-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E2ktfO3Nra/k1DwXfbRDA8ESbS4kqWGHz+AcsIK+2i9ty/ukehMD/Uwq9iScx61J MgJi52qrT/vMUAGj/qX9Gg== 0000950149-98-001036.txt : 19980603 0000950149-98-001036.hdr.sgml : 19980603 ACCESSION NUMBER: 0000950149-98-001036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 DATE AS OF CHANGE: 19980602 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA MICROWAVE INC CENTRAL INDEX KEY: 0000016357 STANDARD INDUSTRIAL CLASSIFICATION: 3663 IRS NUMBER: 941668412 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07428 FILM NUMBER: 98627856 BUSINESS ADDRESS: STREET 1: 1143 BORREGAS AVE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087324000 MAIL ADDRESS: STREET 1: 1143 BORREGAS AVE CITY: SUNNYVALE STATE: CA ZIP: 94089 10-Q 1 10-Q FOR QUARTERLY PERIOD ENDED MARCH 31, 1998 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 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 0-7428 CALIFORNIA MICROWAVE, INC. -------------------------- (Exact name of registrant as specified in its charter) DELAWARE 94-1668412 -------- ---------- (State or other jurisdiction (I.R.S. Employer Identification Number) of Incorporation) 1143 BORREGAS AVENUE, SUNNYVALE, CAIFORNIA 94089 - - ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 732-4000 -------------- - - -------------------------------------------------------------------------------- Former name, former address, and former fiscal year, if changed since last report. 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. Classes Outstanding at April 29, 1998 - - ------------------------------- ----------------------------- Common Stock $.10 Par Value 16,206,812 -1- 2 Part I. Financial Information Item 1. Financial Statements CALIFORNIA MICROWAVE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts) (Unaudited)
Three Months Ended Nine Months Ended March 31 March 31 ------------------------- ------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Net sales $ 66,631 $ 58,559 $ 197,612 $ 183,090 Cost of products sold 44,062 40,197 131,074 134,080 --------- --------- --------- --------- Gross margin 22,569 18,362 66,538 49,010 --------- --------- --------- --------- Expenses: Research and development 4,881 4,154 14,643 13,426 Marketing and administration 11,630 9,659 36,605 33,180 Amortization of intangible assets 344 373 1,032 1,063 --------- --------- --------- --------- Total expenses 16,855 14,186 52,280 47,669 --------- --------- --------- --------- Operating income 5,714 4,176 14,258 1,341 Interest expense (1,315) (1,409) (3,476) (4,142) Interest income 435 3 590 82 Gain on sale of subsidiary -- -- -- 2,744 --------- --------- --------- --------- Income from continuing operations before income taxes 4,834 2,770 11,372 25 Provision for income taxes 1,729 915 4,083 8 --------- --------- --------- --------- Income from continuing operations 3,105 1,855 7,289 17 Loss from discontinued operations (12,500) (7,859) (12,500) (33,289) --------- --------- --------- --------- Net income (loss) $ (9,395) $ (6,004) $ (5,211) $ (33,272) ========= ========= ========= ========= Income (loss) per share (basic): Continuing operations $ .19 $ .11 $ .44 $ .00 Discontinued operations (.76) (.48) (.76) (2.06) --------- --------- --------- --------- Net income (loss) $ (.57) $ (.37) $ (.32) $ (2.06) ========= ========= ========= ========= Average shares 16,505 16,273 16,509 16,182 Income (loss) per share (diluted): Continuing operations $ .19 $ .11 $ .44 $ .00 Discontinued operations (.75) (.48) (.75) (2.04) --------- --------- --------- --------- Net income (loss) $ (.56) $ (.37) $ (.31) $ (2.04) ========= ========= ========= ========= Average shares and equivalents 16,780 16,407 16,753 16,300
See accompanying notes. -2- 3 CALIFORNIA MICROWAVE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
March 31 June 30 1998 1997 ----------- ----------- Assets (unaudited) (A) Current assets: Cash and cash equivalents $ 3,265 $ 4,974 Short-term investments 2,838 2,097 Refundable income taxes -- 10,085 Accounts receivable 55,159 35,701 Inventories 50,819 50,353 Deferred tax assets 21,242 18,359 Prepaid expenses 2,589 1,391 Net current assets of discontinued operations 39,342 60,604 --------- --------- Total current assets 175,254 183,564 --------- --------- Net property, plant and equipment 23,696 22,812 Deferred tax assets 7,411 7,411 Intangible and other assets 32,832 33,534 Net long-term assets of discontinued operations 8,143 19,052 --------- --------- $ 247,336 $ 266,373 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 340 $ 333 Accounts payable 20,738 26,681 Accrued income taxes 3,343 3,211 Other accrued liabilities 52,874 41,833 --------- --------- Total current liabilities 77,295 72,058 --------- --------- Long-term liabilities: Long-term debt 2,985 9,101 Convertible subordinated notes 57,500 63,200 Other long-term liabilities 2,000 3,990 --------- --------- Total long-term liabilities 62,485 76,291 ========= ========= Stockholders' equity: Common stock 1,665 1,641 Capital in excess of par value 95,923 93,249 Retained earnings 18,366 23,577 Unamortized restricted stock plan expense (341) (443) Treasury stock (8,057) -- --------- --------- Total stockholders' equity 107,556 118,024 --------- --------- $ 247,336 $ 266,373 ========= =========
