<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD TO .
COMMISSION FILE NUMBER 0-07428
CALIFORNIA MICROWAVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 94-1668412
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
650 N. MARY AVENUE, SUNNYVALE, CALIFORNIA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 732-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $420,679,000 as of September 15, 1995.
Indicate the number of shares outstanding of the issuer's common stock, as
of the latest practicable date: On September 15, 1995, there were 15,841,002
shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's Annual Report to Stockholders for fiscal
year ended June 30, 1995. (Part II of Form 10-K)
(2) Portions of definitive proxy statement filed with Securities and
Exchange Commission relating to the registrant's 1995 Annual Meeting of
Stockholders. (Part III of Form 10-K)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
ITEM 1. BUSINESS
GENERAL
California Microwave, Inc. (the "Company") designs, manufactures and
markets sophisticated systems and products used worldwide in satellite and
wireless communications for the transmission of voice, data, facsimile and
video. The Company applies its expertise in microwave radio technologies to:
satellite earth stations and equipment, microwave radios for wireless
application, and electronic intelligence systems. California Microwave is a
leading provider of both satellite earth stations used for satellite
communications and digital and analog microwave radios for the cellular,
personal communications network and private network markets.
The Company sells its products through a variety of channels for use by
many of the world's principal providers of telecommunications services. These
include AT&T, MCI, Sprint, GTE, COMSAT Corporation, British Telecom, and
telephone companies around the world. Other users of the Company's products
include private networks, such as broadcast and cable television operators,
utilities and other major corporations, and municipal, state and national
governments. California Microwave believes that it is among the limited number
of key suppliers to these entities because of its proven track record of
technical performance and reliability, customer support and cost effectiveness.
In August 1994, the Company paid the former stockholders of Microwave Radio
Communications ("MRC") $9,600,000, bringing to $11,000,000 the total amount paid
to such stockholders under the contingent payment agreement entered into at the
time of the acquisition of MRC.
In May 1995, California Microwave acquired Microwave Networks Incorporated
("MNI") in a merger effected by exchanging 3,342,653 shares of its common stock
and options to acquire 132,347 shares of its common stock for all the
outstanding MNI common and preferred stock and MNI then-outstanding options,
warrants or other convertible securities. MNI is a manufacturer of digital
microwave transmission products and systems for worldwide cellular operators,
private businesses and domestic common carriers. The merger was accounted for as
a pooling of interests; accordingly, all periods presented in this report have
been restated to include the results of MNI.
In June 1995, the Company recorded restructuring and other charges of
approximately $37 million in connection with a program to reduce costs and
improve operating efficiencies. The program includes, among other things: the
integration of operations within the Company's Wireless Products Group and the
exit by California Microwave -- Telecom Transmission Systems, Inc. ("TTS") from
the short-haul radio market, which included certain shorthaul radio contracts
and the shifting of short-haul radio sales to MRC; the recording of certain
contract costs at Satellite Transmission Systems, Inc. ("STS"); the elimination
of excess facilities; the reduction of employees at STS; the write-off of excess
inventory and capital equipment; and the write-down of intangible assets.
TELECOMMUNICATIONS INDUSTRY OVERVIEW
Telecommunications Market. The demand for improved telecommunications is
increasing worldwide as emerging economies seek to modernize, and as
increasingly information intensive developed countries introduce new
telecommunications services. The telecommunications industry has expanded
rapidly during the last decade, principally due to technological advances and
regulatory changes in the United States and internationally. Advances in
technology have lowered per-unit communications costs, increased product
reliability, and encouraged a proliferation of new and enhanced communications
products and services. Regulatory initiatives (such as the breakup of the Bell
system and the assignment of radio frequency spectrum for cellular telephone
services) have enhanced competition, permitted the opening of new markets and
provided incentives for the development of new products.
Alternative Transmission Media. Customers for telecommunications equipment
must weigh the relative costs and advantages of the four presently available
transmission media: copper cable, fiber optic cable, satellite systems and
terrestrial microwave radio systems.
1
<PAGE> 3
- Copper cable, the traditional transmission medium most familiar to
consumers, is being replaced and supplemented by the other media,
particularly for high-volume and longdistance transmissions where it has
substantial capacity, cost and reliability limitations.
- Fiber optic cable is best suited to high-volume, point-to-point, short-
or long-distance links where its advantages -- capacity, quality and
security -- justify the long lead time and high cost to equip and install
a network.
- Satellite systems are often a preferred medium for transmitting to a
large geographical or multipoint area. These systems, which use microwave
technology, are well suited for rapid introduction of service in remote
areas or where terrestrial alternatives are unavailable, such as mobile,
shipboard or military applications. Satellite systems require a sizeable
initial capital investment by service providers to build and launch one
or more satellites. Once the satellites are in orbit, however, there are
substantial incentives to use this capacity, which typically requires
continued investment in satellite earth stations.
- Terrestrial microwave radio systems can be quickly and easily installed,
require relatively low initial capital investment and can be upgraded and
expanded over time. There are a wide variety of microwave radios offering
different frequencies, modulation techniques (analog or digital), and
transmission capacities. However, microwave radio applications typically
require government licensing and frequency coordination in order to
prevent signal interference among various users, and require a line of
sight between the transmitting and receiving antennas. Unavailability of
sufficient frequency spectrum has historically inhibited sales in
developed countries, although this constraint is being alleviated by the
actions of various governments and the availability of radios that do not
require governmental licensing prior to use.
Rarely is a complete communications system based solely on one of these
media. Transmission is normally routed through a combination of media, each
employed where it fits most cost-effectively within the communications network.
For example, a microwave radio studio-to-transmitter link used by a television
broadcaster may connect to a satellite system used to distribute programs
domestically and overseas. In addition, the various media provide routing
alternatives for the other media, as in the case of satellite backup facilities
for undersea fiber optic cables.
STRATEGY
California Microwave's strategy is to apply its expertise in microwave
technologies to systems and products for the satellite communications, wireless
and intelligence systems markets. The Company works closely with existing and
potential customers to specify and develop new products and product enhancements
that have long-term growth potential. The Company considers its ability to
create and maintain long-term customer relationships an important component of
its overall strategy in each of its markets.
The Company has concentrated its efforts on sales of systems and products
used for communications infrastructure rather than on consumer terminals and
equipment.
The Company's strategy includes the following key elements:
Maintenance of Strong Position in Satellite Communications and Intelligence
Systems Markets. By introducing new products and expanding its marketing
efforts and distribution capabilities worldwide, the Company intends to continue
to strengthen its position in its markets for satellite communications and
intelligence systems.
Wireless Growth. The Company believes that the wireless telecommunications
market offers numerous opportunities because of its rapid growth and relatively
fragmented nature. Emerging opportunities for the sale of microwave radios
include cellular and other portable personal communication systems, mobile data
entry, remote data collection and device monitoring and wireless local area
networks. Many of these opportunities relate to the portability and mobility
requirements of customers.
International Expansion. The Company's systems and equipment are marketed
on a worldwide basis. The Company's international sales have expanded
significantly in both satellite communications and wireless,
2
<PAGE> 4
and represented 48% of total sales for the fiscal year ended June 30, 1995.
International sales are expected to continue to increase due to international
infrastructure requirements in developing countries and the emergence of
wireless opportunities worldwide.
Acquisitions. The Company intends to continue to enhance its market
position through acquisitions of companies or lines of business that complement
its existing businesses. Consistent with this strategy, the Company in April
1992 acquired MRC, in October 1993 acquired substantially all of the assets and
certain of the liabilities of TTS and in May 1995 acquired MNI. In addition, the
Company acquired Mobile Satellite Products Corporation (formerly ViaSat
Technology Corporation; "MobileSat"), Microwave Data Systems ("MDS") and EFData
Corp. ("EFData") in recent years.
Core Technology Focus. Since its founding in 1968, the Company's systems
and products have been based on microwave radio technologies. The Company's
products employ both analog and digital applications of radio frequency
technology. Digital technology significantly enhances performance and capacity
and facilitates new product development. The Company has invested significant
resources in these technologies and believes its microwave communications
technologies provide a solid base for the development of future wireless
communications products and services, including new forms of mobile and portable
communications systems.
Decentralized Organizational Structure. California Microwave's
subsidiaries and divisions are decentralized. The Company believes this
organizational structure allows the key entrepreneurial personnel of each
division to be responsive to particular markets and customers. Each subsidiary
and division typically maintains its own sales, marketing, product development
and manufacturing functions.
Products and Markets. The Company's sales are summarized below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-----------------------------------------------------
1995 1994 1993
------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Sales by Product Class:
Satellite communications......... $174 37 % $178 44 % $157 51 %
Wireless......................... 228 49 176 44 100 33
Intelligence..................... 65 14 50 12 46 15
Other............................ 1 -- 2 -- 3 1
---- ---- ---- ---- ---- ----
Total......................... $468 100 % $406 100 % $306 100 %
==== ==== ==== ==== ==== ====
Sales by Market Sector:
International.................... $224 48 % $189 46 % $146 48 %
U.S. commercial.................. 136 29 115 28 79 26
U.S. government.................. 108 23 102 26 81 26
---- ---- ---- ---- ---- ----
Total......................... $468 100 % $406 100 % $306 100 %
==== ==== ==== ==== ==== ====
</TABLE>
SATELLITE COMMUNICATIONS
California Microwave is a leader in the design, assembly, integration and
installation of satellite earth stations, from the largest international gateway
earth stations, through an extensive series of mid-size earth stations, to very
small portable and fixed VSAT network earth stations. Earth stations are
integrated systems consisting of antennas (1 to 32 meters in diameter),
transmitting and receiving equipment, and video, data and telephone system
interface equipment. The Company also manufactures many electronic products,
such as modems and frequency converters, which are incorporated into earth
stations. Large antennas and certain other equipment are obtained from third
parties. The Company's line of digital and analog earth stations provides
point-to-point and point-to-multipoint transmission of voice, data, facsimile
and video, as well as tracking and command of the satellites themselves. Many of
the earth stations and related equipment are incorporated into communications
networks designed, installed and integrated by the Company. The Company's
systems are installed and operating in more than 110 countries.
3
<PAGE> 5
Turnkey Satellite Earth Stations and Networks. The Company, through its
subsidiary STS, is a leading supplier of turnkey satellite transmit/receive
earth stations and networks for domestic, international and government
applications. The Company is both an equipment supplier and a large-scale
network integrator. It has installed more than 1,000 major earth stations on a
turnkey basis, including more than 200 digital earth stations for use by members
of the INTELSAT network. Turnkey satellite earth stations typically are
completed in three to twelve months.
Transportable, Mobile, Portable and Other Satellite Earth Stations. The
Company, through its subsidiaries STS, EFData and MobileSat(TM), manufactures a
variety of transportable, mobile, portable and other satellite earth stations.
Most have modular designs, which reduce equipment costs, installation costs and
delivery lead times, and accommodate a wide variety of capacity, frequency band
or other customer requirements.
Transportable and mobile earth stations are typically used for rapid
deployment to supply broadcast and voice communications where telephone service
may be non-existent or temporarily unavailable. The Company, through its
MobileSat subsidiary, has developed the world's first portable International
Maritime Satellite Organization ("INMARSAT") B terminal which is used for
high-speed data and voice transmission and is marketed under the trademark
"LYNXX.(R)" The Company commenced shipments of LYNXX following INMARSAT type
approval.
Satellite Earth Station Products. Through various of its subsidiaries and
divisions, California Microwave manufactures a broad line of electronic products
used in earth stations. The products are used extensively in the Company's own
earth stations and are also sold in volume to other earth station suppliers and
to operators of communication networks to upgrade existing earth stations.
EFData is a leading producer of high speed (up to 155 million bits per second)
digital modems used in satellite communications networks. Since 1988, EFData has
delivered more than 15,000 satellite modems for use in INTELSAT systems,
satellite backup facilities for undersea fiber optic cable, and for many private
network applications. STS manufactures a range of frequency converters used in
satellite earth stations, and proprietary computer-based monitor and control
systems. EFData also manufactures a completely self-contained earth station
electronics package for low-cost rural and infrastructure networks. The Company,
through its Sunnyvale Products Division, manufactures a range of frequency
converters and Very Small Aperture Terminals ("VSATs") for data transmission
networks, and operates a shared hub station for data broadcasting in California.
4
<PAGE> 6
The Company's principal satellite communications products are summarized in
the following table:
SATELLITE COMMUNICATIONS
<TABLE>
<CAPTION>
TYPICAL SELECTED CUSTOMERS
PRODUCTS APPLICATION PRICE RANGE OR END USERS
- -------------------- --------------------------------------- ------------- ---------------------------------------
<S> <C> <C> <C>
TURNKEY SATELLITE EARTH STATIONS AND NETWORKS
International Provides direct voice, data, video and $1,000,000 to AT&T, British Telecom, MCI, Singapore
Gateways facsimile services internationally $5,000,000 Telecom, Telefonica (Spain), Bulgaria
(9-32 meter antenna) Telecommunications Company, Hong Kong
Telecom
Networks Provides voice, data, video and $5,000,000 to AT&T, Tenneco Oil, U.S. Government,
facsimile services for corporations, $15,000,000 Acumen (Thailand), Telespazio (Italy),
telephone companies and governments Samsung (South Korea), Emetel
domestically (Ecuador), Shanghai Stock Exchange
Video Uplinks Transmits television signals $500,000 to Hughes Communications, Hong Kong
(analog) $2,000,000 Telecom, Singapore Telecom, British
Telecom, KDD (Japan)
Very Small Aperture Transmits data used by retailers, car $100,000 to Hughes Network Systems, AT&T-Tridom, PC
Terminals ("VSAT") dealers, hotels, news agencies, $2,000,000 Quote, Dow Jones, Telerate, NOAA,
and Hubs financial quotation services, and Xinhua (China), S&P Comstock
weather tracking services in VSAT
networks
Mobile Shore Transmits voice and data to land, $1,000,000 to Hughes Network Systems, Satcom S.A.
Stations mobile and shipboard terminals in $5,000,000 (Portugal), VSNL (India), American
INMARSAT and other mobile satcom Mobil Satellite Corp.
networks
Tracking, Telemetry Tracks, monitors and controls satellite $1,000,000 to AT&T, GTE, INTELSAT, COMSAT
and Command Earth during launch and in orbit $5,000,000
Stations
TRANSPORTABLE, MOBILE, PORTABLE AND OTHER SATELLITE EARTH STATIONS
SCAMP 3.5-9 meter antenna earth stations with $100,000 to CBS, Reuters, U.S. Government,
electronics package on antenna for $400,000 Teleinformatica (Italy), Telefonica
international data and VSAT network (Spain)
hubs
FAST 1.8-2.4 meter antenna "fly-away" earth $100,000 to U.S. Government, CBS, Midwest Video
stations for transmitting voice and $600,000 (CNN)
high-speed data (up to 2
megabits/second)
PSAT 1.2-2.4 meter antenna earth stations $50,000 to Chevron, AMOCO, ABC, U.S. Government
for transmitting voice and low-speed $150,000
data (256 kilobits/second), typically
for emergency communications
LYNXX(R) Suitcase-size complete earth station $30,000 to U.S. Government, Exxon, COMSAT, British
providing voice and data using $50,000 Telecom
INMARSAT-B service
C- and Ku-band C- and Ku-band 70 MHz RF terminals in $10,000 to Hughes Network Systems, MCI, IDB
Transceivers, power levels from 2 to 400 watts for $100,000 Communications, Satelnet (Argentina),
Extended C-band antenna-mounted applications U.S. Government, Reuters, governments
Terminals of India and China
SATELLITE EARTH STATION PRODUCTS
High Speed Modems For connecting telephone lines to $5,000 to AT&T, GTE, MCI, Sprint, British
international satellite networks; $80,000 Telecom, OPTUS (Australia)
optical fiber back-up; and private
networks
Frequency Converters Key component in earth stations for $8,000 to AT&T, MCI, Telefonica (Spain), U.S.
converting frequencies $50,000 Government, Communications Authority of
Thailand, Singapore Telecommunications,
Entel (Chile)
Monitor and Control PC-based color graphics monitor and $5,000 to British Telecom, COMSAT, MCI, Reuters,
Systems; DAMA control system for networks and earth $95,000 U.S. Government, AT&T, GTE, Sprint
Network Products stations
DIGITAL VIDEO TELEVISION PRODUCTS
Progeny(TM) Transmits and receives digital $5,000 to New product; to be marketed to U.S. and
television signals by satellite and $20,000 international broadcast television
other radio carrier media networks
</TABLE>
5
<PAGE> 7
WIRELESS
California Microwave designs, manufactures and markets digital and analog
microwave radios and other equipment used in land-based point-to-point and
point-to-multipoint communications links. The Company is a leading manufacturer
of microwave radios for cellular and other personal communications networks, and
for private voice and data communications networks and for portable electronic
news gathering and studio-to-transmitter links. The Company believes that
wireless is one of the fastest growing areas of the telecommunications industry
due to technological advances, regulatory initiatives and the expanding
requirements for connectivity between people and computers and other electronic
devices.
Cellular and Personal Communications Networks and Systems. The Company,
through MRC, TTS and MNI, manufactures short and long distance digital microwave
radio systems for worldwide applications in cellular and portable personal
communications networks and systems. Over the past three years the Company has
delivered equipment to service providers in the U.S., the United Kingdom,
Germany, Belgium, Israel, Mexico, Brazil, Australia, the Philippines, China and
India. The microwave equipment (13, 18, 23 and 38 GHz) is used to interconnect
the microcells of the cellular and personal communications systems.
Land Mobile and Utility Communications. The Company, through TTS,
manufactures and sells digital and analog microwave radio systems for the
interconnection of statewide public safety mobile networks. Most of these sales
are made through Motorola, with whom TTS has an equipment supply agreement. TTS
also sells products to large utilities to provide voice and data communications
along major rights of way.
Television Broadcast. MRC is a leading supplier of analog microwave radios
to U.S. and international broadcast and cable television markets for use
principally in portable electronic news gathering and studio-to-transmitter
applications.
Wireless Data Networking. The Company, through its MDS division,
manufactures point-to-point and point-to-multipoint microwave data radios. MDS
point-to-point radios are used to extend the reach of a communications system in
areas where low capacity, multi-channel voice or data communications links are
required. Point-to-multipoint radio systems are used principally to connect
central computers to remote computer terminals or to physical measurement and
control devices. Typical applications include remote monitoring and automated
operation of oil and gas production and distribution, water-wastewater treatment
systems, and control of electric utility power generation facilities.
Approximately 100,000 MDS data radios have been sold since MDS commenced the
sale of radios in 1986.
