<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 December 31, 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 February 10, 2000
----- -----------------
Common Stock, par value $0.01 per share 15,472,848
<PAGE>
Blue Wave Systems Inc.
Form 10-Q
For the Quarter Ended December 31, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets
December 31 and June 30, 1999 3
Statements of Operations
for the three and the six months ended December 31, 1999 and 1998 4
Statements of Cash Flows
for the six months ended December 31, 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 4. Submission of Matters to a Vote of Security Holders 14
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>
December 31, June 30,
1999 1999
------------ ----------
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 852 $ 551
Restricted cash 808 788
Warrant subscription receivable 4,000 -
Accounts receivable, net of allowances of $187 and $198, respectively 6,899 6,266
Inventories, net 5,968 5,119
Prepaid expenses and other 440 541
Deferred tax asset 271 271
-------- --------
Total current assets 19,238 13,536
-------- --------
Plant and equipment:
Machinery and equipment 7,499 7,211
Furniture and fixtures 2,700 2,643
-------- --------
10,199 9,854
Less accumulated depreciation (7,300) (6,584)
-------- --------
Plant and equipment, net 2,899 3,270
-------- --------
Deferred tax asset-noncurrent 1,038 1,095
Other assets 79 77
-------- --------
Total assets $ 23,254 $ 17,978
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 4,903 $ 5,071
Accrued compensation 72 437
Other current liabilities 1,223 1,703
Lines of credit - 1,707
-------- --------
Total current liabilities 6,198 8,918
-------- --------
Deferred income taxes 841 821
Noncurrent liabilities 74 104
Long-term debt, net of current maturities 524 788
-------- --------
Total liabilities 7,637 10,631
-------- --------
Stockholders' equity:
Preference stock, $.01 par value; 1,000 shares authorized; no shares
issued and outstanding at December 31 and June 30, 1999 - -
Common stock, $.01 par value; 50,000 shares authorized; 15,950 and 13,665
Shares issued; 15,285 and 12,919 shares outstanding at December 31 and
June 30, 1999, respectively 159 137
Additional paid-in capital 30,109 23,103
Accumulated deficit (13,361) (14,231)
Accumulated other comprehensive loss (184) (261)
-------- --------
16,723 8,748
-------- --------
Less -- treasury stock, at cost (1,106) (1,401)
-------- --------
Total stockholders' equity 15,617 7,347
-------- --------
Total liabilities and stockholders' equity $ 23,254 $ 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 Six Months Ended
December 31, December 31,
1999 1998 1999 1998
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 8,453 $ 7,797 $15,844 $14,603
Cost of sales 3,913 3,562 7,271 6,814
--------- ------- ------- -------
Gross margin 4,540 4,235 8,573 7,789
Operating expenses:
Product development and engineering 1,016 1,401 2,091 2,856
Sales and marketing 1,775 2,007 3,557 4,041
General and administrative 1,059 760 1,905 1,585
--------- ------- ------- -------
Total operating expenses 3,850 4,168 7,553 8,482
--------- ------- ------- -------
Operating income (loss) 690 67 1,020 (693)
--------- ------- ------- -------
Other income (expense):
Interest expense (27) (62) (79) (122)
Interest income 4 22 7 68
Other, net - 21 19 41
--------- ------- ------- -------
Total other income (expense) (23) (19) (53) (13)
--------- ------- ------- -------
Income (loss) before provision for income taxes 667 48 967 (706)
Provision for income taxes 69 12 97 35
--------- ------- ------- -------
Net income (loss) $ 598 $ 36 $ 870 $ (741)
========= ======= ======= =======
Basic net income (loss) per share $ 0.04 $ 0.00 $0.06 $(0.06)
========= ======= ======= =======
Diluted net income (loss) per share $ 0.04 $ 0.00 $0.06 $(0.06)
========= ======= ======= =======
Weighted average common shares outstanding:
Basic 14,401 13,028 14,020 13,021
========= ======= ======= =======
Diluted 15,726 13,669 15,168 13,021
========= ======= ======= =======
</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>
Six Months Ended
December 31,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 870 $ (741)
Adjustments to reconcile net income (loss) to net cash
used by operating activities -
Depreciation 607 716
Deferred tax provision 77 -
Changes in assets and liabilities -
Accounts receivable, net (632) (2,058)
Inventories, net (849) 396
Prepaid expenses and other 99 143
Accounts payable and accrued liabilities (1,053) (602)
------- -------
Net cash used by operating activities (881) (2,146)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery, equipment, furniture and fixtures (171) (364)
Proceeds from dispositions of fixed assets held for sale - 34
Proceeds from maturities of marketable securities - 2,838
------- -------
Net cash (used) provided by investing activities (171) 2,508
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock and warrants (net of expenses) 2,929 -
Exercise of stock options 404 50
Net proceeds (net reductions) associated with bank borrowings (1,980) 225
------- -------
Net cash provided by financing activities 1,353 275
------- -------
Effect of translation rates on cash - 20
NET INCREASE IN CASH AND CASH EQUIVALENTS 301 657
CASH AND CASH EQUIVALENTS, beginning of period 551 1,060
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 852 $ 1,717
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for income taxes $ 4 $ -
Cash paid for interest 77 120
</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 and financial position for the period ended
December 31, 1999, are not necessarily indicative of results to be expected for
the year ending June 30, 2000.
