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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, 1998.
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)
----------------------------
Delaware 94-1668412
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1143 Borregas Avenue, Sunnyvale, California 94089
(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 $154,881,382 as of September 4, 1998.
Indicate the number of shares outstanding of the issuer's common stock, as
of the latest practicable date: On September 4, 1998, there were 15,034,269
shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's Annual Report to Shareholders for fiscal year
ended June 30, 1998. (Part II of Form 10-K)
(2) Portions of definitive proxy statement filed with Securities and Exchange
Commission relating to the registrant's 1998 Annual Meeting of
Shareholders. (Part III of Form 10-K)
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ITEM 1. BUSINESS
General
California Microwave, Inc. (the "Company") designs, manufactures and
markets sophisticated systems, products and services used worldwide in satellite
and wireless communications for the transmission of data, including Internet
protocol data, video and voice. The Company applies its expertise in microwave
radio and digital signal processing technologies to: satellite ground equipment,
microwave radios for wireless communications, and information collection and
communications systems. Users of the Company's products and services include
private networks, broadcast and cable television operators, utilities and other
major corporations, and municipal, state and national governments.
In June 1997, the Company announced its plans to divest its Microwave
Networks Division ("MN") and its Satellite Transmission Systems Division ("STS")
and the financial statements of the Company were restated to reflect the
accounts of MN and STS as discontinued operations. The sale of STS to L-3
Communications Corporation in exchange for $27 million in cash was completed on
February 5, 1998, and the sale of MN to Tadiran, Ltd. in exchange for $31.5
million in cash was completed on April 21, 1998. The post-closing procedure
agreed to in connection with the sale of STS to L-3 Communications Corporation
and the post-closing procedure agreed to in connection with the sale of MN to
Tadiran Ltd. have not been completed.
In April 1998, the Company announced the reorganization of the Company into
three divisions: the Satellite Communications Division, consisting of EF Data,
based in Tempe, Arizona; the Terrestrial Wireless Division, consisting of
Microwave Data Systems, based in Rochester, New York and Microwave Radio
Communications, based in Chelmsford, Massachusetts; and the Government Division,
consisting of the Government Electronics Division, based in Woodland Hills,
California and the Airborne Systems Integration Division, based in Belcamp,
Maryland. It also announced its decision to adopt segment reporting for those
divisions and its intention to sell its Services Division, based in Sunnyvale,
California. In May 1998, the Company sold the Services Division to Telscape
International, Inc. in exchange for $8.2 million in cash; the post-closing
procedure in connection with that transaction has not been completed.
On February 5, 1998, the Company announced its intention to purchase, in
the open market, up to three million shares of its common stock, approximately
18% of the total shares then outstanding, over the next six to twelve months,
contingent upon continued favorable market conditions and available cash flow.
At June 30, 1998, approximately one million six hundred thousand shares of
common stock had been repurchased pursuant to that plan.
In April 1998, the Company announced its new strategy, focused on
commercial business, which includes the expectation to divest its Government
Division, with timing targeted for 1999.
Information Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
companies with a "safe harbor" when making forward-looking statements.
Statements of the Company that are not historical facts, including statements
about management's expectations for fiscal year 1999 and beyond, are forward
looking statements and involve certain risks and uncertainties. Factors that
could cause the Company's actual results to differ materially from management's
projections, forecasts, estimates and expectations include, but are not limited
to, the following:
(a) The timing of receipt of significant orders and of deliveries of new
and existing products and systems;
(b) Fluctuating market demand, price competition and new product
introductions by competitors and the ability to develop and introduce
competitive products and bring them to market in a timely manner;
(c) Cost overruns and contract terminations or adjustments;
(d) With regard to international sales, fluctuations in foreign currency
exchange rates, the availability of suitable export financing,
political instability and the ability to retain stable and experienced
in-country partners to provide sales and support services;
(e) The timing of and proceeds realized from the expected divestiture of
the Government Division and the results of the post-closing procedures
relating to the STS, MN and Services Division divestitures;
(f) The availability of quality components and subsystems used by the
Company in its products and the dependence upon subcontractors to
manufacture and deliver certain items in a timely and satisfactory
manner;
(g) The limitation on the ability to reduce inventory and expenses if
forecasts and demand are not realized;
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(h) The risk of nonpayment of accounts receivable arising out of customer
dissatisfaction or insolvency;
(i) The reliance of certain of the Company's operations upon major orders
from a small number of customers;
(j) Changes in industry or general economic conditions;
(k) The Company's success in implementing its strategic plan.
Telecommunications Industry Overview
Telecommunications Market. The demand for improved telecommunications is
increasing worldwide as emerging economies seek to modernize, as increasingly
information-intensive developed and developing countries introduce new
telecommunications services and as the spread of the Internet has accelerated
and expanded. 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.
Privatization, deregulation and regulatory initiatives, the assignment of radio
frequency spectrum for cellular telephone services and the transition from
analog to digital television have all 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. Each media has certain advantages over the
others--and each suffers certain disadvantages when compared to the others.
California Microwave, Inc.'s principal focus is in the satellite and terrestrial
microwave areas.
o 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.
o 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 wireless
transmission technologies to systems and products for the satellite
communications, telecommunications radio and information collection and
communications 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.
California Microwave's mission is to provide wireless-based bandwidth
solutions to send and receive complex data,
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through the design and manufacture of capital equipment products for public and
private communications systems. The Company has concentrated its efforts on
sales of products and services for communications infrastructure rather than on
consumer terminals and equipment.
Under the leadership of the Company's chief executive officer, the
executive team has formulated a new, integrated, long-term strategy, which will
take advantage of the Company's existing strong market positions and current and
next-generation technologies. This strategy has the following key elements:
Global Information Technology Bandwidth Requirements. The Company believes
that the wireless telecommunications market offers numerous opportunities for
profitable growth because of the growing need for increasing bandwidth, or
carrying capacity, for digital data--a need that corresponds well with the
unique qualities of radio. In particular, continuous improvements in computing
technology create increasingly sophisticated bandwidth requirements for moving
data around the world in ways that align well with the Company's wireless
technology products and services. For instance, telecommunications
infrastructure requires ever-increasing complex data types--such as audio, video
and graphics files--for computer users. "Burst transactions," such as
point-of-sale or ATM activities, create peaks of data-transmission activity that
are well suited for multiple address satellite and terrestrial radio systems.
"Asymmetrical" and one-way data movement, common in Internet usage, create
patterns that take advantage of radio's bandwidth-on-demand capabilities. The
Company's present position as a radio-based bandwidth solutions provider is
solid, and the Company anticipates strong long-term market need for both
existing and new radio-based bandwidth solutions in the future. Those solutions
will address Internet usage, digital TV, remote data collection, and new mobile
air, sea, and terrestrial systems, as well as a host of commercial data
transmission applications for financial networks and inventory management
systems.
Market Leaders. The Company's three divisions concentrate on satellite
communications, terrestrial wireless radio products, and information collection
and communications systems for government markets. In each category, the Company
holds a leading market share, meeting customers' special needs with
application-specific products. These market positions provide a strong base from
which to grow and improve profitability. The Company expects that each division
can deepen and broaden the niches they are serving.
Value-Focused Operations. The Company is currently implementing near-term
managerial and operational adjustments to strengthen financial performance. The
internal focus includes the following operational issues: shortening the product
development cycle; eliminating redundant products with low customer demand;
completing fault-tolerant software applications; reducing inventories; and
filling market needs adjacent to current niches. These issues are all part of
developing internal processes that will result in high customer satisfaction.
Single Operating Entity. California Microwave's divisions have,
historically, been highly decentralized. This organizational structure has
allowed each division to be responsive to particular markets and customers. Each
division typically maintains its own sales, marketing, product development and
manufacturing functions. The Company is shifting from that model to a "Single
Operating Entity," model where the divisions will add more strategic value to
one another, sharing critical resources and cooperatively pursuing common
markets. Each of the division presidents now reports directly to the chief
executive officer and is part of the corporate executive team. The executive
team will constantly examine a multitude of cross-divisional opportunities
relating to sales, joint product development and operational improvements.
International Expansion. The Company's products are marketed on a worldwide
basis. International sales represented approximately 33% of total sales in the
fiscal year ended June 30, 1998. The Company believes that a majority of its
sales growth in future years will come from the international sector due to
communications infrastructure requirements in developing countries and the
growing worldwide need for wireless-based bandwidth solutions. In fiscal 1998
the Company formed an International Division, which is focusing on strategies
and channels for non-NAFTA countries.
Leveraging Divisional Technology. The Company's products employ both analog
and digital applications of radio frequency technologies, enhanced by digital
signal processing and appropriate networking software. A key objective of the
executive team is to leverage, on a company-wide basis, divisional technology
and management strengths to address large emerging market opportunities,
especially in Latin America, Asia and Europe. There will also be increased
emphasis on ad hoc interdivisional team collaboration to resolve technical
issues in order to get products to market faster.
Satellite Communications
Through its Satellite Communications Division (EF Data), the Company is a
leader in the design of satellite earth station products, such as modems and
frequency converters, which are incorporated into earth stations. The Company's
line of digital and analog earth station equipment provides point-to-point and
point-to-multipoint transmission of voice, data and video.
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The Company manufactures a broad line of electronic products used in earth
stations. The products are sold to earth station suppliers and to operators of
communication networks to upgrade existing earth stations. It is a leading
producer of high-speed (up to 155 million bits per second) digital modems, RF
transceivers and frequency converters used in satellite communications networks.
Its products are used in INTELSAT systems, satellite backup facilities for
undersea fiber optic cable, digital video and for many private network
applications. The division also manufactures a completely self-contained earth
station electronics package for low-cost rural and infrastructure networks.
The Company sells its satellite communications products to a wide array of
domestic and international customers, which customers include common carriers,
governmental agencies, private carriers and broadcasters such as AT&T, MCI,
Hughes Network Systems, British Telecom, the U.S. Government, Comsat, and many
more.
Terrestrial Wireless
Through its Terrestrial Wireless Division, the Company 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 private data
communications networks and portable electronic news gathering and broadcasting
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.
The Terrestrial Wireless Division represents the combination of Microwave
Radio Communications (MRC) and Microwave Data Systems (MDS), which provide
products and services primarily to the television broadcast industry and to the
oil, gas and utility industries. The products of both of these operations are
based on microwave radio technology.
Television Broadcast. The Company is a leading supplier of microwave radios
to U.S. and international broadcast and cable television markets for use
principally in portable electronic news gathering and analog and digital
studio-to-transmitter applications.
Wireless Data Networking. The Company manufactures point-to-point and
point-to-multipoint microwave data radios. Its 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. Over 190,000 MDS
data radios have been sold since it commenced the sale of radios in 1986.
The Company sells its wireless communications products to a broad base of
service providers and end-users, including the major U.S. broadcasters (ABC,
CBS, NBC, etc.), utilities and energy companies.
