighted average number of shares of common stock outstanding during the period,
as adjusted, on a historical basis, for the exchange ratio applied in the
combination. Other dilutive securities outstanding during these periods were
anti-dilutive to the net loss per share, and were not used to calculate diluted
loss per share. Shares used in basic and diluted net loss per share calculations
are presented below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic:
- ------
Weighted average common stock outstanding
during the period 13,120 11,075 13,053 10,674
====== ====== ====== ======
Diluted:
- --------
Weighted average common stock outstanding
during the period 13,120 11,075 13,053 10,674
Other dilutive securities of stock option/warrant programs N/A N/A N/A N/A
------ ------ ------ ------
Shares used in calculation of diluted income (loss) per share 13,120 11,075 13,053 10,674
====== ====== ====== ======
</TABLE>
Dilutive securities equivalent to approximately 726,000, 622,000, 1,674,000
and 2,104,000 shares of common stock were outstanding during the three and the
nine months ended March 31, 1999 and 1998, respectively, but were not included
in the computation of diluted EPS because the Company incurred a net loss. The
inclusion of these options would have been anti-dilutive to diluted EPS. Stock
options scheduled to expire within the five years following March 31, 1999,
aggregate 606,501 underlying shares, exercisable for a total of approximately
$226,000, and begin to expire in 2002. Additional disclosures regarding the
stock option plan activity during the past three fiscal years is disclosed in
Note 13 to the consolidated financial statements in the Company's Form 10-K for
the year ended June 30, 1998.
8
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
7. Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, in
fiscal 1999. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the total of net
income (loss) and all other non-owner changes in equity. Excluding net income
(loss), the Company currently has two types of non-owner changes in equity,
including foreign currency translation gains and losses and unrealized gains and
losses on investments. The computation of comprehensive income (loss) for the
three and the nine months ended March 31, 1999 and 1998 follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net (loss) $ (456) $ (511) $(1,197) $(1,235)
Foreign currency translation adjustment (196) 67 (184) 235
Net unrealized gain on marketable securities -- 2 -- 15
------- ------- ------- -------
Total comprehensive income (loss) $ (652) $ (442) $(1,381) $ (985)
======= ======= ======= =======
</TABLE>
8. Recently Issued Accounting Pronouncements
The Company has adopted SFAS No. 131, Disclosure about Segments of An
Enterprise and Related Information, in fiscal 1999. This pronouncement changes
requirements under which public businesses must report segment information. The
objective of the pronouncement is to provide information about a company's
different types of business activities and different economic environments.
SFAS No. 131 requires companies to select segments based on their internal
reporting system. The adoption of SFAS No. 131 is required for fiscal years
beginning after December 15, 1997, however application is not required for
interim periods in the initial year of its application. The Company is
currently evaluating the impact that the adoption of SFAS 131 will have on the
Company's financial statement disclosures.
The 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.
9
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
9. Stockholders' Equity
Common Stock
During 1997, the Company announced plans to repurchase up to $2,000,000
worth of its common stock outstanding. Through September 30, 1997, a total of
281,900 shares had been repurchased at a total cost of $1,081,000. In the second
quarter of fiscal 1998, the Board of Directors canceled the stock repurchase
plan.
Preferred Stock
On April 10, 1997, Sub entered into an agreement with Boston Holdings
Limited ("BHL"), a subsidiary of BancBoston Capital Limited, to sell to BHL at a
subscription price of (Pounds)5,500,000 (approximately $8,914,000), 5,500,000
preference shares, one "B" ordinary share, and warrants to acquire an additional
20,115 "B" ordinary shares. Under the terms of Sub's Articles of Association,
any proceeds resulting from the exercises of the warrants was to be used to
redeem the preference shares. Contemporaneously with the combination, this
warrant was exercised for (Pounds)3,318,975 (or approximately $5,571,000) and
was converted into 1,903,522 common shares of Blue Wave Systems.
