<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 March 31, 2000
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
Carrollton, Texas 75006
(Address of principal executive offices) (Zip Code)
(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 1, 2000
----- -----------
Common Stock, par value $0.01 per share 15,647,664
<PAGE>
Blue Wave Systems Inc.
Form 10-Q
For the Quarter Ended March 31, 2000
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets
March 31, 2000 and June 30, 1999 3
Statements of Operations
for the three and the nine months ended March 31, 2000 and 1999 4
Statements of Cash Flows
for the nine months ended March 31, 2000 and 1999 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
2
<PAGE>
Blue Wave Systems Inc.
Consolidated Balance Sheets
(in thousands, except par value per share)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
-------- --------
(unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,691 $ 551
Restricted cash 516 788
Accounts receivable, net of allowances of $187 and $198, respectively 8,942 5,933
Inventories, net 6,691 5,119
Prepaid expenses and other 1,061 874
Deferred tax asset 271 271
-------- --------
Total current assets 22,172 13,536
-------- --------
Plant and equipment:
Machinery and equipment 7,654 7,211
Furniture and fixtures 2,667 2,643
-------- --------
10,321 9,854
Less accumulated depreciation (7,515) (6,584)
-------- --------
Plant and equipment, net 2,806 3,270
-------- --------
Deferred tax asset-noncurrent 1,342 1,095
Other assets 20 77
-------- --------
Total assets $ 26,340 $ 17,978
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 6,092 $ 5,071
Accrued compensation 326 437
Other current liabilities 1,230 1,703
Lines of credit -- 1,707
-------- --------
Total current liabilities 7,648 8,918
-------- --------
Deferred income taxes 830 821
Noncurrent liabilities 59 104
Long-term debt, net of current maturities 516 788
-------- --------
Total liabilities 9,053 10,631
-------- --------
Stockholders' equity:
Preference stock, $.01 par value; 1,000 shares authorized; no shares
issued and outstanding at March 31, 2000 and June 30, 1999 -- --
Common stock, $.01 par value; 50,000 shares authorized; 16,170 and 13,665
shares issued; 15,511 and 12,919 shares outstanding at March 31, 2000 and
June 30, 1999, respectively 162 137
Additional paid-in capital 31,071 23,103
Accumulated deficit (12,544) (14,231)
Accumulated other comprehensive loss (313) (261)
-------- --------
18,376 8,748
-------- --------
Less -- treasury stock, at cost (1,089) (1,401)
-------- --------
Total stockholders' equity 17,287 7,347
-------- --------
Total liabilities and stockholders' equity $ 26,340 $ 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 Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 9,271 $ 6,700 Net sales $ 25,115 $ 21,303
4,364 3,056 Cost of sales 11,635 9,870
-------- -------- -------- --------
4,907 3,644 Gross margin 13,480 11,433
Operating expenses:
1,470 1,521 Product development and engineering 4,134 4,624
1,647 1,723 Sales and marketing 4,631 5,517
925 833 General and administrative 2,830 2,418
-------- -------- -------- --------
4,042 4,077 Total operating expenses 11,595 12,559
-------- -------- -------- --------
865 (433) Operating income (loss) 1,885 (1,126)
-------- -------- -------- --------
Other income (expense):
(1) (41) Interest expense (80) (163)
43 9 Interest income 50 77
- 18 Other, net 19 59
-------- -------- -------- --------
42 (14) Total other income (expense) (11) (27)
-------- -------- -------- --------
907 (447) Income (loss) before provision for income taxes 1,874 (1,153)
90 9 Provision for income taxes 187 44
-------- -------- -------- --------
$ 817 $ (456) Net income (loss) $ 1,687 $ (1,197)
======== ======== ======== ========
$ 0.05 $ (0.03) Basic net income (loss) per share $ 0.12 $ (0.09)
======== ======== ======== ========
$ 0.05 $ (0.03) Diluted net income (loss) per share $ 0.11 $ (0.09)
======== ======== ======== ========
Weighted average common shares outstanding:
15,528 13,120 Basic 14,519 13,053
======== ======== ======== ========
16,517 13,120 Diluted 15,913 13,053
======== ======== ======== ========
</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,
2000 1999
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,687 $ (1,197)
Adjustments to reconcile net income (loss) to net cash
used by operating activities -
Depreciation 894 1,057
Deferred tax provision 101 -
Changes in assets and liabilities -
Accounts receivable, net (3,009) (1,221)
Inventories, net (1,572) 266
Prepaid expenses and other (130) 21
Accounts payable and accrued liabilities 392 (530)
------- --------
Net cash used by operating activities (1,637) (1,604)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery, equipment, furniture and fixtures (396) (571)
Proceeds from dispositions of fixed assets held for sale - 53
Proceeds from maturities of marketable securities - 3,062
------- --------
Net cash (used) provided by investing activities (396) 2,544
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock and warrants (net of expenses) 6,923 -
Exercise of stock options 1,041 131
Net reductions associated with bank borrowings (1,979) (891)
------- --------
Net cash provided (used) by financing activities 5,985 (760)
------- --------
Effect of translation rates on cash 188 (104)
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,140 76
CASH AND CASH EQUIVALENTS, beginning of period 551 1,060
------- --------
CASH AND CASH EQUIVALENTS, end of period $ 4,691 $ 1,136
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for income taxes $ 10 $ -
Cash paid for interest 84 173
Tax effect of disqualifying dispositions on stock options 339 -
</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 the current year presentation.