In August 1998, California Microwave acquired Adaptive Broadband Limited
("Adaptive"), a U.K.-based company, for $11 million in cash. Adaptive is
developing an innovative combination of Time Division Multiple Access (TDMA) and
Asynchronous Transfer Mode (ATM) technologies combined with unique band width
management that offers unprecedented data rates--enabling portable, low-cost
wireless connections at speeds matching wired network access. The Adaptive
technology will leverage California Microwave's existing technology,
accelerating product introductions in satellite and terrestrial businesses
alike, to meet the needs of fast-expanding data-intensive broadband markets,
notably Internet access.
Government
Through its Government Division, consisting of the former Government
Electronics Division and the Airborne Systems Integration Division, the Company
contracts with various departments and agencies of the U.S. Government,
principally with the United States Department of Defense and provides products
and services primarily for information collection, communications,
reconnaissance, and surveillance systems.
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The Company participates in selected areas of the U.S. government market.
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 various 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 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 its initial prime contract 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 initial 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 and sensors.
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
Company is actively pursuing opportunities to introduce its data collection and
communications networking technology to foreign governments and non-governmental
applications. 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.
In April 1998, the Company announced that it expects to divest this area of
its business.
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 intends to continue to expand its marketing efforts and distribution
channels worldwide.
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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 each of its three product
manufacturing operations has qualified for International Standards Organization
("ISO") quality procedure registration to ISO 9001, a standard sometimes imposed
by foreign buyers.
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 a
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, SSE-Telecom,
and Radyne (ComStream)--Satellite Communications Division; Continental
Microwave, Digital Microwave, MAS Technologies and Motorola--Terrestrial
Wireless Division; TRW Inc., Lockheed Martin Corporation, Sterling Software,
Inc., and E-Systems, Inc.--Government Division.
The Company believes that competition in its markets is based primarily on
features, function, price, performance, reputation, on-time delivery,
reliability and customer support. The Company believes that it has the ability
to develop and produce satellite and radio products faster than many of its
competitors, employing a more efficient usage of bandwidth on a cost basis. In
the Government 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. In addition, the Company
believes that an additional key competitive factor related to the government
business is the in-depth technical expertise, which enables the solution of
loosely defined customer problems by application of the correct proprietary or
commercially available solutions.
Research and Development
Research and development expenses were $20.0 million, $18.2 million and
$16.6 million in fiscal 1998, 1997 and 1996, respectively, representing 7.4%,
7.2% and 6.9% of total sales, respectively, for the same periods. Approximately
90% of the research and development expense in each year related to commercial
business and represented investment in new wireless radio and satellite products
and associated software. The Company expects that research and development
expense as a percentage of sales will remain approximately 8% of sales as it
focuses its efforts on developing the products that will provide unique
radio-based solutions to the growing shortage of bandwidth for digital data
(Internet protocol) and digital video.
Patents and Licenses
Historically, 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. When the Company's technology offers a distinct competitive
advantage, it does employ the use of patents, such as its unique, patent-pending
Twin Stream(TM) digital and analog radio product. Additionally, the Company
intends to seek patent protection for the unique technologies and techniques
employed by it's new subsidiary, Adaptive Broadband. Adaptive currently has five
patents pending.
Employees
At June 30, 1998, California Microwave had 1,528 employees, 1121 of whom
were engaged in production and production support, 144 in research and
development and other engineering support, 100 in marketing and 163 in general
and administration functions. In support of the Company's strategic plan to
pursue high-growth commercial markets, while improving operational performance,
California Microwave completed an 8% reduction in force following the end of the
fiscal year. None of the employees is represented by a labor union. The Company
believes that its employee relations are good.
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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. Second, many government regulatory agencies are
reallocating frequencies from one type of use to another, thus providing
incentive for new communications services.
Backlog
At June 30, 1998, the Company's backlog of undelivered orders was $95.8
million (approximately 90% of which is expected to be delivered during fiscal
1999) compared with $91.1 million at June 30, 1997. Of the $95.8 million fiscal
1998 backlog, 73% is government and 27% is commercial business. In the 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 as of June 30, 1998:
<TABLE>
<CAPTION>
Lease No. of Square
Occupant Expires Buildings Footage Location
- ------------------------------------------------- ------------- ------------ ------------ --------------------------
<S> <C> <C> <C> <C>
1. Corporate Headquarters 2000 1 10,968 Sunnyvale, CA
2. Government 1998 1 5,850 Woodland Hills, CA
2003 1 22,640 Woodland Hills, CA
2003 1 29,260 Woodland Hills, CA
2000 1 994 San Diego, CA
1999 1 2,736 Stafford, VA
1998 1 100,232 Hagerstown, MN
1999 1 45,000 Belcamp, MD
2003 1 38,578 Baltimore, MD
1999 1 15,000 Annapolis Junction, MD
2000 1 1,750 Arlington, VA
3. Satellite Communications 2006 2 115,000 Tempe, AZ
2000 1 1,944 Tempe, AZ
4. Terrestrial Wireless (owned) 1 56,060 Rochester, NY
2002 1 71,500 Chelmsford, MA
</TABLE>
The Company believes that its facilities are adequate for its present
needs.
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ITEM 3. LEGAL PROCEEDINGS
In May 1995, the Company's MN division entered into certain agreements with
Nokia Telecommunications Oy (Nokia) pursuant to which MN was to provide to Nokia
certain microwave radios and related software and services, and was to carry out
certain development programs. In September 1997, Nokia informed MN of a
purported failure of certain of the products sold to Nokia to meet certain
contractual specification. MN was sold to Tadiran in April 1998 and under the
terms of the sale agreement Tadiran assumed and indemnified the Company with
respect to the Nokia claims. While Tadiran has now taken the position that the
Company is responsible for the Nokia claims, Tadiran has not provided support
for its position. Also, the Company, in September 1998, received notices from
Nokia that Nokia has decided to terminate the May 1995 agreements, and has begun
arbitration proceedings to recover damages, which Nokia provisionally claims are
$9.6 million. The Company believes that it has good defenses and will vigorously
defend against the Nokia and Tadiran claims. No accruals have been recorded for
expenses, which may be incurred to resolve the dispute, and the Company believes
final resolution of this matter will not have a material impact on the Company's
financial position, results of operations or cash flow. The Company also is
subject to other legal proceedings and claims that are in the ordinary course of
business. The Company believes these proceedings will not have a material
adverse effect on its financial position or results of operations or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 persons, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Frederick D. Lawrence 50 Chairman of the Board, President and Chief Executive Officer
Donna S. Birks 42 Executive Vice President and Chief Financial Officer
George G. Arena 45 Executive Vice President and President-Terrestrial Wireless
Division
Donald V. Anderson 44 Executive Vice President and President-Satellite
Communications Division
Dr. Daniel L. Scharre 47 Vice President and Chief Technology Officer and
Chief Executive Officer of Adaptive Broadband Limited,
a wholly owned subsidiary
Kenneth J. Wees 55 Vice President, General Counsel and Secretary
</TABLE>
Frederick D. Lawrence joined the Company as Chairman of the Board,
President and Chief Executive Officer in July 1997. From May 1996 to July 1997,
Mr. Lawrence served as Chief Executive Officer of ComStream, Inc., an
international supplier of satellite communications networks and products and
from February 1994 to April 1996, he served as President of the Transmission
Group for ADC Telecommunications, which included five independent business units
producing products for high speed video, voice, data and wireless
communications. From 1982 to 1994, Mr. Lawrence held executive positions in
networks operations and engineering at Sprint Corporation and its operating
companies, dealing in local telephone, cellular and long distance. Prior to
this, Mr. Lawrence worked at AT&T from 1970 to 1982 in a variety of positions.
He holds a BSEE degree from Western Michigan University.
Donna S. Birks joined the Company in December 1997 as Executive Vice
President and Chief Financial Officer. From August 1994 to June 1997, Ms. Birks
was Vice President, Administration and Chief Financial Officer of ComStream
Inc., an international supplier of satellite communications networks and
products. From January 1992 to August 1994, she was Vice President and Chief
Financial Officer of Macrovision Corporation, a video technology licensing
company. From December 1982 to January 1992, Ms. Birks served in several senior
executive positions at Contel ASC (purchased by GTE Spacenet in 1991), a
satellite communications transmission company. She holds a B.S. in Business
Administration form George Mason University, an M.S. in Finance from American
University and is a Certified Public Accountant.
George G. Arena joined the Company in 1985 as Vice President, Sales and
Marketing for its Microwave Data Systems (MDS) subsidiary. Later, he became Sr.
Vice President, Operations and then President of MDS in 1994. He became an
Executive Vice President of California Microwave, Inc. and President of its
Terrestrial Wireless Division (a combination of MDS and the Company's Microwave
9
<PAGE> 10
Radio Communications unit) in April 1998. Mr. Arena holds an MBA from the
Rochester Institute of Technology and a B.S. in Industrial Distribution from
Clarkson College of Technology.
Donald V. Anderson joined the Company in 1991 as President of its Mobile
Satellite Products Corporation subsidiary (acquired in 1991 and divested with
the Company's STS division in 1998). He became President of the EF Data Division
in 1995 and became an Executive Vice President of California Microwave, Inc. and
President of the Satellite Communications Division (comprised of EF Data) in
April 1998. Prior to joining Mobile Satellite Products in 1989 as Vice President
of Engineering, he held management positions at Emerson Electric and Magnavox
Advanced Products Co. Mr. Anderson holds an MSE in Communication Theory from
California State University and a BSEE from Purdue University.
Dr. Daniel L. Scharre joined the Company in September 1997 as Vice
President and Chief Technology Officer. In August 1998, he was appointed Chief
Executive Officer of the Company's UK-based wholly owned subsidiary, Adaptive
Broadband Limited. From November 1996 to September 1997, Dr. Scharre was Vice
President and Chief Technical Officer of ComStream, Inc. From February 1994 to
November 1996, Dr. Scharre was Vice President and General Manager of Ilex
Systems, a satellite communications and equipment company. From June 1988 to
December 1993, he held executive positions at Loral Western Development Labs,
where he led and managed the development of a digital satellite communications
system. He has a B.S. in physics from Caltech, a Ph.D. in physics from the
University of California at Berkeley and an M.B.A. from Santa Clara University.
Kenneth J. Wees joined the Company in May 1998 as Vice President and
General Counsel, and became Secretary in September 1998. From September 1991 to
May 1998, Mr. Wees served as General Counsel of Cable & Wireless, Inc., the
American subsidiary of Cable and Wireless plc, an international supplier of
voice, data, messaging and Internet services. Prior to this, he worked at GTE
and Booz Allen & Hamilton in a variety of legal positions. Mr. Wees holds a B.A.
degree from Marquette University and a Juris Doctor degree from American
University's Washington College of Law.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The stock and stock price information on page 33 of California Microwave's
1998 Annual Report to Shareholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data on page 32 of California Microwave's 1998
Annual Report to Shareholders 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 1998 Annual
Report to Shareholders is incorporated herein by reference. For factors
affecting any forward-looking statements contained in such discussion and
analysis, see "Business - Information Regarding Forward Looking Statements" in
Item 1 of Part 1 of this Form 10-K Annual Report.