The preference shares and accrued dividends thereon ranked first in
liquidation priority over all other equity shares and accrued first preference
cumulative dividends of 6% per annum beginning on April 1, 1998, such dividends
being payable in cash biannually on March 31 and September 30. The preference
shares also accrued a second preference cumulative dividend of 8% per annum
until March 31, 1998, and 2% per annum thereafter, and such dividends were paid
as one additional preference share for each pound sterling in dividends due on
March 31 and September 30. Dividends accrued between March 31, 1998 and the
date of redemption were paid in cash.
10
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The consolidated financial statements for periods presented for fiscal year
1998 have been prepared to give retroactive effect to the combination with
Loughborough Sound Images Limited ("Sub" or "LSI") on April 27, 1998, which has
been accounted for as a pooling of interests. The restated consolidated
statements of operations and cash flows for the three and the nine months ended
March 31, 1998, combine Blue Wave's historical statements of operations and cash
flows with the corresponding Sub historical statements of operations and cash
flows for the same time period.
The following table expresses the Company's statements of operations as a
percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 45% 45% 46% 44%
---- ---- ---- ----
Gross margin 55% 55% 54% 56%
Operating expenses:
Product development and engineering 20% 24% 20% 22%
Sales and marketing 29% 24% 28% 23%
General and administrative 12% 11% 11% 12%
---- ---- ---- ----
Total operating expenses 61% 59% 59% 57%
---- ---- ---- ----
Operating loss -6% -4% -5% -1%
Total other income (expense) -1% 2% 0% 2%
---- ---- ---- ----
Income (loss) from continuing operations
before provision (benefit) for income taxes -7% -2% -5% 1%
Provision (benefit) for income taxes 0% -1% 0% -1%
---- ---- ---- ----
Income (loss) from continuing operations -7% -1% -5% 2%
Loss from discontinued operations, net of
tax benefit 0% 0% 0% -1%
---- ---- ---- ----
Net income (loss) -7% -1% -5% 1%
==== ==== ==== ====
</TABLE>
Results of operations for the three months ended March 31, 1999 compared to the
three months ended March 31, 1998
For the three months ended March 31, 1999 the Company reported net sales of
$6,700,000, as compared to $8,004,000 in the same period of the prior year. The
decrease in net sales is mainly attributable to the delays of initial product
deliveries into two defense programs. The Company's net sales during the past
several quarters has also been significantly effected by recently introduced
next generation DSPs, including the C6000 family of DSPs offered by Texas
Instruments ("TI"). The C6000 family represents a 10x improvement in
performance over existing DSPs. DSPs comprise a key portion of the technology
content of the Company's products and the majority of the Company's DSP-based
revenues are derived from products that incorporate TI DSPs. Market interest in
recently introduced products that utilize next generation DSPs has been at the
expense of the Company's existing products that incorporate previous generation
DSPs. The Company believes that its newer C6000-based products will be able to
serve a much larger market as new emerging applications utilize high-performance
DSP-based sub-systems and, leverage the Company's signal processing design
expertise. When TI introduced their C4x family of DSPs in 1992, the Company
experienced a similar revenue trend for existing products followed by a
significant increase in revenue as the C4x family of DSPs were incorporated into
new applications.
A significant portion of the Company's sales are to prime contractors for
the federal government and are used in defense, aviation and intelligence
applications. The Company believes that the trend of the federal government is
to emphasize the purchase of commercial off-the-shelf (COTS) products versus
proprietary designs dedicated to a specific application and expects this trend
will have a positive impact on revenues in the future. More recently, the
Company has also experienced a significant increase in bookings for "ruggedized"
DSP-based products that are designed for harsh environments. The time lag
between order booking and revenue recognition associated with "ruggedized"
products can be much longer due to engineering effort, component ordering and
manufacturing lead-times. Previously, a large portion of the Company's DSP
business was modest orders for relatively standard products. These products were
used to prove a concept or deploy a small number of prototypes or systems.