The interim results of operations for the period ended March 31, 2000, are not
necessarily indicative of results to be expected for the year ending June 30,
2000.
2. Cash and cash equivalents
Cash and cash equivalents at March 31, 2000 include $4,074,000 of cash held
in money market funds.
3. Inventories
Inventories at March 31, 2000 and June 30, 1999, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
-------------- -------------
<S> <C> <C>
Raw materials $ 2,871 $ 2,326
Work-in-process 3,063 2,185
Finished goods 1,867 1,705
Reserves (1,110) (1,097)
------- -------
Inventories, net $ 6,691 $ 5,119
======= =======
</TABLE>
4. Debt
Lines of Credit
Facility with U.K. Bank--In July 1999, the Company finalized a renewal
agreement for (Pounds)1,000,000 (approximately $1,600,000) 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 (7.5% at March 31, 2000) plus 1.75%, for a
total rate of 9.25% at March 31, 2000. The lending formula is calculated based
on eligible accounts receivable and inventory, as defined. At March 31, 2000
there was no balance outstanding. As of March 31, 2000, the Company was in
compliance with the financial covenants contained in this agreement.
Facility with U.S. Bank--The Company also has a $3,500,000 line of credit
facility with a commercial bank in the United States. Loans made pursuant to the
U.S. facility are secured by all assets in the United States and bear interest
at the bank's base rate (9.0% at March 31, 2000) plus 1%, for a total rate of
10% at March 31, 2000. The lending formula is calculated based on eligible
accounts receivable, as defined. At March 31, 2000 there was no balance
outstanding. As of March 31, 2000, the Company was in compliance with the
financial covenants contained in this agreement.
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
6
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
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
(7.5% at March 31, 2000) plus 1.50%, for a total rate of 9.0% at March 31, 2000.
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. In
December 1999, proceeds aggregating $290,000 from eligible stock option
exercises were used to reduce the balance of the note payable. The associated
restricted cash balance was reduced in the third quarter of fiscal 2000 by an
equivalent amount.
5. 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, the Company's annual U. S. utilization limitation related
to its net federal operating loss carryforward is now $1,373,000.
Blue Wave had net deferred tax assets of $545,000 at fiscal year end 1999
and $783,000 at March 31, 2000, which is reflected in the accompanying
consolidated balance sheets. In the quarter ended March 31, 2000, the net tax
asset was increased by approximately $339,000 as a result of the tax benefit
recorded due to the disqualifying dispositions of employee incentive stock
options. 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 the majority 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 (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 into the telecommunications industry, (4) the introduction of new
products based upon new DSP microprocessors, (5) the 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 fiscal year 2001. Management
continually evaluates the realizability of the net deferred tax assets and the
need for a valuation allowance on such assets.