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 33, of California
Microwave's 1998 Annual Report to Shareholders are incorporated herein by
reference.
10
<PAGE> 11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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, 1998 (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 1998 Annual Report
to Shareholders
Report of Ernst & Young LLP, Independent Auditors (page 27
of 1998 Annual Report to Shareholders)
Consolidated statements of operations for each of the three
years in the period ended June 30, 1998 (page 16 of 1998
Annual Report to Shareholders)
Consolidated balance sheets as of June 30, 1998 and 1997
(page 17 of 1998 Annual Report to Shareholders)
Consolidated statements of shareholders' equity for each of
the three years in the period ended June 30, 1998 (page 18
of 1998 Annual Report to Shareholders)
Consolidated statements of cash flows for each of the three
years in the period ended June 30, 1998 (page 19 of 1998
Annual Report to Shareholders)
Notes to Consolidated Financial Statements (pages 20 through
26 of 1998 Annual Report to Shareholders)
With the exception of the information incorporated by reference into Items 5, 6,
7 and 8 of this Form 10-K, the California
11
<PAGE> 12
Microwave 1998 Annual Report to Shareholders is not deemed filed as part of this
report.
(a) 2. FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report:
Schedules for the three years ended June 30, 1998 Schedule
II -- 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
<TABLE>
<S> <C>
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 herein by
reference.)
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
1998.**
10.2 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.)
10.3 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.)
10.4 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.)
10.5 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.)
10.6 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.)
10.7 Amendment to letter agreement with Philip F. Otto**, dated
August 15, 1994. (Exhibit to the Company's
</TABLE>
12
<PAGE> 13
<TABLE>
<S> <C>
Form 10-K for its fiscal year ended June 30, 1994;
incorporated herein by reference.)
10.8 Lease of premises located at 2114 West 7th Street, Tempe,
Arizona. (Exhibit to the Company's Form 10-K for the fiscal
year ended June 30, 1996; incorporated herein by
reference.)
10.9 Lease of premises known as Top Flight Airport on Showalter
Road, Washington County, Maryland. (Exhibit to the
Company's Form 10-K for its fiscal year ended June 30,
1996; incorporated herein by reference.)
10.10 Lease of premises located at 175 West Wall Street, Glendale
Heights, Illinois. (Exhibit to the Company's Form 10-K for
its fiscal year ended June 30, 1996; incorporated herein by
reference.)
10.11 1992 Stock Option Plan, as amended. (Exhibit to Company's
Form 10-K for the fiscal year ended June 30, 1997;
incorporated herein by reference.)
10.12 Loan and Security Agreement among BANKAMERICA Business
Credit, Inc., California Microwave, Inc. and EF Data Corp,
dated as of June 30, 1997. (Exhibit to the Company's Form
10-K for its fiscal year ended June 30, 1997, incorporated
herein by reference.)
10.13 Amendment to letter agreement with Philip F. Otto,** dated
January 10, 1997. (Exhibit to the Company's Form 10-K for
its fiscal year ended June 30, 1997; incorporated herein by
reference).
10.14 Letter Agreement with Frederick D. Lawrence**, dated July
16, 1997. (Exhibit to Company's Form 10-K for its fiscal
year ended June 30, 1997; incorporated herein by
reference).
10.15 Letter Agreement with Donna S. Birks, dated December 12,
1997.**
10.16 Form of Severance Agreement entered into in May 1998 with
George G. Arena and Donald V. Anderson.**
10.17 Form of severance agreement entered into in May 1998 with
Donna S. Birks.**
10.18 Asset Purchase Agreement between L-3 Communications
Corporation and California Microwave, Inc. dated as of
December 19, 1997 and amendment thereto. (Exhibits to the
Company's Form 8-K filed on February 13, 1998; incorporated
herein by reference.)
10.19 Asset Purchase Agreement between Tadiran Ltd. and
California Microwave, Inc., dated as of March 1, 1998 and
amendment thereto. (Exhibit to the Company's Form 8-K filed
on April 27, 1998; incorporated herein by reference.)
10.20 Stock Purchase Agreement between Telscape International,
Inc., California Microwave Services Division, Inc. and
California Microwave, Inc. dated as of May 8, 1998.
(Exhibit to the Company's Form 8-K filed on June 5, 1998;
incorporated herein by reference.)
10.21 Form of severance agreement entered into in May 1998
with George L. Spillane.**
13 Annual Report to Shareholders (pages incorporated by
reference).
21 List of subsidiaries.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney.
27 Financial Data Schedule for the fiscal year ended June 30,
1998.
27.01 Restated Financial Data Schedule for the fiscal years
ended June 30, 1995 and 1996 and for the first three
quarters of the fiscal year ended June 30, 1996.***
27.02 Restated Financial Data Schedule for the first three
quarters of and the fiscal year ended June 30, 1997.***
27.03 Restated Financial Data Schedule for the first three
quarters of the fiscal year ended June 30, 1998.
</TABLE>
Exhibits are available from the Registrant upon request.
- --------
* Registrant agrees to file such exhibits upon request by the Commission.
** Compensatory plan or arrangement.
*** The reclassified results of operations for the quarterly periods referenced
were also previously furnished in the Company's Form 8-K, dated August 13,
1997.
13
<PAGE> 14
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during the last fiscal quarter
of fiscal 1998:
Form 8-K filed on April 27, 1998 announcing completion of
the sale of the MN Division of the Company to Tadiran, Ltd.
Form 8-K filed on April 28, 1998 relating to the
announcement of adoption of a new corporate strategy and a
reorganization of the Company's divisions, results of
operations for the quarter ended March 31, 1998 and adoption
of segment reporting for the divisions, and the appointment
of a new director.
Form 8-K filed on June 5, 1998 announcing the sale of the
Services Division to Telscape International, Inc.
14
<PAGE> 15
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.
Dated: September 25, 1998 CALIFORNIA MICROWAVE, INC.
By /s/ FREDERICK D. LAWRENCE
--------------------------------------
Frederick D. Lawrence
Chairman, President and
Chief Executive Officer
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/ Frederick D. Lawrence President and Chief Executive Officer September 25, 1998
- ------------------------------------- (principal executive officer)
FREDERICK D. LAWRENCE and Director
/s/ Donna S. Birks Executive Vice President and Chief September 25, 1998
- ------------------------------------- Financial Officer (principal financial
DONNA S. BIRKS and accounting officer)
/s/ Arthur H. Hausman* Director September 25, 1998
- -------------------------------------
ARTHUR H. HAUSMAN
/s/ Alfred M. Gray* Director September 25, 1998
- -------------------------------------
ALFRED M. GRAY
/s/ William B. Marx, Jr.* Director September 25, 1998
- -------------------------------------
WILLIAM B. MARX, JR.
/s/ Terry W. Ward* Director September 25, 1998
- -------------------------------------
TERRY W. WARD
/s/ Frederick W. Whitridge, Jr.* Director September 25, 1998
- -------------------------------------
FREDERICK W. WHITRIDGE, JR.
/s/ George A. Joulwan* Director September 25, 1998
- -------------------------------------
GEORGE A. JOULWAN
/s/ Leslie G. Denend* Director September 25, 1998
- -------------------------------------
LESLIE G. DENEND
*By /s/ KENNETH J. WEES
---------------------------------
Attorney-in-fact
</TABLE>
<PAGE> 16
CALIFORNIA MICROWAVE, INC.
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS
Years ended June 30, 1998, 1997, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Additions Other(1)(2) Balance
beginning charged additions at end
of year to income (transfers) Deductions of year
-------------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
1998
Allowance for doubtful accounts . . . . . . $ 943 $ 719 $ (88) $ 408 $1,166
Estimated liability for warranties . . . . . 1,841 3,277 (50) 2,970 2,098
Restructuring reserves 7,512 4,585 4,576 7,521
Estimated liability for contract costs . . . 1,567 55 1,212 410
Accrued loss on disposal of
discontinued operations . . . . . . . . . . 12,538 23,530 31,004 5,064
1997
Allowance for doubtful accounts . . . . . . 798 465 320 943
Estimated liability for warranties . . . . . 1,084 3,780 3,023 1,841
Restructuring reserves . . . . . . . . . . . 2,876 500 5,520 1,384 7,512
Estimated liability for contract costs . . . 3,252 734 2,419 1,567
Accrued loss on disposal of
discontinued operations . . . . . . . . . . 12,538 12,538
1996
Allowance for doubtful accounts . . . . . . 806 177 185 798
Estimated liability for warranties . . . . . 962 2,261 2,139 1,084
Restructuring reserves . . . . . . . . . . . 3,930 1,054 2,876
Estimated liability for contract costs . . . 3,538 286 3,252
(1) 1997 and 1996 transfers from discontinued operations.
(2) Sale of Services Division during 1998.
</TABLE>
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- ----------------------------------------------------------------------
<S> <C>
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 herein by reference.)
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 1998.**
10.2 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.)
10.3 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.)
10.4 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.)
10.5 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.)
10.6 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.)
10.7 Amendment to letter agreement with Philip F. Otto**, dated August 15,
1994. (Exhibit to the Company's
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
Exhibit Description
- ------- ----------------------------------------------------------------------
<S> <C>
Form 10-K for its fiscal year ended June 30, 1994; incorporated herein
by reference.)
10.8 Lease of premises located at 2114 West 7th Street, Tempe, Arizona.
(Exhibit to the Company's Form 10-K for the fiscal year ended June 30,
1996; incorporated herein by reference.)
10.9 Lease of premises known as Top Flight Airport on Showalter Road,
Washington County, Maryland. (Exhibit to the Company's Form 10-K for
its fiscal year ended June 30, 1996; incorporated herein by
reference.)
10.10 Lease of premises located at 175 West Wall Street, Glendale Heights,
Illinois. (Exhibit to the Company's Form 10-K for its fiscal year
ended June 30, 1996; incorporated herein by reference.)
10.11 1992 Stock Option Plan, as amended. (Exhibit to Company's Form 10-K
for the fiscal year ended June 30, 1997; incorporated herein by
reference.)
10.12 Loan and Security Agreement among BANKAMERICA Business Credit, Inc.,
California Microwave, Inc. and EF Data Corp, dated as of June 30,
1997. (Exhibit to the Company's Form 10-K for its fiscal year ended
June 30, 1997, incorporated herein by reference.)
10.13 Amendment to letter agreement with Philip F. Otto,** dated January 10,
1997. (Exhibit to the Company's Form 10-K for its fiscal year ended
June 30, 1997; incorporated herein by reference).
10.14 Letter Agreement with Frederick D. Lawrence**, dated July 16, 1997.
(Exhibit to Company's Form 10-K for its fiscal year ended June 30,
1997; incorporated herein by reference).