2. Inventories
Inventories at December 31 and June 30, 1999, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
----------------- -------------
<S> <C> <C>
Raw materials $ 3,139 $ 2,326
Work-in-process 2,179 2,185
Finished goods 1,888 1,705
Reserves (1,238) (1,097)
------- -------
Inventories, net $ 5,968 $ 5,119
======= =======
</TABLE>
3. 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 December 31, 1999) plus 1.75%,
for a total rate of 9.25% at December 31, 1999. The lending formula is
calculated based on eligible accounts receivable and inventory, as defined. At
December 31, 1999 there was no balance outstanding. As of December 31, 1999, the
Company was in compliance with its financial covenants under its agreement with
the U.K. bank.
Facility with U.S. Bank--The Company also has entered into a binding
commitment for a $3.5 million line of credit facility with a commercial bank in
the United States. This new facility is expected to be finalized in the
Company's third quarter of fiscal 2000 (March) and replaces a credit facility
with a different commercial bank in the United States that expired January 31,
2000. The new facility will contain customary financial covenants and will be
secured by all assets in the United States. The lending formula will be based on
eligible accounts receivable.
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 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 December 31, 1999) plus 1.50%, for a total rate of 9.0% at December 31,
1999. The note is subject to renewal annually. The debt agreements related to
this note contain warranties and covenants and require
6
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
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 will be reduced in the third
quarter of fiscal 2000 by an equivalent amount.
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, 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 $468,000 at December 31, 1999, which is reflected in the accompanying
consolidated 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 into the telecommunications industry, (4) the
introduction of new products 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 fiscal year 2001. 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 and the six months ended December
31, 1999 and December 31, 1998 was computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
periods. Diluted net income per share for the three and the six months ended
December 31, 1999 and the three months ended December 31, 1998 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 six months ended December 31, 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 Six Months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
------
Weighted average common stock outstanding during the period 14,401 13,028 14,020 13,021
====== ====== ====== ======
Diluted:
--------
Weighted average common stock outstanding during the period 14,401 13,028 14,020 13,021
Dilutive securities from stock option/warrant programs 1,325 641 1,148 N/A
------ ------ ------ ------
Shares used in calculation of diluted net income (loss) per share 15,726 13,669 15,168 13,021
====== ====== ====== ======
</TABLE>
7
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
Dilutive securities equivalent to approximately 551,000 shares of common
stock were outstanding during the six months ended December 31, 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
December 31, 1999, aggregate 586,261 underlying shares, exercisable for a total
of approximately $235,000, 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. The Company currently has two
types of other non-owner changes in equity, which are (a) foreign currency
translation gains and losses, and (b) unrealized gains and losses on marketable
securities. The computation of comprehensive income (loss) for the three and the
six months ended December 31, 1999 and 1998 follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income (loss) $ 598 $ 36 $ 870 $(741)
Foreign currency translation adjustment (58) (96) 77 12
Net unrealized loss on marketable securities -- (2) -- --
----- ----- ----- -----
Total comprehensive income (loss) $ 540 $ (62) $ 947 $(729)
===== ===== ===== =====
</TABLE>
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 December 31,
----------------------------------------------------------------------------------------
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 $3,506 $ 4,947 $ 8,453 $3,511 $ 4,286 $ 7,797
Operating income (loss) (561) 1,251 690 40 27 67
Capital expenditures 3 75 78 72 147 219
Depreciation 90 208 298 136 226 362
<CAPTION>
For the six months ended December 31,
----------------------------------------------------------------------------------------
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 $8,468 $ 7,376 $15,844 $6,334 $ 8,269 $14,603
Operating income (loss) (376) 1,396 1,020 (377) (316) (693)
Capital expenditures 22 149 171 176 188 364
Depreciation 186 421 607 268 448 716
Identifiable assets 10,235 13,019 23,254 8,415 10,924 19,339
</TABLE>
8
<PAGE>
Blue Wave Systems Inc.
Notes to Interim Consolidated Financial Statements
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.