Customer orders for "ruggedized" products typically are quite large and result
in a high degree of variability in bookings during any given three month
measurement period. The
11
<PAGE>
customer order backlog was $16,100,000 at March 31, 1999, as compared to
$11,298,000 at June 30, 1998. Certain customer orders may be subject to
cancellation and/or revision and therefore backlog is not a guarantee of future
revenue.
Gross margin percent for the three months ended March 31, 1999 was 55%, as
compared to 55% for the same period in the prior year. Although there was no
change in the gross margin percentage, there was a decrease in functional
spending for the three months ended March 31, 1999 as compared to the three
months ended March 31, 1998. The reduction in functional spending includes a
reduction in force that was a part of the Company's post-merger organization
plan. The Company's historical gross margin percentage has also varied by
quarter in both a positive and negative fashion due to volume-related
efficiencies, changes in product and customer mix, and provisions for
manufacturing scrap and obsolescence.
During the three months ended March 31, 1999 product development and
engineering expenses were $1,328,000, or 20% of net sales, compared to
$1,918,000, or 24% of net sales, during the same period in the prior year. The
reduction in absolute spending is the result of the Company's focus on specific
vertical markets and certain cost benefits attributable to the post-merger
organization plan.
During the three months ended March 31, 1999 sales and marketing expenses
were essentially flat when compared to the same period of the prior year.
Certain cost benefits were realized as a result of the post-merger organization
plan, however, those savings have been invested in technical sales support
functions as well as marketing efforts for the new ComStruct(TM) product line.
During the three months ended March 31, 1999 general and administrative
expenses were $833,000, or 12% of net sales, as compared to $886,000, or 11% of
net sales, during the same period in the prior year. The reduction in absolute
spending is the result of implementing the post-merger organization plan and
realizing other cost benefits as a result of the combination.
During the three months ended March 31, 1999 total other income (expense)
declined to $(14,000), as compared to $151,000 during the same period in the
prior year. The change is due to both a decline in interest income and an
increase in interest expense associated with bank credit facilities. The
redemption of the preference shares owned by Boston Holdings, Ltd., net of a
warrant exercise, consumed approximately $4.5 million in cash in 1998. Cash
consumed for merger related expenses and implementing the post-merger
organization plan was an additional $3.9 million during the 21 months ended
March 31, 1999. Operating losses, capital expenditures, and other items
consumed an additional $3 million in cash during the 21 months ended March 31,
1999.
The Company reported a net loss of $456,000 for the three months ended
March 31, 1999 as compared to a net loss applicable to common stock of $511,000
during the same period in the prior year. The decrease in net sales was offset
by the reduction in functional spending attributable to the significant
reductions created by implementing the post-merger organization plan. The
production delays that occurred in the third quarter of 1999 caused the loss
that was incurred during the quarter.
Results of operations for the nine months ended March 31, 1999 compared to the
nine months ended March 31, 1998
For the nine months ended March 31, 1999 the Company reported net sales of
$21,303,000, as compared to $25,661,000 in the same period of the prior year.
The Company's net sales during the past several quarters have been significantly
effected by recently introduced next generation DSPs, including the C6000 family
of DSPs offered by Texas Instruments ("TI"). The C6000 family represents a 10x
improvement in performance over existing DSPs. DSPs comprise a key portion of
the technology content of the Company's products and the majority of the
Company's DSP-based revenues are derived from products that incorporate TI DSPs.
Market interest in recently introduced products that utilize next generation
DSPs has been at the expense of the Company's existing products that incorporate
previous generation DSPs. The Company believes that its newer C6000-based
products will be able to serve a much larger market as new emerging applications
utilize high-performance DSP-based sub-systems and, leverage the Company's
signal processing design expertise. When TI introduced their C4x family of DSPs
in 1992, the Company experienced a similar revenue trend for existing products
followed by a significant increase in revenue as the C4x family of DSPs were
incorporated into new applications.