10.15 Letter Agreement with Donna S. Birks, dated December 12, 1997.**
10.16 Form of Severance Agreement entered into in May 1998 with George G.
Arena and Donald V. Anderson.**
10.17 Form of severance agreement entered into in May 1998 with Donna S.
Birks.**
10.18 Asset Purchase Agreement between L-3 Communications Corporation and
California Microwave, Inc. dated as of December 19, 1997 and amendment
thereto. (Exhibits to the Company's Form 8-K filed on February 13,
1998; incorporated herein by reference.)
10.19 Asset Purchase Agreement between Tadiran Ltd. and California
Microwave, Inc., dated as of March 1, 1998 and amendment thereto.
(Exhibit to the Company's Form 8-K filed on April 27, 1998;
incorporated herein by reference.)
10.20 Stock Purchase Agreement between Telscape International, Inc.,
California Microwave Services Division, Inc. and California Microwave,
Inc. dated as of May 8, 1998. (Exhibit to the Company's Form 8-K filed
on June 5, 1998; incorporated herein by reference.)
10.21 Form of severance agreement entered into in May 1998 with George L.
Spillane.**
13 Annual Report to Shareholders (pages incorporated by reference).
21 List of subsidiaries.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney.
27 Financial Data Schedule for the fiscal year ended June 30, 1998.
27.01 Restated Financial Data Schedule for the fiscal years ended June 30,
1995 and 1996 and for the first three quarters of the fiscal year
ended June 30, 1996.***
27.02 Restated Financial Data Schedule for the first three quarters of and
the fiscal year ended June 30, 1997.***
27.03 Restated Financial Data Schedule for the first three quarters of
the fiscal year ended June 30, 1998.
</TABLE>
Exhibits are available from the Registrant upon request.
- --------
* Registrant agrees to file such exhibits upon request by the Commission.
** Compensatory plan or arrangement.
*** The reclassified results of operations for the quarterly periods referenced
were also previously furnished in the Company's Form 8-K, dated August 13,
1997.
<PAGE> 1
EXHIBIT 10.1
CALIFORNIA MICROWAVE, INC.
EMPLOYEE STOCK PURCHASE PLAN
(as amended through August 1998)
1. PURPOSE:
The CALIFORNIA MICROWAVE, INC. EMPLOYEE STOCK PURCHASE PLAN
(hereinafter called the "Plan") is designed to foster continued cordial employee
relations, to encourage and assist its employees and the employees of any
present or future subsidiaries in acquiring a stock ownership interest in
CALIFORNIA MICROWAVE, INC. (hereinafter called the "Corporation") and to help
them provide for their future security. For this purpose the Corporation
reserved 1,952,756* shares of its capital stock.
2. BI-ANNUAL PERIODS:
Bi-annual periods shall mean the six-month periods ending June 30th
and December 31st of each year. The first period under this Plan commenced on
January 1, 1973.
3. ELIGIBILITY:
Anyone who was an employee at the inception of the Plan (except
those employees who own five percent (5%) or more of the stock of the
Corporation or any subsidiary of the Corporation at the start of any bi-annual
period and part-time employees, all as defined in Internal Revenue Code Section
423), was or is eligible to become a member of the Plan. Anyone who became or
becomes an employee of the Corporation or any of its present or future
subsidiaries thereafter (subject to the exceptions stated in the preceding
sentence), was or is eligible to become a member of the Plan, on the first day
of the bi-annual period following the completion of (30) days of continuous
service. Notwithstanding the foregoing, no employee shall be entitled to
purchase (i) shares of stock under the Plan and all other purchase plans of the
Corporation and any parent or subsidiary of the Corporation with an aggregate
fair market value (determined at date of grant) exceeding $25,000 per year for
each calendar year in which such option is
- --------
*Includes an increase of 300,000 shares approved by the Board of Directors
in August 1998, subject to approval of the shareholders at the Annual Meeting of
Shareholders.
-1-
<PAGE> 2
outstanding at any time, or (ii) more than 1,000 shares of stock under the Plan
in any bi-annual period.
4. JOINING THE PLAN:
Any eligible employees' participation in the Plan shall be effective
on the seventh working day after the employee has completed, signed and returned
to the Corporation, or one of its present or future subsidiaries, a Stock
Purchase Plan Application and Payroll Deduction Authority form indicating his
acceptance and agreement to the Plan.
Membership of any employee in the Plan is entirely voluntary.
5. MEMBER'S CONTRIBUTIONS:
Each member shall elect to make contributions by monthly payroll
deduction of two percent (2%), five percent (5%), eight percent (8%) or ten
percent (10%) of such member's monthly gross pay.
Subject to the maximum described above, a member may elect in
writing to increase or decrease his rate of contribution; such change will
become effective the first day of the bi-annual period following receipt by the
Corporation or one of its present or future subsidiaries of such written
election.
The amount of each member's monthly contribution shall be held by
the Corporation in a special account and such contributions, free of any
obligation of the Corporation to pay interest thereon, shall be credited to such
member's individual account as soon as practicable after each pay day.
No member will be permitted to make contributions for any period
during which he is not receiving pay from the Corporation or one of its present
or future subsidiaries.
6. ISSUANCE OF SHARES:
On the last trading day of each bi-annual period so long as the Plan
shall remain in effect, and provided the member has not before that date advised
the Corporation that he does not wish shares purchased for his account on that
date, the Corporation shall apply the funds then in the member's account to the
purchase of authorized but unissued shares of its capital stock in units of one
share or multiples thereof. Until the Corporation's shares are actively traded,
the Board of Directors shall set, on or before the first day of each bi-annual
period, the cost to
-2-
<PAGE> 3
each member for shares purchased for members' accounts on the last day of such
bi-annual period. The cost as determined by the Board of Directors shall be
communicated to the members on or before the first day of each bi-annual period.
The cost shall be no less than eighty-five percent (85%) and no more than one
hundred percent (100%) of the fair market value of the shares as determined by
the Board of Directors.
When the Corporation's shares are actively traded, the cost to each
member for the shares so purchased shall be no less than eighty-five percent
(85%) and no more than one hundred percent (100%) of the lower of:
1. The mean between the average bid and ask prices of the stock
in the over-the-counter market as quoted on the National Association of Security
Dealers Automatic Quotation System (NASDAQ) or as reported by the National
Quotation Bureau, Inc., or if the stock is traded on one or more securities
exchanges, the average of the closing prices on all such exchanges, on the first
trading day of the bi-annual period;
2. The mean between the average bid and ask prices of the stock
in the over-the-counter market as quoted on the National Association of
Securities Dealers Automatic Quotation System (NASDAQ) or as reported by
National Quotation Bureau, Inc., or if the stock is traded on one or more
securities exchanges, the average of the closing prices on all such exchanges,
on the last trading day of the bi-annual period.
The Board of Directors shall set, on or before the first trading day
of each bi-annual period, the percentage factors to be used for the bi-annual
period about to commence. The percentage factors as decided upon by the Board of
Directors shall be communicated to the members on or before the first trading
day of each bi-annual period.
Any moneys remaining in such member's account equaling less than the
sum required to purchase one share, or moneys remaining in such member's account
by reason of application of the provisions of the next paragraph hereof, shall
be held in such member's account for use during the next bi-annual period. Any
moneys remaining in such member's account by reason of his prior election not to
purchase shares in a given bi-annual period as aforesaid and any moneys
remaining in such member's account upon termination of the member's membership
in the Plan shall be promptly returned to the member. The Corporation shall, as
expeditiously as possible after the last day of each December and June issue to
the member entitled thereto the
-3-
<PAGE> 4
certificates evidencing the shares issuable to him as provided herein.
If the number of shares members desire to purchase at the end of any
bi-annual period exceeds the number of shares then available under the Plan, the
shares available shall be allocated among such members in proportion to their
contributions during the bi-annual period.
7. TERMINATION OF MEMBERSHIP:
A member's membership in the Plan will be terminated when the member
(a) voluntarily elects to withdraw his entire account, (b) resigns or is
discharged from the Corporation or one of its present or future subsidiaries,
(c) dies, or (d) does not receive pay from the Corporation or one of its present
or future subsidiaries for twelve (12) consecutive months, unless this period is
due to illness, injury or for other reasons approved by the persons or person
appointed by the Corporation to administer the Plan as provided in Paragraph 10
below. Upon termination of membership, the terminated member shall not be
entitled to rejoin the Plan until the first day of the bi-annual period
immediately following the bi-annual period in which the termination occurs. Upon
termination of membership, the member shall be entitled to the amount of his
individual account within fifteen (15) days after the termination.
8. BENEFICIARY:
Each member shall designate a beneficiary or beneficiaries and may,
without their consent, change his designator. Any designation shall be effective
only after it is received by the Corporation and shall become effective as of
the date it is signed and shall be controlling over any disposition by will or
otherwise.
Upon the death of a member his account shall be paid or distributed
to the beneficiary or beneficiaries designated by him, or in the absence of such
designation, to the executor or administrator of his estate, and in either event
the Corporation shall not be under any further liability to anyone. If more than
one beneficiary is designated, then each beneficiary shall receive an equal
portion of the account unless the member indicates to the contrary in his
designation, provided that the Corporation may in its sole discretion make
distributions in such form as will avoid the creation of fractional shares.
-4-
<PAGE> 5
9. ADMINISTRATION OF THE PLAN:
The Plan shall be administered by such officers or other employees
of the Corporation as the Corporation may from time to time select, and the
persons so selected shall be responsible for the administration of the Plan. All
costs and expenses incurred in administering the Plan shall be paid by the
Corporation. Any taxes applicable to the member's account shall be charged or
credited to the member's account by the Corporation.
10. MODIFICATION AND TERMINATION:
The Corporation expects to continue the Plan until such time as the
shares reserved for issuance under the Plan have been sold. The Corporation
reserves, however, the right to amend, alter, or terminate the Plan in its
discretion. Upon termination, each member shall be entitled to the amount of his
individual account within fifteen (15) days after termination. Appropriate and
proportionate adjustments shall be made in the number and class of shares of
stock subject to this Plan, and to the rights granted hereunder and the prices
applicable to such rights, in the event of a stock dividend, stock split,
reverse stock split, recapitalization, reorganization, merger, consolidation,
acquisition, separation, or like change in the capital structure of the
Corporation.
11. ASSIGNABILITY OF RIGHTS:
No rights of any employee under this Plan shall be assigned by him,
by operation of law, or otherwise, except to the extent that he is permitted to
designate a beneficiary or beneficiaries as hereinabove provided, and except to
the extent permitted by the law of descent and distribution if no such
beneficiary be designated. Prior to the issuance of any shares under this Plan,
each employee member shall be required to sign a statement as set forth in
Exhibit "A" attached hereto and incorporated herein.
12. PARTICIPATION IN OTHER PLANS:
Nothing herein contained shall affect an employee's right to
participate in and receive benefits under and in accordance with the then
current provisions of any pension, insurance, or other employee welfare plan or
program of the Corporation.