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. The Company currently has one
type of other non-owner changes in equity, which is foreign currency translation
gains and losses. The computation of comprehensive income (loss) for the three
and the nine months ended March 31, 2000 and 1999 follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
------ ------ ------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 817 $(456) $1,687 $(1,197)
Foreign currency translation adjustment (129) (196) (52) (184)
----- ----- ------ -------
Total comprehensive income (loss) $ 688 $(652) $1,635 $(1,381)
===== ===== ====== =======
</TABLE>
7
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
7. Income (Loss) Per Share
Basic net income per share for the three and the nine months ended March
31, 2000 were computed by dividing net income attributable to common stock by
the weighted average number of shares of common stock outstanding during the
periods presented. Diluted net income per share for the three and the nine
months ended March 31, 2000 was computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the periods 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
periods presented. Basic and diluted net loss per share for the three and the
nine months ended March 31, 1999 were computed by dividing net loss by the
weighted average number of shares of common stock outstanding during the
periods presented. Shares used in basic and diluted net income (loss) per share
calculations are presented below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic:
- ------
Weighted average common stock outstanding during the period 15,528 13,120 14,519 13,053
====== ====== ====== ======
Diluted:
- --------
Weighted average common stock outstanding during the period 15,528 13,120 14,519 13,053
Dilutive securities from stock option/warrant programs 989 N/A 1,394 N/A
------ ------ ------ ------
Shares used in calculation of diluted net income (loss) per share 16,517 13,120 15,913 13,053
====== ====== ====== ======
</TABLE>
Dilutive securities equivalent to approximately 726,000 and 1,674,000
shares of common stock were outstanding during the three and the nine months
ended March 31, 1999, 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, 2000, aggregate 486,570
underlying shares, exercisable for a total of approximately $179,000, 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.
8. 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 March 31,
--------------------------------------------------------------------------------------------
2000 1999
---------------------------------------- ----------------------------------------
North Outside of North Outside of
America North America Total America North America Total
------- ------------- ------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 3,946 $ 5,325 $ 9,271 $ 1,419 $ 5,281 $ 6,700
Operating income (loss) (404) 1,269 865 (1,234) 801 (433)
Capital expenditures 58 167 225 35 172 207
Depreciation 78 209 287 133 208 341
For the nine months ended March 31,
--------------------------------------------------------------------------------------------
2000 1999
---------------------------------------- ----------------------------------------
North Outside of North Outside of
America North America Total America North America Total
------- ------------- ------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales $12,414 $12,701 $25,115 $ 7,753 $13,550 $21,303
Operating income (loss) (780) 2,665 1,885 (1,618) 492 (1,126)
Capital expenditures 80 316 396 211 360 571
Depreciation 264 630 894 401 656 1,057
Identifiable assets 10,713 15,627 26,340 5,472 12,211 17,683
</TABLE>
8
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
9. 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.
10. 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 1,000,002
common shares. The first warrant, for 500,001 common shares at an exercise price
of $3.50 per share, and the second warrant, also for 500,001 common shares, at
an exercise price of $4.50 per share, were exercised in December 1999 resulting
in total proceeds to the Company of $4,000,000. 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 from the placement and
the warrant exercise for general working capital purposes.
Treasury Stock
Shares available under the employee stock ownership plan ("ESOP"), which
provides for the issuance of stock options for the benefit of employees of the
Company's UK subsidiary, are classified as treasury stock in the accompanying
consolidated balance sheets. There was an issuance of a portion of these
treasury shares as a result of the exercise of stock options in the second and
third quarters of fiscal 2000, which reduced the number of treasury shares held
by the ESOP. The impact of the exercise of these stock options was to reduce
treasury stock by $312,000.
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 Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 47% 46% 46% 46%
---- ---- ---- ----
Gross margin 53% 54% 54% 54%
Operating expenses:
Product development and engineering 16% 23% 17% 22%
Sales and marketing 18% 26% 18% 26%
General and administrative 10% 12% 11% 11%
---- ---- ---- ----
Total operating expenses 44% 61% 46% 59%
---- ---- ---- ----
Operating income (loss) 9% -7% 8% -5%
Total other income (expense) 1% -0% 0% 0%
---- ---- ---- ----
Income (loss) from continuing operations
before provision for income taxes 10% -7% 8% -5%
Provision for income taxes 1% 0% 1% 0%
---- ---- ---- ----
Net income (loss) 9% -7% 7% -5%
==== ==== ==== ====
</TABLE>
Results of operations for the three months ended March 31, 2000 compared to
the three months ended March 31, 1999
For the three months ended March 31, 2000 (third quarter of fiscal 2000),
the Company reported net sales of $9,271,000, compared to $6,700,000 in the same
period last year. This 38% increase is due to shipments of the recently
introduced ComStruct(TM) telecommunications product line which incorporates a
new generation of DSP microprocessors (digital signal processor) developed by
Texas Instruments ("TI"). This new generation of DSP's represents 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.