Gross margin percent for the nine months ended March 31, 1999 was 54%, as
compared to 56% for the same period in the prior year. The decline in gross
margin percentage is due to the high margin % reported in the September quarter
of fiscal 1998. That quarter represented a record revenue level for the Company
and the associated fixed costs of
12
<PAGE>
manufacturing the Company's products were spread over a much larger revenue
base. Those fixed manufacturing costs have recently been reduced as a result of
implementing the post-merger organization plan.
During the nine months ended March 31, 1999 product development and
engineering expenses were $4,184,000, or 20% of net sales, compared to
$5,543,000, or 22% of net sales, during the same period in the prior year. The
reduction in absolute spending is the result of the Company's focus on specific
vertical markets and certain cost benefits attributable to the post-merger
organization plan.
During the nine months ended March 31, 1999 sales and marketing expenses
were essentially flat when compared to the same period in the prior year.
Certain cost benefits were realized as a result of the post-merger organization
plan, however, those savings have been invested in technical sales support
functions as well as marketing efforts for the new ComStruct(TM) product line.
During the nine months ended March 31, 1999 general and administrative
expenses were $2,418,000, or 11% of net sales, as compared to $3,153,000, or 12%
of net sales, during the same period in the prior year. The reduction in
absolute spending is the result of implementing the post-merger organization
plan and realizing other cost benefits as a result of the combination.
During the nine months ended March 31, 1999 total other income (expense)
declined to $(27,000), as compared to $483,000 during the same period in the
prior year. The change is due to both a decline in interest income and an
increase in interest expense associated with bank credit facilities. The
redemption of the preference shares owned by Boston Holdings, Ltd., net of a
warrant exercise, consumed approximately $4.5 million in cash in 1998. Cash
consumed for merger related expenses and implementing the post-merger
organization plan was an additional $3.9 million during the 21 months ended
March 31, 1999. Operating losses, capital expenditures, and other items
consumed an additional $3 million in cash during the 21 months ended March 31,
1999.
The Company reported a net loss of $1,197,000 for the nine months ended
March 31, 1999 as compared to a net loss applicable to common stock of
$1,235,000 during the same period in the prior year. The loss is attributable to
the 17% decline in net sales somewhat offset by significant operating expense
reductions created by implementing the post-merger organization plan.
Liquidity and Capital Resources
The Company's total cash, cash equivalents and purchased marketable
securities were $1,943,000 at March 31, 1999, as compared to $4,957,000 at June
30, 1998. Net working capital at March 31, 1999, was $5,917,000, as compared to
$6,568,000 at June 30, 1998, a decrease of $651,000. Accounts receivable at
March 31, 1999 increased significantly over the June 30, 1998 balance primarily
due to the timing of shipments during each respective quarter.
Expenditures for capital equipment were $571,000 for the nine months ended
March 31, 1999, as compared to $927,000 in the prior year.
During the nine months ended March 31, 1999 the Company has consumed cash
approximating $3 million but decreased its short-term bank borrowings by
approximately $900,000. The cash consumption during this period is attributable
to the payment of merger related expenses of approximately $1.2 million and a
$1.2 million increase in accounts receivable due to the timing of shipments
during each respective quarter. In order to fund current operations and the
payment of merger related expenses the Company has in place credit facilities
with a commercial bank in the United States and a commercial bank in the United
Kingdom. Following is a description of these credit facilities:
Facility with U.S. Bank--In December 1998, the Company entered into a
$2,500,000 revolving line of credit agreement with a commercial bank (U.S.
Agreement) which expires December 31, 1999. Loans made pursuant to the U.S.
Agreement are secured by all assets in the United States and bear interest at
varying rates, as defined. The rate for borrowings at March 31, 1999 was prime
(7.75%) plus 1.0%, for a total rate of 8.75%. Borrowings are limited to a
lending formula which is based on eligible trade accounts receivable, as
defined. At March 31, 1999 the balance outstanding was $473,000. The U.S.