A- The balance sheet at June 30, 1997, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. -3- 4 CALIFORNIA MICROWAVE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands)
Nine Months Ended March 31 1998 1997 -------- -------- Operating activities: Income from continuing operations $ 7,289 $ 17 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities Gain from sale of subsidiary -- (2,744) Depreciation and amortization 6,461 6,134 Amortization of intangible assets 1,032 1,063 Deferred taxes 4,147 (16,388) Amortization of debt issuance costs 238 200 Other adjustments (575) -- Net effect of changes in: Accounts receivable (19,458) 4,222 Refundable income taxes 10,085 -- Inventories (466) (294) Prepaid expenses (1,198) (38) Accounts payable (5,943) 2,275 Accrued income taxes 236 (607) Other accrued liabilities and long-term liabilities 4,134 10,895 -------- -------- Net cash provided by continuing operations 5,982 4,735 Net cash (used in) discontinued operations (6,662) (6,597) -------- -------- Net cash (used in) operating activities (680) (1,862) -------- -------- Investing activities: Capital expenditures (6,837) (6,310) Proceeds from sale of subsidiary -- 3,501 Proceeds from sale of discontinued operations 27,000 -- Other (2,596) (976) -------- -------- Net cash provided by (used in) continuing operations investing activities 17,567 (3,785) Net cash (used in) discontinued operations investing activities (1,230) (1,219) -------- -------- Net cash provided by (used in) investing activities 16,337 (5,004) -------- -------- Financing activities: Payments on long-term debt (109) (109) Net borrowings (repayments) under bank credit facilities (6,000) 1,000 Repayment of convertible subordinated notes (5,700) -- Issuance of common stock 2,600 3,249 Purchases of treasury stock (8,057) -- -------- -------- Net cash provided by (used in) continuing operations financing activities (17,266) 4,140 Net cash (used in) discontinued operations financing activities (100) (200) -------- -------- Net cash provided by (used in) financing activities (17,366) 3,940 -------- -------- Net (decrease) in cash and cash equivalents (1,709) (2,926) Cash and cash equivalents at beginning of year (4,974) 4,560 -------- -------- Cash and cash equivalents at end of period $ 3,265 $ 1,634 ======== ======== Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 2,339 $ 3,475 Income taxes (300) 592
See accompanying notes -4- 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 - Basis of Presentation The financial information at March 31, 1998, and for the three and nine-month periods ended March 31, 1998 and 1997, is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) which the management of California Microwave, Inc. believes are necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for a full year. The financial statements for fiscal 1997 have been restated to reflect the accounts of Microwave Networks (MN) and Satellite Transmission Systems (STS) as discontinued operations. The consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 1997, included in the California Microwave, Inc. 1997 Annual Report to Stockholders. Note 2 - Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per shares. Unlike primary earnings per share, basic earnings per share exclude any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. This restatement did not result in any material changes. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. -5- 6 Computation of Per Share Income (Loss) (In thousands, except per share amounts)