Gross margin percentage for the three months ended March 31, 2000, was 53%,
compared to 54% in the same period last year. The Company's historical gross
margin percentage has varied by quarter in both a positive and negative fashion
due to volume-related efficiencies, changes in product and customer mix, and
provisions for manufacturing scrap and obsolescence.
During the three months ended March 31, 2000, product development and
engineering expenses were $1,470,000, or 16% of net sales, compared to
$1,521,000, or 23% of net sales, during the same period last year. The reduction
in absolute spending is the result of the Company's decision to focus new
product development on the telecommunications market. The Company now classifies
certain engineering expenses previously classified as sales expense in product
development and engineering in the accompanying Statements of Operations. The
Company has made a reclassification of $193,000 for the three months ended March
31, 1999 in order to conform to the current year presentation.
During the three months ended March 31, 2000, sales and marketing expenses
were $1,647,000, or 18% of net sales, compared to $1,723,000, or 26% of net
sales, during the same period last year. The reduction in absolute spending is
the result of the Company's decision to focus its sales and marketing efforts on
the telecommunications market. The Company now classifies certain engineering
expenses previously classified as sales expense in product development and
engineering in the accompanying Statements of Operations. The Company has made a
reclassification of $193,000 for the three months ended March 31, 1999 in order
to conform to the current year presentation.
During the three months ended March 31, 2000, general and administrative
expenses were $925,000, or 10% of net sales, compared to $833,000, or 12% of net
sales, during the same period last year. The Company has incurred higher costs
in fiscal 2000 related to compensation increases and its investor relations
program.
10
<PAGE>
During the three months ended March 31, 2000, total other income was
$42,000, compared to total other expense of $14,000 during the same period last
year. As a result of receiving the approximately $6.9 million in proceeds from
the private placement and the subsequent exercise of the warrants issued in
conjunction with the private placement, short-term borrowings have been
eliminated and interest income was generated from the investment of excess
available cash. In the same period last year, interest expense was incurred on
the Company's credit facilities with two commercial banks.
The Company reported net income of $817,000 for the three months ended
March 31, 2000, compared to a net loss of $456,000 during the same period last
year. The significant improvement in the Company's net operating result is
attributable to the 38 percent increase in net sales.
Results of operations for the nine months ended March 31, 2000 compared to
the nine months ended March 31, 1999
For the nine months ended March 31, 2000, the Company reported net sales of
$25,115,000, compared to $21,303,000 in the same period last year. This 18%
increase is due to shipments of the recently introduced ComStruct (TM)
telecommunications product line which incorporates a new generation of DSP
microprocessors (digital signal processor) developed by Texas Instruments
("TI"). This new generation of DSP's represents 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.
Gross margin percentage for the nine months ended March 31, 2000, was 54%,
compared to 54% in the same period last year. The Company's historical gross
margin percentage has varied by quarter in both a positive and negative fashion
due to volume-related efficiencies, changes in product and customer mix, and
provisions for manufacturing scrap and obsolescence.
During the nine months ended March 31, 2000, product development and
engineering expenses were $4,134,000, or 17% of net sales, compared to
$4,624,000, or 22% of net sales, during the same period last year. The reduction
in absolute spending is the result of the Company's decision to focus new
product development on the telecommunications market and certain cost benefits
attributable to the post-merger organization plan. The Company now classifies
certain engineering expenses previously classified as sales expense in product
development and engineering in the accompanying Statements of Operations. The
Company has made a reclassification of $440,000 for the nine months ended March
31, 1999 in order to conform to the current year presentation.
During the nine months ended March 31, 2000, sales and marketing expenses
were $4,631,000, or 18% of net sales, compared to $5,517,000, or 26% of net
sales, during the same period last year. The reduction in absolute spending is
the result of the Company's decision to focus its sales and marketing efforts on
the telecommunications market and certain cost benefits attributable to
consolidating respective marketing operations as a result of implementing the
post-merger organization plan. The Company now classifies certain engineering
expenses previously classified as sales expense in product development and
engineering in the accompanying Statements of Operations. The Company has made a
reclassification of $440,000 for the nine months ended March 31, 1999 in order
to conform to the current year presentation.