The Company's MRC division manufactures a short-distance microwave radio
system that provides point-to-point high speed data connection of local area
networks. Typical users include companies operating multiple local area networks
within a metropolitan area.
MNI is a manufacturer of digital microwave transmission products and
systems for worldwide cellular operations, private businesses and common
carriers.
6
<PAGE> 8
The Company's principal wireless products are summarized in the following
table:
WIRELESS
<TABLE>
<CAPTION>
TYPICAL SELECTED CUSTOMERS
PRODUCTS APPLICATION PRICE RANGE OR END USERS
- -------------------- ---------------------------------------- ----------- ----------------------------------------
<S> <C> <C> <C>
CELLULAR AND PERSONAL COMMUNICATIONS NETWORKS AND SERVICES AND SPECIALIZED MOBILE RADIOS
Digital microwave Cell-to-cell interconnections $7,000 to Mercury One-2-One (U.K.), Vodafone
radios $50,000 (U.K.), British Telecom (U.K.), Orange
(2 to 38 GHz) (U.K.), CellTel (Sri Lanka), Sprint
Cellular, Bell South Cellular, OPTUS
(Australia), IUSACELL (Mexico) and
Telstra (India)
LAND MOBILE AND UTILITY COMMUNICATIONS
Analog radios Large statewide public safety mobile $10,000 to Motorola, NYPD, Massachusetts State
(2-7 GHz) networks $50,000 Police, Indiana State Police, Orange
Digital radios Co., Florida Police and Fire, City of
(2-23 GHz) Cleveland Public Safety, Michigan State
Public Safety System
Analog radios Large utility right-of-way networks $10,000 to Motorola, Tenneco Gas, PT.
(2-6 GHz) $50,000 Telkomunikasi, Indonesia, Daqing Oil
Digital radios (China), Pennsylvania Game Commission
(2-23 GHz)
TELEVISION BROADCAST
Analog radios Electronic news gathering; electronic $8,000 to ABC, CBS, NBC, CNN, FOX, C-SPAN
(2-40 GHz) field production $20,000
(2-23 GHz) Studio-to-transmitter links, regional $18,000 to PBS, BBC (U.K.), Prime Television and
networks $100,000 Southern Cross Broadcasting (Australia)
WIRELESS DATA NETWORKING
Analog and digital Point-to-point and point-to-multipoint, $1,000 to Mobil, Phillips Petroleum, Florida Power
data radios remote monitoring, data collection $10,000 & Light, PG&E, Georgia Power, El Paso
(450 and Gas, Amoco, China National Petroleum
900 MHz) Corporation
LAN microwave radios Local area network interconnection $10,000 to Pacific Communications, Watchtower Bible
(23 GHz) $12,000 and Tract Society of NY, HSC Corp.
</TABLE>
INTELLIGENCE SYSTEMS
The Company participates in selected areas of the U.S. government market
which are closely related to the Company's commercial technological and product
base. In recent years, as U.S. defense spending has declined, the Company has
competed effectively by offering adaptations of its technologies and
commercially available "off-the-shelf" products to stable and growing segments
of the Department of Defense market at significantly less cost than would be the
case under military specification procurement procedures. The Company integrates
electronic and electro-optical systems for both airborne and ground-based
applications. These systems collect, process and disseminate intelligence and
reconnaissance information using advanced radio communications hardware and both
special-purpose and off-the-shelf computers and software. The Company maintains
and upgrades these systems throughout their useful lives, which can be a decade
or more. The Company has developed a series of products with secure, portable,
ruggedized suitcase sized packaging that incorporate key intelligence
information collection, processing and analysis capabilities contained in its
larger systems.
The Company also designs and develops state-of-the-art multisensor imaging
systems and sophisticated electronic intelligence collection systems which it
integrates into inexpensive commercial aircraft. In fiscal 1991, the Company
received contracts totaling $19.6 million as a prime contractor for the U.S.
Army's Air Reconnaissance Low ("ARL") program. The ARL program employs both
imagery and signal intelligence sensors mounted on deHavilland-7 aircraft. These
sensors collect information which can be immediately transmitted to designated
receiving locations. The ARL aircraft can be rapidly deployed anywhere in the
world. The Company completed its first ARL contracts and made final delivery of
the first aircraft to the Army in 1993. The Company has received significant
follow-on ARL contracts involving additional aircraft.
7
<PAGE> 9
In early 1993, the Company introduced its new airborne intercept and
direction finding and geo-location system. The Company believes that this system
locates signals from over a wide range of frequencies more rapidly and
accurately than do other systems.
The Company's intelligence projects typically involve multi-year,
multi-million dollar contracts. In addition, the Company sells subsystems and
other equipment to U.S. government agencies on a short-term delivery basis. The
price of a project depends on a number of factors, including the amount of
development involved, quantities ordered, maintenance requirements and whether
an aircraft is to be modified and supplied by the Company in connection with the
contract.
SALES, MARKETING AND CUSTOMER SUPPORT
California Microwave directs its sales and marketing efforts toward major
users of its systems and products through a well established international
distribution network. The sales and marketing strategy of the Company varies
with the particular market served and involves direct sales by the Company's own
sales force, sales through representatives, value-added resellers, or a
combination of the foregoing. The Company also has entered into sales
distribution agreements with respect to certain of its satellite communications
and wireless products.
The Company considers its ability to create and maintain long-term customer
relationships an important component of its overall strategy in each of its
markets. Relationships with customers are established and maintained by the
Company's divisional area managers and their technical and marketing staffs. The
Company's strategy also includes its commitment to provide ongoing customer
support for its systems and products. This support involves providing direct
access to the Company's engineering staff or trained technical representatives
located throughout the world to resolve technical or operational problems.
The Company has expanded its international sales significantly and has sold
products in over 110 countries. The Company intends to continue to expand its
marketing efforts and distribution channels worldwide.
MANUFACTURING
Manufacturing operations consist principally of assembly and testing of
electronic systems built from fabricated parts, printed circuits and electronic
components. Both manual and various automated methods are employed, depending
primarily upon production volume. The Company employs formal Total Quality
Management programs and other training programs, and several of its operations
have qualified for International Standards Organization ("ISO") quality
procedure registration to ISO 9001, a standard sometimes imposed by foreign
buyers. Other subsidiaries and divisions of the Company are working toward
registration to ISO 9001, and the Company believes that lack of such
registration does not currently have any material adverse effect on its
business.
Electronic components and raw materials used in the Company's products are
generally obtained from a large number of suppliers. Some components are
standard items and others are manufactured to the Company's specifications by
subcontractors. The Company obtains certain components and subsystems from
single, or a limited number of, sources. The Company operates without a
substantial inventory of components and subsystems but believes that most
components and subsystems are available from existing or alternative suppliers
and subcontractors. A significant interruption in the delivery of such items
could have a material adverse effect on the Company's results of operations.
COMPETITION
California Microwave is engaged in a highly competitive business and the
number of potential customers for the Company's products is limited. Many of the
Company's competitors have significantly greater financial, marketing and
operating resources than the Company. In addition, certain of the Company's
customers have technological capabilities in the Company's product areas and
could choose to replace the Company's products with their own. The Company's
major competitors by product area include: NEC, Alcatel Telespace and
Scientific-Atlanta, Inc. -- satellite communications; NEC, Digital Microwave
Corpo-
8
<PAGE> 10
ration, Harris Corporation, Alcatel and Motorola -- wireless; ESL, Inc. (a
subsidiary of TRW Inc.), Lockheed Martin Corporation and E-Systems,
Inc. -- intelligence.
The Company believes that competition in its markets is based primarily on
price, performance, reputation, on-time delivery, reliability and customer
support. The Company believes that it has the ability to develop, produce and
install turnkey satellite earth stations, and to deliver satellite and wireless
equipment, faster than many of its competitors. In the intelligence area, the
Company believes that it has the ability to solve customers' problems with
proprietary solutions and to offer cost-effective approaches using commercially
available products.
RESEARCH AND DEVELOPMENT
Research and development expenses were $29.7 million, $17.6 million and
$11.9 million in fiscal 1995, 1994 and 1993, respectively, representing 6.3%,
4.3% and 3.9% of total sales, respectively, for the same periods.
The Company obtains customer funding for research and development where
possible to adapt the Company's basic technology to specialized customer
requirements. Most research and development expenses in turnkey satellite earth
stations and intelligence systems are customer-funded and are included in cost
of products sold. Since the Company expects to emphasize equipment sales,
particularly in the wireless area, it expects research and development
expenditures, as a percent of sales, to continue to increase.
PATENTS AND LICENSES
Due to the rapidly changing nature of technology in the Company's business,
patents and licenses have been of substantially less significance in the
Company's business than have been the timely application of its technology and
the design, development and marketing capabilities of its personnel.
EMPLOYEES
At June 30, 1995, California Microwave had 2,382 employees, 1,323 of whom
were engaged in production and production support, 605 in research and
development and other engineering support, 247 in marketing and 207 in general
and administration functions. None of the employees is represented by a labor
union. The Company believes that its employee relations are good.
REGULATION
Radio communications, including satellite communications, are subject to
regulation by United States and foreign laws and international treaty. The
Company's equipment must conform to domestic and international requirements
established to avoid interference among users of microwave frequencies and to
permit interconnection of equipment.
The use of microwave signals depends upon the availability of frequencies
that permit interference-free operation. In many developed countries, the
unavailability of frequency spectrum has historically inhibited the growth of
microwave systems. However, two factors are alleviating this problem. First, the
proliferation of fiber optics for high capacity systems has reduced the demand
for microwave frequencies for such systems, thus freeing up frequency spectrum
for new types of services, particularly for portable or mobile communications.
Second, many government regulatory agencies are reallocating frequencies from
one type of use to another, thus providing incentive for new communications
services. Current regulatory efforts by international and national regulatory
authorities are directed at providing microwave frequencies for new portable
wireless personal communications services. Equipment to support these new
services can be marketed only if permitted by suitable frequency allocations and
regulations, and the process of establishing new regulations is complex and
lengthy.
BACKLOG
At June 30, 1995, the Company's backlog of undelivered orders was $231.5
million (approximately 80% of which is expected to be delivered during fiscal
1996) compared with $232.7 million at June 30, 1994. In the
9
<PAGE> 11
Company's experience, its backlog at any given time is not necessarily
indicative of prospective period revenues. The Company generally records an
order in backlog when the Company receives a firm contract or purchase order
which identifies product quantities and delivery dates, and in the case of
government contracts, when such contracts have been funded by the government.
While from time to time a substantial portion of the Company's backlog has been
comprised of large orders, the cancellation of any of which could have a
material adverse effect on the Company's operating results, the Company
historically has not experienced significant changes in its backlog from
cancellations or revisions of orders.
ITEM 2. PROPERTIES
The table below describes the location and general character of the
principal plants and materially important physical properties that are owned or
leased by the Company and its subsidiaries as of June 30, 1995:
<TABLE>
<CAPTION>
LEASE NO. OF SQUARE
OCCUPANT EXPIRES BUILDINGS FOOTAGE LOCATION
----------------------------------- ------------ --------- ------- -----------------------
<C> <S> <C> <C> <C> <C>
1. Corporate Headquarters............. 1997 1 20,000 Sunnyvale, CA
2. Satellite Transmission Systems,
Inc................................ (owned) 2 90,000 Hauppauge, NY
3. Mobile Satellite Products
Corporation........................ 1998 1 35,000 Hauppauge, NY
4. Sunnyvale Products Division........ 2001 2 79,020 Sunnyvale, CA
5. Government Electronics Division.... 1998-1999 2 51,900 Woodland Hills, CA
6. Airborne Systems Integration
Division........................... 1999 1 45,000 Belcamp, MD
1998 1 19,619 Baltimore, MD
7. EFData Corp........................ 1996-2001 4 68,600 Tempe, AZ
8. Microwave Data Systems Division.... (owned) 1 43,260* Rochester, NY
9. Microwave Radio Communications
Division........................... 1997 1 71,500 Chelmsford, MA
monthly 1 5,247 Lowell, MA
10. California Microwave -- TeleCom
Transmission Systems, Inc.......... 2004 1 108,698 Bloomingdale, IL
1997 1 36,348 Fremont, CA
1996-1998 2 5,200 High Wycombe, U.K.
11. Government Communications Systems
Division........................... monthly 1 12,000 Annapolis Junction, MD
12. California Microwave -- Microwave
Networks Incorporated.............. 1998-2001 3 74,300 Houston, TX
13. Government Group................... 1997 1 1,750 Arlington, VA
14. Digital Radio Technology, Inc...... Monthly 1 2,700 Fishers, NY
</TABLE>
- ---------------
* Does not include 12,800 square feet under construction.
The Company believes that its facilities are adequate for its present
needs.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
<PAGE> 12
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of all executive officers of the Company, and all
positions with the Company held by such person, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- -------------------------------------------------------------
<S> <C> <C>
Philip F. Otto................ 54 Chairman of the Board, President and Chief Executive Officer
Gilbert F. Johnson............ 64 President of the Government Group
Douglas H. Morais............. 52 President of the Wireless Products Group
Leon F. Blachowicz............ 55 President of Satellite Communications Group
Garrett E. Pierce............. 51 Executive Vice President and Chief Financial Officer
George L. Spillane............ 61 Vice President and Secretary
Michael L. Foster............. 49 Vice President-Financial Planning and Treasurer
Lanny B. Myers................ 58 Vice President-Controller
</TABLE>
Philip F. Otto rejoined the Company as a Director and as President of the
Wireless Products Group in January 1992, became President and Chief Executive
Officer of the Company in March 1992 and Chairman of the Board in January 1993.
He served as Executive Vice President, Chief Financial Officer and a director of
General Cellular Corporation, a cellular telecommunications company, from 1989
to 1991. Subsequent to Mr. Otto's employment by General Cellular Corporation,
that corporation negotiated a "prepackaged" plan of reorganization under Chapter
11 that involved the infusion of additional capital. He also served as President
of Netline Communications Corporation, a telecommunications software company, in
1988; as a consultant to the telecommunications industry from 1986 to 1988; and
as Chief Executive Officer and a director of Telco Systems, Inc., a fiber optics
telecommunications company, from 1981 to 1986. Mr. Otto served as Chief
Financial Officer of the Company from 1975 to 1980, was a director of the
Company from 1976 to 1985 and was an Executive Vice President of the Company
from 1979 to 1981. He holds a Bachelor of Science Degree in Engineering from
Yale University and a Master's Degree in Business Administration from the
Harvard Business School.
Gilbert F. Johnson, who joined California Microwave in 1973, became the
Company's President and Chief Operating Officer in 1985 and President of the
Government Group in 1991. Mr. Johnson, who holds a Bachelor's Degree in
Electrical Engineering from the University of Illinois and a Master's Degree in
Electrical Engineering from the University of Southern California, is a senior
member of the IEEE. Prior to joining California Microwave, Mr. Johnson held
engineering management positions at Applied Technology and Hughes Aircraft
Company.
Dr. Douglas H. Morais joined California Microwave in February 1993 as
Senior Vice-President-Corporate Development and became President of the Wireless
Products Group in July 1993. From October 1992 to February 1993, Dr. Morais
engaged in private business development and investment; from October 1990 to
October 1992 he was an officer of Digital Microwave Corporation, becoming its
President and Chief Operating Officer in May 1991. Prior to joining Digital
Microwave, Dr. Morais spent 24 years at the Farinon Division of Harris
Corporation and headed the division as general manager from 1983 to 1990. Dr.
Morais received a B.Sc. in electrical engineering from the University of
Edinburgh in Scotland and an M.Sc. and Ph.D., also in electrical engineering,
from the University of California at Berkeley and the University of Ottawa,
respectively. He is a senior member of the IEEE.
Leon F. Blachowicz joined the Company in January 1995 as President of the
Satellite Communications Group. From 1989 to January 1995 he was Vice
President/General Manager of Varian's Microwave Equipment Products division.
Prior to 1989 he was Vice President of the Business Communications System
Division of Harris Corporation for the last three of his 20 years at Harris
Corporation.
Garrett E. Pierce joined the Company in April 1994 as Executive Vice
President and Chief Financial Officer. From September 1980 to December 1993 Mr.
Pierce was employed by Materials Research Corporation, a thin-film equipment and
materials manufacturer that was publicly held until it became a subsidiary of
Sony U.S.A., Inc. in 1989, and he served on its Board of Directors from 1984 to
1993. At
11
<PAGE> 13
Materials Research Corporation, Mr. Pierce served as Vice President -- Chief
Financial Officer from 1980 to 1985, Senior Vice President -- Europe from 1985
to 1987, Executive Vice President from 1987 to 1989, President and Chief
Operating Officer from 1989 to 1992, and President and Chief Executive Officer
from 1992 to July 1993. Mr. Pierce is a Certified Public Accountant and holds a
Masters of Science in Economics from Southern Illinois University.
George L. Spillane became Vice President-Finance and Chief Financial
Officer of the Company in November 1980 and Secretary of the Company in October
1981. Upon Mr. Pierce becoming Chief Financial Officer in April 1994, Mr.
Spillane's title was changed to Vice President and Secretary. From 1975 to March
1980, Mr. Spillane was the treasurer of Farinon Corporation (now a part of
Harris Corporation). Prior thereto, Mr. Spillane was employed by Arthur Andersen
& Co.
Michael L. Foster became a Vice President of the Company in October 1990.
Mr. Foster joined California Microwave in 1979 as Manager-Corporate Planning,
was promoted to Director-Finance and Planning in 1980 and to Staff Vice
President in 1983. Prior thereto, Mr. Foster was with Watkins Johnson, where he
held the position of financial manger for one of the systems divisions. Mr.
Foster holds an MBA from Stanford University.
Lanny B. Myers became a Vice President of the Company in July 1991. Mr.
Myers joined California Microwave in 1977 as Corporate Controller. Prior
thereto, he was with Intersil, Inc. as Corporate Accounting Manager and with
Arthur Young & Company as an Audit Manger. Mr. Myers is a Certified Public
Accountant and holds an MBA from San Jose State University and a BS Industrial
Engineering degree from Iowa State University.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The stock and stock price information on page 32 of California Microwave's
1995 Annual Report to Stockholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data on page 32 of California Microwave's 1995
Annual Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The management's discussion and analysis of financial condition and results
of operations on pages 28 through 31 of California Microwave's 1995 Annual
Report to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements on pages 16 through 26, and the
financial results by fiscal quarter information on page 32, of California
Microwave's 1995 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
12
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to directors of California Microwave required to
be furnished pursuant to this item is incorporated by reference from portions of
the Company's definitive Proxy Statement for its annual meeting of shareholders
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days after June 30, 1995 (the "Proxy Statement") under the
caption "Election of Directors." Certain information relating to executive
officers of the Company is set forth in Item 4A of Part I of this Form 10-K
under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from portions of the Proxy Statement under the
caption "Compensation of Directors and Executive Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
CALIFORNIA MICROWAVE, INC.