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 1,000,002
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. The
$4,000,000 in proceeds from the exercise was received on January 3, 2000, and is
reflected in the accompanying consolidated balance sheet as a warrant
subscription receivable as of December 31, 1999. 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 for
general working capital purposes. The Company will use the proceeds from 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
quarter 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 $295,000.
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 Six Months Ended
December 31, December 31,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 46% 45% 46% 46%
--- --- --- ---
Gross margin 54% 55% 54% 54%
Operating expenses:
Product development and engineering 12% 18% 13% 20%
Sales and marketing 21% 26% 23% 28%
General and administrative 13% 10% 12% 11%
--- --- --- ---
Total operating expenses 46% 54% 48% 59%
--- --- --- ---
Operating income (loss) 8% 1% 6% -5%
Total other income (expense) 0% 0% 0% 0%
--- --- --- ---
Income (loss) from continuing operations
before provision for income taxes 8% 1% 6% -5%
Provision for income taxes 1% 0% 1% 0%
--- --- --- ---
Net income (loss) 7% 1% 5% -5%
=== === === ===
</TABLE>
Results of operations for the three months ended December 31, 1999 compared to
the three months ended December 31, 1998
For the three months ended December 31, 1999 (second quarter of fiscal
2000), the Company reported net sales of $8,453,000, compared to $7,797,000 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"). 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. 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 December 31, 1999, was
54%, compared to 55% 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 December 31, 1999, product development and
engineering expenses were $1,016,000, or 12% of net sales, compared to
$1,401,000, or 18% 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 December 31, 1999, sales and marketing
expenses were $1,775,000, or 21% of net sales, compared to $2,007,000, or 26% 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 December 31, 1999, general and administrative
expenses were $1,059,000, or 13% of net sales, compared to $760,000, or 10% of
net sales, during the same period last year. The Company's absolute level of
spending in the December 1999 quarter 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 for
its investor relations program.
During the three months ended December 31, 1999, interest expense was $27,000,
compared to $62,000 during the same period last year. Interest expense was
incurred on the Company's credit facilities with two commercial banks. The
10
<PAGE>
level of outstanding debt has been reduced and there was no balance outstanding
as of December 31, 1999 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 $598,000 for the three months ended
December 31, 1999, compared to net income of $36,000 during the same period last
year. The significant improvement in the Company's net operating result is
attributable to an 8 percent increase in net sales and an 8 percent decrease in
operating expenses.
Results of operations for the six months ended December 31, 1999 compared to the
six months ended December 31, 1998
For the six months ended December 31, 1999, the Company reported net sales of
$15,844,000, compared to $14,603,000 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"). 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.
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 six months ended December 31, 1999, 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 six months ended December 31, 1999, product development and
engineering expenses were $2,091,000, or 13% of net sales, compared to
$2,856,000, or 20% 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 six months ended December 31, 1999, sales and marketing expenses
were $3,557,000, or 23% of net sales, compared to $4,041,000, or 28% 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 six months ended December 31, 1999, general and administrative
expenses were $1,905,000, or 12% of net sales, compared to $1,585,000, 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 for its investor
relations program.
During the six months ended December 31, 1999, interest expense was $79,000,
compared to $122,000 during the same period last year. Interest expense was
incurred on the Company's credit facilities with two commercial banks. The level
of outstanding debt has been reduced and there was no balance outstanding as of
December 31, 1999 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 $870,000 for the six months ended December
31, 1999, compared to a net loss of $741,000 during the same period last year.
The significant improvement in the Company's net operating result is
attributable to an 8 percent increase in net sales and an 11 percent decrease in
operating expenses.
Liquidity and Capital Resources
The Company's total cash, cash equivalents and purchased marketable securities
were $1,660,000 at December 31, 1999, as compared to $1,339,000 at June 30,
1999. Net working capital at December 31, 1999, was $13,040,000, as compared to
$4,618,000 at June 30, 1999, an increase of $8,422,000. 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.
Expenditures for capital equipment were $171,000 for the six months ended
December 31, 1999, as compared to $364,000 in the prior year.
11
<PAGE>
In order to fund current operations the Company has in place a credit facility
with a commercial bank in the United Kingdom.
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 December 31, 1999) plus 1.75%,
for a total rate of 9.25% at December 31, 1999. The lending formula is
calculated based on eligible accounts receivable and inventory, as defined. At
December 31, 1999 there was no balance outstanding. As of December 31, 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.