During the nine months ended March 31, 2000, general and administrative
expenses were $2,830,000, or 11% of net sales, compared to $2,418,000, or 11% of
net sales, during the same period last year. The Company's absolute level of
spending in fiscal 2000 was impacted by a $130,000 provision related to the
resignation of Simon Yates, the Company's former CEO who resigned in November
1999. The Company also incurred approximately $63,000 in expenses associated
with obtaining a binding credit facility commitment from a U. S. commercial
bank. The Company has also incurred higher costs in fiscal 2000 related to
compensation increases and its investor relations program.
During the nine months ended March 31, 2000, total other expense was
$11,000, compared to $27,000 during the same period last year. As a result of
receiving the approximately $6.9 million in proceeds from the private placement
and the subsequent exercise of the warrants issued in conjunction with the
private placement, short-term borrowings have been eliminated and interest
income has been generated from the investment of excess available cash.
The Company reported net income of $1,687,000 for the nine months ended
March 31, 2000, compared to a net loss of $1,197,000 during the same period last
year. The significant improvement in the Company's net operating result is
attributable to the 18 percent increase in net sales and an 8 percent decrease
in operating expenses.
11
<PAGE>
Liquidity and Capital Resources
The Company's total cash, cash equivalents and purchased marketable
securities were $5,207,000 at March 31, 2000, as compared to $1,339,000 at June
30, 1999. Net working capital at March 31, 2000, was $14,524,000, as compared to
$4,618,000 at June 30, 1999, an increase of $9,906,000. The increase in working
capital is due primarily to the approximately $6.9 million, net of expenses,
raised in connection with the private placement of the Company's common stock,
including the exercise of the warrants issued in conjunction with the private
placement. Proceeds from the exercise of stock options contributed approximately
$750,000 to the increase in working capital. Accounts receivable at March 31,
2000 increased significantly over the June 30, 1999 balance primarily due to the
overall increase in net sales and, to a lesser extent, the timing of shipments
in the quarter ended March 31, 2000 as compared to the quarter ended June 30,
1999.
Expenditures for capital equipment were $396,000 for the nine months ended
March 31, 2000, as compared to $571,000 in the prior year.
Facility with U.K. Bank--In July 1999, the Company finalized a renewal
agreement for (Pounds)1,000,000 (approximately $1,600,000) 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 (7.5% at March 31, 2000) plus 1.75%, for a
total rate of 9.25% at March 31, 2000. The lending formula is calculated based
on eligible accounts receivable and inventory, as defined. At March 31, 2000
there was no balance outstanding. As of March 31, 2000, the Company was in
compliance with the financial covenants contained in this agreement.
Facility with U.S. Bank--The Company also has a $3,500,000 line of credit
facility with a commercial bank in the United States. Loans made pursuant to the
U.S. facility are secured by all assets in the United States and bear interest
at the bank's base rate (9.0% at March 31, 2000) plus 1%, for a total rate of
10% at March 31, 2000. The lending formula is calculated based on eligible
accounts receivable, as defined. At March 31, 2000 there was no balance
outstanding. As of March 31, 2000, the Company was in compliance with the
financial covenants contained in this agreement.
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 1,000,002
common shares. The first warrant, for 500,001 common shares at an exercise price
of $3.50 per share, and the second warrant, also for 500,001 common shares, at
an exercise price of $4.50 per share, were exercised in December 1999 resulting
in total proceeds to the Company of $4,000,000. 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 from the placement and
the warrant exercise for general working capital purposes.
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 (7.5%
at March 31, 2000) plus 1.50%, for a total rate of 9.0% at March 31, 2000. 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. In December 1999,
proceeds aggregating $290,000 from eligible stock option exercises were used to
reduce the balance of the note payable. The associated restricted cash balance
was reduced in the third quarter of fiscal 2000 by an equivalent amount.
Management believes that its working capital and currently available debt
facilities will be adequate to fund the Company's 2000 operating plan.
12
<PAGE>
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 debt transaction or consider raising additional funds
through an equity offering.
Market Risk Disclosure
Foreign Currency Exchange Rate Risk - Certain of the Company's sales, cost
of manufacturing and marketing are transacted in local currencies. As a result,
the Company's international results of operations are subject to foreign
exchange rate fluctuations. The Company does not currently hedge against foreign
currency rate fluctuations. Historical gains and losses from such fluctuations
have not been material to the Company's consolidated results of operations.
Year 2000 Initiatives
The Company 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 may reside with key business partners to the
Company.