Incorporated by reference from portions of the Proxy Statement under the
captions "Certain Shareholders" and "Compensation of Directors and Executive
Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
Included in Part II of this report by incorporation by reference from
the California Microwave 1995 Annual Report to Stockholders
Report of Ernst & Young LLP, Independent Auditors (page 27 of 1995
Annual Report to Stockholders)
Consolidated statements of income for each of the three years in the
period ended June 30, 1995 (page 16 of 1995 Annual Report to Stockholders)
Consolidated balance sheets as of June 30, 1995 and 1994 (page 17 of
1995 Annual Report to Stockholders)
Consolidated statements of stockholders' equity for each of the three
years in the period ended June 30, 1995 (page 18 of 1995 Annual Report to
Stockholders)
Consolidated statements of cash flows for each of the three years in
the period ended June 30, 1995 (page 19 of 1995 Annual Report to
Stockholders)
Notes to Consolidated Financial Statements (pages 20 through 26 of
1995 Annual Report to Stockholders)
With the exception of the information incorporated by reference into Items
5, 6, 7 and 8 of this Form 10-K, the California Microwave 1995 Annual Report to
Stockholders is not deemed filed as part of this report.
(A) 2. FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report:
13
<PAGE> 15
Schedules for the three years ended June 30, 1995 Schedule
VIII -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, or are not
applicable, or the information is included in the consolidated financial
statements or notes to consolidated financial statements.
(A) 3. EXHIBITS
3.1 Restated Certificate of Incorporation. (Exhibit to the Company's Form
8 dated February 19, 1993, constituting Amendment No. 1 to the
Company's Registration Statement on Form 8-A for the Common Stock;
incorporated herein by reference.)
3.2 Bylaws. (Exhibit to the Company's Form 10-K for its fiscal year ended
June 30, 1994; incorporated by reference herein.)
4.1 Indenture of Trust, amended, as relating to 1987 Industrial
Development Revenue Refunding Bonds of Satellite Transmission Systems,
Inc.*
4.2 Reimbursement Agreement between Satellite Transmission Systems, Inc.
and The Bank of Tokyo, Ltd., San Francisco Agency, relating to
Satellite Transmission Systems, Inc. Indenture.*
4.3 Guarantee of California Microwave, Inc. in favor of The Bank of Tokyo,
Ltd., San Francisco Agency, relating to Satellite Transmission
Systems, Inc. Indenture.*
4.4 Rights Agreement, dated July 27, 1989. (Exhibit to the Company's Form
8-A filed on August 2, 1989; incorporated herein by reference.)
4.5 Master Indenture of Trust (First Program), relating to County of
Monroe Industrial Development Bonds.*
4.6 Series F Supplemental Indenture, dated as of June 1, 1992, relating to
$2,800,000 of County of Monroe Industrial Development Bonds.*
4.7 Guaranty of California Microwave, Inc. in favor of Security Pacific
National Trust Company (New York), as Trustee, dated as of June 1,
1992, relating to $2,800,000 of County of Monroe Industrial
Development Bonds.*
4.8 Letter of Credit Reimbursement Agreement, between California
Microwave, Inc. and Marine Midland Bank, N.A., dated as of June 1,
1992, relating to $2,800,000 of County of Monroe Industrial
Development Bonds.*
10.1 Employee Stock Purchase Plan, as amended through August 1994.**
(Exhibit to the Company's Form 10-K for its fiscal year ended June
30, 1994; incorporated herein by reference.)
10.2 Lease dated March 10, 1977, of the premises at 990 Almanor Avenue in
Sunnyvale, California. (Exhibit for the Company's Form 10-K for its
fiscal year ended June 30, 1994; incorporated herein by reference.)
10.3 Lease dated July 27, 1977, of the premises at 985 Almanor Avenue in
Sunnyvale, California, with Lease Amendment Number One dated August
23, 1977. (Exhibit to the Company's Form 10-K for its fiscal year
ended June 30, 1993; incorporated herein by reference.)
10.4 1986 Stock Option Plan, as amended.** (Exhibit to the Company's Form
10-K for its fiscal year ended June 30, 1991; incorporated herein by
reference.)
10.5 1988 Restricted Stock Plan.** (Exhibit to the Company's Form 10-K for
its fiscal year ended June 30, 1994; incorporated herein by
reference.)
- ---------------
* Registrant agrees to file such exhibits upon request by the Commission.
** Compensatory plan or arrangement.
14
<PAGE> 16
10.6 Lease of the property located at 2105 West Fifth, Tempe, Arizona.
(Exhibit to the Company's Form 10-K for its fiscal year ended June
30, 1991; incorporated herein by reference.)
10.7 Stock Purchase Agreement among Microwave Radio Corporation, the
stockholders of Microwave Radio Corporation and California Microwave,
Inc., dated as of March 11, 1992. (Exhibit to the Company's Form 8-K,
filed on May 4, 1992; incorporated herein by reference.)
10.8 Credit Agreement between California Microwave, Inc. and Bank of
America National Trust and Savings Association, as agent, dated April
20, 1992. (Exhibit to the Company's Form 10-K for the fiscal year
ended June 30, 1992; incorporated herein by reference.)
10.9 First Amendment to Credit Agreement between California Microwave,
Inc. and Bank of America National Trust Association, as agent, dated
June 29, 1992. (Exhibit to the Company's Form 10-K for the fiscal
year ended June 30, 1992; incorporated herein by reference.)
10.10 Lease of the premises located at 20 Alpha Road, Chelmsford, MA.
(Exhibit to the Company's Form 10-K for the fiscal year ended June
30, 1992; incorporated herein by reference.)
10.11 1992 Stock Option Plan as amended through August 1995.**
10.12 Letter agreement with Philip F. Otto** dated September 22, 1992.
(Exhibit to the Company's Form 10-K for its fiscal year ended June
30, 1992; incorporated herein by reference.)
10.13 Amendment to letter agreement with Philip F. Otto**, dated July 30,
1993. (Exhibit to Company's Form 10-K for its fiscal year ended June
30, 1993; incorporated herein by reference.)
10.14 Letter agreement between California Microwave, Inc. and David B.
Leeson dated January 20, 1993.** (Exhibit to the Company's Form 8-K
dated January 20, 1993; incorporated herein by reference.)
10.15 Consulting agreement between California Microwave, Inc. and David B.
Leeson dated January 20, 1993.** (Exhibit to the Company's Form 8-K
dated January 20, 1993; incorporated herein by reference).
10.16 Lease of the property located at 55 Commerce Drive, Hauppauge, N.Y.
(Exhibit to the Company's Form 10-K for its fiscal year ended June
30, 1993; incorporated herein by reference).
10.17 Credit Agreement between California Microwave, Inc. and Bank of
America National Trust and Savings Association, dated May 17, 1993.
(Exhibit to the Company's Form 10-K for the fiscal year ended June
30, 1993; incorporated herein by reference.)
10.18 Credit Agreement between California Microwave, Inc. and Banca
Nazionale Del Lavoro, dated June 25, 1993. (Exhibit to the Company's
Form 10-K for the fiscal year ended June 30, 1993; incorporated
herein by reference.)
10.19 Amendment to Credit Agreement between California Microwave, Inc. and
Bank of America National Trust and Savings Association, dated October
25, 1993. (Exhibit to the Company's Form 10-K for the fiscal year
ended June 30, 1994; incorporated herein by reference)
10.20 Second Amendment to Credit Agreement between California Microwave,
Inc. and Bank of America National Trust and Savings Association,
dated October 25, 1993. (Exhibit to the Company's Form 10-K for the
fiscal year ended June 30, 1994; incorporated herein by reference)
10.21 Third Amendment to Credit Agreement between California Microwave,
Inc. and Bank of America National Trust and Savings Association,
dated February 22, 1994. (Exhibit to the Company's Form 10-K for the
fiscal year ended June 30, 1994; incorporated herein by reference)
- ---------------
** Compensatory plan or arrangement.
15
<PAGE> 17
10.22 Fourth Amendment to Credit Agreement between California Microwave,
Inc. and Bank of America National Trust and Savings Association,
dated as of March 1, 1995
10.23 Waiver and Fifth Amendment to Credit Agreement between California
Microwave, Inc. and Bank of America National Trust and Savings
Association, dated as of June 30, 1995.
10.24 Agreement For the Sale of Assets of Telesciences Transmission
Systems, Inc. to CMI Sub, Inc. and California Microwave Inc., dated
October 23, 1993. (Exhibit to the Company's Form 8-K dated November
9, 1993; incorporated herein by reference.)
10.25 Shareholders' Agreement among California Microwave, Inc., Cornix
Systems, Harry F. Eustace, Barbara Eustace, Garber International
Associates and Dr. F.V. Garber, dated March 8, 1994. (Exhibit to the
Company's Form 10-K for its fiscal year ended June 30, 1994;
incorporated herein reference.)
10.26 Amendment to letter agreement with Philip F. Otto**, dated August 15,
1994. (Exhibit to the Company's Form 10-K for its fiscal year ended
June 30, 1994; incorporated herein reference.)
10.27 Agreement and Plan of Reorganization of Merger, dated as of January
31, 1995 among California Microwave, Inc., CMI Acquisition
Corporation and Microwave Networks Incorporated ("Agreement and Plan
of Reorganization"; Exhibit to the Company's Form 8-K dated February
13, 1995; incorporated herein by reference.)
10.28 First Amendment to Agreement and Plan of Reorganization, dated April
28, 1995 (Exhibit to the Company's Registration Statement on Form
S-4, Registration No. 33-57593, filed May 1, 1995; incorporated
herein by reference).
10.29 Letter Agreement with Garrett E. Pierce, dated March 30, 1994.**
10.30 Letter Agreement with Leon F. Blachowicz, dated December 2, 1994.**
11 Computation of Per Share Earnings.
13 Annual Report to Stockholders (pages incorporated by reference).
21 List of Subsidiaries.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedule.
Exhibits are available from the Registrant upon request.
(B) REPORTS ON FORM 8-K
1. Form 8-K filed on June 14, 1995 regarding the acquisition of MNI by
Registrant.
2. Form 8-K filed on June 30, 1995 regarding restructuring and other
charges taken by Registrant in June 1995.
- ---------------
** Compensatory plan or arrangement.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C>
Dated: September 28, 1995 CALIFORNIA MICROWAVE, INC.
By/s/ PHILIP F. OTTO
Philip F. Otto
Chairman, President and
Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<S> <C> <C>
/s/ Philip F. Otto Chairman, President and Chief September 28, 1995
PHILIP F. OTTO Executive Officer (principal executive
officer)
/s/ Garrett E. Pierce Executive Vice President and Chief September 28, 1995
GARRETT E. PIERCE Financial Officer (principal financial
and accounting officer)
Gilbert F. Johnson* President -- Government Group and September 28, 1995
GILBERT F. JOHNSON Director
David B. Leeson* Director September 28, 1995
DAVID B. LESSON
Robert A. Helliwell* Director September 28, 1995
ROBERT A. HELLIWELL
Arthur H. Hausman* Director September 28, 1995
ARTHUR H. HAUSMAN
Edward E. David. Jr.* Director September 28, 1995
EDWARD E. DAVID, JR.
Alfred M. Gray* Director September 28, 1995
ALFRED M. GRAY*
*By /s/ George L. Spillane
Attorney-in-fact
</TABLE>
17
<PAGE> 19
CALIFORNIA MICROWAVE, INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED AT END
OF YEAR TO INCOME DEDUCTIONS OF YEAR
---------- --------- ---------- -------
<S> <C> <C> <C> <C>
1995
Allowance for doubtful accounts.............. $ 925 $ 1,297 $ 86 $ 2,136
Estimated liability for warranties........... 1,074 7,120 3,912 4,282
Allowance for excess facilities.............. 1,969 -- 1,969 0
Estimated liability for contract costs....... 3,963 14,355 3,018 15,300
1994
Allowance for doubtful accounts.............. $ 677 $ 361 $ 113 $ 925
Estimated liability for warranties........... 1,261 3,606(1) 3,793 1,074
Allowance for excess facilities.............. 1,094 1,451(2) 576 1,969
Estimated liability for contract costs....... 0 9,631(3) 5,668 3,963
1993
Allowance for doubtful accounts.............. $ 458 $ 381 $ 162 $ 677
Estimated liability for warranties........... 1,005 1,970 1,714 1,261
Allowance for excess facilities.............. 1,450 -- 356 1,094
</TABLE>
- ---------------
Amounts from acquisition of TTS not charged to income:
(1) $360
(2) $145
(3) $5,595
18
<PAGE> 20
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<S> <C>
10.11 1992 Stock Option Plan as amended through August 1995
10.22 Fourth Amendment to Credit Agreement between California Microwave, Inc. and Bank of
America National Trust and Savings Association, dated as of March 1, 1995
10.23 Waiver and Fifth Amendment to Credit Agreement between California Microwave, Inc.
and Bank of America National Trust and Savings Association, dated as of June 30,
1995
10.29 Letter Agreement with Garrett E. Pierce, dated March 30, 1994
10.30 Letter Agreement with Leon F. Blachowicz, dated December 2, 1994
11 Computation of Per Share Earnings.
13 Annual Report to Stockholders (pages incorporated by reference).
21 List of Subsidiaries.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.11
1992 STOCK OPTION PLAN
OF
CALIFORNIA MICROWAVE, INC.
(as amended through August 1995)
1. PURPOSE
The purpose of the 1992 Stock Option Plan (the "Plan") is to enable
California Microwave, Inc. (the "Company") and its subsidiaries to attract and
retain officers and other key employees, directors, and consultants and to
provide them with additional incentive to advance the interests of the Company.
Options qualifying as incentive stock options under Section 422 of the Internal
Revenue Code of 1954, as amended, and non-qualified options may be granted under
the Plan.
2. ADMINISTRATION
(a) The Plan shall be administered by the Board of Directors of the
Company, or by a committee (the "Committee") of two or more directors selected
by the Board.
(b) The Board of Directors or the Committee shall have the power,
subject to the express provisions of the Plan:
(1) To determine the recipients of options under the Plan, the time
of grant of the options, and the number of shares covered by the grant.
(2) To prescribe the terms and provisions of each option granted
(which need not be identical).
(3) To construe and interpret the Plan and options, to establish,
amend, and revoke rules and regulations for the Plan's administration, and to
make all other determinations necessary or advisable for the administration of
the Plan.
3. SHARES SUBJECT TO THE PLAN
Subject to the provisions of Paragraph 7 (relating to the adjustment
upon changes in stock), the number of shares which may be sold pursuant to
options granted under the Plan shall not exceed in the aggregate 1,600,000
shares of Common stock of the Company. Shares sold pursuant to options granted
under the Plan may be unissued shares or reacquired shares.
-1-
<PAGE> 2
If any options granted under the Plan shall for any reason terminate or expire
without having been exercised in full, the shares not purchased under such
options shall be available again for the purposes of the Plan.
4. ELIGIBILITY
(a) Options under this Plan may be granted to officers and other key
employees and consultants of the Company and/or of its subsidiaries, provided
that incentive stock options may be granted hereunder only to officers and other
key employees (including directors who are also officers or employees). No
officer or key employee may receive options under this Plan covering in excess
of 100,000 shares in any fiscal year of the Company (subject to adjustment in
accordance with the provisions of paragraph 7 of the Plan).
(b) Each director of the Company who is not an employee of the Company
shall receive a non-qualified stock option under the Plan immediately following
each annual meeting of shareholders of the Company. The first option received by
a director under this paragraph 4(b) shall cover 10,000 shares of common stock
of the Company and each option received by a director under this Plan thereafter
shall cover 5,000 shares of common stock in the case of a director who is a
chair of a committee of the Board of Directors and 3,000 shares in the case of a
director who is not.(1) Each such option shall have an exercise price equal to
the fair market value of the common stock of the Company on the date of the
annual meeting of shareholders to which it relates, determined in accordance
with the provisions of paragraph 5(a)(2) of this Plan. The number of options
that directors may receive pursuant to this paragraph 4(b) shall be
appropriately adjusted in accordance with the provisions of paragraph 7 of this
Plan. This paragraph 4(b) shall not be amended more than once every six months,
other than to comply with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act or the rules or regulations thereunder.
(c) Persons to whom options to purchase shares are granted are
hereinafter referred to as "optionee(s)."
5. TERMS OF OPTION AGREEMENTS
(a) All Option Agreements. Options granted pursuant to the Plan
shall be evidenced by agreements specifying the number of shares
- -------------------------
(1) The provisions of this sentence were amended by the Board of
Directors in July 1995, subject to obtaining shareholders approval at the Annual
Meeting of Shareholders in October 1995.
-2-
<PAGE> 3
covered thereby, in such form as the Board of Directors or Committee shall from
time to time establish, which agreements may incorporate all or any of the terms
hereof by reference and shall comply with and be subject to the following terms
and conditions:
(1) The Board of Directors or Committee shall have the power to set
the time or times within which each option shall be exercisable and to at any
time accelerate the time or times of exercise (notwithstanding the terms of the
option). Unless the stock option agreement executed by the optionee expressly
otherwise provides, (i) an option granted to an officer or other key employees
or consultant shall become exercisable on a cumulative basis as to one-quarter
of the total number of shares covered thereby on each of the first, second,
third, and fourth anniversary dates of the date of grant of the option, (ii) an
option granted to a director who is not an employee of the Company shall vest
fully on the date of grant,(2) and (iii) an option shall not be exercisable
after the expiration of ten years from the date of grant. Any option granted to
an executive officer or director of the Company shall in no event be exercisable
until the elapse of six months from the date of its grant.
(2) Except as provided in Paragraph 5(b) below, the exercise price
of any stock option granted under this Plan shall not be less than 100% of the
fair market value of the shares of common stock of the Company on the date of
the granting of the option. The fair market value per share shall be the last
sale price on the day the option is granted as reported on the National Market
System, or, if such stock is not then reported on the National Market System but
quotations are reported on the National Association of Securities Dealers
Automated Quotations System, the average of the bid and asked prices on the day
the option is granted, in either event as such price quotes are listed in The
Wall Street Journal, Western Edition (or if not so reported in The Wall Street
Journal, any other listing service or publication known to the Board of
Directors). If the stock is listed upon an established stock exchange or
exchanges, such fair market value shall be deemed to be the closing price of the
common stock on the largest such stock exchange upon which such stock is listed
on the day the option is granted.
