<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
______________________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________to________________
Commission File Number 0-26858
BLUE WAVE SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1425902
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2410 Luna Road 75006
Carrollton, Texas (Zip Code)
(Address of principal executive offices)
(972) 277-4600
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_______
------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class November 8, 1999
----- ----------------
Common Stock, par value $0.01 per share 14,358,230
<PAGE>
Blue Wave Systems Inc.
Form 10-Q
For the Quarter Ended September 30, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets
September 30 and June 30, 1999 3
Statements of Operations
for the three months ended September 30, 1999 and 1998 4
Statements of Cash Flows
for the three months ended September 30, 1999 and 1998 5
Notes to Interim Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
</TABLE>
2
<PAGE>
Blue Wave Systems Inc.
Consolidated Balance Sheets
(in thousands, except par value per share)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- ---------
(unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 865 $ 551
Restricted cash 823 788
Accounts receivable, net of allowances of $157 and $198, respectively 6,833 6,266
Inventories, net 6,528 5,119
Prepaid expenses and other 449 541
Deferred tax asset 271 271
------------ --------
Total current assets 15,769 13,536
------------ --------
Plant and equipment:
Machinery and equipment 7,517 7,211
Furniture and fixtures 2,744 2,643
------------ --------
10,261 9,854
Less accumulated depreciation (7,095) (6,584)
------------ --------
Plant and equipment, net 3,166 3,270
------------ --------
Deferred tax asset-noncurrent 1,107 1,095
Other assets 81 77
------------ --------
Total assets $ 20,123 $ 17,978
============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 4,756 $ 5,071
Accrued compensation 221 437
Other current liabilities 1,329 1,703
Lines of credit 1,306 1,707
------------ --------
Total current liabilities 7,612 8,918
------------ --------
Deferred income taxes 857 821
Noncurrent liabilities 92 104
Long-term debt, net of current maturities 823 788
------------ --------
Total liabilities 9,384 10,631
------------ --------
Stockholders' equity:
Preference stock, $.01 par value; 1,000 shares authorized; no shares
issued and outstanding at September 30 and June 30, 1999 - -
Common stock, $.01 par value; 50,000 shares authorized; 14,880 and 13,665 shares
issued; 14,134 and 12,919 shares outstanding at September 30 and June 30, 1999,
respectively 149 137
Additional paid-in capital 25,140 23,103
Additional paid-in capital - warrants outstanding 936 -
Accumulated deficit (13,959) (14,231)
Accumulated other comprehensive loss (126) (261)
------------ --------
12,140 8,748
------------ --------
Less -- treasury stock, at cost (1,401) (1,401)
------------ --------
Total stockholders' equity 10,739 7,347
------------ --------
Total liabilities and stockholders' equity $ 20,123 $ 17,978
============ ========
</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
September 30,
1999 1998
---- ----
<S> <C> <C>
Net sales $ 7,391 $ 6,806
Cost of sales 3,358 3,252
-------- ---------
Gross margin 4,033 3,554
Operating expenses:
Product development and engineering 1,075 1,455
Sales and marketing 1,782 2,034
General and administrative 846 825
-------- ---------
Total operating expenses 3,703 4,314
-------- ---------
Operating income (loss) 330 (760)
-------- ---------
Other income (expense):
Interest expense (52) (60)
Interest income 3 46
Other, net 19 20
-------- ---------
Total other income (expense) (30) 6
-------- ---------
Income (loss) before provision for income taxes 300 (754)
Provision for income taxes 28 23
-------- ---------
Net income (loss) $ 272 $ (777)
======== =========
Basic net income (loss) per share $ 0.02 $ (0.06)
======== =========
Diluted net income (loss) per share $ 0.02 $ (0.06)
======== =========
Weighted average common shares outstanding:
Basic
13,639 13,014
======== =========
Diluted 14,053 13,014
======== =========
</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>
Three Months Ended
September 30,
1999 1998
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 272 $ (777)
Adjustments to reconcile net income (loss) to net cash
used by operating activities -
Depreciation 309 354
Deferred tax provision 24 9
Changes in assets and liabilities -
Accounts receivable, net (567) (782)
Inventories, net (1,409) 452
Prepaid expenses and other 88 (8)
Accounts payable and accrued liabilities (917) (68)
------- --------
Net cash used by operating activities (2,200) (820)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery, equipment, furniture and fixtures (93) (145)
Proceeds from dispositions of fixed assets held for sale - 35
Proceeds from maturities of marketable securities - 1,970
------- --------
Net cash (used) provided by investing activities (93) 1,860
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock and warrants (net of expenses) 2,929 -
Exercise of stock options 56 -
Net proceeds (net reductions) associated with bank borrowings (401) 582
------- --------
Net cash provided by financing activities 2,584 582
------- --------
Effect of translation rates on cash 23 48
NET INCREASE IN CASH AND CASH EQUIVALENTS 314 1,670
CASH AND CASH EQUIVALENTS, beginning of period 551 1,060
------- --------
CASH AND CASH EQUIVALENTS, end of period $ 865 $ 2,730
======= ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for income taxes $ 2 $ -
Cash paid for interest 64 57
</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,
1999, as included in Form 10-K, previously filed. Certain previously reported
amounts have been reclassified to conform with current year presentation. The
interim results of operations for the period ended September 30, 1999, are not
necessarily indicative of results to be expected for the year ending June 30,
2000.