Agreement contains a number of covenants including the maintenance of certain
financial ratios and the prohibition of certain transactions, as defined. The
failure of the Company to meet each covenant could be considered an event of
default which would enable the lender to demand immediate acceleration of the
loan. As a result of the loss incurred in the quarter ended March 31, 1999, the
Company violated one of the financial covenants of the U. S. Agreement. The
Bank issued a written waiver of this violation. Any significant negative change
to the lending formula under this agreement or acceleration of amounts due would
have a material negative impact upon the Company's ability to fund its
13
<PAGE>
1999 operating plan.
Facility with U.K. Bank--In December 1998, the Company finalized a renewal
agreement for (Pounds)1,000,000 (approximately $1,610,000) with a commercial
bank (U.K. Renewal Agreement) which is due upon demand. Loans made pursuant to
the U.K. Renewal Agreement are secured by all assets in the United Kingdom and
bear interest at the bank's base rate (5.5% at March 31, 1999) plus 1.75%, for a
total rate of 7.25% at March 31, 1999. The lending formula is calculated based
on eligible accounts receivable and inventory, as defined. At March 31, 1999
the balance outstanding was (Pounds)581,000 (approximately $938,000). Any
significant reduction in the borrowing capacity allowable under this agreement
or acceleration of amounts due would have a material negative impact upon the
Company's ability to fund its 1999 operating plan.
In connection with the establishment of an employee stock ownership plan
("ESOP"), the Company has guaranteed the debt of the ESOP. The guarantee
required the Company to place cash in escrow in an amount equal to the debt.
Such cash has been reflected as restricted cash in the accompanying consolidated
balance sheets. The guarantee is reflected as long-term debt in the
accompanying consolidated balance sheets. This debt consists of a note payable
to a commercial bank with interest at the bank's base rate (5.5% at March 31,
1999) plus 1.50%, for a total rate of 7.0% at March 31, 1999. The note is
payable in 2002. The debt agreements related to this note contain warranties and
covenants and require maintenance of certain financial ratios. Default on any
warranty or covenant could, if not waived or corrected, accelerate the maturity
of any borrowings outstanding. Management believes the Company is in compliance
with such warranties and covenants.
Management believes that through its cash resources and currently available
debt facilities it will have adequate resources to fund the Company's 1999
operating plan. The Company will, from time to time, evaluate potential
strategic transaction opportunities including acquisitions and joint ventures.
In order to fund such transactions the Company may find it necessary to seek
additional capital via either a debt or equity offering.
Year 2000 Initiatives
The Company has implemented a plan ("Y2K Plan") to attempt to assess and
mitigate the potential impact of the Year 2000 problem throughout the Company.
This problem can arise when time-sensitive embedded software utilizes a two
digit year date field, sorting years beginning in 2000 ("00") before the year
1999 ("99"). Improper sorting can result in data corruption and processing
errors. This problem can be present in licensed software, software developed
for internal use, software developed for customer use, and technology equipment.
Additionally, Year 2000 problems resident with key business partners to the
Company must also be identified and addressed.