-5-
<PAGE> 6
13. APPLICABLE LAW:
The interpretation, performance, and enforcement of this Plan shall
be governed by the laws of the State of California.
14. EFFECTIVE DATE AND APPROVALS:
This Plan as originally approved by the shareholders of the
Corporation on July 25, 1972 covered 16,000 shares. The Plan was increased by
the following:
<TABLE>
<CAPTION>
Number
Year Transaction of Shares
- ---- ----------- ---------
<S> <C> <C>
1972 Original Authorization 16,000
1974 Board of Directors & Stockholder Approval 25,000
1977 Board of Directors & Stockholder Approval 25,000
1978 50% stock dividend 12,658
1979 50% stock dividend 13,338
1980 Board of Directors & Stockholder Approval 50,000
1981 100% stock dividend 47,768
1982 Board of Directors & Stockholder Approval 100,000
1983 50% stock dividend 62,992
1985 Board of Directors & Stockholder Approval 200,000
1988 Board of Directors & Stockholder Approval 200,000
1991 Board of Directors & Stockholder Approval 200,000
1994 Board of Directors & Stockholder Approval 300,000
1996 Board of Directors & Stockholder Approval 400,000
1998 Board of Directors & Stockholder Approval 300,000
---------
Total 1,952,756
</TABLE>
-6-
<PAGE> 1
EXHIBIT 10.15
[CALIFORNIA MICROWAVE LETTERHEAD]
December 12, 1997
Ms. Donna S. Birks
1611 Highland Cove
Solana Beach, CA 92075
Dear Donna,
On behalf of California Microwave, I am pleased to extend to you an offer of
employment as the company's Executive Vice President and Chief Financial
Officer. Details of this offer, including compensation, benefits and other
employment provision are defined in this letter.
You will report directly to me and your name will be put in nomination to the
Board of Directors to become an officer of the corporation. Your base salary
will be at the rate of $275,000 per year, payable bi-weekly. As with other
executives, your salary will be subject to annual reviews shortly after the end
of each fiscal year (June 30). For fiscal year 1998, you will be eligible to
participate in CMI's Executive Incentive Plan (EIP) with a target bonus of 55%
of the base salary. Your payout under this plan will be based upon individual
performance goals and, due to the timing of your arrival, the continuing
business's second-half operating profit contributions to earnings per share
(assuming no stock repurchase, reversal of restructuring reserves or gains on
divestitures) as compared to our second-half plan. For the current fiscal year,
this bonus will be paid on a pro-rata basis, reflecting that portion of the
fiscal year during which you are employed by CMI. Your payout under the EIP can
be as much as 2.7 times the targeted amount; for your initial six-month period
of employment, that maximum would amount to $204,188. A copy of the FY98 plan is
enclosed.
<PAGE> 2
You will receive a hiring bonus of $40,000, payable within two weeks of your
start of employment. If within one year of your start date you voluntarily
terminate your employment or are terminated for cause, this bonus must be repaid
to the company within 90 days of your termination date.
Management will recommend to the Compensation Committee of the California
Microwave Board of Directors that, on the later of your start of employment or
approval by the Committee, you receive a stock option grant of 134,000 shares at
a price equal to the fair market value on the date of receipt, in accordance
with CMI's 1992 Stock Option Plan.
As an employee of California Microwave, a benefit package including medical,
dental and life insurance will be available to you and your dependents effective
on the 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, the
Deferred Profit Sharing Plan and the company's Employee Stock Purchase Plan. You
will be provided with term life insurance coverage at two times your annual base
salary; the portion over $400,000 will require you to pass a physical
examination. Company policy grants employees two weeks of paid vacation annually
for the first five years of employment but you will be provided four weeks of
vacation annually during your first ten years of employment. A general overview
of these and other employee benefits is included in the enclosed Benefits
Summary.
In addition to the above-mentioned benefits, your status as a key executive
makes you eligible to receive an additional amount of cash compensation, in lieu
of traditional executive perquisites, equal to 8% ($34,100) of your targeted
cash compensation (base salary plus targeted bonus) and payable monthly. Your
executive status also makes you eligible to participate in the company's
Non-qualified Deferred Compensation Plan, allowing you to set aside up to 70% of
your base salary and up to 80% of your EIP bonus compensation on a pre-tax
basis. Also available to you as a key executive will be a change in control
contract, affording you protections under various sale, merger and divestiture
circumstances.
You will be provided with relocation assistance benefits consisting of 1)
payment for moving, packing, unpacking and transit insurance related expenses
for your household goods and storage for up to three months, 2) temporary
housing, commuting and local living expenses for a period of up to 12 months, 3)
reimbursement of expenses associated with both the sale of your home (up to 6%
commission, plus incidentals), and the purchase of a new home (title insurance,
closing costs, plus incidentals, etc.), 4) purchase of your home at its
appraised value if it fails to sell within 90 days after being listed at an
offering price of no more than ten percent above the appraised value and 5) a
gross-up payment at your Federal/state tax rate to eliminate the tax liability
associated with these relocation assistance benefits.
In recognition of the higher housing costs in this area, you will also be given
a loan of $500,000, with the principle to be re-paid in a balloon payment on the
five-year anniversary of your start of employment. This loan will be
interest-free and you will be
<PAGE> 3
compensated for any taxes resulting from imputed interest. If you voluntarily
terminate your employment or are terminated by the company for cause, the
principle must be repaid in full within 90 days. In addition, if you voluntarily
terminate or are terminated for cause within two years of your hire date, an
interest charge will be due on the loan based on the outstanding period and at
the Applicable Federal Rate, due and payable within 90 days of your termination
date. If your employment terminates for any reason (including voluntary or for
cause) within one-year following a change in control occurring while this loan
is outstanding, you will be permitted to repay the principle on the
aforementioned five-year anniversary date.
If, within the first three years of your employment with CMI, your employment is
terminated without cause, you will be entitled to receive up to two years of
your base salary at the time of your termination to be paid to you over the two
years immediately following termination under normal payroll terms plus payments
equal to the company's cost for your medical, dental, vision, disability and
life insurance premiums. Such payments will cease immediately during this period
upon your acceptance of new employment of any duration and of a type
commensurate with your skills. In order to avoid adverse tax consequences to the
company and you from the applications of Sections 280G and 4999 of the Internal
Revenue Code of 1986 (the "IRC"), if there is an event described in Section
280G(b)(2)(A)(i) of the IRC (an "IRC Defined Change in Control") and if the
company's accountant or tax counsel notifies you that any payment or transfer by
the company to or for you under this agreement and any other agreement or
arrangement between the company and you (a "Payment") would constitute an excess
parachute payment, as defined in Section 280G(b) of the IRC (an "Excess
Parachute Payment"), then the aggregate present value, as determined under
Section 280G(d)(4)) (the "Present Value"), of all Payments shall be reduced to
the maximum whole dollar amount which may be paid to you without resulting in
any Excess Parachute Payment; provided, however, that such reduction in the
Present Value of the Payments otherwise due you may be accomplished, at your
option, by altering the Payments in one or more of the following ways:
a) Reduce the amount of any Payment otherwise due you;
b) Extend the period over which any Payment otherwise due you is made,
and/or adjust the amount of each installment of such Payment; or
c) Delay and/or waive the vesting of any unvested Payment which would
otherwise vest upon the IRC Defined Change in Control.
The company has recently adopted an executive stock ownership program requiring
executives to acquire and hold outright a multiple of between one-half to two
times their base salary (depending on their position) in California Microwave
stock. The exact terms, conditions, timing and financial support mechanisms for
this program have yet to be finalized; in fact, as CFO you will likely
participate in their development. However, I thought it important to apprise you
that this requirement is forthcoming since you will be subject to the program's
provisions.
<PAGE> 4
Donna, I'm very excited about the prospect of again having you on my team.
Please call me if you have any questions about the terms of this offer. If the
terms are acceptable to you, please so indicate by signing in the space provided
below and returning a copy of this letter to me by 11:30 a.m. on December 12,
1997, enabling me to submit your name in nomination as an officer to the Board
of Directors.
CALIFORNIA MICROWAVE, INC.
- --------------------------------
Frederick D. Lawrence
Chairman and CEO
Agreed and Accepted:
- -------------------------------- --------------------------------
Donna S. Birks Date
Enclosures
<PAGE> 1
Exhibit 10.16
CALIFORNIA MICROWAVE, INC.
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT is entered into as of May 18, 1998 (the "Effective
Date"), between CALIFORNIA MICROWAVE, INC., a Delaware corporation ("CMI") and
[Employee Name] (the "Employee").
RECITAL
The Employee serves as CMI's (Job Title). CMI and the Employee desire to set
forth the terms of the Employee's severance compensation if the Employee's
employment is ended as a result of a Change in Control. If a Change in Control
occurs, the Employee and other key employees may be more vulnerable to dismissal
or other negative consequences without regard to the quality of their past or
prospective service. The Board of Directors (the "Board") believes that it is in
the best interest of CMI and its stockholders to ensure fair treatment to CMI's
key employees and to reduce the adverse effects upon their performance that may
be caused by an acquisition or change in control.
The parties agree as follows:
1. Definitions. For purposes of this Agreement, the following terms will have
the meanings set forth below.
1.1 A "Change in Control" will occur if (a) any person, as that term
is used in Section 13(d) and 14(d)(2) of the Securities and
Exchange Act of 1934 (the 'Exchange Act.), other than CMI, is or
becomes the beneficial owner, as defined in Rule 13(d)(3) under
the Exchange Act, directly or indirectly (including by holding
securities which are exercisable for or convertible into shares
of capital stock of CMI), of 30 percent or more of the combined
voting power of the outstanding shares of capital stock of CMI
entitled to vote generally in the election of directors
(calculated as provided in Rule 13(d) under the Exchange Act in
the case of rights to acquire capital stock), whether by means
of a tender offer or exchange offer or open-market purchases or
a combination thereof; (b) a Transaction is consummated; (c)
Continuing Directors cease to constitute at least a majority of
the Board: or (d) a majority of the CMI's Outside Directors
determine that a Change in Control has occurred.
1.2 "Continuing Directors" shall mean the directors of CMI in office
on January 1, 1998 and any successor to any such director whose
1
<PAGE> 2
nomination or selection was approved by a majority of the
Continuing Directors in office at the time of the director's
nomination or selection and who is not an "affiliate" or
"associate" (as defined in Regulation 12B under the Securities
Exchange Act of 1934, as amended) of any person who is the
beneficial owner, directly or indirectly, of securities
representing ten percent (10%) or more of the combined voting
power of CMI's outstanding securities then entitled ordinarily
to vote for the election of directors.
1.3 "Disability" means that the Employee has met the qualifications
for CMI's long-term disability benefit.