Three months ended Nine months ended March 31 March 31 ----------------------- ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- BASIC - EPS: - - ------------ Income from continuing operations $ 3,105 $ 1,855 $ 7,289 $ 17 Loss from discontinued operations (12,500) (7,859) (12,500) (33,289) -------- -------- -------- -------- Net income (loss) $ (9,395) $ (6,004) $ (5,211) $(33,272) ======== ======== ======== ======== Average shares outstanding 16,505 16,273 16,509 16,182 ======== ======== ======== ======== Income (loss) per share: Continuing operations $ .19 $ .11 $ .44 $ .00 Discontinued operations (.76) (.48) (.76) (2.06) -------- -------- -------- -------- Net income (loss) $ (.57) $ (.37) $ (.32) $ (2.06) ======== ======== ======== ======== DILUTED - EPS: - - -------------- Income from continuing operations $ 3,105 $ 1,855 $ 7,289 $ 17 Add back interest, net of taxes (a) (a) (a) (a) -------- -------- -------- -------- Income from continuing operations $ 3,105 $ 1,855 $ 7,289 $ 17 Loss from discontinued operations (12,500) (7,859) (12,500) (33,289) -------- -------- -------- -------- Net income (loss) $ (9,395) $ (6,004) $ (5,211) $(33,272) ======== ======== ======== ======== Average shares and equivalents - basic 16,505 16,273 16,509 16,182 Add - additional common stock equivalents of the Company's stock options 275 134 244 118 Add - shares to be issued at conversion of convertible debentures (a) (a) (a) (a) -------- -------- -------- -------- Average shares and equivalents 16,780 16,407 16,753 16,300 ======== ======== ======== ======== Income (loss) per share Continuing operations $ .19 $ .11 $ .44 $ .00 Discontinued operations (.75) (.48) (.75) (2.04) -------- -------- -------- -------- Net income (loss) $ (.56) $ (.37) $ (.31) $ (2.04) ======== ======== ======== ========
(a) Anti-dilutive as to convertible subordinated debentures in fiscal 1998 and 1997. Note 3 - Discontinued Operations In June 1997, the Company's Board of Directors adopted a formal plan to sell the Microwave Networks (MN) and Satellite Transmission Systems (STS) divisions. At that time, the operating results and financial position of these divisions were classified separately as discontinued operations in the Company's financial statements and a provision of $8.4 million (after related tax benefit of $3.8 million) was made for expected losses until the units could be sold and for the then expected losses on their eventual sale. STS was sold to L-3 Communications Corporation on February 5, 1998, for $27 million cash. MN was sold to Tadiran Ltd on April 21, 1998, for approximately $31.5 million cash. During the quarter ended March 31, 1998, the Company recorded an additional provision for $12.5 million (after related tax benefit of $7.0 million) in losses on discontinuance of these units. -6- 7 For the three and nine-month periods ended March 31, 1997, these discontinued units incurred losses from operations of $7.9 million (after related tax benefits of $3.9 million) and $33.3 million (after related tax benefits of $16.4 million) on revenues (not shown in the condensed consolidated statements of operations) of $34 million and $131 million, respectively. The losses for the March 31, 1997, quarter included restructuring charges of approximately $8 million before tax benefits. The losses for the nine months ended March 31, 1997, include the $8 million in restructuring charges plus an additional amount of approximately $32 million recorded in the quarter ended December 31, 1996, for inventory, warranty and contract provisions, all before related tax benefits. The operating losses of these discontinued units in the current fiscal year and the anticipated loss on sale of MN assets were charged against the provision for loss on discontinuance established at June 30, 1997, and increased in the quarter ended March 31, 1998. Note 4 - Litigation Settlement The Company announced in November 1995, that a shareholders' class action lawsuit had been filed in the United States District Court for the Northern District of California against it and certain of its former officers on behalf of persons who purchased shares of the company's common stock between September 6, 1994, and June 29, 1995. The complaint filed in the lawsuit alleged certain violations of the federal securities laws by the company and certain of its former officers and sought damages in an unspecified amount. Although California Microwave did not believe that it or its former officers committed any securities law violations and considered the allegations made in the class action suit to be without merit, in order to avoid the expense and distraction of protracted litigation, the Company reached an agreement to settle the lawsuit. The net expense of the settlement (including defense costs) to the Company, recorded as an expense in California Microwave's fiscal 1998 second quarter, was $1.9 million, before taxes, or approximately $.07 per share. The court approved the settlement on March 23, 1998.