(3) To the extent that the right to purchase shares has accrued
hereunder, options may be exercised from time to time by written notice to the
Company, stating the number of shares being purchased and accompanied by the
payment in full of the option price for such shares. Such payment shall be made
in cash or in shares of the outstanding common stock
- -------------------------
(2) The provisions of this clause (ii) were amended by the Board of
Directors in July 1995, subject to obtaining shareholders approval at the Annual
Meeting of Shareholders in October 1995.
-3-
<PAGE> 4
of the Company which have been held by the optionee for at least six months or
in a combination of cash and such stock, except that the Board of Directors or
the Committee in its sole discretion may authorize payment by any optionee (for
all or part of his or her purchase price) by a promissory note or such other
from of legal consideration that may be acceptable to the Board or Committee.
If shares of common stock are used in part or full payment for the
shares to be acquired upon exercise of the option, such shares shall be valued
for the purpose of such exchange as of the date of exercise of the option in
accordance with the provisions of Subparagraph (2) above. Any certificates for
shares of outstanding common stock used to pay the option price shall be
accompanied by stock powers duly endorsed in blank by the registered holder of
the certificate (with the signature thereon guaranteed). In the event the
certificates tendered by the optionee in such payment cover more shares than are
required for such payment, the certificates shall also be accompanied by
instructions from the optionee to the Company's transfer agent with regard to
disposition of the balance of the shares covered thereby.
If payment by promissory note is authorized, the interest rate,
term, repayment schedule and other provisions of such note shall be as specified
by the Board of Directors or the Committee; provided, however, that such note
shall bear interest at a rate not less than the applicable test rate of interest
prescribed by Regulation 1.483-1(d)(1) of the Income Tax Regulations, as in
effect at the time the stock is purchased. The Board of Directors or Committee
may require that the optionee pledge his or her stock to the Company for the
purpose of securing the payment of such note, and the Company may hold the
certificate(s) representing such stock in order to perfect its security
interest.
An option may be exercised by a securities broker acting on behalf
of an optionee pursuant to authorization instructions approved by the Company,
provided that the notice of exercise of such option shall be delivered, and the
exercise price of such option shall be paid in full, as specified above.
(4) The Company at all times shall keep available the number of
shares of stock required to satisfy options granted under the Plan.
(5) The Company may require any person to whom an option is
granted, his or her legal representative, heir, legatee, or distributee, as a
condition of exercising any option granted hereunder, to give written assurance
satisfactory to the Company to the effect that such person is acquiring the
shares subject to the option for his or her own account for investment and not
with any present intention of selling or otherwise
-4-
<PAGE> 5
distributing the same. The Company reserves the right to place a legend on any
share certificate issued pursuant to this Plan to assure compliance with this
paragraph. No shares of common stock of the Company shall be required to be
distributed until the Company shall have taken such action, if any, as is then
required to comply with the provisions of the Securities Act of 1933 or any
other then applicable securities law.
(6) Neither a person to whom an option is granted, nor such
person's legal representative, heir, legatee, or distributee, shall be deemed to
be the holder of, or to have any of the rights of a holder with respect to, any
shares subject to such option unless and until such person has exercised his or
her option pursuant to the terms thereof.
(7) Options shall be transferable only by will or by the laws of
descent and distribution, and during the lifetime of the person to whom they are
granted such person alone may exercise them.
(8) An option granted to an employee or director shall terminate
and may not be exercised if the person to whom it is granted ceases to be
employed by the Company or by a subsidiary of the Company, or ceases to be a
director (unless such person continues as an employee), with the following
exceptions:
(i) If the employment or directorship is terminated for any
reason other than the person's death or disability, he or she may at any time
within not more than three months after such termination exercise the option,
but only to the extent that it was exercisable by such person on the date of
such termination, or
(ii) If such person dies or becomes disabled while in the
employ of the Company or of a subsidiary, or while a director, his or her option
may be exercised by his or her personal representatives, heirs or legatees at
any time within not more than twelve (12) months following the date of death or
disability, but only to the extent such option was exercisable by such person on
the date of death or disability.
An option granted to a consultant shall terminate in accordance
with the terms specified in the option.
(9) In no event may an option be exercised by anyone after the
expiration of the term of the option established pursuant to Subparagraph
5(a)(1) hereof.
-5-
<PAGE> 6
(10) Each option granted pursuant to this Plan shall specify
whether it is a non-qualified or an incentive stock option, provided that the
Board of Directors or Committee may give the optionee the right to elect to
receive either an incentive or a non-qualified stock option.
(11) An option granted pursuant to this Plan may have such other
terms as the Board of Directors or Committee in its discretion may deem
necessary or appropriate and shares issued upon exercise of any option hereunder
may be subject to such restrictions as the Board of Directors or Committee deems
appropriate.
(b) Incentive Stock Options. In addition to the terms and conditions
specified above, incentive stock options granted under this Plan shall be
subject to the following terms and conditions:
(1) The aggregate fair market value (determined as of the time the
option is granted) of the stock with respect to which incentive stock options
are exercisable for the first time by any optionee during any calendar year
(under all option plans of the Company or its parent and subsidiary
corporations) shall not exceed $100,000.
(2) As to individuals otherwise eligible under this Plan who own
more than 10 percent of the total combined voting power of all classes of stock
of the Company and its parent and subsidiary corporations, an incentive option
can be granted under this Plan to any such individual only if at the time such
option is granted the option price is at least 110 percent of the fair market
value of the stock subject to the option and such option by its terms is not
exercisable after the expiration of five years from the date such option is
granted.
6. USE OF PROCEEDS FROM SHARES
Proceeds from the sale of shares pursuant to options granted under the
Plan shall be used for general corporate purposes.
7. ADJUSTMENT UPON CHANGES IN SHARES
(a) If any change is made in the shares subject to the Plan, or subject
to any option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or otherwise), appropriate adjustments
shall be made by the Board of Directors or Committee in the maximum
-6-
<PAGE> 7
number of shares subject to the Plan and the number of shares and price per
share of stock subject to outstanding options.
(b) Other than in the case of a reincorporation of the Company in
another state, in the event of (i) dissolution or liquidation of the Company,
(ii) a transaction in which more than 50 percent of the shares of the Company
that are entitled to vote are exchanged, or (iii) any merger or consolidation or
other reorganization in which the Company is not the surviving corporation (or
in which the Company becomes a subsidiary of another corporation), outstanding
options under this Plan shall become fully exercisable immediately prior to any
such event.
8. RIGHTS AS AN EMPLOYEE.
Nothing in this Plan or in any options awarded hereunder shall confer
upon any employee any right to continue in the employ of the Company or of any
of its subsidiaries or interfere in any way with the right of the Company or any
such subsidiary to terminate such employee's employment at any time.
9. WITHHOLDING TAX
There shall be deducted from the compensation of any employee holding
options under this Plan the amount of any tax required by any governmental
authority to be withheld and paid over by the Company to such governmental
authority for the account of the person with respect to such options.
10. TERMINATION AND AMENDMENT OF PLAN
The Board of Directors may at any time terminate this Plan or make such
modifications of the Plan as it shall deem advisable. Any modification which
increases the number of shares which may be issued under the Plan (other than
pursuant to Paragraph 7 hereof ), or changes the requirements as to eligibility
for participation in the Plan shall become effective only upon approval of the
holders of a majority of the securities of the Company present, or represented,
and entitled to vote at a meeting duly held in accordance with the laws of the
State of Delaware.
11. INDEMNIFICATION
In addition to such other rights of indemnification as they may have as
directors, the members of the Board of Directors or Committee administering the
Plan shall be indemnified by the Company against the
-7-
<PAGE> 8
reasonable expenses, including attorneys' fees actually and necessarily incurred
in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such member is liable
for negligence or misconduct in the performance of his duties; provided that
within 60 days after institution of any such action, suit or proceeding, the
member shall in writing offer the Company the opportunity, at its own expense,
to handle and defend the same.
12. EFFECTIVE DATE AND DURATION OF THE PLAN
The 1992 Stock Option Plan shall become effective on July 23, 1992. Any
rights granted under this Plan must be granted within ten (10) years of such
effective date.
-8-
<PAGE> 1
EXHIBIT 10.22
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as
of March 1, 1995, is entered into by and between CALIFORNIA MICROWAVE, INC. (the
"Company") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the
"Bank").
RECITALS
A. The Company and the Bank are parties to a Credit Agreement dated as
of May 17, 1993 (the "Original Credit Agreement"), as amended by that certain
Amendment to Credit Agreement dated as of October 25, 1993, and as further
amended by that certain Second Amendment to Credit Agreement dated as of October
25, 1993 and that certain Third Amendment to Credit Agreement dated as of
February 22, 1994 (the Original Credit Agreement, as so amended, the "Credit
Agreement") pursuant to which the Bank has extended certain credit facilities to
the Company.
B. The Company has requested that the Bank agree to certain amendments
of the Credit Agreement.
C. The Bank is willing to amend the Credit Agreement, subject to the
terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendments to Credit Agreement. The Credit Agreement shall be
amended as follows:
(a) Section 1.01 of the Credit Agreement shall be amended by
adding the following defined term in appropriate alphabetical order:
"'MNI Acquisition' means the acquisition by the Company of all of
the stock of Microwave Networks Incorporated for the consideration of
approximately 3,350,000 shares of the Company's common stock."
(b) Section 1.01 of the Credit Agreement shall be amended at the
defined term "Net Issuance Proceeds" by amending and restating such definition
in its entirety as follows:
-1-
<PAGE> 2
"'Net Issuance Proceeds' means, in respect of any issuance of
debt or equity, cash proceeds and non-cash proceeds received or receivable in
connection therewith, net of reasonable out-of-pocket costs and expenses paid or
incurred in connection therewith in favor of any Person not an Affiliate of the
Company; provided, that for purposes of Section 2.08A only, Net Issuance
Proceeds shall not include any such non-cash proceeds."
(c) Subsection 2.08A(a) of the Credit Agreement shall be amended
by adding the following sentence at the end of such subsection: "Notwithstanding
the foregoing, no such notice or prepayment shall be required in connection with
the issuance by the Company of any new common or preferred equity to be used as
consideration in the MNI Acquisition in accordance with its terms."
(d) Section 7.07 of the Credit Agreement shall be amended by (i)
deleting the word "and" at the end of subsection (b) thereof; (ii) deleting the
period at the end of subsection (c) thereof and inserting "; and" in lieu
thereof; and (iii) adding the following as new subsection (d) after subsection
(c) thereof:
"(d) Contingent Obligations of any corporations which become
Subsidiaries after the date of this Agreement, provided, however, that such
Contingent Obligations existed at the time the respective corporations became
Subsidiaries and were not created in anticipation thereof."
(e) Section 7.16 of the Credit Agreement shall be amended and
restated in its entirety as follows:
"7.16 Change in Structure. Except as (i) expressly permitted
under Section 7.03, (ii) in connection with the issuance and any conversion in
accordance with its terms of any Convertible Subordinated Indebtedness, (iii) in
connection with any conversion in accordance with the respective terms of the
Approved Subordinated Indebtedness, and (iv) in connection with the issuance of
new common or preferred stock of the Company and the amendment of the Company's
articles of incorporation or bylaws in connection with such issuance, in each
case where such issuance is otherwise permitted hereunder, the Company shall not
and shall not permit any of its Subsidiaries to, make any changes in its equity
capital structure (including in the terms of its outstanding stock), or amend
its certificate of incorporation or by-laws in any material respect."
3. Representations and Warranties. The Company hereby represents and
warrants to the Bank as follows:
-2-
<PAGE> 3
(a) No Default or Event of Default has occurred and is
continuing, and no Default of Event of Default shall, after giving effect to the
amendments contemplated hereby, result from the MNI Acquisition.
(b) The execution, delivery and performance by the Company of
this Amendment have been duly authorized by all necessary corporate and other
action and do not and will not require any registration with, consent or
approval of, notice to or action by, any Person (including any Governmental
Authority) in order to be effective and enforceable. The Credit Agreement as
amended by this Amendment constitutes the legal, valid and binding obligations
of the Company, enforceable against it in accordance with its respective terms,
without defense, counterclaim or offset.
(c) All representations and warranties of the Company contained
in the Credit Agreement are true and correct, and shall, after giving effect to
the amendments contemplated hereby, by true and correct upon the consummation of
the MNI Acquisition.
(d) The Company is entering into this Amendment on the basis of
its own investigation and for its own reasons, without reliance upon the Bank or
any other Person.
4. Effective Date.
(a) This Amendment will become effective as of March 1, 1995 (the
"Effective Date"), provided that each of the following conditions precedent has
been satisfied:
(i) The Bank has received from the Company a duly executed
original of this Amendment.
(ii) The Bank has received from the Company a copy of a
resolution passed by the board of directors of such corporation, certified by
the Secretary or an Assistant Secretary of such corporation as being in full
force and effect on the date hereof, authorizing the execution, delivery and
performance of this Amendment.
(iii) The Bank has received from the Company such other
approvals, opinions or documents as the Bank may reasonably request.
-3-
<PAGE> 4
5. Reservation of Rights. The Company acknowledges and agrees that
the execution and delivery by the Bank of this Amendment shall not be deemed to
create a course of dealing or otherwise obligate the Bank to forbear or execute
similar amendments under the same or similar circumstances in the future.
6. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and all references therein to such Credit Agreement shall henceforth refer to
the Credit Agreement as amended by this Amendment. This Amendment shall be
deemed incorporated into, and a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the benefit
of the parties hereto and thereto and their respective successors and assigns.
No third party beneficiaries are intended in connection with this Amendment.
(c) This Amendment shall be governed by and construed in
accordance with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such counterparts together
shall constitute but one and the same instrument.
(e) This Amendment, together with the Credit Agreement, contains
the entire and exclusive agreement of the parties hereto with reference to the
matters discussed herein and therein. This Amendment supersedes all prior drafts
and communications with respect thereto. This Amendment may not be amended
except in accordance with the provisions of Section 9.01 of the Credit
Agreement.
(f) If any term or provision of this Amendment shall be deemed
prohibited or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
(g) The Company covenants to pay to or reimburse the Bank, upon
demand, for all costs and expenses (including allocated costs of in-house
counsel) incurred in connection with the development, preparation, negotiation,
execution and delivery of this Amendment.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
CALIFORNIA MICROWAVE, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:
----------------------------------
Kevin McMahon
Vice President
-5-
<PAGE> 1
EXHIBIT 10.23
WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT
THIS WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT (the "Waiver and
Amendment"), dated as of June 30, 1995, is entered into by and between
CALIFORNIA MICROWAVE, INC. (the "Company") and BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION (the "Bank").
RECITALS
A. The Company and the Bank are parties to a Credit Agreement dated as of
May 17, 1993 (the "Original Credit Agreement"), as amended by an Amendment to
Credit Agreement dated as of October 25, 1993, a Second Amendment to Credit
Agreement dated as of October 25, 1993, a Third Amendment to Credit Agreement
dated as of February 22, 1994, and a Fourth Amendment to Credit Agreement dated
as of March 1, 1995 (the Original Credit Agreement, as so amended, the "Credit
Agreement") pursuant to which the Bank has extended certain credit facilities to
the Company.
B. The Company has reported to the Bank the existence of certain events of
default under the Credit Agreement. The Company has requested that the Bank
waive certain events of default and agree to certain amendments of the Credit
Agreement.
C. The Bank is willing to waive certain defaults under the Credit
Agreement, and to amend the Credit Agreement subject to the terms and conditions
of this Waiver and Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms used
herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Defaults and Waiver.
(a) For purposes of this Waiver and Amendment, the "Existing Defaults"
shall mean the defaults existing on this date under Section 8.01(c) of the
Credit Agreement solely as a consequence of a breach of the negative covenants
set forth at Sections 7.11, 7.13 and 7.14(b).
(b) Subject to and upon the terms and conditions hereof, the Bank
hereby waives the Existing Defaults; provided, however, the waiver with respect
to the Existing
-1-
<PAGE> 2
Default relating to Section 7.14(b) shall only apply if and to the extent that
the Company's consolidated operating loss for June 30, 1995 does not exceed
$37,500,000 and the Company's consolidated net loss after taxes for June 30,
1995 does not exceed $27,500,000. If either such loss is determined to exceed
such amount, an Event of Default shall exist relating to Section 7.14(b) as of
June 30, 1995.
(c) Nothing contained herein shall be deemed a waiver of (or otherwise
affect the Bank's ability to enforce) any other default or Event of Default,
including without limitation (i) any default or Event of Default as may now or
hereafter exist and arise from or otherwise be related to the Existing Defaults
(including without limitation any cross-default arising under the Credit
Agreement by virtue of any matters resulting from the Existing Defaults), and
(ii) any default or Event of Default arising at any time after the Effective
Date and which is the same as any of the Existing Defaults.
3. Amendments to Credit Agreement. The Credit Agreement shall be amended
as follows:
(a) Section 7.11 shall be amended in its entirety to read as follows:
"7.11 Quick Ratio. The Company shall not at the end of any fiscal
quarter suffer or permit its ratio (determined on a consolidated
basis ) of (a) cash plus Cash Equivalents plus the amount of
Eligible Receivables, net of any allowance for doubtful accounts,
to (b) Consolidated Current Liabilities to be less than 0.90:1.0"
(b) Section 7.13 shall be amended in its entirety to read as follows:
"7.13 Tangible Net Worth. The Company shall not permit its Tangible
Net Worth (determined on a consolidated basis) at the end of any
fiscal quarter to be less than the sum of (a) $160,000,000 plus (b)
seventy-five percent (75%) of quarterly net income for each fiscal
quarter ending subsequent to the quarter ended June 30, 1995, with
no reduction for net losses, plus (c) seventy-five percent (75%) of
the Net Issuance Proceeds of any equity securities issued by the
Company after the fiscal quarter
-2-
<PAGE> 3
ended June 30, 1995, (Net Issuance Proceeds including for this
purpose the value of any equity securities issued by the Company
upon conversion of any convertible Indebtedness of the Company)."
(c) Section 7.14 shall be amended in its entirety to read as follows:
"7.14 Consecutive Quarterly Losses. The Company, on a consolidated
basis, shall not incur or suffer or permit to be incurred (a) any
quarterly operating loss or any quarterly net loss in any two
consecutive fiscal quarters or (b) any quarterly operating loss or
quarterly net loss in excess of 5% of Tangible Net Worth."