The Company has completed a detailed assessment of its internal systems and
will have to replace portions of software used internally so that its computer
systems will function properly with respect to dates beginning in 2000, and
thereafter. Year 2000 compliance questionnaires are being sent to key suppliers
and a monitoring process has been established to ensure the suppliers respond
and comply with the requirements. 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 no corrective action. Compliance testing of the remaining
areas are scheduled for completion by June 30, 1999. Any necessary corrective
actions are scheduled for completion by August 31, 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 of the Company fails
to be Y2K compliant, the Company could suffer a material loss of business or
incur significant additional expenses. The Company has developed the framework
for contingency plans in the event it or third parties are unable to complete
system modifications to address the Year 2000 issue.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Other than historical facts, disclosures and statements made by the Company
should be considered forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These disclosures and
statements
14
<PAGE>
involve a number of risks and uncertainties including, but not limited to,
technological change, quarterly fluctuations, integration of Mizar and
Loughborough Sound Images, dependence on the defense industry, dependence upon
key suppliers and employees, competition, and Year 2000 compliance. The
foregoing list should not be construed as exhaustive and the Company disclaims
any obligation subsequently to revise forward-looking statements to reflect
unanticipated events. For a further explanation of risk factors, please see the
Company's most recent SEC filings. The Company further cautions users who may
utilize published bookings and backlog information as tools to forecast the
Company's revenue during a given timeframe since certain purchase orders may be
subject to 1) cancellation and, 2) revision to delivery schedules.
15
<PAGE>
Blue Wave Systems Inc.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation S-K)
11(a) Computation of Per Share Loss for the three months ended March
31, 1999 and 1998.
11(b) Computation of Per Share Loss for the nine months ended March 31,
1999 and 1998.
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K
None.
16
<PAGE>
Blue Wave Systems Inc.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Blue Wave Systems Inc.
Date: May 14, 1999 By /s/ Charles D. Brockenbush
------------ --------------------------------
Charles D. Brockenbush
Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
<PAGE>
Exhibit Index
Exhibit
No. Description
- ------- ----------------------------
11(a) Computation of Per Share Loss for the three months ended March 31,
1999 and 1998.
11(b) Computation of Per Share Loss for the nine months ended March 31, 1999
and 1998.
27 Financial Data Schedule (filed electronically only).
<PAGE>
Exhibit 11(a)
Blue Wave Systems Inc.
Computation of Per Share Loss
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------- -------
<S> <C> <C>
Basic Loss Per Share:
Net loss applicable to common stock $ (456) $ (511)
======= =======
Weighted average shares outstanding 13,120 11,075
Basic loss per share $ (0.03) $ (0.05)
======= =======
Diluted Loss Per Share:
Weighted average shares outstanding 13,120 11,075
Effect of common stock equivalents:
Options granted 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
Effect of using option proceeds to repurchase common stock at
average fair market value N/A N/A
------- -------
Total common stock equivalents - -
------- -------
13,120 11,075
------- -------
Diluted loss per share $ (0.03) $ (0.05)
======= =======
</TABLE>
<PAGE>
Exhibit 11(b)
Blue Wave Systems Inc.
Computation of Per Share Loss
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
1999 1998
------- -------
<S> <C> <C>
Basic Loss Per Share:
Net loss applicable to common stock $(1,197) $(1,235)
======= =======
Weighted average shares outstanding 13,053 10,674
Basic loss per share $ (0.09) $ (0.12)
======= =======
Diluted Loss Per Share:
Weighted average shares outstanding 13,053 10,674
Effect of common stock equivalents:
Options granted 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
Effect of using option proceeds to repurchase common stock at
average fair market value N/A N/A
------- -------
Total common stock equivalents - -
------- -------
13,053 10,674
------- -------
Diluted loss per share $ (0.09) $ (0.12)
======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BLUE WAVE SYSTEMS AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,943
<SECURITIES> 0
<RECEIVABLES> 6,380
<ALLOWANCES> 184
<INVENTORY> 3,890
<CURRENT-ASSETS> 13,541
<PP&E> 10,251
<DEPRECIATION> 6,665
<TOTAL-ASSETS> 17,683
<CURRENT-LIABILITIES> 7,624
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 8,052
<TOTAL-LIABILITY-AND-EQUITY> 17,683
<SALES> 21,303
<TOTAL-REVENUES> 21,303
<CGS> 9,756
<TOTAL-COSTS> 9,756
<OTHER-EXPENSES> 12,673
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 163
<INCOME-PRETAX> (1,153)
<INCOME-TAX> 44
<INCOME-CONTINUING> (1,197)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,197)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