Note 5 - Inventories (in thousands) ----------- March 31 June 30 1998 1997 --------- -------- Projects in process $ 14,751 $ 7,795 Less progress billings 1,804 1,938 --------- -------- 12,947 5,857 Work-in-process and finished goods 18,267 21,915 Raw materials and parts 19,605 22,581 --------- -------- $ 50,819 $ 50,353 ========= ========
Note 6 - Stockholders' Equity On February 12, 1998, the Company's Board of Directors authorized the repurchase for the treasury of up to 3,000,000 shares of its common stock. During the three months ended March 31, 1998, the Company acquired 398,000 treasury shares for $8,057,181. The change in capital in excess of par value for the nine months ended March 31, 1998, consists principally of common stock issuances and related tax benefit of options exercised. Note 7 - Income Taxes At March 31, 1998, the Company had a cumulative net deferred tax asset of $28.7 million that will be available to reduce payments on future tax liabilities. Management of the Company believes it is more likely than not that the asset will be realized through refunds of previously paid income taxes, future profitable operations, and tax planning strategies. -7- 8 Note 8 - Segment Reporting During the period ended March 31, 1998, the Company reorganized its six continuing operating divisions into three divisions, and elected to early adoption of segment reporting for the reorganized divisions in accordance with the provisions of Statement 131 of the Financial Accounting Standards Board (FASB). California Microwave's reportable segments are business units that develop, manufacture and distribute different products for specific industry customers. These reportable segments are each managed separately, because they each provide distinct products for different industry customers. California Microwave has three reportable segments: 1) Satellite Communications Division consists of the EFData business unit which provides products and services to telecommunications carriers, companies and organizations. These products enable customers to provide voice, video and data services via satellite. 2) Terrestrial Microwave Division represents the combination of Microwave Radio Communications (MRC) and Microwave Data Systems (MDS) which provide products and services mainly to the television broadcast, oil, gas and utility industries. The products of both of these operations are based on microwave radio technology and although currently manufactured separately, are produced and tested with similar equipment and techniques. 3) Government includes the Government Electronics Division (GED), Airborne Systems Integrated Division (ASID) and the Services Division (SD). These operations contract principally with the United States Department of Defense and provides products and services principally in the areas of communications, reconnaissance and surveillance systems. Intersegment sales are recorded at negotiated sales prices, which approximate market and the related intercompany profit is eliminated in the Company's consolidation process. Cost transfers are minimal and are recorded at cost. Intersegment sales are not material in fiscal 1997 and 1998. -8- 9 CALIFORNIA MICROWAVE SEGMENT REPORTING FOR THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
1998 - 3 MOS.(1) TERRESTRIAL SATELLITE GOVERNMENT ALL OTHERS TOTAL - - -------------------- ----------- --------- ---------- ----------- ----- Net sales $ 21,318 $ 23,068 $ 22,291 $ (46) $ 66,631 Operating income 4,018 2,007 2,269 0 8,294 Bookings 20,712 22,146 25,836 855 69,549 International: Sales 8,100 13,500 600 22,200 Bookings 8,400 12,000 2,600 23,000 - - ----------------------------------------------------------------------------------------------
1997 - 3 MOS.(1) - - ---------------- Net sales $ 17,578 $ 17,740 $ 23,610 $ (369) $ 58,559 Operating income 1,941 1,031 2,156 (164) 4,964 Bookings 21,134 21,839 33,092 (803) 75,262 International: Sales 6,200 10,200 100 16,500 Bookings 11,400 9,600 400 21,400 - - ----------------------------------------------------------------------------------------------