4. Representations and Warranties. The Company hereby represents and
warrants to the Bank as follows:
(a) Other than the Existing Defaults, no Default or Event of Default
has occurred and is continuing.
(b) The execution, delivery and performance by the Company of this
Waiver and Amendment have been duly authorized by all necessary corporate and
other action and do not and will not require any registration with, consent or
approval of, notice to or action by, any Person (including any Governmental
Authority) in order to be effective and enforceable. The Credit Agreement as
amended by this Waiver and Amendment constitutes the legal, valid and binding
obligations of the Company, enforceable against it in accordance with its
respective terms, without defense, counterclaim or offset.
(c) Subject to the Existing Defaults, all representations and
warranties of the Company contained in the Credit Agreement are true and
correct.
(d) The Company is entering into this Waiver and Amendment on the basis
of its own investigation and for its own reasons, without reliance upon the Bank
or any other Person.
5. Effective Date
This Waiver and Amendment will become effective as of June 30, 1995
(the "Effective Date") upon receipt by the
-3-
<PAGE> 4
Bank from the Company of a duly executed original of this Waiver and Amendment.
6. Reservation of Rights. The Company acknowledges and agrees that neither
the Bank's forbearance in exercising its rights and remedies in connection with
the Existing Defaults, nor the execution and delivery by the Bank of this Waiver
and Amendment, shall be deemed (i) to create a course of dealing or otherwise
obligate the Bank to forbear or execute similar waivers under the same or
similar circumstances in the future, or (ii) to waive, relinquish, or impair any
right of the Bank to receive any indemnity or similar payment from any person or
entity as a result of any matters arising form or relating to the Existing
Defaults.
7. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and all references therein to such Credit Agreement shall henceforth refer to
the Credit Agreement as amended by this Waiver and Amendment. This Waiver and
Amendment shall be deemed incorporated into, and a part of, the Credit
Agreement.
(b) This Waiver and Amendment shall be binding upon and inure to the
benefit of the parties hereto and thereto and their respective successors and
assigns. No third party beneficiaries are intended in connection with this
Waiver and Amendment.
(c) This Waiver and Amendment shall be governed by and construed in
accordance with the law of the State of California.
(d) This Waiver and Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument. Each of
the parties hereto understands and agrees that this document (and any other
document required herein) may be delivered by any party thereto either in the
form of an executed original or an executed original sent by facsimile
transmission to be followed promptly by mailing of a hard copy original, and
that receipt by the Bank of a facsimile transmitted document purportedly bearing
the signature of the Company shall bind the Company, with the same force and
effect as the delivery of a hard copy original. Any failure by the Bank to
receive the hard copy executed original of such document shall not diminish the
binding effect of receipt of the facsimile transmitted executed original of such
document which hard copy page was not received by the Bank.
-4-
<PAGE> 5
(e) This Waiver and Amendment together with the Credit Agreement,
contains the entire and exclusive agreement of the parties hereto with reference
to the matters discussed herein and therein. This Waiver and Amendment
supersedes all prior drafts and communications with respect thereto. This Waiver
and Amendment may not be amended except in accordance with the provisions of
Section 9.01 of the Credit Agreement.
(f) If any term or provision of this Waiver and Amendment shall be
deemed prohibited by or invalid under any applicable law, such provision shall
be invalidated without affecting the remaining provisions of this Waiver and
Amendment or the Credit Agreement, respectively.
(g) The Company covenants to pay to or reimburse the Bank, upon demand,
for all costs and expenses (including allocated costs of in-house counsel)
incurred in connection with the development, preparation, negotiation, execution
and delivery of this Waiver and Amendment and the administration of the Existing
Defaults, including without limitation appraisal, audit, search and filing fees
incurred in connection therewith.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Waiver and Amendment as of the date first above written.
CALIFORNIA MICROWAVE, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
-5-
<PAGE> 1
EXHIBIT 10.29
[California Microwave Letterhead]
March 30, 1994
Mr. Garrett Pierce
102 Apple Tree Lane
New Canaan, Connecticut 06840
Dear Garrett:
I am pleased to confirm California Microwave, Inc.'s ("CMI") offer to you to
become Executive Vice President and Chief Financial Officer reporting directly
to me. Your base salary would be at the annual rate of $205,000 per year,
payable bi-weekly. Your base salary would be subject to review shortly after the
end of CMI's 1995 fiscal year (at the same time as all other executives in the
company). You would receive a guaranteed bonus of $32,200 following the
completion of CMI's audited June 30, 1994 results. For fiscal year 1995 you
would be eligible to participate in CMI's Executive Incentive Program (EIP) with
a target bonus of 40% of your base salary. A copy of CMI's EIP for FY1994 has
been previously provided to you; the FY1995 EIP is expected to be similar.
Upon commencement of your employment, you would be granted options to purchase,
at a price equal to the then fair-market value, 72,500 shares of California
Microwave common stock in accordance with CMI's 1992 Stock Option Plan. The
option vests 25% on each anniversary date of your grant over four years. You
would also be eligible for a company automobile allowance at a minimum level of
$650 per month. As we have discussed, the company's automobile policy is under
review and to the extent that the final plan provides for a higher allowance,
your allowance would be adjusted retroactively. Additionally, you would be
reimbursed for reasonable relocation and other temporary living arrangements as
set forth in the attached Relocation Policy, as amended by Exhibit I.
In the event that, prior to the expiration of 18 months from the date hereof,
your employment is terminated by CMI, except for due cause, you would receive,
as a minimum, salary and medical benefit continuation for twelve months or until
you obtain other employment, whichever comes first, subject to increase, in
CMI's sole discretion, based on the circumstances at the time and to review and
approval by CMI's Board of Directors. You agree that during the twelve month
period referred to in this paragraph that you would actively seek other
employment. The term "due cause" as used herein shall mean only willful
misconduct or dishonesty or your neglect of your duties, obligations and
responsibilities on behalf of the Company (after having received reasonable
notice of such neglect).
<PAGE> 2
Mr. Garrett Pierce
March 30, 1994
Page Two
As an employee of California Microwave, Inc., CMI's fringe benefit package,
including dental and life insurance, would be available to you and your
dependents effective on your first day of employment. It is noted that you have
declined medical coverage for the period through March 31, 1995, but that you
would be eligible to enroll for coverage commencing April 1, 1995. Once you meet
the eligibility requirements, you would also be able to participate in CMI's
401(k) Tax-Deferred Savings Plan and the Company's Employee Stock Purchase Plan.
You would be provided with term life insurance coverage valued at twice your
annual base salary. I understand that information about these benefit plans has
already been provided to you.
The stock options and your appointment as an officer of the corporation are
subject to formal ratification by the Board of Directors and the Compensation
Committee of the Board; I would anticipate that this can be accomplished by the
end of this month.
Garrett, I look forward to finalizing these arrangements and finalizing the date
you can join us, which we currently are targeting on or before April 5, 1994.
If the terms of this offer are acceptable to you, please so indicate by signing
in the space provided below, and returning a copy to me. The offer will remain
open until April 1, 1994.
Sincerely,
CALIFORNIA MICROWAVE, INC.
/s/ Philip F. Otto
Philip F. Otto
Chairman and Chief Executive Officer
PFOjmz
Enc.
AGREED: /s/ Garrett E. Pierce
---------------------------
Signature
3/31/94
---------------------------
Date
4/1/94
---------------------------
Start Date
<PAGE> 3
EXHIBIT I
This is attached to Garrett Pierce's offer letter and lists the exceptions to
CMI's relocation policy:
California Microwave's Relocation Policy A-10 (dated January 29, 1993) is the
basis for your relocation from Connecticut to California with the following
exceptions (References to CFO are to be to the CEO):
General Provisions
Time and Distance Limitations
This paragraph is amended to allow 18 months for the completion of the
subject relocation
Voluntary Resignations
This paragraph is amended to exclude from the relocation expense
category to be repaid to CMI the following:
1) The $1,500 per month (combination of apartment rental and
furniture rental) for up to 18 months from date of hire (L.K. of
the policy).
2) The cost of the round trip Y class airplane tickets for Mrs.
Pierce and the $75.00 per diem (5 days total) (covered under
L.O.)
The paragraph is further amended so that if the voluntary resignation
occurs during the 12 month period, any expense which CMI incurs
involving the sale of the home in Connecticut or the purchase of a
home in California will be reimbursed to CMI.
I. A. Shipment of Household Goods
The maximum 12,000 pound limitation is not applicable and policy
provision IIA is in effect
B. Insurance Coverage
The $1.50 per pound limitation is not applicable and policy
provisions IIB is in effect.
K. Temporary Living Expenses at New Location
This provision is not applicable because CMI will provide you with a
furnished apartment. The cost is limited to $1,500 per month
(combination of apartment rental and furniture rental) for up to 18
months from date of hire.
N. Sale of Home at Present Location
This provision is amended to cover a period of 18 months. The
reimbursement for normal closing costs is limited to $58,000 or 7.25%
of the final selling price, whichever is the lesser.
This additional provision is added to cover the purchase of a home in
California. CMI will reimburse for actual
<PAGE> 4
home closing costs such as appraisals, title insurance, mortgage
application, placement fees (points), credit reports, recording fees
and state transfer taxes. The reimbursement of actual home closing
costs is limited to $20,000 or 2.5% of the purchase price, whichever
is the lesser.
The overall limit of $78,000 can be applied to closing costs
discussed above on either the sale of the current home or the
purchase of the new home.
O. House-Hunting Trip to the New Location
This provision is modified by the following:
1. CMI will provide Mrs. Pierce four round trip Y class airplane
tickets per six month period up to a maximum of 12 trips.
2. CMI will provide Mrs. Pierce a $75.00 per diem for meals and
incidental expenses for up to a total of 5 days.
II. C. Miscellaneous Expenses
This provision is amended to provide a one time payment of $10,000
for miscellaneous expenses at the time of the purchase of the new
home in California.
III. Cost of Living Adjustment
CMI will pay to Mr. Pierce the following amounts for the
following periods, so long as Mr. Pierce is employed by CMI.
First Year Employment $7,500.00
Second Year Employment $5,000.00
Third Year Employment $2,500.00
The payments will be made on April 1, 1994, April 1, 1995 and
April 1, 1996, and will be repayable to CMI by Mr. Pierce on a
pro-rata basis in the event of Mr. Pierce's termination of
employment during the 12 months following payment of the above
amounts.
IV. New Provisions added to the Relocation Policy
1. To the extent that any payments under this policy, including
those set forth under III above, constitute taxable income to
Garrett Pierce and are not deductible by him, CMI will make
such additional payments to him as are necessary to reimburse
him on a fully grossed-up after tax basis, for such amounts.
<PAGE> 5
2. Bridge Financing
CMI will provide at Mr. Pierce's request, reasonable
bridge financing to him for up to six months in
connection with the purchase of a new home in California.
The bridge financing may take the form of a guarantee by
CMI of a personal loan obtained by Mr. Pierce. The bridge
financing or the amount of CMI's guarantee will not
exceed $200,000.
<PAGE> 1
EXHIBIT 10.30
[California Microwave Letterhead]
December 2, 1994
Mr. Leon F. Blachowicz
1126 Flaxwood Street
San Jose, CA 95120
Dear Lee:
I am pleased to confirm California Microwave, Inc.'s ("CMI") offer to you to
become President of CMI's Satellite Communications Group and an officer of the
corporation, reporting directly to me. Your base salary would be at the annual
rate of $225,000 per year, payable biweekly and would be subject to review
shortly after the end of CMI's 1995 fiscal year (at the same time as the review
of compensation of other CMI executives).
For fiscal year 1995, you would be eligible to participate in CMI's Executive
Incentive Program (EIP) with a target bonus of 50% of your base salary for the
period of your employment during fiscal year 1995, provided that your bonus
shall not be less than $100,000. A copy of CMI's EIP for FY1995 has been
previously provided to you. As provided in the EIP, to be entitled to the bonus,
including the minimum bonus, you must be actively employed by CMI on June 30,
1995.
Upon commencement of your employment, you would be granted options to purchase,
at a price equal to the then fair-market value, 55,000 shares of California
Microwave common stock in accordance with CMI's 1992 Stock Option Plan. The
option vests 25% on each anniversary date of your grant over four years. Also
upon commencement of employment, you would be issued 3000 shares of California
Microwave restricted stock. These shares would vest 20% on each anniversary date
of issuance over five years.
You would also be eligible to participate in the CMI Executive Benefit Plan.
This Plan is available for any of the uses set forth on the attached schedule of
Executive Benefit Options and would provide you with an additional 8% of your
base salary, plus target bonus, for the period of your employment in fiscal year
1995.
Your employment would be at will, provided that in the event your employment is
terminated by CMI prior to January 1, 1996, except for cause, you would receive
salary and medical benefit continuation for twelve months or until you obtain
other
<PAGE> 2
employment, whichever comes first. You agree that during the twelve month period
referred to in this paragraph that you would actively seek other employment. The
term "cause" as used herein shall mean only willful misconduct or dishonesty or
neglect of your duties, obligations and responsibilities on behalf of the
Company (after having received reasonable notice of such neglect).
CMI's fringe benefit package, including dental and life insurance, would be
available to you and your dependents effective on your first day of employment.
Once you meet the eligibility requirements, you would also be able to
participate in CMI's 401(k) Tax- Deferred Savings Plan and the Company's
Employee Stock Purchase Plan. You would be provided with term life insurance
coverage valued at twice your annual base salary. I understand that information
about these benefit plans has already been provided to you.
The stock options and your appointment as an officer of CMI are subject to
approval by the Board of Directors and the Compensation Committee of the Board.
I would anticipate that this can be accomplished by the end of the calendar
year.
Lee, I look forward to finalizing these arrangements and finalizing the date you
can join us.
If the terms of this offer are acceptable to you, please so indicate by signing
in the space provided below and returning a copy to me. The offer will remain
open until December 16, 1994.
Sincerely,
CALIFORNIA MICROWAVE, INC.
/s/ Philip F. Otto
Philip F. Otto
Chairman and Chief Executive Officer
PFO:es
AGREED: /s/ Leon F. Blachowicz
---------------------------
Signature
13 Dec. '94
---------------------------
Date
3 Jan. '95
---------------------------
Start Date
<PAGE> 1
CALIFORNIA MICROWAVE, INC.
COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11
<TABLE>
<CAPTION>
Year Ended June 30,
1995 1994 1993
---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
Primary
Net income (loss), as reported $(7,895) $16,598 $13,705
======= ======= =======
Average shares outstanding 15,533 15,140 12,908
Add - Common stock equivalents of Company's stock options using -- 622 472
the treasury stock method
Add - Contingent shares based upon Microwave Radio Corporation -- 128 --
earnings exceeding target levels
------- ------- -------
Average shares and equivalents 15,533 15,890 13,380
======= ======= =======
Net income (loss) per share $ (0.51) $ 1.04 $ 1.02
======== ======= =======
Fully-diluted
Net income (loss) as reported $(7,895) $16,598 $13,705
Add back interest charges, net of taxes -- 1,310 --
------- ------- -------
Net income (loss), for fully diluted $(7,895) $17,908 $13,705
======== ======= =======
Average shares and equivalent-primary 15,533 15,890 13,380
Add - additional common stock equivalents of the Company's -- 52 --
stock options
Add - shares to be issued at conversion of Convertible -- 1,298 --
Debentures ------- ------- -------
Total shares for fully diluted 15,533 17,240 13,380
======= ======= =======
Net income per share $(0.51) $ 1.04 $ 1.02
======= ======= =======
</TABLE>
<PAGE> 1
Exhibit 13
Annual Report to Stockholders
(pages incorporated by reference)
CONSOLIDATED STATEMENTS OF OPERATIONS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------------------
Years ended June 30, 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES $467,928 $405,832 $306,564
Cost of products sold 344,806 294,803 220,896
--------------------------------------
Gross margin 123,122 111,029 85,668
EXPENSES:
Research and development 29,707 17,627 11,916
Marketing and administration 73,236 62,875 49,422
Amortization of intangible assets 2,452 2,068 1,554
Other charges:
Restructuring 20,946
Merger-related 3,762
--------------------------------------
Total expenses 130,103 82,570 62,892
--------------------------------------
OPERATING INCOME (LOSS) (6,981) 28,459 22,776
Interest expense (4,813) (3,045) (2,576)
Interest income 452 521 216
--------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (11,342) 25,935 20,416
Provision for (benefit from) income taxes (3,447) 9,337 6,711
--------------------------------------
NET INCOME (LOSS) $ (7,895) $ 16,598 $ 13,705
======================================
NET INCOME (LOSS) PER SHARE:
Primary $ (0.51) $ 1.04 $ 1.02
======================================
Fully diluted $ (0.51) $ 1.04 $ 1.02
======================================
Average shares and equivalents outstanding:
Primary 15,533 15,890 13,380
Fully diluted 15,533 17,240 13,380
======================================
</TABLE>
See Notes to Consolidated Financial Statements
16
<PAGE> 2
CONSOLIDATED BALANCE SHEETS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
June 30, 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,983 $ 13,949
Short-term investments 613 434
Accounts receivable, less $2,136 allowance for
doubtful accounts ($925 in 1994) 106,635 115,943
Inventories 100,431 79,422
Deferred tax assets 11,494 5,404
Prepaid expenses 1,898 2,180
-------- --------
Total current assets 223,054 217,332
-------- --------
Property, plant and equipment, at cost 86,633 73,521
Less accumulated depreciation and amortization 46,365 37,060
-------- --------
Net property, plant and equipment 40,268 36,461
-------- --------
Intangible assets of businesses acquired, less accumulated
amortization of $19,348 ($6,896 in 1994) 52,007 64,511
Deferred tax assets 5,467
Other assets 5,816 3,146
-------- --------
$326,612 $321,450
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ $ 3,400
Current portion of long-term debt 301 465
Accounts payable 38,637 39,688
Accrued income taxes 2,892 6,574
Other accrued liabilities 55,403 44,016
-------- --------
Total current liabilities 97,233 94,143
-------- --------
LONG-TERM LIABILITIES:
Long-term debt 4,591 5,203
Other long-term liabilities 7,876 2,394
Convertible subordinated notes 63,200 65,200
-------- --------
Total long-term liabilities 75,667 72,797
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value, 29,200,000 shares authorized:
15,718,872 shares issued and outstanding (15,257,094 shares in 1994) 1,572 1,526
Capital in excess of par value 84,034 77,165
Retained earnings 68,720 76,615
Unamortized restricted stock plan expense (462) (775)
Cumulative translation adjustment (152) (21)
-------- --------
Total stockholders' equity 153,712 154,510
-------- --------
$326,612 $321,450
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
17
<PAGE> 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three years ended June 30, 1995 (In thousands, except for shares)
- ----------------------------------------------------------------------------------------------------------------------------------
Unamortized
Capital restricted Cumulative Total stock-
Common stock in excess of Retained stock plan translation holders'
Shares Amount par value earnings expense adjustment equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1992 11,817,617 $1,182 $36,146 $46,312 $(1,359) $ $ 82,281
-------------------------------------------------------------------------------------------
Public offering of common stock 2,530,000 253 30,934 31,187
Common stock issued under:
Stock option, restricted stock
and stock purchase plans 285,674 29 2,592 120 2,741
Other 205,088 20 1,473 1,493
Currency translation adjustment 3 3
Net income 13,705 13,705
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1993 14,838,379 1,484 71,145 60,017 (1,239) 3 131,410
-------------------------------------------------------------------------------------------
Common stock issued under:
Stock option, restricted stock and
stock purchase plans 407,235 41 5,916 464 6,421
Other 11,480 1 104 105
Currency translation adjustment (24) (24)
Net income 16,598 16,598
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1994 15,257,094 1,526 77,165 76,615 (775) (21) 154,510
-------------------------------------------------------------------------------------------
Common stock issued under:
Stock option, restricted stock
and stock purchase plans 465,028 47 6,941 313 7,301
Other (3,250) (1) (72) (73)
Currency translation adjustment (131) (131)
Net loss (7,895) (7,895)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1995 15,718,872 $1,572 $84,034 $68,720 $ (462) $(152) $153,712
===========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------------------------------
Years ended June 30, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (7,895) $ 16,598 $ 13,705
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 11,762 8,567 6,539
Amortization of intangible assets 2,452 2,068 1,554
Non-cash portion of restructuring charge 12,345
Other adjustments (155) 449 181
Deferred taxes (11,557) (120) 15
Debt issuance costs paid 210 (1,936) 581
Net effect of changes in:
Accounts receivable 9,308 (34,284) (13,560)
Inventories (23,009) (10,967) (9,525)
Prepaid expenses 282 429 (423)
Accounts payable (1,051) 1,493 6,733
Accrued income taxes (1,910) 2,664 849
Other accrued liabilities and other long-term liabilities 24,409 (8,255) 5,654
--------------------------------------
Net cash provided by (used in) operating activities 15,191 (23,294) 12,303
--------------------------------------
INVESTING ACTIVITIES
Capital expenditures (17,259) (12,266) (11,889)
Acquisition of MRC (9,600) (1,550)
Acquisition of TTS (24,196)
Proceeds from sale of assets 123 142 98
Unexpended plant and equipment funds 341 2,981
Other (902) (302) 173
--------------------------------------
Net cash provided by (used in) investing activities (27,638) (37,831) (8,637)
--------------------------------------
FINANCING ACTIVITIES
Issuance of convertible subordinated notes 63,200
Payments on long-term obligations (1,356) (503) (35,260)
Net borrowings (repayments) of notes payable (3,400) 1,900 (1,950)
Issuance of long-term debt 267 215
Issuance of common stock 5,237 4,657 34,480
--------------------------------------
Net cash provided by (used in) financing activities 481 69,521 (2,515)
--------------------------------------
Net increase (decrease) in cash and cash equivalents (11,966) 8,396 1,151
Cash and cash equivalents at beginning of year 13,949 5,553 4,402
--------------------------------------
Cash and cash equivalents at end of year $ 1,983 $ 13,949 $ 5,553
======================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 4,746 $ 2,771 $ 2,942
Income taxes 9,808 6,884 6,348
Supplemental disclosure of non-cash investing and
financing activities:
Additional purchase price of MRC's stock 9,600 1,400
Tax benefit of options exercised 1,772 1,448 437
Note issued in connection with the purchase
of TTS' assets (2,000) 2,000
======================================
</TABLE>
See Notes to Consolidated Financial Statements
19
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CALIFORNIA MICROWAVE, INC.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
California Microwave, Inc. and all subsidiaries (the "Company"). All significant
intercompany balances and transactions have been eliminated.