The Company completed a detailed assessment of its products and internal
systems. The results of testing of the Company's product range are available for
customers on the Company's web site, which details the Year 2000 conformity
status of individual products. From the Company's detailed assessment of its
internal systems, the Company instigated a replacement program for those limited
portions of software that were used internally which were not Y2K compliant.
Although the Company believes that its Y2K Plan adequately addressed the
potential impact caused by the Year 2000 problem, there can be no assurance that
the Company's Y2K Plan was sufficiently comprehensive. 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. The Company is not aware of
any significant problems as a result of Y2K compliance issues experienced by
suppliers or customers. The total Year 2000 project cost has not been, and is
not expected to be, material in relation to the Company's financial position or
results of operations.
To date there has been no negative impact on the Company's operations or
financial condition as a result of the Year 2000 date change. Although the
Company has not been affected to date by the changes from December 31,1999 to
January 1, 2000, Year 2000 issues could arise subsequent to the filing of this
report. The Company believes that such circumstances are highly unlikely to
occur and that, even if they were to occur, it is highly unlikely that the
Company's financial condition would be materially adversely affected.
Nevertheless, the Company intends to continue to monitor Year 2000 related
issues and immediately address any effects that may arise as a result.
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 March 31, 2000 and 1999.
11(b) Computation of Per Share Net Income (Loss) for the nine months ended
March 31, 2000 and 1999.
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K
None.
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: May 15, 2000 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 March 31, 2000 and 1999.
11(b) Computation of Per Share Net Income (Loss) for the nine months ended
March 31, 2000 and 1999.
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
March 31,
2000 1999
-------- --------
<S> <C> <C>
Basic Net Income (Loss) Per Share:
Net income (loss) applicable to common stock $ 817 $ (456)
======== ========
Weighted average shares outstanding 15,528 13,120
Basic net income (loss) per share $ 0.05 $ (0.03)
======== ========
Diluted Net Income (Loss) Per Share:
Weighted average shares outstanding 15,528 13,120
Effect of common stock equivalents:
Options granted and warrants issued 1,058 N/A
Weighted average exercised options outstanding for portion of
period, net of equivalent shares purchased at average fair market value 102 N/A
Effect of using option and warrant proceeds to repurchase common stock
at average fair market value (171) N/A
-------- --------
Total common stock equivalents 989 -
-------- --------
Weighted average diluted shares outstanding 16,517 13,120
-------- --------
Diluted net income (loss) per share $ 0.05 $ (0.03)
======== ========
</TABLE>
<PAGE>
Exhibit 11(b)
Blue Wave Systems Inc.
Computation of Per Share Net Income (Loss)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
2000 1999
-------- --------
<S> <C> <C>
Basic Net Income (Loss) Per Share:
Net income (loss) applicable to common stock $ 1,687 $ (1,197)
======== ========
Weighted average shares outstanding 14,519 13,053
Basic net income (loss) per share $ 0.12 $ (0.09)
======== ========
Diluted Net Income (Loss) Per Share:
Weighted average shares outstanding 14,519 13,053
Effect of common stock equivalents:
Options granted and warrants issued 940 N/A
Weighted average exercised options and warrants outstanding for portion of
period, net of equivalent shares purchased at average fair market value 641 N/A
Effect of using option and warrant proceeds to repurchase common stock
at average fair market value (187) N/A
-------- --------
Total common stock equivalents 1,394 -
-------- --------
Weighted average diluted shares outstanding 15,913 13,053
-------- --------
Diluted net income (loss) per share $ 0.11 $ (0.09)
======== ========
</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, 2000 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-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 5,207
<SECURITIES> 0
<RECEIVABLES> 9,129
<ALLOWANCES> 187
<INVENTORY> 6,691
<CURRENT-ASSETS> 22,172
<PP&E> 10,321
<DEPRECIATION> 7,515
<TOTAL-ASSETS> 26,340
<CURRENT-LIABILITIES> 7,648
<BONDS> 0
0
0
<COMMON> 162
<OTHER-SE> 17,125
<TOTAL-LIABILITY-AND-EQUITY> 26,340
<SALES> 25,115
<TOTAL-REVENUES> 25,115
<CGS> 11,635
<TOTAL-COSTS> 11,635
<OTHER-EXPENSES> 11,595
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80
<INCOME-PRETAX> 1,874
<INCOME-TAX> 187
<INCOME-CONTINUING> 1,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,687
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.11
</TABLE>