2. Inventories
Inventories at September 30 and June 30, 1999, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
<S> <C> <C>
Raw materials $ 2,961 $ 2,326
Work-in-process 2,757 2,185
Finished goods 2,070 1,705
Reserves (1,260) (1,097)
------- -------
Inventories, net $ 6,528 $ 5,119
======= =======
</TABLE>
3. Debt
Lines of Credit
In order to fund current operations 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 September 30, 1999 was
prime (8.25%) plus 1.0%, for a total rate of 9.25%. Borrowings are governed by a
lending formula which is based on eligible trade accounts receivable, as
defined, and are currently limited to a maximum advance rate of $1,000,000. At
September 30, 1999 there was no balance outstanding. 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 of September 30,
1999, the Company was in compliance with its financial covenants under its
agreement with the U.S. bank.
Facility with U.K. Bank--In July 1999, the Company finalized a renewal
agreement for (Pounds)1,000,000 (approximately $1,650,000) 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 (7.0% at September 30, 1999) plus 1.75%,
for a total rate of 8.75% at September 30, 1999. The lending formula is
calculated based on eligible accounts receivable and inventory, as defined. At
September 30, 1999 the balance outstanding was (Pounds)794,000 (approximately
$1,300,000). As of September 30, 1999, the Company was in compliance with its
financial covenants under its agreement with the U.K. bank.
Long-term Debt
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 the Company's UK subsidiary, 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
6
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
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 (7.0% at September 30, 1999) plus 1.50%, for a
total rate of 8.5% at September 30, 1999. The note is subject to renewal
annually. 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.
4. 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 end 1999, were also
available to reduce future federal income taxes. Pursuant to Section 382 of the
Internal Revenue Code, a change in ownership 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 net federal operating loss carryforward is now
$1,373,000.
Blue Wave had net deferred tax assets of approximately $500,000 at fiscal
year end 1999 and September 30, 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. The Company 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) changes in
operations that have recently occurred, including the acquisition of
Loughborough Sound Images ("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 new DSP microprocessors, (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.
5. Income (Loss) Per Share
Basic net income per share for the three months ended September 30, 1999
was computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted net income per share for the
three months ended September 30, 1999 was computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period presented. Common stock equivalents included in
diluted net income per share are stock options and warrants calculated under the
treasury stock method using the prevailing average market price for the period
presented. Basic and diluted net loss per share for the three months ended
September 30, 1998 were computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the period. Shares used in
basic and diluted net income (loss) per share calculations are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
-------- --------
<S> <C> <C>
Basic:
- ------
Weighted average common stock outstanding during the period 13,639 13,014
======== ========
Diluted:
- --------
Weighted average common stock outstanding during the period 13,639 13,014
Other dilutive securities of stock option/warrant programs 414 N/A
-------- --------
Shares used in calculation of diluted net income (loss) per share 14,053 13,014
======== ========
</TABLE>
7
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
Dilutive securities equivalent to approximately 379,000 shares of common
stock were outstanding during the three months ended September 30, 1998, but
were not included in the computation of diluted EPS because the Company incurred
a net loss. The inclusion of these options would have been anti-dilutive to
diluted EPS. Stock options scheduled to expire within the five years following
September 30, 1999, aggregate 649,001 underlying shares, exercisable for a total
of approximately $260,000, and begin to expire in 2002. Additional disclosures
regarding the stock option plan activity during the past three fiscal years is
disclosed in Note 14 to the consolidated financial statements in the Company's
Form 10-K for the year ended June 30, 1999.
6. Comprehensive Income
The Company 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 months
ended September 30, 1999 and 1998 follows (in thousands):
Three Months Ended
September 30,
1999 1998
------ ------
Net income (loss) $ 272 $(777)
Foreign currency translation adjustment 135 108
Net unrealized gain on marketable securities -- 2
----- -----
Total comprehensive income (loss) $ 407 $(667)
===== =====
7. Operating Segments
The Company's net sales, operating income, capital expenditures,
depreciation and identifiable assets by operating segment were as follows (in
thousands):
<TABLE>
<CAPTION>
For the quarter ended September 30,
1999 1998
--------------------------------------- ------------------------------------------
North Outside of North Outside of
America North America Total America North America Total
-------- ------------- -------- ------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 4,962 $ 2,429 $ 7,391 $ 3,038 $ 3,768 $ 6,806
Operating income (loss) 185 145 330 (261) (499) (760)
Capital expenditures 31 62 93 104 41 145
Depreciation 96 213 309 132 222 354
Identifiable assets 7,697 12,426 20,123 9,687 10,713 20,400
</TABLE>
8. Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 133,
Accounting for Derivative and Similar Financial Instruments For Hedging
Activities, as amended by SFAS No. 137. 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, 2000.
