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Cincinnati Microwave Beams a Campaign at Rumors

October 6, 1995

Cincinnati Microwave Inc. has some problems cropping up on its radar screen.

In recent weeks, the maker of wireless devices such as cordless phones and radar detectors, has been the subject of persistent and negative rumors that have sent its stock tumbling from a high of $21.625 a share in August to its current price of around $12.875 a share on the Nasdaq Stock Market. Nervous shareholders have been calling Cincinnati Microwave to ask about rumors that it hasn’t paid Ohio state taxes, is suffering production problems and, most seriously, fabricated a supply shortage that it blamed for 1994 losses to cover up internal problems.

To silence the whispers, the concern last week issued a highly unusual news release listing the various stories and stating, ``There is absolutely no merit to the rumors about our business.″ But the talk has continued to plague the Cincinnati-based company and take up its time. Executives believe it originates from short-sellers. Although Cincinnati Microwave doesn’t have proof, it believes the raiders want to sell borrowed stock, then talk the stock price down and repurchase the lower-priced stock to make a profit.

Whatever the source, the persistency of the rumors has underscored some credibility problems for Cincinnati Microwave, which hasn’t posted a profit since 1988 in spite of the telecommunications boom. Investors were disappointed last year when Jacques A. Robinson, the chief executive brought in to stage a turnaround in 1991, couldn’t make good on his promise to post a profit in 1994. Instead the company reported a $10.3 million loss, which Mr. Robinson attributed to an unexpected shortage of key components for their bestselling phones.

``Especially when you’ve fallen short of expectations, I think there is always a credibility issue,″ says Sally A. Anderson, senior vice president of Kopp Investment Advisors in Edina, Minn., the company’s largest institutional shareholder. ``There’s reason for people to say, `You haven’t delivered yet.‴

An even more formidable task than the credibility question is the need for Cincinnati Microwave to diversify its product lineup. While the company has a technological edge in the design and manufacture of complicated wireless products, its revenue growth depends almost entirely on its cordless phone, Meanwhile, heavy-hitters with greater marketing leverage loom as potential competitors.

The company’s star product is a powerful, 900-megahertz spread-spectrum cordless phone, which has greater geographic range than most phones. It also has a scrambled signal so calls can’t be monitored by anyone snooping on radio waves. Those features have long been coveted by consumers, but have been out of the price range of most. By cutting production costs, Cincinnati Microwave has managed to offer the first such phone for as low as $200, affordable to many buyers.

As a result, sales are booming. The product accounts for about a fourth of the company’s sales. The company says it expects phone sales to more than double in 1995 to about $30 million.

But the phone, which relies on unpatented technology, faces competition, possibly from some of its own customers. Cincinnati Microwave conceded in a rights offering this August that several key customers have the capability to develop their own versions.

A spokesman for AT&T Corp., its largest buyer, calls the phone ``a great product that’s selling well.″ But the telecommunications giant admits it’s working on its own version, although it won’t say when, or if that product will come to market. ``The whole wireless area is exploding,″ says Richard McGinn, president of AT&T’s network-systems business. ``I’m constantly amazed at the inventiveness of our R&D folks and the appetite of consumers to embrace the freedom this technology offers.″

That puts pressure on Cincinnati Microwave, a small firm with little clout and a volatile stock price, to roll out more leading-edge products. ``The big question is whether they can turn all this technology into net income,″ says Matthew S. Robison, a Montgomery Securities analyst who has a ``buy″ on the stock. He also says the company must enhance its distribution channels and obtain adequate financing to fund its product development and growth.

The phones are pivotal. The company built its name on high-quality radar detectors in the 1980s, but that market is mature and is expected to keep declining. Detectors still account for about three-fourths of Cincinnati Microwave’s sales, but the company would like the figure to be about 20 percent. Proceeds from a third product, a promising wireless modem, aren’t expected to reach significant levels for at least a year.

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