1.4 "Good Reason" includes any of the following:
(a) the assignment to the Employee of duties inconsistent
with, or a substantial alteration in the nature or status
of, the Employee's responsibilities immediately before a
Change in Control;
(b) a reduction in the Employee's salary or other
benefits as in effect on the date of a Change in
Control;
(c) the Employee's relocation to a work site requiring an
increase in one-way commute from Employee's residence of
more than thirty-five (35) miles; or
(d) a breach by CMI of this Agreement if the breach has not
been cured within 30 days after written notice by the
Employee to CMI setting forth with specificity the nature
of the breach.
1.5 "Outside Director" is a member of CMI's Board of Directors who
is not, and who during the past six months was not, an employee
or officer of CMI.
1.6 "Termination for Cause" is termination of the Employee's
employment as a result of (a) the Employee's willful misconduct
or the Employee's dishonesty towards, fraud upon, crime against
or deliberate or attempted injury or bad faith action with
respect to CMI; or (b) the Employee's conviction for a felony
(whether in connection with CMI's affairs or otherwise).
1.7 "Termination Upon a Change in Control" is (a) termination by
the Employee of his employment for Good Reason within one year
2
<PAGE> 3
after the occurrence of a Change in Control; or (b) declination
by the Employee of an offer of employment from the buyer or the
newly created entity for Good Reason at the time of a Change in
Control if the Employee would not have been permitted to remain
in his/her existing position following such declination; or (c)
termination by CMI, the buyer or the newly created entity of
the Employee's employment within one year after the occurrence
of a Change in Control other than a Termination for Cause or a
termination resulting from the Employee's death or Disability.
The one-year period provided for herein shall be six months in
the event a Change in Control arises out of a Transaction
defined in Section 1.8 (c) hereof.
1.8 "Transaction" is (a) a consolidation or merger of CMI if the
shareholders of CMI immediately before the merger or
consolidation do not immediately after the merger or
consolidation own equity securities of the surviving or
acquiring corporation or a parent party possessing 50% or more
of the voting power of the surviving or acquiring corporation
or parent party; (b) a sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of 50
% or more of the assets of CMI; (c) the sale or other
disposition of business units other than the one in which the
Employee works within any 12-month period that contributed for
that 12-month period more than 45% of CMI's revenues; or (d)
the sale or spin-off by CMI of the division or business unit in
which the Employee works provided that, within thirty days
following such sale or spin-off, the Employee has not accepted
an offer to remain employed by CMI. The Transaction
requirements defined in parts (b) and (c) above shall
specifically exclude the sales of the Satellite Transmission
Systems and Microwave Networks divisions and their associated
assets, and the designated percentage thresholds (50% and 45%,
respectively) shall be calculated without including these two
divisions' assets or revenues in the base.
2. Term. If no Change in Control has occurred, this Agreement will expire on
December 31, 1999. If a Change in Control occurs prior to December 31,
1999, this Agreement will continue in effect, and will not terminate,
until either the Employee has received the severance compensation provided
for below or has ceased to be eligible for such compensation by reason of
there not having been a Termination Upon a Change in Control.
3. Termination Upon a Change in Control. If a Termination Upon a Change in
Control occurs, the Employee will immediately be paid all accrued salary,
bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits, which will be
paid in accordance with the applicable plan), any benefits then due under
any plans of CMI in which the Employee is a participant, accrued vacation
pay
3
<PAGE> 4
and any appropriate business expenses incurred by the Employee in
connection with his duties, all to the date of termination ("Accrued
Compensation"). The Employee will also be entitled to the severance
compensation described in Section 4.
4. Severance Compensation. If a Termination Upon a Change in Control occurs,
CMI shall pay monthly severance compensation to the Employee for a period
ending 12 months after termination, or ending six months after termination
if the Termination Upon a Change in Control is by reason of a Transaction
defined in Section 1.8 (c), in an aggregate amount determined by adding
(a) the Employee's monthly base salary at the time of termination, (b) a
proportionate amount of the Employee's targeted bonus, determined by
multiplying the Employee's targeted bonus by the number of complete months
from the start of the then current fiscal year to the Employee's
termination date and dividing the product by 144, and (c) an amount equal
to the monthly `Perk Pot' benefit to which the Employee is entitled as an
officer of the company at the time of termination, and (d) the amount of
$2400.00 in lieu of other employee benefits (including health benefits)
the Employee was receiving from CMI. If the Employee becomes employed
prior to the expiration of the aforesaid twelve month period, or six
months if the Termination Upon a Change in Control is by reason of a
Transaction defined in Section 1.8 (c), the payments provided for in this
Section 4 shall cease as of the date of such employment; Employee agrees
to promptly notify CMI of any such employment and to reimburse CMI for any
payments made by CMI hereunder that cover any period during which the
Employee was employed.
5. Acceleration of Options. If a Termination Upon a Change in Control occurs,
all stock options and restricted stock held by the Employee immediately
before the termination will become fully vested and the stock options will
be exercisable for the periods specified with respect to termination of
employment in the plans covering the options.
6. Other Benefits. Neither this Agreement nor the severance compensation that
it provides for will reduce any amounts otherwise payable, or in any way
diminish the Employee's rights as an employee of CMI, whether existing now
or hereafter, under any benefit, incentive, retirement, stock option,
stock bonus or stock purchase plan or under any employment agreement or
other plan or arrangement, provided, however, that the rights granted to
the Employee and the obligations assumed by CMI under this Agreement will
be in lieu of, and not in addition to, any severance or other termination
payments to which the Employee may be entitled under any employment
agreement or other plan or arrangement that the Employee may now or
hereafter have with CMI.
7. Employment Status. This Agreement does not constitute a contract of
employment. It does not impose on CMI any obligation to retain the
Employee as an employee, to change the status of the Employee's employment
or to change CMI's policies regarding termination of employment.
8. Miscellaneous.
a. Severability. If a court or other body of competent jurisdiction
determines
4
<PAGE> 5
that any provision of this Agreement is invalid or unenforceable, that
provision will be adjusted rather than voided, if possible, so that it
is enforceable to the maximum extent possible, and all other
provisions of the Agreement will be deemed valid and enforceable to
the fullest extent possible.
b. Withholding. Compensation and benefits to the Employee under this
Agreement will be reduced by all federal, state, local and other
withholdings or similar taxes as required by applicable law.
c. Arbitration. The parties will submit all controversies, claims and
matters of difference in any way related to this Agreement, its
performance or breach, to arbitration in San Francisco, California,
according to the rules and practices of the American Arbitration
Association from time to time in effect. Any awards in such arbitration
shall be final and binding on all parties. The arbitrators shall
allocate the costs of the arbitration in such manner as they deem
equitable. The arbitrators may require the reimbursement of all or a
portion of the reasonable legal fees incurred by the prevailing party
in the arbitration proceeding and any legal proceedings which are taken
to enforce the arbitral award.
d. Entire Agreement: Modifications. This Agreement is the entire agreement
between the parties with respect to the matters covered hereby, and may
be amended, modified, superseded or canceled, or its terms waived, only
by a written instrument executed by each party or, in the case of a
waiver, by the party waiving compliance. Failure of a party at any time
to require performance of any provision of this Agreement will not
affect the right at a later time to enforce the same. No waiver of a
breach of this Agreement, whether by conduct or otherwise, in any one
or more instances will be construed as a further or continuing waiver
of the breach or of any other term of this Agreement. This Agreement
shall inure to the benefit of and be binding upon the successors and
assigns of the parties hereto.
e. Confidential Information. The Employee agrees not to disclose, either
while in the Company's employ or at any time thereafter, to any person
not employed by CMI any confidential information obtained while in the
employ of CMI (including, without limitation, any of CMI's inventions,
processes, methods of distribution, customers or trade secrets). This
shall not preclude the Employee from the use or disclosure of
information known generally to the public or from making disclosures
required by law or court order.
f. Applicable Law. This Agreement will be construed under and governed by
the laws of the State of California without regard or reference to the
rules of conflicts of law that would require the application of the
laws of any other jurisdiction.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
CALIFORNIA MICROWAVE, INC.
- ---------------------------- --------------------------------
Frederick D. Lawrence (Employee Name)
Chairman and Chief Executive Officer (Job Title)
6
<PAGE> 1
Exhibit 10.17
CALIFORNIA MICROWAVE, INC.
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT is entered into as of May 18, 1998 (the "Effective
Date"), between CALIFORNIA MICROWAVE, INC., a Delaware corporation ("CMI") and
Donna Birks (the "Employee").
RECITAL
The Employee serves as CMI's Executive Vice President and Chief Financial
Officer. CMI and the Employee desire to set forth the terms of the Employee's
severance compensation if the Employee's employment is ended as a result of a
Change in Control. If a Change in Control occurs, the Employee and other key
employees may be more vulnerable to dismissal or other negative consequences
without regard to the quality of their past or prospective service. The Board of
Directors (the "Board") believes that it is in the best interest of CMI and its
stockholders to ensure fair treatment to CMI's key employees and to reduce the
adverse effects upon their performance that may be caused by an acquisition or
change in control.
The parties agree as follows:
1. Definitions. For purposes of this Agreement, the following terms will
have the meanings set forth below.
1.1 A "Change in Control" will occur if (a) any person, as that term
is used in Section 13(d) and 14(d)(2) of the Securities and Exchange
Act of 1934 (the 'Exchange Act.), other than CMI, is or becomes the
beneficial owner, as defined in Rule 13(d)(3) under the Exchange Act,
directly or indirectly (including by holding securities which are
exercisable for or convertible into shares of capital stock of CMI),
of 30 percent or more of the combined voting power of the outstanding
shares of capital stock of CMI entitled to vote generally in the
election of directors (calculated as provided in Rule 13(d) under the
Exchange Act in the case of rights to acquire capital stock), whether
by means of a tender offer or exchange offer or open-market purchases
or a combination thereof; (b) a Transaction is consummated; (c)
Continuing Directors cease to constitute at least a majority of the
Board: or (d)
<PAGE> 2
a majority of the CMI's Outside Directors determine that a Change in
Control has occurred.
1.2 "Continuing Directors" shall mean the directors of CMI in office on
January 1, 1998 and any successor to any such director whose
nomination or selection was approved by a majority of the Continuing
Directors in office at the time of the director's nomination or
selection and who is not an "affiliate" or "associate" (as defined in
Regulation 12B under the Securities Exchange Act of 1934, as amended)
of any person who is the beneficial owner, directly or indirectly, of
securities representing ten percent (10%) or more of the combined
voting power of CMI's outstanding securities then entitled ordinarily
to vote for the election of directors.
1.3 "Disability" means that the Employee has met the qualifications for
CMI's long-term disability benefit.
1.4 "Good Reason" includes any of the following:
(a) the assignment to the Employee of duties inconsistent with, or a
substantial alteration in the nature or status of, the Employee's
responsibilities immediately before a Change in Control;
(b) a reduction in the Employee's salary or other benefits as in
effect on the date of a Change in Control;
(c) the Employee's relocation to a work site requiring an
increase in one-way commute from Employee's residence of
more than thirty-five (35) miles; or
(d) a breach by CMI of this Agreement if the breach has not been
cured within 30 days after written notice by the Employee to
CMI setting forth with specificity the nature of the breach.