Microwave Networks Incorporated ("MNI") merged with a wholly owned subsidiary of
the Company effective May 31, 1995, in a transaction accounted for as a pooling
of interests. All periods presented prior to 1995 have been restated to reflect
this merger (see Note 3).
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to June 30 and includes
53 weeks in fiscal 1993 and 52 weeks in fiscal 1994 and 1995. For clarity of
presentation, all fiscal periods are reported as ending on a calendar month-end.
REVENUE RECOGNITION
Generally, sales are recorded at the time individual items are shipped. Sales on
certain long-term, small quantity, high unit-value contracts are recognized at
the completion of significant project milestones, which generally are contract
line items. Scheduled billings and retainages under certain contracts
(principally export contracts) have deferred billing provisions resulting in
unbilled accounts receivable at June 30, 1995 and 1994 of $12,650,000 and
$21,359,000, respectively. The unbilled receivable at June 30, 1995 is expected
to be collected within one year.
INVENTORIES AND COST OF PRODUCTS SOLD
Inventories are recorded at the lower of cost or market. Project inventories are
transferred to cost of products sold at the time revenue is recognized based on
the estimated total manufacturing costs and total contract prices under each
contract. Losses on contracts are recognized in full when the losses become
determinable. The cost of other inventories is generally based on standard costs
which approximate actual costs as determined by the first-in, first-out method.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are carried at cost which approximates market and consist of
highly liquid investments with maturities, when purchased, of three months or
less. The Company invests its excess cash principally in commercial paper of
highly rated large industrial companies and in bankers' acceptances and
certificates of deposits of large banks. Generally, these investments mature
within 90 days. The Company has not experienced losses related to these
investments. The adoption of the Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 115, "Accounting for Investments in Debt
and Equity Securities," did not have a material impact on the Company's
financial position or results of operations.
CREDIT RISK
The Company manufactures and sells communications products and systems to large
commercial customers, principally domestic and foreign telephone companies and
major common carriers, and to the U.S. government. The Company generally
requires no collateral, but generally requires letters of credit, denominated in
U.S. dollars, from its foreign customers. In 1995, 1994 and 1993, the Company
charged to operations $1,297,000, $361,000 and $381,000, respectively, for its
provision for doubtful accounts.
FOREIGN EXCHANGE CONTRACTS
The Company enters into forward currency exchange contracts to hedge foreign
currency transactions on a continuing basis for periods consistent with its
committed exposures. This hedging minimizes the impact of foreign exchange rate
movements on the Company's operating results. The Company's foreign exchange
contracts do not subject the Company's results of operations to risk due to
exchange rate movements because gains and losses on these contracts generally
offset losses and gains on the assets being hedged. Gains and losses on hedges
of firm commitments are deferred and included in the basis of the hedged
transaction when it is completed. Contracts to sell 4.6 million United Kingdom
pounds and 17.4 million German marks (total U.S. dollar equivalent of
approximately $19.8 million) were outstanding at June 30, 1995 and mature from
July 1995 through December 1995. The net gains and losses resulting from these
and other foreign currency transactions have not been material.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization charges are computed under the
straight-line method based on the estimated useful lives of the related assets.
NET INCOME (LOSS) PER SHARE
Net income per share is based on the weighted average number of common shares
outstanding plus the effect of the assumed exercise of stock options which are
dilutive common stock equivalents. Fully diluted net income per share assumes
conversion of the convertible subordinated notes and the related reduction of
interest expense, when dilutive. Net loss per share is computed using the
weighted average number of common shares outstanding.
INTANGIBLE ASSETS OF BUSINESSES ACQUIRED
The excess of purchase price over the fair market value of net assets acquired
generally is amortized on a straight-line basis over periods of 5 to 30 years.
The carrying value of this excess purchase price will be reviewed if the facts
and circumstances suggest that the asset may be impaired. If this review
indicates that the excess purchase price will not be recoverable, the Company's
carrying value will be reduced appropriately. See Note 12.
20
<PAGE> 6
CALIFORNIA MICROWAVE, INC.
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign subsidiaries
into U.S. dollars at the rates of exchange in effect at the end of the period.
Gains and losses from this translation are credited or charged to stockholders'
equity as cumulative translation adjustments. Revenues and expenses are
translated using average rates in effect during the period.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SALES
The Company operates in one industry--the manufacture of electronics equipment
for communications, including telephone, data, control, detection, ranging and
surveillance. A breakdown of sales by product class and by market sector for the
last three years is shown below:
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Satellite communications $174,034 $178,119 $157,282
37% 44% 51%
Wireless 228,069 176,239 100,388
49% 44% 33%
Intelligence 64,625 49,796 45,511
14% 12% 15%
Other 1,200 1,678 3,383
1%
------------------------------------------
$467,928 $405,832 $306,564
==========================================
International $223,976 $188,473 $146,461
48% 46% 48%
U.S. commercial 136,284 115,479 78,608
29% 28% 26%
U.S. government 107,668 101,880 81,495
23% 26% 26%
------------------------------------------
$467,928 $405,832 $306,564
==========================================
</TABLE>
International sales by geographic area were as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Asia--Pacific $ 66,598 $ 64,570 $ 36,989
Latin America 62,623 45,368 37,436
Europe 58,744 49,795 37,137
Africa and Middle East 23,334 17,765 28,229
Other--principally
Canada 12,677 10,975 6,670
------------------------------------------
$223,976 $188,473 $146,461
==========================================
</TABLE>
3. ACQUISITIONS
Microwave Networks Incorporated
On May 31, 1995, California Microwave, Inc. acquired MNI in a merger effected by
exchanging 3,342,653 shares of the Company's common stock and options to acquire
132,347 shares of the Company's common stock for all of the outstanding MNI
Capital Stock (defined as the then outstanding MNI common and preferred stock
and MNI common stock issuable under then outstanding options, warrants or other
convertible securities). At May 31, 1995, MNI had outstanding 9,140,422 shares
of common and preferred stock and 361,900 options to acquire MNI common stock,
resulting in an exchange ratio of 0.3657 share of the Company's common stock for
each share of MNI Capital Stock. MNI is engaged in the design, manufacture, sale
and installation of high performance microwave radios and transmission products.
The merger was accounted for as a pooling of interests, and accordingly, the
Company's consolidated financial statements have been restated to include the
results of MNI for all periods presented. Separate results of operations are as
follows:
<TABLE>
<CAPTION>
(In thousands)
- ---------------------------------------------------------------------------------------------
Merger-
California Related
Microwave, Inc. MNI Expenses Adjustments Combined
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended
June 30, 1995
Sales $409,208 $59,720 $ $(1,000) $467,928
Net income (loss) $ (9,244) $ 5,152 $(3,762) $ (41) $ (7,895)
Year ended
June 30, 1994
Sales $369,017 $36,976 $ $ (161) $405,832
Net income $ 15,056 $ 1,612 $ $ (70) $ 16,598
Year ended
June 30, 1993
Sales $267,181 $39,383 $ $ $306,564
Net income $ 10,004 $ 3,701 $ $ $ 13,705
</TABLE>
The merger-related expenses reflect costs associated with the merger
transaction, such as legal, investment banking and accounting fees.
California Microwave-TeleCom Transmission Systems, Inc. (formerly TeleSciences
Transmission Systems, Inc.) The Company acquired substantially all of the assets
and certain of the liabilities of TeleSciences Transmission Systems, Inc.
("TTS"), a wholly owned subsidiary of TeleSciences, Inc., on October 26, 1993.
TTS' product line consists of digital and analog microwave radios for the
cellular, personal communications network and private network markets. The
Company paid $28.7 million for those net assets at the closing, consisting of
$23.7 million in cash and a $5 million, five-year, 5% convertible subordinated
note, convertible (after the resolution of certain acquisition-related matters)
at the option of the holder into common stock of the Company at a conversion
price of $28.50 per share.
21
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CALIFORNIA MICROWAVE, INC.
Concurrent with the closing of this transaction, the Company issued for cash to
Motorola, Inc., an investor in TeleSciences, Inc., a $5.7 million, five-year 5%
convertible subordinated note, convertible at Motorola's option into the
Company's common stock at a price of $28.50 per share.
Of the $5 million note to TeleSciences, Inc., $3 million was offset against
advances from TTS to its parent during the period prior to the closing of the
acquisition, and the remaining $2 million was offset during 1995 by adjustments
provided for in the acquisition agreement.
The acquisition was accounted for as a purchase transaction and accordingly, the
acquired assets and liabilities were recorded at their estimated fair value at
the date of acquisition. The net assets at acquisition were adjusted from
preliminary estimates as information regarding asset and liability valuations
and customer commitments was obtained and finalized. The excess of the purchase
price over the valuation of the net assets acquired is being amortized on a
straight-line basis over thirty years. During 1995, the excess of purchase price
over the valuation of net assets acquired for TTS of $22,103,000 was reduced by
$10,000,000 as a result of the restructuring described in Note 12. The operating
results of TTS have been included in the Consolidated Statements of Operations
from the acquisition date.
The effect of the acquisition of TTS on the Consolidated Statements of Cash
Flows was as follows:
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
1994
- -------------------------------------------------------------------------------
<S> <C>
Working capital acquired (excluding cash),
as adjusted $(1,903)
Property, plant and equipment 5,188
Other assets 497
Other long-term obligations (1,689)
Excess of purchase price over valuation
of net assets acquired 22,103
-------
Total cash price, net of cash received $24,196
=======
</TABLE>
The following pro forma combined results for 1994 and 1993 are as if the
acquisition of TTS had been consummated on July 1, 1992.
<TABLE>
<CAPTION>
(Unaudited) (In thousands, except per share amounts)
- --------------------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales $426,697 $371,178
Income before income taxes 21,790 18,380
Net income 13,987 12,422
Net income per share $ 0.88 $ 0.93
Average shares outstanding 15,890 13,380
===========================
</TABLE>
The pro forma results, which are based upon certain assumptions and estimates
which the Company believes are reasonable, do not purport to be indicative of
results that actually would have occurred had the acquisition closed on July 1,
1992, and are not intended to be a projection of future results.
Intangible assets resulting from acquisitions made prior to 1993 are being
amortized over periods ranging from five to thirty years.
4. INVENTORIES
The components of inventories were as follows:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Projects in process $ 35,062 $20,963
Less progress billings 13,358 4,702
-------- -------
21,704 16,261
Work-in-process and
finished goods 38,179 30,953
Raw materials and parts 40,548 32,208
-------- -------
$100,431 $79,422
======== =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
Life 1995 1994
(In years)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 2,220 $ 2,514
Buildings 30-40 6,072 9,838
Test equipment and
machinery 3-10 49,255 40,305
Office equipment 5-10 22,076 16,294
Vehicles 3-5 1,337 1,441
Leasehold
improvements Term of lease 5,673 3,129
---------------------------------------------------------
$86,633 $73,521
=========================================================
</TABLE>
Included in other assets at June 30, 1995 is approximately $2.3 million of land
and buildings held for sale in conjunction with the restructuring described in
Note 12.
Depreciation and amortization expense was $11,465,000 for the year ended June
30, 1995 ($8,694,000 and $6,084,000 for the years ended June 30, 1994 and 1993,
respectively).
22
<PAGE> 8
CALIFORNIA MICROWAVE, INC.
6. ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Salaries, bonuses and
commissions $12,563 $10,368
Vacations 5,732 4,720
Other payroll related 3,670 4,159
Warranties 4,282 1,074
Contract costs 15,300 3,963
Advance payments 3,131 2,666
Due to former MRC stockholders 9,600
Accrued restructuring expenses 4,303
Other 6,422 7,466
-------------------------
$55,403 $44,016
=========================
</TABLE>
7. CREDIT LINES, NOTES PAYABLE AND LONG-TERM DEBT
The Company has available two unsecured committed credit facilities totaling
$33.5 million. In October 1993, the Company amended one of these agreements to
increase its credit facilities to a total of $48.5 million. In February 1994,
the unsecured committed credit facilities were reduced to $33.5 million, of
which $25 million expires in October 1995, and $8.5 million expires in October
1996. As of June 30, 1995, there were no borrowings and $10.6 million of standby
letters of credit outstanding under these credit lines. The standby letters of
credit support certain export contracts. The facilities require 1/4% annual
commitment fees and interest rates for borrowings will not exceed the banks'
reference rates.
At June 30, 1994, MNI had notes payable consisting of funds borrowed under a
$7,622,000 line of credit with a bank. The line bore interest at the prime rate
and was secured by certain assets. At June 30, 1994, the unused portion of the
line of credit was $4,222,000. Also at June 30, 1994, MNI had long-term debt
consisting of a $378,000 note payable to a bank, which bore interest at prime
and was secured by certain assets. In connection with the merger, both the line
of credit and the long-term debt were repaid and canceled.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Industrial Development Bonds:
Suffolk County, New York $ 1,930 $ 2,130
Monroe County, New York 2,370 2,550
City of Rochester, New York 592 610
Other 378
------------------------
$ 4,892 $ 5,668
========================
Current portion of above $ 301 $ 465
========================
Long-term portion of above $ 4,591 $ 5,203
========================
Convertible subordinated notes:
5 1/4% notes due 2003 $57,500 $57,500
5% notes due 1998 5,700 7,700
------------------------
$63,200 $65,200
========================
</TABLE>
Debt maturing in each of the next five years and thereafter is as follows:
1996--$301,000; 1997--$413,000; 1998--$315,000; 1999--$6,126,000;
2000--$278,000; 2001 and thereafter--$60,659,000.
The industrial development bonds bear interest at a floating rate, based upon
prevailing market conditions, which is redetermined every seven days. The
weighted average interest rate in effect on both bonds as of June 30, 1995, was
4.3%. The Suffolk County bonds are repaid in 15 annual installments beginning
November 1993, while the Monroe County bonds are repaid in 20 annual
installments beginning June 1993. Both bonds may be prepaid at any time, without
penalty and are backed by letters of credit. The City of Rochester loans bear an
interest rate of 5.9% and require monthly repayments. Both the bonds and the
city loans are secured by mortgages on the properties involved.
At June 30, 1995, there existed certain events of technical defaults under the
credit facilities and debt agreements. The lenders have waived such defaults and
amended such covenants under the credit facilities and debt agreements as
necessary to bring the Company into compliance at June 30, 1995.
On December 15, 1993, the Company issued $57.5 million of 5 1/4% convertible
subordinated notes, due December 15, 2003. These notes are convertible, at the
option of the holder, at a price of $28.4375 per share at any time prior to
maturity. These notes are redeemable at any time on or after January 1, 1997, at
the option of the Company. Interest is payable semi-annually commencing June 15,
1994. The notes are subordinated to all existing and future senior indebtedness
of the Company. These notes are quoted on the Nasdaq National Market. At June
30, 1995, the fair value of the outstanding notes was $59.2 million, based on
quoted market prices (which reflect the market value of the underlying
securities into which they are convertible, as well as current interest rates),
compared to the carrying amount of $57.5 million.