Historically, the Company has not invested in derivatives nor utilized
derivative financial instruments.
8
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
9. Stockholders' Equity
Common Stock
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 shares of
common stock and two warrants convertible, in the aggregate, into 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 has used the proceeds of the
placement for general working capital purposes including reducing borrowing
levels. Using the Black-Scholes option pricing model, the fair value of the
warrants is $936,000, and has been classified separately as Additional Paid-in
Capital - Warrants Outstanding in the accompanying balance sheet as of September
30, 1999.
9
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following table expresses the Company's statements of operations as a
percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Net sales 100% 100%
Cost of sales 45% 48%
---- ----
Gross margin 55% 52%
Operating expenses:
Product development and engineering 15% 21%
Sales and marketing 24% 30%
General and administrative 11% 12%
---- ----
Total operating expenses 50% 63%
---- ----
Operating income (loss) 5% -11%
Total other income (expense) -1% 0%
---- ----
Income (loss) from continuing operations
before provision for income taxes 4% -11%
Provision for income taxes 0% -0%
---- ----
Net income (loss) 4% -11%
==== ====
</TABLE>
Results of operations for the three months ended September 30, 1999 compared to
the three months ended September 30, 1998.
For the three months ended September 30, 1999 (first quarter of fiscal
2000), the Company reported net sales of $7,391,000, compared to $6,806,000 in
the same period last year. This increase is due to shipments of recently
introduced sub-system products which incorporate a new generation of DSP
microprocessors (digital signal processor) developed by Texas Instruments
("TI"). The initial introduction of TI's C6000 family of DSP's in 1997 created a
"technology transition" in the legacy markets that the Company served which in
turn suppressed sales of the Company's sub-system products during portions of
fiscal 1998 and 1999. This new generation of DSP's represent a 10X improvement
in performance over existing DSP's and according to Texas Instruments this
family of DSP's is being designed into new equipment at a rate 5 times greater
than the highest rate of any predecessor DSP developed by TI. The C6000 family
of DSP's is a key element of the Company's recently announced ComStruct(TM)
telecommunications product line.
Gross margin percentage for the three months ended September 30, 1999, was
55%, compared to 52% in the same period last year. This increase is due to a
reduction in the absolute level of departmental spending classified as cost of
sales and the impact of our fixed cost base of manufacturing expenses being
spread over a larger net sales amount. The reduction in absolute spending is the
result of merger related cost synergies that have been realized since the
combination with Loughborough Sound Images in April 1998. 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 September 30, 1999, product development and
engineering expenses were $1,075,000, or 15% of net sales, compared to
$1,455,000, or 21% of net sales, during the same period last 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 September 30, 1999, sales and marketing
expenses were $1,782,000, or 24% of net sales, compared to $2,034,000, or 30% of
net sales, during the same period last year. The reduction in absolute spending
is the result of the Company's focus on specific vertical markets and certain
cost benefits attributable to consolidating respective marketing operations as a
result of implementing the post-merger organization plan.
During the three months ended September 30, 1999, general and
administrative expenses were $846,000, or 11% of net sales, compared to
$825,000, or 12% of net sales, during the same period last year. Increased
spending in investor relations marketing initiatives has offset cost savings
created by implementing the Company's post-merger organization plan.
10
<PAGE>
During the three months ended September 30, 1999, interest expense was
$52,000, compared to $60,000 during the same period last year. Interest expense
is incurred on the Company's credit facilities with two commercial banks. The
level of outstanding debt has been reduced as a result of the $3 million raised
in connection with a private placement of the Company's common stock completed
August 24, 1999.
The Company reported net income of $272,000 for the three months ended
September 30, 1999, compared to a net loss of $(777,000) during the same period
last year. The significant improvement in the Company's net operating result is
attributable to a 9 percent increase in net sales and a 14 percent decrease in
operating expenses.
Liquidity and Capital Resources
The Company's total cash, cash equivalents and purchased marketable
securities were $1,688,000 at September 30, 1999, as compared to $1,339,000 at
June 30, 1999. Net working capital at September 30, 1999, was $8,157,000, as
compared to $4,618,000 at June 30, 1999, an increase of $3,539,000. Inventories
at September 30, 1999 increased significantly since June 30, 1999 due to the
high level of order backlog and the long completion time associated with complex
products.