1.5 "Outside Director" is a member of CMI's Board of Directors who is not,
and who during the past six months was not, an employee or officer of
CMI.
1.6 "Termination for Cause" is termination of the Employee's employment as
a result of (a) the Employee's willful misconduct or
<PAGE> 3
the Employee's dishonesty towards, fraud upon, crime against or
deliberate or attempted injury or bad faith action with respect to
CMI; or (b) the Employee's conviction for a felony (whether in
connection with CMI's affairs or otherwise).
1.7 "Termination Upon a Change in Control" is (a) termination by the
Employee of his employment for Good Reason within one year after the
occurrence of a Change in Control; or (b) declination by the Employee
of an offer of employment from the buyer or the newly created entity
for Good Reason at the time of a Change in Control if the Employee
would not have been permitted to remain in his/her existing position
following such declination; or (c) termination by CMI, the buyer or
the newly created entity of the Employee's employment within one year
after the occurrence of a Change in Control other than a Termination
for Cause or a termination resulting from the Employee's death or
Disability. The one-year period provided for herein shall be six
months in the event a Change in Control arises out of a Transaction
defined in Section 1.8 (c) hereof.
1.8 "Transaction" is (a) a consolidation or merger of CMI if the
shareholders of CMI immediately before the merger or consolidation do
not immediately after the merger or consolidation own equity
securities of the surviving or acquiring corporation or a parent party
possessing 50% or more of the voting power of the surviving or
acquiring corporation or parent party; (b) a sale, lease, exchange or
other transfer (in one transaction or a series of related
transactions) of 50 % or more of the assets of CMI; or (c) the sale or
other disposition of business units within any 12-month period that
contributed for that 12-month period more than 45% of CMI's revenues.
The Transaction requirements defined in parts (b) and (c) above shall
specifically exclude the sales of the Satellite Transmission Systems
and Microwave Networks divisions and their associated assets, and the
designated percentage thresholds (50% and 45%, respectively) shall be
calculated without including these two divisions' assets or revenues
in the base.
2. Term. If no Change in Control has occurred, this Agreement will expire on
December 17, 2000. If a Change in Control occurs prior to December 17,
2000, this Agreement will continue in effect, and will not terminate, until
either the Employee has received the severance compensation provided for
below or has ceased to be eligible for such compensation by reason of there
not having been a Termination Upon a Change in Control.
<PAGE> 4
3. Termination Upon a Change in Control. If a Termination Upon a Change in
Control occurs, the Employee will immediately be paid all accrued salary,
bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits, which will be
paid in accordance with the applicable plan), any benefits then due under
any plans of CMI in which the Employee is a participant, accrued vacation
pay and any appropriate business expenses incurred by the Employee in
connection with his duties, all to the date of termination ("Accrued
Compensation"). The Employee will also be entitled to the greater of i) the
severance compensation described in Section 4 or ii) any severance benefit
to which the Employee is entitled based on her offer letter of December 12,
1997.
4. Severance Compensation. If a Termination Upon a Change in Control occurs,
CMI shall pay monthly severance compensation to the Employee for a period
ending 24 months after termination in an aggregate amount determined by
adding (a) the Employee's monthly base salary at the time of termination,
(b) a proportionate amount of the Employee's targeted bonus, determined by
multiplying the Employee's targeted bonus by the number of complete months
from the start of the then current fiscal year to the Employee's
termination date and dividing the product by 144, and (c) an amount equal
to the monthly `Perk Pot' benefit to which the Employee is entitled as an
officer of the company at the time of termination, and (d) the amount of
$2400.00 in lieu of other employee benefits (including health benefits) the
Employee was receiving from CMI. If the Employee becomes employed prior to
the expiration of the aforesaid 24 month period, the payments provided for
in this Section 4 shall cease as of the date of such employment; Employee
agrees to promptly notify CMI of any such employment and to reimburse CMI
for any payments made by CMI hereunder that cover any period during which
the Employee was employed. The severance compensation described herein will
be provided only in lieu of any severance benefit to which the Employee is
entitled in Employee's offer letter of December 12, 1997.
5. Acceleration of Options. If a Termination Upon a Change in Control occurs,
all stock options and restricted stock held by the Employee immediately
before the termination will become fully vested and the stock options will
be exercisable for the periods specified with respect to termination of
employment in the plans covering the options.
6. Other Benefits. Neither this Agreement nor the severance compensation that
it provides for will reduce any amounts otherwise payable, or in any way
diminish the Employee's rights as an employee of CMI, whether existing now
or hereafter, under any benefit, incentive, retirement, stock option, stock
bonus or stock purchase plan or under any employment agreement or other
plan or arrangement, provided, however, that the rights granted to the
Employee and the obligations assumed by CMI under this Agreement will be in
lieu of, and not in addition to, any severance or other termination
payments to which the Employee may be entitled under any employment
agreement or other plan or arrangement that the Employee may now or
hereafter have with CMI.
<PAGE> 5
7. Employment Status. This Agreement does not constitute a contract of
employment. It does not impose on CMI any obligation to retain the Employee
as an employee, to change the status of the Employee's employment or to
change CMI's policies regarding termination of employment.
8. Miscellaneous.
a. Severability. If a court or other body of competent jurisdiction
determines that any provision of this Agreement is invalid or
unenforceable, that provision will be adjusted rather than voided, if
possible, so that it is enforceable to the maximum extent possible,
and all other provisions of the Agreement will be deemed valid and
enforceable to the fullest extent possible.
b. Withholding. Compensation and benefits to the Employee under this
Agreement will be reduced by all federal, state, local and other
withholdings or similar taxes as required by applicable law.
c. Arbitration. The parties will submit all controversies, claims and
matters of difference in any way related to this Agreement, its
performance or breach, to arbitration in San Francisco, California,
according to the rules and practices of the American Arbitration
Association from time to time in effect. Any awards in such
arbitration shall be final and binding on all parties. The arbitrators
shall allocate the costs of the arbitration in such manner as they
deem equitable. The arbitrators may require the reimbursement of all
or a portion of the reasonable legal fees incurred by the prevailing
party in the arbitration proceeding and any legal proceedings which
are taken to enforce the arbitral award.
d. Entire Agreement: Modifications. This Agreement sets forth the entire
Agreement between the parties and supersedes any and all prior
agreements or understandings, written or oral, between the parties
pertaining to the subject matter of this Agreement with the express
limitation that the provisions of the offer letter sent to employee on
December 12, 1997 remain in force and effect except as specified in
Paragraphs 3 and 4 above. It may be amended, modified, superseded or
canceled, or its terms waived, only by a written instrument executed
by each party or, in the case of a waiver, by the party waiving
compliance. Failure of a party at any time to require performance of
any provision of this Agreement will not affect the right at a later
time to enforce the same. No waiver of a breach of this Agreement,
whether by conduct or otherwise, in any one or more instances will be
construed as a further or continuing waiver of the breach or of any
other term of this Agreement. This Agreement shall inure to the
benefit of and be binding upon
<PAGE> 6
the successors and assigns of the parties hereto.
e. Confidential Information. The Employee agrees not to disclose, either
while in the Company's employ or at any time thereafter, to any person
not employed by CMI any confidential information obtained while in the
employ of CMI (including, without limitation, any of CMI's inventions,
processes, methods of distribution, customers or trade secrets). This
shall not preclude the Employee from the use or disclosure of
information known generally to the public or from making disclosures
required by law or court order.
f. Applicable Law. This Agreement will be construed under and governed by
the laws of the State of California without regard or reference to the
rules of conflicts of law that would require the application of the
laws of any other jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
CALIFORNIA MICROWAVE, INC.
- -------------------------------- ----------------------------------
Frederick D. Lawrence Donna Birks
Chairman and Chief Executive Officer Executive Vice President and Chief
Financial Officer
<PAGE> 1
Exhibit 10.21
CALIFORNIA MICROWAVE, INC.
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT is entered into as of May 18, 1998 (the "Effective
Date"), between CALIFORNIA MICROWAVE, INC., a Delaware corporation ("CMI") and
EmployeeName (the "Employee").
RECITAL
The Employee serves as CMI's (Job Title). CMI and the Employee desire to set
forth the terms of the Employee's severance compensation if the Employee's
employment is ended as a result of a Change in Control. If a Change in Control
occurs, the Employee and other key employees may be more vulnerable to dismissal
or other negative consequences without regard to the quality of their past or
prospective service. The Board of Directors (the "Board") believes that it is in
the best interest of CMI and its stockholders to ensure fair treatment to CMI's
key employees and to reduce the adverse effects upon their performance that may
be caused by an acquisition or change in control.
The parties agree as follows:
1. Definitions. For purposes of this Agreement, the following terms will have
the meanings set forth below.
1.1 A "Change in Control" will occur if (a) any person, as that term
is used in Section 13(d) and 14(d)(2) of the Securities and
Exchange Act of 1934 (the 'Exchange Act.), other than CMI, is or
becomes the beneficial owner, as defined in Rule 13(d)(3) under
the Exchange Act, directly or indirectly (including by holding
securities which are exercisable for or convertible into shares
of capital stock of CMI), of 30 percent or more of the combined
voting power of the outstanding shares of capital stock of CMI
entitled to vote generally in the election of directors
(calculated as provided in Rule 13(d) under the Exchange Act in
the case of rights to acquire capital stock), whether by means
of a tender offer or exchange offer or open-market purchases or
a combination thereof; (b) a Transaction is consummated; (c)
Continuing Directors cease to constitute at least a majority of
the Board: or (d) a majority of the CMI's Outside Directors
determine that a Change in Control has occurred.
1
<PAGE> 2
1.2 "Continuing Directors" shall mean the directors of CMI in office
on January 1, 1998 and any successor to any such director whose
nomination or selection was approved by a majority of the
Continuing Directors in office at the time of the director's
nomination or selection and who is not an "affiliate" or
"associate" (as defined in Regulation 12B under the Securities
Exchange Act of 1934, as amended) of any person who is the
beneficial owner, directly or indirectly, of securities
representing ten percent (10%) or more of the combined voting
power of CMI's outstanding securities then entitled ordinarily
to vote for the election of directors.
1.3 "Disability" means that the Employee has met the qualifications
for CMI's long-term disability benefit.
1.4 "Good Reason" includes any of the following:
(a) the assignment to the Employee of duties inconsistent
with, or a substantial alteration in the nature or status
of, the Employee's responsibilities immediately before a
Change in Control;
(b) a reduction in the Employee's salary or other
benefits as in effect on the date of a Change in
Control;
(c) the Employee's relocation to a work site requiring an
increase in one-way commute from Employee's residence of
more than thirty-five (35) miles; or
(d) a breach by CMI of this Agreement if the breach has not
been cured within 30 days after written notice by the
Employee to CMI setting forth with specificity the nature
of the breach.