Concurrent with the closing of the acquisition of TTS in October 1993, the
Company issued a $5.7 million, five-year 5% convertible subordinated note to
Motorola, Inc., convertible at Motorola's option into the Company's common stock
at a price of $28.50 per share. At its option, the Company may redeem the note
without penalty, at any time after December 31, 1994. The note is subordinated
to all existing and future senior indebtedness of the Company.
Also concurrent with the closing of the acquisition of TTS, the Company issued a
$5 million, five year, 5% convertible subordinated note to TeleSciences, Inc. Of
the $5 million note, $3 million was offset against advances from TTS to its
parent during the period prior to the closing of the acquisition, and the
remaining $2 million was offset during 1995 by adjustments provided for in the
acquisition agreement.
23
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CALIFORNIA MICROWAVE, INC.
The maximum amount of interest-bearing debt during 1995 was $ 95.6 million and
the average amount borrowed was $80.2 million at an average interest rate of
5.5%. Comparable amounts for 1994 and 1993 were $75.4 million and $ 47.0 million
maximum borrowings, $ 49.9 million and $ 32.9 million average borrowings and
5.0% and 5.5% average rates, respectively.
8. COMMON STOCK
STOCKHOLDER RIGHTS
In October 1989, the stockholders approved a rights agreement under which there
was distributed to the Company's stockholders the right to buy, for $35, one
share of common stock for each share of common stock held by such stockholders.
The rights will only become exercisable if a person or group acquires 20% or
more of the Company's common stock or announces an offer to acquire 30% or more
of the Company's common stock. In the event the Company is acquired, or upon the
occurrence of certain other events, each right may under certain circumstances
entitle the holder to purchase, for $35, $70 worth of common stock. Until such
events occur, the rights are redeemable at any time by the Company for $0.01 per
right.
PUBLIC OFFERING
In March 1993, the Company sold in a public offering 2,530,000 shares of its
common stock at $13.25 per share. The net proceeds of $31.2 million were used to
retire the bridge loan incurred in the acquisition of Microwave Radio
Corporation ("MRC").
OPTIONS AND OTHER STOCK PLANS
Stock options have been granted to officers, directors, key employees and
consultants under the Company's stock option plans at the fair market value on
the date of grant. Most options currently outstanding become exercisable in
annual installments of 25%, beginning one year after the date of grant. Options
granted under the 1986 and 1992 Stock Option Plans expire after ten years.
Options assumed by the Company that were granted under MNI's stock option plans
(the "MNI Plans") generally become exercisable in annual installments of 25%,
beginning on the date of grant.
A summary of activity for fiscal 1995, 1994 and 1993 under the 1986 and 1992
Stock Option Plans and the MNI Plans is presented below:
Shares Under Option
- --------------------------------------------------------------------------------
Years ended June 30,
<TABLE>
<CAPTION>
Option Price
1995 1994 1993 Per Share
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of year 1,663,947 1,517,724 1,084,641 $0.49 - $27.25
Granted 628,695 598,945 715,822 $2.60 - $34.25
Exercised (376,712) (327,087) (175,889) $0.49 - $27.25
Canceled (199,106) (125,635) (106,850) $0.64 - $27.25
-------------------------------------------------------
End of year 1,716,824 1,663,947 1,517,724 $0.56 - $34.25
=======================================================
Exercisable 517,306 484,213 412,866
Available for grant 713,947 743,588 716,898
Additional authorized 500,000 500,000 600,000
</TABLE>
Stock grants have been made to officers and other key employees under the 1988
restricted stock plan at no charge to the employees. These grants generally vest
20% per year, beginning one year after the date of issue. The fair market value
of the shares, at grant date, is charged to compensation expense over the
five-year period. Compensation expense relating to this plan for the past three
years was: 1995--$298,000; 1994--$404,000 and 1993--$454,000. On October 21,
1993, the Company's 1992 Restricted Stock Plan covering 250,000 shares was
terminated.
A summary of activity in the restricted stock plans is as follows:
<TABLE>
<CAPTION>
Outstanding Restricted Shares
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year 83,300 129,200 138,300
Granted 3,450 600 40,000
Canceled (10,600) (6,300) (11,500)
Vested (31,820) (40,200) (37,600)
-------------------------------------------
End of year 44,330 83,300 129,200
===========================================
Available for grant 32,050 24,900 269,200
===========================================
</TABLE>
The Company has an employee stock purchase plan under which employees may
purchase shares, subject to certain limitations, at no less than 85% of the
lower of the fair market value of the shares at the beginning or end of a
six-month purchase period. During 1995, 95,466 shares were issued for $1,880,000
(85,848 shares for $1,271,000 during 1994 and 81,285 shares for $696,000 during
1993), leaving 287,457 shares reserved for future issuances.
9. RETIREMENT PLANS
The Company has a defined contribution retirement plan covering substantially
all employees. One part of the plan is a 401(k) savings plan which allows
employees to contribute pretax compensation up to the lesser of 20% of total
annual compensation or the statutory limit (currently $9,240). The Company
matched 67% of the first $1,200 of each employee's contributions in fiscal 1995.
The second part of the plan arises out of the conversion by the Company of its
previous cash profit sharing plan to a defined contribution plan. Contributions
are allocated based on each employee's salary and length of California Microwave
employment. All of the above employer contributions are determined by and
subject to the approval of the Company's board of directors.
Contributions to these plans are summarized below. Included in these amounts are
amounts expensed under California Microwave's previous cash profit sharing plan
and MRC's and MNI's separate 401(k) plans. MRC's employees participated in the
MRC 401(k) plan through June 30, 1994. They began participation in the Company's
retirement plans on July 1, 1994. MNI's employees participated in MNI's 401(k)
through June 30, 1995.
24
<PAGE> 10
CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year: (In thousands)
- --------------------------------------------------------------------------------
<S> <C>
1995 $1,730
1994 2,157
1993 1,270
</TABLE>
10. INCOME TAXES
The provision for (benefit from) income taxes consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 6,862 $ 9,791 $ 5,735
State 1,248 2,282 1,143
Foreign 236
---------------------------------------------
8,110 12,073 7,114
---------------------------------------------
Deferred:
Federal (9,779) (2,312) 12
State (1,778) (424) (415)
---------------------------------------------
(11,557) (2,736) (403)
---------------------------------------------
$ (3,447) $ 9,337 $ 6,711
=============================================
</TABLE>
Deferred taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities used for financial reporting purposes
and the amounts used for income tax purposes. The components of net deferred tax
assets are as follows:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
June 30, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Restructuring charges $ 8,169 $
Inventory reserve 4,231 3,237
Warranty reserve 1,771 627
Contracts in progress 1,458 1,042
Receivables reserve 932 414
Compensation related reserves 714 630
Other 1,230 1,504
-----------------------
18,505 7,454
-----------------------
Deferred tax liabilities:
Depreciation 1,163 1,196
Other 381 854
-----------------------
1,544 2,050
-----------------------
Net deferred tax assets $16,961 $5,404
=======================
</TABLE>
The differences between the U.S. federal statutory income tax rate and the
Company's effective rate were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory
income tax rate (35.0)% 35.0% 34.0%
Merger expenses 11.6
State income taxes,
net of federal benefit (3.0) 4.7 3.7
Goodwill 5.5 2.1 2.4
Foreign Sales Corporation
tax benefits (8.0) (5.0) (4.2)
Research tax credits (2.6) (2.2) (0.9)
Other 1.1 1.4 (2.1)
-----------------------------------
(30.4)% 36.0% 32.9%
===================================
</TABLE>
At June 30, 1995, the Company has available to provide future tax benefits net
operating loss carryforwards of approximately $416,000, which will expire in
2002, and unused foreign tax credits of approximately $224,000, which will
expire in 1997 and 1998.
11. COMMITMENTS
All of the buildings occupied by the Company, except for Company-owned
facilities, are occupied under operating leases which expire in one to ten
years. Certain of these leases contain escalation clauses. Total lease expense
for the past three years was: 1995--$5,270,000; 1994--$4,098,000 and
1993--$2,868,000. Lease commitments, exclusive of property taxes, which are
payable by the Company, will be due as follows: 1996--$4,944,000;
1997--$4,217,000; 1998--$3,504,000; 1999--$2,498,000; 2000--$2,516,000 and 2001
through 2008--$1,028,000.
12. RESTRUCTURING AND OTHER CHARGES
In June 1995, the Company recorded restructuring and other charges of
approximately $37 million in connection with a program to reduce costs and
improve operating efficiencies. The program includes, among other things: the
integration of operations within the Company's Wireless Products Group and the
exit by TTS from the short-haul radio market, which included certain short-haul
radio contracts and the shifting of short-haul radio sales to MRC; the recording
of certain contract costs at STS; the elimination of excess facilities; the
reduction of employees at STS; the write-off of excess inventory and capital
equipment; and the write down of intangible assets.
25
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
The elements of the total charges as of June 30, 1995 are as follows:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
Representing
---------------------------
Asset Future
Provision Write Downs Cash Outlays
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Contract
termination
and other
costs $13,450 $ 750 $12,700
Excess facilities 6,702 955 5,747
Severance costs 1,254 1,254
Inventory write-offs 227 227
Capital equipment
write-offs 1,363 1,363
Other 3,400 600 2,800
Intangible asset
write-down 10,000 10,000
---------------------------------------
$36,396 $13,895 $22,501
=======================================
</TABLE>
The charges are included in the accompanying Consolidated Statements of
Operations as follows:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------
<S> <C>
Cost of sales $14,850
Marketing and administration 600
Restructuring 20,946
-------
$36,396
=======
Tax effect of charges $14,195
=======
Net after tax effect $22,201
=======
</TABLE>
Contract termination and other costs represent the estimated costs of certain
low-margin, short-haul radio contracts at TTS, including extended warranty
provisions and other charges, as well as certain contract costs at STS. The
excess facilities costs represent the consolidation into one location from two
previously occupied by STS and the consolidation of other facilities. Employee
severance costs relate to the termination of approximately 90 employees in
connection with the STS consolidation. Inventory and capital equipment
write-offs relate to the excess inventory and capital equipment as a result of
the consolidation of STS locations, the integration of Wireless Products Group
operations and TTS exiting the short-haul radio market. The write down of
intangible assets represents the excess of the carrying value of TTS' intangible
assets over the revised amount recoverable as a result of TTS exiting the
short-haul radio market.
26
<PAGE> 12
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders
California Microwave, Inc.
We have audited the accompanying consolidated balance sheets of California
Microwave, Inc. at June 30, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of California
Microwave, Inc. at June 30, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1995, in conformity with generally accepted accounting principles.
Palo Alto, California
August 4, 1995
27
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
OVERVIEW
Since the late 1980s, California Microwave, Inc.'s strategy has focused on
increasing sales through penetration of international markets and on increased
internal and external investment in new wireless and satellite communications
products. Consistent with this strategy, the Company has targeted the wireless
product area and in April 1992 acquired Microwave Radio Corporation (MRC), a
manufacturer of digital and analog fixed-link and portable microwave radios, and
in October 1993 acquired all of the assets and certain of the liabilities of
TeleSciences Transmission Systems, Inc. (TTS), a manufacturer of digital and
analog microwave radios for the cellular, personal communications network and
private network markets.
In May 1995, California Microwave acquired Microwave Networks Incorporated (MNI)
in a merger effected by exchanging approximately 3.3 million shares of its
common stock for all the outstanding common and preferred stock of MNI and
options to acquire approximately 132,000 shares of California Microwave common
stock for all the outstanding options of MNI. MNI is a manufacturer of digital
microwave transmission products and systems for worldwide cellular operators,
private businesses and domestic common carriers. The merger was accounted for as
a pooling of interests, and accordingly, all periods presented have been
restated to include the results of MNI.
As a result of these acquisitions, wireless sales have grown from 21% of total
sales in fiscal 1992 to 49% of total sales in fiscal 1995. The Company's
international sales have also expanded significantly, from 40% of total sales in
1992 to 48% of total sales in 1995. This growth in international sales has been
in both the satellite communications and wireless areas, as investment in
telecommunications infrastructure in foreign countries has accelerated.
Likewise, since 1992, sales of wireless and satellite communications products
have increased by approximately 400% while overall sales of turnkey satellite
earth stations and intelligence systems have remained relatively flat.
Consequently, product sales represented 70% of total sales in 1995 compared to
37% of total sales in 1992.
In June 1995, the Company recorded restructuring and other charges totaling
approximately $37 million. The restructuring charges of approximately $21
million reflect actions the Company is taking to improve profit margins over the
long term and were recorded principally in connection with the integration of
operations within the Company's Wireless Products Group and the consolidation of
facilities of its Satellite Transmission Systems, Inc. (STS) subsidiary. The
other charges of approximately $16 million related principally to the phase-out
of short-haul radios and associated contracts at TTS and costs to complete
certain long-term contracts at STS.
The Company's overall gross margin reflects a blend of higher gross margin
product sales combined with lower gross margin system sales. Gross margin as a
percentage of sales decreased from 27.9% in 1993 to 26.3% in 1995. Excluding the
other charges to cost of products sold relating to the phase-out of short-haul
radios and associated contracts at TTS and to certain contract costs at STS
described above, the Company's gross margin would have increased to 29.5% in
1995, reflecting a higher proportion of product sales in 1995 compared to 1994
and 1993, offset in part by declining margins on satellite communications
systems sales, and to a lesser extent by the impact of a full year of TTS sales
which continued at relatively low margins.
The Company's fiscal year ends on the Saturday closest to June 30 and included
53 weeks in fiscal 1993 and 52 weeks in fiscal 1994 and 1995. For clarity of
presentation, all fiscal periods are reported as ending on a calendar month end.
The effect on operations of this method of reporting has not been material.
The following table sets forth, for the periods indicated, certain income and
expense items expressed as a percentage of total sales:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Gross margin 26.3 27.4 27.9
Research and devlopment expenses 6.3 4.3 3.9
Marketing and administration expenses 15.7 15.5 16.1
Amortization of intangible assets .5 .5 .5
Restructuring charges 4.5
Merger related charges .8
Operating income (loss) (1.5) 7.0 7.4
Interest income
(expense), net (0.9) (0.6) (0.8)
Income (loss) before
income taxes (2.4) 6.4 6.7
Net income (loss) (1.7) 4.1 4.5
</TABLE>
COMPARISON OF FISCAL YEARS 1995, 1994 AND 1993
Bookings and Backlog. Bookings were $462.7 million, $441.0 million, and $327.0
million in fiscal 1995, 1994 and 1993, respectively, representing year-to-year
increases of 5% in 1995 and 35% in 1994.
Bookings increased during the three-year period in each of the Company's
principal product areas and market sectors, except for intelligence systems and
U.S. government orders in fiscal 1995, which declined $7.2 million, or 9%, and
$14.3 million, or 12%, respectively, compared to fiscal 1994.
28
<PAGE> 14
CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
The most significant bookings increase during the three-year period was in the
wireless product area, which included bookings of TTS since its acquisition in
October 1993. Wireless bookings accounted for 55% of the increase in total
bookings from fiscal 1993 to fiscal 1995. Wireless bookings were 42% of total
bookings in 1995 compared to 36% in 1993.
International bookings increased 15% in fiscal 1995, offsetting a 12% decrease
in bookings from the U.S. government. The increase in international orders
reflects the growing demand for wireless and satellite products in expanding the
worldwide telecommunications infrastructure, both within and between countries.
The Company anticipates that U.S. government bookings will continue to decline
as a percentage of total bookings and that U.S. commercial bookings will
increase due, in part, to the development of the Personal Communications
Services (PCS) market.
Backlog was $231.5 million, $232.7 million, and $164.8 million at June 30, 1995,
1994 and 1993, respectively, representing a decrease of 1% for 1995 and an
increase of 41% for 1994. The proportion of such backlog that was expected to be
delivered within 12 months was 80%, 80%, and 85% as of the end of 1995, 1994,
and 1993, respectively.
SALES. Sales were $467.9 million, $405.8 million and $306.6 million in fiscal
1995, 1994 and 1993, respectively, representing year-to-year increases of 15% in
1995 and 32% in 1994.
Sales increased in each of the Company's three primary product areas in both
1995 and 1994, except for satellite communications, which decreased by 2% in
1995. Approximately 79% of the increase in sales during the two-year period was
in wireless, which includes the sales of TTS from the date of its acquisition in
October 1993. Nearly half of the wireless increase was due to the acquisition of
TTS, with the balance principally due to growth in digital microwave radio sales
into the international cellular and personal communications network markets.
Sales of satellite communications products increased by over 50% in 1995, but
this was more than offset by a 34% reduction in sales of turnkey earth station
systems. Satellite systems sales are expected to improve in fiscal 1996 due to
significant sales to AT&T for its telecommunications projects in Saudi Arabia.
Sales also increased in each major market sector. International and U.S.
commercial sales increased 19% and 18%, respectively, in 1995 compared to 1994,
and 29% and 47%, respectively, in 1994 compared to 1993. International sales
represented 57% of the total sales growth in 1995 and 42% of the total sales
growth in 1994. This strong growth in international sales was due to the growing
demand for wireless and satellite communications products in expanding the
worldwide telecommunications infrastructure. This growth was broad-based, but
was strongest in Latin America, reflecting the Company's continued penetration
into that market sector. However, there can be no assurances that this trend of
growth in Latin America will continue given the lack of liquidity in Mexico, a
significant market for MNI. The Company's international sales are generally
denominated in U.S. dollars. During the three year period ended June 30, 1995,
fluctuations of currency exchange rates did not have a material effect on the
Company's results of operations.
Another trend was the continuing increase in wireless and satellite
communications product sales relative to lower margin intelligence and satellite
system sales. Product sales increased 31%, representing 70% of total sales in
fiscal 1995 compared to 61% of total sales in 1994.
No single customer accounted for more than 10% of sales in 1995, 1994 or 1993.
However, the Company's sales to all departments and agencies of the U.S.
government represented 23%, 26%, and 26% of total sales in 1995, 1994 and 1993,
respectively. Because California Microwave is concentrating its investments in
commercial areas, this downward trend is expected to continue.
GROSS MARGIN. Gross margin was $123.1 million, $111.0 million and $85.7 million
in 1995, 1994 and 1993, respectively, representing year-to-year increases of 11%
in 1995 and 30% in 1994. Gross margins as a percentage of sales for products are
generally in the 35% to 45% range, while turnkey satellite earth stations and
intelligence systems typically yield gross margins in the 10% to 20% range.