Three months ended Reconciliation 3/31/98 3/31/97 ------- ------- Operating profit from segments $ 8,294 $ 4,964 Corporate expenses (2,748) (1,278) Amortization of intangible assets (344) (373) Interest expense (880) (1,406) Eliminations 510 863 ------- ------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $ 4,834 $ 2,770 ======= =======
(1) Includes DRT, sold in fiscal 1997, and Calnav, sold in fiscal 1998, and eliminations with discontinued operations in both fiscal 1998 and 1997 -9- 10 CALIFORNIA MICROWAVE SEGMENT REPORTING FOR NINE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
1998 - 9 MOS.(1) TERRESTRIAL SATELLITE GOVERNMENT ALL OTHERS TOTAL - - -------------------- ----------- --------- ---------- ----------- --------- Net sales $ 62,112 $ 71,051 $ 68,059 $ (3,610) $ 197,612 Operating income 10,372 7,847 5,897 0 24,116 Operating assets - period end 37,919 58,873 34,857 131,649 Bookings 63,630 71,491 77,240 (984) 211,377 International: Sales 24,200 40,100 800 65,100 Bookings 24,000 40,300 2,900 67,200 - - ----------------------------------------------------------------------------------------------
1997 - 9 MOS.(1) - - ----------------- Net sales $ 54,183 56,059 76,844 $ (3,996) $ 183,090 Operating income 6,389 (1,542) 4,654 (1,054) 8,447 Operating assets - period end 34,815 43,909 28,183 106,907 Bookings 57,306 65,436 86,807 (3,741) 205,808 International: Sales 14,800 34,100 500 49,400 Bookings 21,400 36,800 400 58,600 - - ----------------------------------------------------------------------------------------------
Nine months ended Reconciliation 3/31/98 3/31/97 -------- -------- Operating profit from segments $ 24,116 $ 8,447 Corporate expenses (7,437) (7,222) Amortization of intangible assets (1,032) (1,063) Litigation settlement (1,900) Sale of subsidiary 2,744 Interest expense (2,886) (4,060) Eliminations 511 1,179 -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $ 11,372 $ 25 ======== ========
(1) Includes DRT, sold in fiscal 1997, and Calnav, sold in fiscal 1998, and eliminations with discontinued operations in both fiscal 1998 and 1997 -10- 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Statements made below and elsewhere in this Form 10-Q that are not historical facts, including any statements about expectations for fiscal year 1998 and beyond, involve certain risks and uncertainties. Factors that could cause the Company's actual results to differ materially from management's projections, estimates and expectations include, but are not limited to, delays in the receipt of orders or in the shipment of products, the Company's success in implementing its strategic plan, delays in transitioning from older to newer products, and other factors referred to under "Information Regarding Forward Looking Statements" in the Company's Form 10-K Annual Report for its fiscal year ended June 30, 1997, and in the Company's Consolidated Financial Statements and Notes to Financial Statements contained in its 1997 Annual Report to Stockholders. The Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements should be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations. In June 1997, the Company decided to divest its Satellite Transmission Systems (STS) and Microwave Networks (MN) business units and those business units were sold in February, 1998 and April, 1998, respectively. The STS and MN businesses have been accounted for as discontinued operations in the accompanying financial statements. Accordingly, the discussion that follows concerns only the results of continuing operations. The fiscal year 1997 accounts have been restated to conform to this presentation. The following table sets forth for the periods indicated (i) certain income and expense items expressed as a percentage of the Company's total sales and (ii) the percentage change of such items for the three and nine months ended March 31, 1998, compared to the three and nine months ended March 31, 1997. See Condensed Consolidated Statements of Operations.