Expenditures for capital equipment were $93,000 for the three months ended
September 30, 1999, as compared to $145,000 in the prior year.
In order to fund current operations, 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 September 30, 1999 was
prime (8.25%) plus 1.0%, for a total rate of 9.25%. Borrowings are governed by a
lending formula which is based on eligible trade accounts receivable, as
defined, and are currently limited to a maximum advance rate of $1,000,000. At
September 30, 1999 there was no balance outstanding. 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 of September 30,
1999, the Company was in compliance with its financial covenants under its
agreement with the U.S. bank. 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 2000 operating
plan.
Facility with U.K. Bank-- In July 1999, the Company finalized a renewal
agreement for (Pounds)1,000,000 (approximately $1,650,000) 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 (7.0% at September 30, 1999) plus 1.75%,
for a total rate of 8.75% at September 30, 1999. The lending formula is
calculated based on eligible accounts receivable and inventory, as defined. At
September 30, 1999 the balance outstanding was (Pounds)794,000 (approximately
$1,300,000). As of September 30, 1999, the Company was in compliance with its
financial covenants under its agreement with the U.K. bank. 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 2000 operating plan.
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 shares of
common stock and two warrants convertible, in the aggregate, into 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 has used the proceeds of the
placement for general working capital purposes including reducing borrowing
levels. Using the Black-Scholes option pricing model, the fair value of the
warrants is $936,000 and has been classified separately as Additional Paid-in
Capital - Warrants Outstanding in the accompanying balance sheet as of September
30, 1999.
11
<PAGE>
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 the Company's UK subsidiary, 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 (7.0%
at September 30, 1999) plus 1.50%, for a total rate of 8.5% at September 30,
1999. The note is subject to renewal annually. 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 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 by December 20, 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 nearing
completion and any necessary corrective actions are scheduled for completion by
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.
12
<PAGE>
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 involve a number of risks and uncertainties including, but not
limited to, rapid technological change, quarterly fluctuations, integration of
Mizar and Loughborough Sound Images, dependence on the defense industry,
commercial market uncertainties, 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 cancellation and/or
revision to delivery schedules.
13
<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 Net Income (Loss) for the three months
ended September 30, 1999 and 1998.
27 Financial Data Schedule (filed electronically only).
(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.
14
<PAGE>
Blue Wave Systems Inc.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Blue Wave Systems Inc.
Date: November 10, 1999 By /s/ Charles D. Brockenbush
------------------------------------
Charles D. Brockenbush
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<PAGE>
Exhibit Index
Exhibit
No. Description
- -------- ------------------------
11(a) Computation of Per Share Net Income (Loss) for the three months
ended September 30, 1999 and 1998.
27 Financial Data Schedule (filed electronically only).
16
<PAGE>
Exhibit 11(a)
Blue Wave Systems Inc.
Computation of Per Share Net Income (Loss)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
------- --------
<S> <C> <C>
Basic Net Income (Loss) Per Share:
Net income (loss) applicable to common stock $ 272 $ (777)
======= ========
Weighted average shares outstanding 13,639 13,014
Basic net income (loss) per share $ 0.02 $ (0.06)
======= ========
Diluted Net Income (Loss) Per Share:
Weighted average shares outstanding 13,639 13,014
Effect of common stock equivalents:
Options granted and warrants issued 1,148 N/A
Weighted average exercised options outstanding for portion of period,
net of equivalent shares purchased at average fair market value 1 N/A
Effect of using option and warrant proceeds to repurchase common
stock at average fair market value (735) N/A
------- --------
Other dilutive securities 414 -
------- --------
Weighted average diluted shares outstanding 14,053 13,014
------- --------
Diluted net income (loss) per share $ 0.02 $ (0.06)
======= ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BLUE WAVE SYSTEMS INC. AS OF SEPTEMBER 30, 1999 AND FOR
THE THREE MONTHS THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,688
<SECURITIES> 0
<RECEIVABLES> 6,990
<ALLOWANCES> 157
<INVENTORY> 6,528
<CURRENT-ASSETS> 15,769
<PP&E> 10,261
<DEPRECIATION> 7,095
<TOTAL-ASSETS> 20,123
<CURRENT-LIABILITIES> 7,612
<BONDS> 0
0
0
<COMMON> 149
<OTHER-SE> 10,590
<TOTAL-LIABILITY-AND-EQUITY> 20,123
<SALES> 7,391
<TOTAL-REVENUES> 7,391
<CGS> 3,358
<TOTAL-COSTS> 3,358
<OTHER-EXPENSES> 3,703
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> 300
<INCOME-TAX> 28
<INCOME-CONTINUING> 272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 272
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