System sales include a relatively high percentage of large subcontracted items
to which the Company adds less value and upon which customers allow minimal
markup. In addition, engineering costs in turnkey satellite earth stations and
intelligence systems are customer funded and are included in cost of products
sold. The Company's strategy includes increasing the proportion of product
sales.
The Company recorded charges of approximately $15 million to cost of products
sold during the fourth quarter of fiscal 1995. These charges reflect
principally the Company's estimate of additional future costs required to
complete certain long-term contracts at STS and the costs to phase-out of the
short-haul radio market and associated contracts at TTS. Future short-haul
radio business will be conducted by MRC. The Company believes that these
charges will be adequate to complete these contracts.
Gross margin as a percentage of sales decreased from 27.9% in 1993 to 27.4% in
1994 and to 26.3% in 1995. Excluding the charges to cost of products sold
relating to the phase-out of short-haul radios and associated contracts at TTS
and certain contract costs at STS described above, the gross margin would have
increased to approximately 29.5% in 1995, reflecting a higher proportion of
wireless and satellite communications product sales in 1995 compared to 1994 and
1993, offset in part by depressed margins on satellite communications systems
sales, and to a
29
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
lesser extent by the impact of a full year of TTS sales which continued at
relatively low margins.
Research and Development Expenses. Research and development expenses were $29.7
million, $17.6 million, and $11.9 million in 1995, 1994, and 1993, respectively,
representing year-to-year increases of 69% in 1995 and 48% in 1994. Research and
development expenses as a percentage of sales were 6.3%, 4.3% and 3.9% in 1995,
1994, and 1993, respectively. The Company anticipates that research and
development expenses will remain in the range of 6% to 7% of sales as it
continues to accelerate development of new wireless and satellite networking
products with higher value added. In general, engineering expenditures in
turnkey satellite earth stations and intelligence systems are customer funded
and are included in cost of products sold.
Marketing and Administration Expenses. Marketing and administration expenses
were $73.2 million, $62.9 million and $49.4 million in 1995, 1994 and 1993,
respectively, representing year-to-year increases of 16% in 1995 and 27% in
1994. Marketing and administration expenses as a percentage of total sales were
15.7%, 15.5% and 16.1% in 1995, 1994, and 1993, respectively. In general, the
dollar increases in marketing and administration expenses relate to increased
expenses associated with the Company's strategy of expanding its wireless
operations, as well as increased expenses in satellite communications, where the
Company continues to develop new international and domestic markets. In
addition, 1995 includes a full year and 1994 includes eight months of marketing
and administration expenses for TTS. California Microwave anticipates that
marketing and administration expense, as a percent of sales, will remain in the
15% to 16% range, excluding the impact of any future acquisitions.
AMORTIZATION OF INTANGIBLE ASSETS EXPENSE. Amortization expense associated with
intangible assets was $2.5 million, $2.1 million and $1.6 million in 1995, 1994
and 1993, respectively, representing year-to-year increases of 19% in 1995 and
31% in 1994. The increases reflect increased intangible assets associated with
the acquisitions of TTS and MRC. During 1995, the Company wrote down intangible
assets of $10 million in connection with the restructuring described below.
Accordingly, the Company expects that amortization expense will decrease in the
future by approximately $350,000 per year, excluding the impact of any future
acquisitions.
RESTRUCTURING CHARGES. In June 1995, California Microwave recorded restructuring
charges of $20.9 million in connection with a program to reduce costs and
improve operating efficiencies. The program includes, among other things, the
elimination of excess facilities; the integration of operations within the
Company's Wireless Products Group; the reduction in number of employees; the
write-off of capital equipment; and the write-down of intangible assets.
The elements of the total charge are as follows:
<TABLE>
<S> <C>
Excess facilities $ 6,702,000
Severance costs 1,254,000
Capital equipment write-offs 1,363,000
Intangible assets write-down 10,000,000
Other costs 1,627,000
-----------
$20,946,000
===========
</TABLE>
The excess facilities costs represent the consolidation into one location from
two previously occupied by STS, and the consolidation of other facilities.
Employee severance costs relate to the termination of approximately 90 employees
in connection with the STS consolidation. The write-off of capital equipment is
the result of the consolidation of STS locations, the integration of Wireless
Products Group operations, and TTS exiting the short-haul radio market. The
write-down of intangible assets represents the excess of the carrying value of
TTS' intangible assets over the revised amount recoverable as a result of TTS
exiting the short-haul radio market.
Approximately $12 million of the restructuring charges are non-cash items. The
remaining $9 million will be spent during fiscal 1996 and 1997.
MERGER RELATED CHARGES. Merger related charges of $3.8 million reflect costs
associated with the merger of California Microwave and MNI during 1995,
including legal, investment banking and accounting fees.
INTEREST EXPENSE, NET. Net interest expense was $4.4 million, $2.5 million and
$2.4 million in 1995, 1994 and 1993, respectively. The increase during 1995
reflects a full year of interest for the $65.2 million of subordinated
convertible notes issued during the second quarter of fiscal 1994 principally to
fund the acquisition and working capital needs of TTS. Interest expense also
increased during 1995 due to the impact of the final $9.6 million payment to the
former stockholders of MRC and extended payment terms on certain international
system contracts.
PROVISION FOR (BENEFIT OF) INCOME TAXES. The provision for (benefit of) income
taxes was ($3.4) million, $9.3 million, and $6.7 million in 1995, 1994 and 1993,
respectively. The effective tax rate was (30%), 36%, and 33% for such years. The
effective tax rate increased from 33% in 1993 to 36% in 1994 due to a 1%
increase in the federal statutory rate and the increase in state taxes as more
taxable income was allocated to states with higher tax rates. Due to taxable
losses and non-deductible merger related expenses in 1995, tax rates (benefits)
are not comparable to prior years.
30
<PAGE> 16
CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
It is anticipated that the Company's 1996 effective tax rate will be 36%.
At June 30, 1995, the Company had a cumulative net deferred tax asset of
approximately $17 million that will be available to reduce payments on future
federal and state tax liabilities. Management believes it is more likely than
not that the asset will be realized based on the Company's operating history and
future results.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the Company had working capital of $125.8 million, including
cash and cash equivalents of $2.0 million, compared to working capital at June
30, 1994 of $123.2 million, including cash and cash equivalents of $13.9
million. Net cash from operating activities was $15.2 million in 1995 compared
to net cash used in operating activities of $23.3 million in 1994 and net cash
provided from operating activities of $12.3 million in 1993. Cash flow from
operations was negative in 1994 principally due to the need to infuse
approximately $25 million of working capital into TTS and to extended payment
terms on certain international contracts. The latter factor continued to impact
cash flow in 1995. Average receivables increased to 87 days of sales in 1995
from 81 days in 1994. Partially offsetting the longer collection period,
unbilled receivables were reduced from $21.4 million at June 30, 1994 to $12.7
million at June 30, 1995. The Company expects to collect these receivables in
fiscal 1996. Another factor contributing to the improved cash flow from
operating activities was the increase in other accrued liabilities and other
long-term liabilities during 1995. This increase had the following components:
$8.6 million of accrued liabilities and long-term liabilities associated with
the Company's restructuring of operations and $13.9 million of charges
associated with TTS phasing out of certain short-haul radio contracts and with
STS contract costs. Offsetting the increase in accrued liabilities were
increases in inventories of approximately $23.0 million. Inventory turnover
decreased from 4.5 in 1994 to 3.8 in 1995. This is principally due to the impact
of increased product sales relative to faster turning system sales.
The Company's investing activities in 1995 were a final payment, under the April
1992 MRC acquisition agreement, to MRC's former stockholders of $9.6 million and
payments for capital additions of $17.3 million. Total cash outflows for
investing activities were $27.6 million.
Sales of the Company's common stock to its employees under on-going stock plans
resulted in a cash inflow of $5.2 million. This amount was offset in part by the
repayment of MNI's notes payable of $3.4 million upon the acquisition of MNI in
May 1995.
The above activity resulted in a net decrease in cash and cash equivalents of
$12.0 million in 1995.
Capital expenditures were $12.3 million and $11.9 million in 1994 and 1993,
respectively, compared to $17.3 million in 1995.
During 1994, cash was generated from the sale of $57.5 million of ten-year,
51/4% convertible subordinated notes due 2003 and a $5.7 million, five-year, 5%
convertible subordinated note due 1998. The ten year notes are convertible at
the option of the holder into the Company's common stock at a conversion price
of $28.4375 per share and the five-year note is convertible at $28.50 per share.
The proceeds of $63.2 million were used to retire a bank loan incurred to fund
the acquisition and working capital needs of TTS. The Company paid $28.7 million
for the net assets of TTS, consisting of $23.7 million in cash and a $5 million,
five-year, 5% convertible subordinated note. Of the $5 million note, $3 million
was offset against advances from TTS to its parent prior to the closing of the
acquisition and the remaining $2 million was offset during 1995 by adjustments
provided for in the acquisition agreement.
In fiscal 1993, the Company sold 2,530,000 shares of its common stock at $13.25
per share. The net proceeds of approximately $31.2 million along with then
current cash balances were used to retire the $35 million bridge loan incurred
in connection with the 1992 acquisition of MRC.
The Company has available two unsecured committed credit facilities, totaling
$33.5 million, $25 million of which expires in October 1995 and $8.5 million of
which expires in October 1996. At June 30, 1995, there were no borrowings and
$10.6 million of standby letters of credit outstanding under these credit lines,
leaving $22.9 million of available credit lines. At June 30, 1995, there existed
certain events of technical default under the credit facilities. The lenders
have waived such defaults and amended such covenants under the credit facilities
as necessary to bring the Company into compliance at June 30, 1995. The Company
expects to renew or replace its credit facility that expires in October 1995 on
terms no less favorable than current terms.
The Company believes that its current cash position, funds generated from
operations and funds available from its credit facilities will be adequate to
meet California Microwave's requirements for working capital, capital
expenditures, debt service and external investments for the foreseeable future.
31
<PAGE> 17
SELECTED FINANCIAL DATA (UNAUDITED) CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five years ended June 30, 1995 (A) (Dollars in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------
1995 1994(B) 1993 1992(C) 1991
<S> <C> <C> <C> <C> <C>
OPERATIONS
Sales $467,928 $405,832 $306,564 $221,506 $193,414
Operating income (loss) (6,981) 28,459 22,776 8,068 14,310
Income (loss) before income taxes (11,342) 25,935 20,416 7,198 13,304
Net income (loss) (7,895) 16,598 13,705 5,294 8,597
Net income (loss) per share $ (0.51) $ 1.04 $ 1.02 $ 0.44 $ 0.76
Average shares and equivalents (in thousands) 15,533 15,890 13,380 12,138 11,374
PERCENT OF SALES:
Gross margin 26.3% 27.4% 27.9% 24.1% 24.7%
Operating income (1.5)% 7.0% 7.4% 3.6% 7.4%
Income (loss) before income taxes (2.4)% 6.4% 6.7% 3.2% 6.9%
Net income (loss) (1.7)% 4.1% 4.5% 2.4% 4.4%
Return on average assets N/M 6.5% 7.8% 3.9% 8.4%
Return on average stockholders' equity N/M 11.6% 12.8% 6.8% 13.0%
FINANCIAL POSITION
Total assets $326,612 $321,450 $188,894 $162,016 $108,809
Long term debt (excluding current portion) 67,791 70,403 5,955 40,726 2,230
Current ratio 2.3:1 2.3:1 2.4:1 2.6:1 2.6:1
Debt to capitalization (D) 0.31 0.33 0.05 0.35 0.07
Stockholders' equity per share 9.78 10.13 8.86 6.96 6.45
Ratio of earnings to fixed charges (E) N/M 6.88 6.78 4.62 7.92
OTHER SELECTED DATA
Year end backlog $231,546 $232,680 $164,752 $144,291 $127,684
Year end employment 2,382 2,136 1,595 1,480 1,197
Year end facilities (thousands of square feet) 770 795 616 551 436
</TABLE>
(A) In May 1995, the Company acquired Microwave Networks Incorporated (MNI) for
3,475,000 shares of the Company's common stock and options to acquire common
stock. The acquisition was accounted for as a pooling of interests. All periods
have been restated to include MNI.
(B) In October 1993, the Company acquired substantially all the assets and
certain of the liabilities of TeleSciences Transmission Systems, Inc. (TTS) for
$23.7 million in cash. The acquisition was accounted for as a purchase
transaction. The operating results of TTS have been included in operations from
the acquisition date.
(C) In April 1992, the Company acquired Microwave Radio Corporation (MRC) for
$33 million in cash. An additional $11 million in contingent payments based on
the income of MRC has been subsequently paid. The acquisition was accounted for
as a purchase transaction. The operating results of MRC have been included in
operations from the acquisition date.
(D) Debt to capitalization is debt divided by debt plus stockholders' equity.
(E) The ratio of earnings to fixed charges has been computed by dividing income
before income taxes plus fixed charges by fixed charges.
N/M Not meaningful
STOCK AND QUARTERLY DATA (UNAUDITED)
California Microwave, Inc. has one series of common stock, $.10 par value common
stock. Holders of common stock have full voting rights and have the right to
cumulate votes for the election of directors. California Microwave follows the
policy of reinvesting all earnings to finance expansion of its business and has
paid no cash dividends. No change in this policy is contemplated in the
foreseeable future. At June 30, 1995, the number of California Microwave
shareholders totaled approximately 12,000, of which approximately 1,800 were
holders of record. California Microwave stock is traded in the Nasdaq Stock
Market, is quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System (Nasdaq National Market) under the trading symbol
CMIC, and is listed in the Wall Street Journal and in other newspapers. The
following table sets forth for the fiscal periods indicated the high and low
stock prices.
STOCK PRICES BY QUARTER Fiscal years 1994 and 1995
<TABLE>
<CAPTION>
1994 1995
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 29 31 1/4 27 1/2 24 26 38 1/4 39 3/4 35
Low 17 1/4 21 19 1/4 16 1/2 20 3/4 24 1/4 24 1/2 23 1/2
</TABLE>
FINANCIAL RESULTS BY FISCAL QUARTER
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Fiscal Gross Net income Earnings per share
quarter Sales margin (loss) Primary Fully diluted
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
1 $ 71,320 $ 22,042 $ 3,733 $ 0.24 $ 0.24
2 90,393 26,253 3,547 0.22 0.22
3 115,072 31,173 4,876 0.30 0.30
4 129,047 31,561 4,442 0.28 0.28
-------------------------------------------------------------------
$405,832 $111,029 $ 16,598 $ 1.04 $ 1.04
===================================================================
1995
1 $115,139 $ 32,268 $ 5,177 $ 0.32 $ 0.31
2 119,063 35,473 5,943 0.37 0.35
3 121,893 36,914 6,035 0.37 0.36
4 111,833 18,467 (25,050) (1.60) (1.60)
-------------------------------------------------------------------
$467,928 $123,122 $ (7,895) $(0.51) $(0.51)
===================================================================
</TABLE>
32
<PAGE> 1
Exhibit 21
List of Subsidiaries
<TABLE>
<CAPTION>
Name Place of Incorporation
---- ----------------------
<S> <C>
Satellite Transmission Systems, Inc. New York
Mobile Satellite Products
Corporation Delaware
EFData Corp. California
California Microwave Foreign
Sales Corporation Barbados,
West Indies
California Microwave - TeleCom
Transmission Systems, Inc. Delaware
California Microwave Navigation
Systems, Inc. Delaware
California Microwave - Microwave
Networks Incorporated, Inc. Texas
Digital Radio Technology, Inc. New York
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Annual Report (Form 10-K) of
California Microwave, Inc. of our report dated August 4, 1995 included in the
1995 Annual Report to Shareholders of California Microwave, Inc.
Our audits also included the financial statement schedule of California
Microwave, Inc. listed in Item 14(a). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No.'s 33-09117, 33-24517, 33-44397, 33-58108, 33-73584 and 33-86968)
pertaining to the 1992 Stock Option, 1992 Restricted Stock, Employee Stock
Purchase and 1986 Stock Option Plans of California Microwave, Inc. and the
Registration Statement (Form S-8 No. 33-60957) pertaining to Microwave Networks
Incorporated 1990 Non-Qualified Stock Option Plan for Employees and 1990
Non-Qualified Stock Option Plan for Non-Employed Directors and Consultants of
our report dated August 4, 1995, with respect to the financial statements
incorporated herein by reference.
ERNST & YOUNG LLP
Palo Alto, California
September 28, 1995
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature
appears below, being a member of the Board of Directors of California
Microwave, Inc. (the "Company"), hereby constitutes and appoints Philip F. Otto
and George L. Spillane, and each of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for and in his name, place and stead, in any and all capacities, to sign on his
behalf the Company's Annual Report on Form 10-K for its fiscal year ended June
30, 1995, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
with the full power and authority to do and perform each and every act and thing
necessary or advisable to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
DATED: July 27, 1995
/s/ Edward E. David, Jr. /s/ Gilbert F. Johnson
- ------------------------------ -----------------------------------
EDWARD E. DAVID, JR. GILBERT F. JOHNSON
/s/ Alfred M. Gray /s/ David B. Leeson
- ------------------------------ -----------------------------------
ALFRED M. GRAY DAVID B. LEESON
/s/ Arthur H. Hausman /s/ Robert A. Helliwell
- ------------------------------ -----------------------------------
ARTHUR H. HAUSMAN ROBERT A. HELLIWELL
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS WHICH ARE INCORPORATED BY
REFERENCE INTO THIS FORM 10-K FILING.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 1,983
<SECURITIES> 613
<RECEIVABLES> 106,635
<ALLOWANCES> 2,136
<INVENTORY> 100,431
<CURRENT-ASSETS> 223,054
<PP&E> 86,633
<DEPRECIATION> 46,365
<TOTAL-ASSETS> 326,612
<CURRENT-LIABILITIES> 97,233
<BONDS> 67,791
<COMMON> 1,572
0
0
<OTHER-SE> 152,140
<TOTAL-LIABILITY-AND-EQUITY> 326,612
<SALES> 467,428
<TOTAL-REVENUES> 467,428
<CGS> 344,806
<TOTAL-COSTS> 344,806
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,813
<INCOME-PRETAX> (11,342)
<INCOME-TAX> (3,447)
<INCOME-CONTINUING> (7,895)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,895)
<EPS-PRIMARY> (.51)
<EPS-DILUTED> (.51)
</TABLE>