Period to Period Percent of Sales Increase (Decrease) ---------------- ------------------- Three Months Nine Months Three Months Nine Months Ended Ended Ended Ended March 31 March 31 March 31 March 31 1998 1997 1998 1997 1998 vs 1997 1998 vs 1997 ------ ------ ------ ------ ------------ ------------ Sales 100.0% 100.0% 100.0% 100.0% 13.8% 7.9% Gross margin 33.9 31.4 33.7 26.8 22.9 35.8 Research and development expenses 7.3 7.1 7.4 7.3 17.5 9.1 Marketing and administration expenses 17.5 16.5 18.5 18.1 20.4 10.3 Amortization of intangible assets 0.5 0.6 0.5 0.6 -- -- Operating income 8.6 7.1 7.2 0.7 36.8 NM Interest (expense) net (1.3) (2.4) 1.5 (2.2) (37.4) (29.0) Income from continuing operations before income taxes 7.3 4.7 5.8 0.0 74.5 NM Income from continuing operations 4.7 3.2 3.7 0.0 67.4 NM
NM - Not meaningful -11- 12 RESULTS OF OPERATIONS Sales Sales were $66.6 million and $58.6 million for the three months ended March 31, 1998 and 1997, respectively, representing an increase of 14%. Satellite communications sales increased by 30%, as new modem and transceiver products were successfully introduced and sold. Terrestrial microwave (radio products) sales increased by 21% due to a substantial increase in sales of multiport data radios into Latin America. Government sales declined by 6%, as certain U.S. government projects matured, resulting in lower sales. U.S. commercial sales and international sales increased 18% and 35%, respectively. The increase in international sales is consistent with the increase in satellite communications product sales and terrestrial microwave (radio products) sales mentioned above. Sales to the U.S. government declined in the three months ended March 31, 1998, as sales were unusually strong in fiscal 1997 due to a large project to add sensors to existing Airborne Reconnaissance Low program platforms. This project was completed in early fiscal 1998. Sales were $197.6 million and $183.1 million for the nine months ended March 31, 1998, and 1997, respectively, representing an increase of 8%. Satellite communications and terrestrial microwave (radio products) sales increased 27% and 15%, respectively, substantially offsetting an 11% decrease in government sales. International and U.S. commercial sales increased 32% and 12%, respectively. Gross Margin Gross margin was $22.6 million and $18.4 million for the three months ended March 31, 1998, and 1997, respectively, representing an increase of 23%. Gross margin as a percentage of total sales was 33.9% and 31.4% for such periods, respectively. The increase in gross margin in dollars and as a percentage of sales was due largely to higher sales of satellite communications and terrestrial microwave products, which have higher gross margins, and to lower sales to the U.S. government, which have lower gross margins. Gross margin was $66.5 million and $49.0 million for the nine months ended March 31, 1998, and 1997, respectively, representing an increase of 36%. Gross margin as a percentage of sales was 33.7% and 26.8% for such periods, respectively. In December 1996, charges of $6 million were recorded to cost of sales as a result of a comprehensive review of all Companies' operations. In addition, as described above, fiscal 1997 included a higher proportion of lower margin government sales. Research and Development Research and development expenses were $4.9 million and $4.2 million for the three months ended March 31, 1998 and 1997, respectively, representing an increase of 18%. Research and development expenses as a percentage of sales were 7.3% and 7.1% for such periods, respectively. The Company continues to focus its research and development efforts primarily on the development of new satellite networking products and software and microwave radio products. Research and development expenses were $14.6 million and $13.4 million for the nine months ended March 31, 1998 and 1997, respectively, representing an increase of 9%. Research and development expenses as a percentage of sales were 7.4% and 7.3% for such periods, respectively. Marketing and Administration Marketing and administration expenses were $11.6 million and $9.7 million for the three months ended March 31, 1998 and 1997, respectively, representing an increase of 20%. Marketing and administration expenses as a percentage of total sales were 17.5% and 16.5% for such periods, respectively. The Company has experienced some increase in costs in this area as a result of hiring and relocation of several key members of the new management team. -12- 13 Marketing and administration expenses were $36.6 million and $33.2 million for the nine months ended March 31, 1998 and 1997, respectively, representing an increase of 10%. Included in the three months ended December 31, 1997, was a charge for $1.9 million for the settlement of a lawsuit (including defense costs) and included in the three months ended December 31, 1996, was a charge for $1.3 million for severance charges for the Company's former chief executive officer. Marketing and administration expenses as a percentage of sales were 18.5% and 18.1% for such periods, respectively. The combining of the MRC and MDS businesses may lead to restructure charges in the three months ended June 30, 1998. These charges, if any, have not been determined at this time. Amortization of Intangible Assets Amortization expenses associated with intangible assets remained constant at approximately $344,000 per quarter for the three months and nine months ended March 31, 1998. Interest Expense, Net Net interest expense was $0.9 million and $1.4 million for the three months ended March 31, 1998 and 1997, respectively, representing a 37% decrease. Net interest expense was $2.9 million and $4.1 million for the nine months ended March 31, 1998 and 1997, respectively, representing a 29% decrease. The decrease in net interest expense for the three months and nine months ended March 31, 1998, reflects the collection of refundable income taxes in September, 1997 and the use of proceeds from the STS sale in February, 1998 to retire the Motorola subordinated debt of $5.7 million and the reduction in borrowings on credit lines. Provision for Income Taxes For the three months ended March 31, 1998, the Company provided for $1.7 million of taxes on income from continuing operations compared to $0.9 million for the three months ended March 31, 1997. During the three months ended March 1998 and 1997, the Company recorded tax benefits on losses of discontinued operations of $7.0 million and $3.9 million, respectively. The effective tax rates were 36% and 33% for the nine months ended March 31, 1998 and 1997, respectively. The variation in tax rates is principally due to the loss, in fiscal 1997, in certain states of benefits from loss carry forwards. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, the Company had working capital of $98.0 million, including $3.3 million of cash and cash equivalents, compared with working capital of $111.5 million, including cash and cash equivalents of $5.0 million, at June 30, 1997. This decline is due principally to retirement of $11.8 million of long-term debt and the purchase of $8.1 million of treasury stock in the nine months ended March 31, 1998. Net cash provided by continuing operations was $6.0 million and $4.7 million for the nine months ended March 31, 1998 and 1997, respectively. During the first nine months of fiscal 1998, the Company obtained $10.1 million from income tax refunds, which was offset by an increase in accounts receivable of $19.5 million. Days receivable increased to 75 days at March 31, 1998, from 46 days at June 30, 1997, due to; (a) U.S. government collections were extraordinarily large in June 1997 and returned to normal levels in fiscal 1998 and, (b) an increase in international sales and related receivables, which have extended terms in certain cases. The Company has established a new bank discount facility and has resumed selling certain export receivables, which are covered by trade credit insurance. Receivables sold to a bank at March 31, 1998, were $4.4 million compared to $7.0 million at June 30, 1997. Operating income adjusted for non-cash items provided cash of $14.4 million and $7.4 million in the nine months ended March 31, 1998 and 1997, respectively. Cash (used in) discontinued operations was ($6.7) million and ($6.6) million during the nine months ended March 31, 1998 and 1997, respectively. -13- 14 The Company's investing activities during the first nine months of fiscal 1998 include the receipt of $27.0 million from the sale of STS offset by capital expenditures of $6.8 million. Total cash provided by investing activities was $17.6 million. Net cash used for investing activities during the first nine months of fiscal 1997 was $3.8 million, which included $6.3 million of capital expenditures and cash proceeds of $3.5 million from the sale of a subsidiary. During the first nine months of fiscal 1998, cash and cash equivalents of $17.3 million were used in financing activities, including stock repurchases of $8.1 million, net repayment of $6.0 million under the Company's credit lines and repayment of $5.7 million of convertible subordinated notes, offset by sales of $2.6 million of common stock to employees under on-going stock option and purchase plans. During the first nine months of fiscal 1997, the Company borrowed $1.0 million under its credit lines and sold $3.2 million of common stock to its employees. On February 12, 1998, the Company's Board of Directors authorized the repurchase of up to 3,000,000 shares of the Company's outstanding stock over the next six to twelve months. During the three months ended March 31, 1998, the Company acquired 398,000 treasury shares for $8,057,181. The above activity resulted in a net decrease in cash and cash equivalents of $1.7 million and $2.9 million for