Facility with U.S. Bank-- The Company also has entered into a binding
commitment for a $3.5 million line of credit facility with a commercial bank in
the United States. This new facility is expected to be finalized in the
Company's third quarter of fiscal 2000 (March) and replaces a credit facility
with a different commercial bank in the United States that expired January 31,
2000. The new facility will contain customary financial covenants and will be
secured by all assets in the United States. The lending formula will be based on
eligible accounts receivable.
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. The $4,000,000 in
proceeds from the exercise was received on January 3, 2000, and is reflected in
the accompanying consolidated balance sheet as a warrant subscription receivable
as of December 31, 1999. 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 for general
working capital purposes. The Company will use the proceeds from 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 December 31, 1999) plus 1.50%, for a total rate of 9.0% at December 31,
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. 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 will be 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.
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 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,
12
<PAGE>
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. As an example, the Company's systems could fail to recognize 2000 as a
leap year. 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 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on November 16, 1999.
The following measures were approved at the meeting:
<TABLE>
<CAPTION>
Shares Shares Shares
For Against Abstaining
--- ------- ----------
<S> <C> <C> <C>
(1) Election of Directors:
Simon Yates 12,937,467 1,306 1,333,172
Rob Shaddock 12,938,167 606 1,333,172
John Forrest 12,938,167 606 1,333,172
John Rynearson 12,937,667 1,106 1,333,172
Sam Smith 12,938,167 606 1,333,172
(2) Increase the number of shares issuable under the
Directors' Stock Option Plan from 75,000 to 150,000 12,870,232 185,353 16,900
</TABLE>
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 for the three months ended
December 31, 1999 and 1998.
11(b) Computation of Per Share Net Income (Loss) for the six months ended
December 31, 1999 and 1998.
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: February 14, 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
<TABLE>
<CAPTION>
Exhibit
No. Description
------- --------------------------------
<S> <C>
11(a) Computation of Per Share Net Income for the three months ended
December 31, 1999 and 1998.
11(b) Computation of Per Share Net Income (Loss) for the six months
ended December 31, 1999 and 1998.
27 Financial Data Schedule (filed electronically only).
</TABLE>
16
<PAGE>
EXHIBIT 11(a)
Blue Wave Systems Inc.
Computation of Per Share Net Income
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
-------- --------
<S> <C> <C>
Basic Net Income Per Share:
Net income applicable to common stock $ 598 $ 36
======= =======
Weighted average shares outstanding 14,401 13,028
Basic net income per share $ 0.04 $ 0.00
======= =======
Diluted Net Income Per Share:
Weighted average shares outstanding 14,401 13,028
Effect of common stock equivalents:
Options granted 1,080 968
Weighted average exercised options and warrants outstanding for portion of
period, net of equivalent shares purchased at average fair market value 551 8
Effect of using option proceeds to repurchase common stock at average
fair market value (306) (335)
------- -------
Total common stock equivalents 1,325 641
------- -------
Weighted average diluted shares outstanding 15,726 13,669
------- -------
Diluted net income per share $ 0.04 $ 0.00
======= =======
</TABLE>
<PAGE>
EXHIBIT 11(b)
Blue Wave Systems Inc.
Computation of Per Share Net Income (Loss)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1999 1998
-------- --------
<S> <C> <C>
Basic Net Income (Loss) Per Share:
Net income (loss) applicable to common stock $ 870 $ (741)
======= =======
Weighted average shares outstanding 14,020 13,021
Basic net income (loss) per share $ 0.06 $ (0.06)
======= =======
Diluted Net Income (Loss) Per Share:
Weighted average shares outstanding 14,020 13,021
Effect of common stock equivalents:
Options granted 1,056 N/A
Weighted average exercised options and warrants outstanding for portion of
period, net of equivalent shares purchased at average fair market value 408 N/A
Effect of using option proceeds to repurchase common stock at
average fair market value (316) N/A
------- -------
Total common stock equivalents 1,148 -
------- -------
Weighted average diluted shares outstanding 15,168 13,021
------- -------
Diluted net income (loss) per share $ 0.06 $ (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 DECEMBER 31, 1999 AND FOR
THE SIX MONTHS THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,660
<SECURITIES> 0
<RECEIVABLES> 7,086
<ALLOWANCES> 187
<INVENTORY> 5,968
<CURRENT-ASSETS> 19,238
<PP&E> 10,199
<DEPRECIATION> 7,300
<TOTAL-ASSETS> 23,254
<CURRENT-LIABILITIES> 6,198
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 15,458
<TOTAL-LIABILITY-AND-EQUITY> 23,254
<SALES> 15,844
<TOTAL-REVENUES> 15,844
<CGS> 7,271
<TOTAL-COSTS> 7,271
<OTHER-EXPENSES> 7,553
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 967
<INCOME-TAX> 97
<INCOME-CONTINUING> 870
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 870
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