the first nine months of fiscal 1998 and 1997, respectively. The Company has a $30 million committed asset-based bank credit facility, which expires in June 2000. As of March 31, 1998, there were no borrowings and there were $1.7 million of standby letters of credit and guarantees outstanding under this credit facility. At March 31, 1998, the Company was not in compliance with certain covenants required by its industrial development bond agreements. The lenders have waived such non-compliance. The Company believes that its current cash position, funds generated from operations, funds from the sale of divested operations, and funds it believes will be available from its credit facilities will be adequate to meet the Company's requirements for working capital, capital expenditures and debt service for at least the next 12 months. OTHER FINANCIAL INFORMATION Bookings Orders booked were $69.5 million and $75.3 million for the three months ended March 31, 1998 and 1997, respectively, representing a decrease of 8%. Bookings for government systems during the third quarter of fiscal 1998 decreased 22%. Terrestrial microwave and satellite communications product bookings decreased by 2% and increased by 1%, respectively. International bookings increased by 7% for the three months ended March 31, 1998, compared to the same period of the prior fiscal year. International bookings totaled $23 million and represent 33% of total bookings. The receipt of new orders in the government systems area tend to be uneven, as they are program or project based. For the nine months ended March 31, 1998, bookings increased in the terrestrial microwave and satellite communications segments by 11% and 9%, respectively, and decreased by 11% in the government segment, compared to the same period of the prior fiscal year. International bookings for the nine months increased by 15% over the bookings for the comparable period of the prior fiscal year and represent 32% of total bookings. Latin America bookings remained strong during the period. Backlog Backlog was $104.8 million and $119.8 million at March 31, 1998 and 1997, respectively, representing a decrease of 12%. Substantially all of the March 31, 1998, backlog is expected to be delivered within twelve months. -14- 15 Part II - Other Information Item 1. Legal Proceedings On November 9, 1995, and December 12, 1995, putative class-action lawsuits entitled Rick Fairchild v. California Microwave, Inc. et al. and Mark E. McKinney v. California Microwave, Inc., et al. were filed in the United States District Court for the Northern District of California. The Plaintiffs in these two cases, which were consolidated, alleged that the Company and certain of its former executive officers violated various Federal securities laws through material misrepresentations and omissions during the period between September 6, 1994 and June 29, 1995. Although the Company did not believe that it or its former officers committed any securities law violations, and considered the allegations made in the class-action suit to be without merit, in order to avoid the expense and distraction of protracted litigation, the Company reached an agreement to settle the lawsuit with the Plaintiffs. The net expense of the settlement (including defense costs) to the Company, recorded as an expense in California Microwave's fiscal 1998 second quarter, was $1.9 million, before taxes, or approximately $0.7 cents per share. The United States District Court for the Northern District of California approved the settlement on March 23, 1998. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K. February 13, 1998, reporting under Item 2- Disposition of assets Announcement of completion of sale of STS division February 19, 1998 reporting under Item 5 - Other events Announcement of intention to purchase company shares March 4, 1998 reporting under Item 5 - Other events Announcement of agreement to sell MN division Announcement of additional charge for loss on disposition of discontinued operations -15- 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CALIFORNIA MICROWAVE, INC. May 8, 1998 BY /s/ Frederick D. Lawrence - - ----------------------------- -------------------------------------- Date Frederick D. Lawrence Chairman of the Board President and Chief Executive Officer May 8, 1998 BY /s/ Donna S. Birks - - ----------------------------- -------------------------------------- Date Donna S. Birks Executive Vice President Chief Financial Officer -16- EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS JUN-30-1998 JUL-01-1997 MAR-31-1998 3,265 2,838 56,335 1,176 50,819 175,254 58,526 34,830 247,336 77,295 62,485 0 0 1,665 105,891 247,336 197,612 197,612 131,074 52,120 0 160 3,886 11,372 4,083 7,289 (12,500) 0 0 (5,211) (.32) (.31) DISCONTINUED OPERATIONS - CONSISTS OF ADDITIONAL LOSS ON DISPOSAL OF THE MICROWAVE NETWORK'S DIVISION.
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