1.5 "Outside Director" is a member of CMI's Board of Directors who
is not, and who during the past six months was not, an employee
or officer of CMI.
1.6 "Termination for Cause" is termination of the Employee's
employment as a result of (a) the Employee's willful misconduct
or the Employee's dishonesty towards, fraud upon, crime against
or deliberate or attempted injury or bad faith action with
respect to CMI; or (b) the Employee's conviction for a felony
(whether in connection with CMI's affairs or otherwise).
2
<PAGE> 3
1.7 "Termination Upon a Change in Control" is (a) termination by
the Employee of his employment for Good Reason within one year
after the occurrence of a Change in Control; or (b) declination
by the Employee of an offer of employment from the buyer or the
newly created entity for Good Reason at the time of a Change in
Control if the Employee would not have been permitted to remain
in his/her existing position following such declination; or (c)
termination by CMI, the buyer or the newly created entity of
the Employee's employment within one year after the occurrence
of a Change in Control other than a Termination for Cause or a
termination resulting from the Employee's death or Disability.
The one-year period provided for herein shall be six months in
the event a Change in Control arises out of a Transaction
defined in Section 1.8 (c) hereof.
1.8 "Transaction" is (a) a consolidation or merger of CMI if the
shareholders of CMI immediately before the merger or
consolidation do not immediately after the merger or
consolidation own equity securities of the surviving or
acquiring corporation or a parent party possessing 50% or more
of the voting power of the surviving or acquiring corporation
or parent party; (b) a sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of 50
% or more of the assets of CMI; or (c) the sale or other
disposition of business units within any 12-month period that
contributed for that 12-month period more than 45% of CMI's
revenues. The Transaction requirements defined in parts (b) and
(c) above shall specifically exclude the sales of the Satellite
Transmission Systems and Microwave Networks divisions and their
associated assets, and the designated percentage thresholds
(50% and 45%, respectively) shall be calculated without
including these two divisions' assets or revenues in the base.
2. Term. If no Change in Control has occurred, this Agreement will expire on
December 31, 1999. If a Change in Control occurs prior to December 31,
1999, this Agreement will continue in effect, and will not terminate,
until either the Employee has received the severance compensation provided
for below or has ceased to be eligible for such compensation by reason of
there not having been a Termination Upon a Change in Control.
3. Termination Upon a Change in Control. If a Termination Upon a Change in
Control occurs, the Employee will immediately be paid all accrued salary,
bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits, which will be
paid in accordance with the applicable plan), any benefits then due under
any plans of CMI in which the Employee is a participant, accrued vacation
pay and any appropriate business expenses incurred by the Employee in
connection with his duties, all to the date of termination ("Accrued
Compensation"). The Employee will also be
3
<PAGE> 4
entitled to the severance compensation described in Section 4.
4. Severance Compensation. If a Termination Upon a Change in Control occurs,
CMI shall pay monthly severance compensation to the Employee for a period
ending 12 months after termination, or ending six months after termination
if the Termination Upon a Change in Control is by reason of a Transaction
defined in Section 1.8 (c), in an aggregate amount determined by adding
(a) the Employee's monthly base salary at the time of termination, (b) a
proportionate amount of the Employee's targeted bonus, determined by
multiplying the Employee's targeted bonus by the number of complete months
from the start of the then current fiscal year to the Employee's
termination date and dividing the product by 144, and (c) an amount equal
to the monthly `Perk Pot' benefit to which the Employee is entitled as an
officer of the company at the time of termination, and (d) the amount of
$2400.00 in lieu of other employee benefits (including health benefits)
the Employee was receiving from CMI. If the Employee becomes employed
prior to the expiration of the aforesaid twelve month period, or six
months if the Termination Upon a Change in Control is by reason of a
Transaction defined in Section 1.8 (c), the payments provided for in this
Section 4 shall cease as of the date of such employment; Employee agrees
to promptly notify CMI of any such employment and to reimburse CMI for any
payments made by CMI hereunder that cover any period during which the
Employee was employed.
5. Acceleration of Options. If a Termination Upon a Change in Control occurs,
all stock options and restricted stock held by the Employee immediately
before the termination will become fully vested and the stock options will
be exercisable for the periods specified with respect to termination of
employment in the plans covering the options.
6. Other Benefits. Neither this Agreement nor the severance compensation that
it provides for will reduce any amounts otherwise payable, or in any way
diminish the Employee's rights as an employee of CMI, whether existing now
or hereafter, under any benefit, incentive, retirement, stock option,
stock bonus or stock purchase plan or under any employment agreement or
other plan or arrangement, provided, however, that the rights granted to
the Employee and the obligations assumed by CMI under this Agreement will
be in lieu of, and not in addition to, any severance or other termination
payments to which the Employee may be entitled under any employment
agreement or other plan or arrangement that the Employee may now or
hereafter have with CMI.
7. Employment Status. This Agreement does not constitute a contract of
employment. It does not impose on CMI any obligation to retain the
Employee as an employee, to change the status of the Employee's employment
or to change CMI's policies regarding termination of employment.
8. Miscellaneous.
a. Severability. If a court or other body of competent jurisdiction
determines that any provision of this Agreement is invalid or
unenforceable, that provision will be adjusted rather than voided, if
possible, so that it is
4
<PAGE> 5
enforceable to the maximum extent possible, and all other provisions
of the Agreement will be deemed valid and enforceable to the fullest
extent possible.
b. Withholding. Compensation and benefits to the Employee under this
Agreement will be reduced by all federal, state, local and other
withholdings or similar taxes as required by applicable law.
c. Arbitration. The parties will submit all controversies, claims and
matters of difference in any way related to this Agreement, its
performance or breach, to arbitration in San Francisco, California,
according to the rules and practices of the American Arbitration
Association from time to time in effect. Any awards in such arbitration
shall be final and binding on all parties. The arbitrators shall
allocate the costs of the arbitration in such manner as they deem
equitable. The arbitrators may require the reimbursement of all or a
portion of the reasonable legal fees incurred by the prevailing party
in the arbitration proceeding and any legal proceedings which are taken
to enforce the arbitral award.
d. Entire Agreement: Modifications. This Agreement is the entire agreement
between the parties with respect to the matters covered hereby, and may
be amended, modified, superseded or canceled, or its terms waived, only
by a written instrument executed by each party or, in the case of a
waiver, by the party waiving compliance. Failure of a party at any time
to require performance of any provision of this Agreement will not
affect the right at a later time to enforce the same. No waiver of a
breach of this Agreement, whether by conduct or otherwise, in any one
or more instances will be construed as a further or continuing waiver
of the breach or of any other term of this Agreement. This Agreement
shall inure to the benefit of and be binding upon the successors and
assigns of the parties hereto.
e. Confidential Information. The Employee agrees not to disclose, either
while in the Company's employ or at any time thereafter, to any person
not employed by CMI any confidential information obtained while in the
employ of CMI (including, without limitation, any of CMI's inventions,
processes, methods of distribution, customers or trade secrets). This
shall not preclude the Employee from the use or disclosure of
information known generally to the public or from making disclosures
required by law or court order.
f. Applicable Law. This Agreement will be construed under and governed by
the laws of the State of California without regard or reference to the
rules of conflicts of law that would require the application of the
laws of any other jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
5
<PAGE> 6
CALIFORNIA MICROWAVE, INC.
- -------------------------------- --------------------------------
Frederick D. Lawrence (Employee Name)
Chairman and Chief Executive Officer (Job Title)
6
<PAGE> 1
EXHIBIT 13
FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE $ 269,189 $ 254,161 $ 239,964
Costs of revenue 187,908 181,404 158,042
--------- --------------------------
Gross margin 81,281 72,757 81,922
--------- --------------------------
Expenses:
Research and development 20,046 18,214 16,608
Sales, marketing and administration 50,432 46,107 38,747
Amortization of intangible assets 1,377 1,394 1,381
Restructuring and other charges 4,585 -- --
--------- --------------------------
Total expenses 76,440 65,715 56,736
--------- --------------------------
Operating income 4,841 7,042 25,186
Interest expense (4,468) (5,944) (4,314)
Interest income 819 5 --
Gain on sale of business units 6,290 2,744 --
--------- --------------------------
Income from continuing operations before income taxes 7,482 3,847 20,872
Provision for income taxes 183 1,268 7,514
Income from continuing operations 7,299 2,579 13,358
Discontinued operations:
Loss from discontinued operations, net of income taxes -- (50,974) (1,735)
Loss on disposal, net of income taxes (15,059) (8,371) --
--------- --------------------------
(15,059) (59,345) (1,735)
Net income (loss) $ (7,760) $ (56,766) $ 11,623
========= ==========================
Basic earnings (loss) per share:
Income from continuing operations $ .45 $ .16 $ .84
Loss from discontinued operations (.92) (3.66) (.11)
Net income (loss) $ (.47) $ (3.50) $ .73
========= ==========================
Weighted average common shares outstanding 16,363 16,226 15,912
Diluted earnings (loss) per share:
Income from continuing operations $ .44 $ .16 $ .82
Loss from discontinued operations (.90) (3.63) (.11)
--------- --------------------------
Net income (loss) $ (.47) $ (3.48) $ .72
========= ==========================
Weighted average common shares and common
equivalent shares outstanding 16,640 16,333 16,200
</TABLE>
See Notes to Consolidated Financial Statements
16
<PAGE> 2
CONSOLIDATED BALANCE SHEETS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
JUNE 30 JUNE 30
1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 23,974 $ 4,974
Short-term investments 2,636 2,097
Accounts receivable, less allowance for doubtful
accounts of $1,166 in 1998 and $943 in 1997 47,627 35,701
Inventories 37,562 50,353
Refundable income taxes -- 10,085
Deferred income taxes 15,714 18,359
Prepaid expenses 771 1,391
Net current assets of discontinued operations -- 60,604
--------------------------
Total current assets 128,284 183,564
--------------------------
Property, plant and equipment, net 25,388 22,812
Intangible assets of businesses acquired, net 27,887 29,488
Deferred income taxes 16,448 7,411
Other assets 3,698 4,046
Net long-term assets of discontinued operations -- 19,052
--------------------------
$ 201,705 $ 266,373
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 352 $ 333
Accounts payable 18,535 26,681
Accrued liabilities 36,017 45,044
--------------------------
Total current liabilities 54,904 72,058
--------------------------
Long-term debt 2,748 9,101
Convertible subordinated notes 57,500 63,200
Other long-term liabilities 2,000 3,990
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, $0.10 par value, 29,200,000 shares authorized;
16,629,031 shares issued (16,406,473 shares in 1997) 1,663 1,641
Capital in excess of par value 95,673 93,249
Treasury stock, 1,285,080 shares held in
treasury, (no shares in 1997) (27,831) --
Retained earnings 15,048 23,577
Unamortized restricted stock plan expense -- (443)
--------------------------
Total shareholders' equity 84,553 118,024
--------------------------
$ 201,705 $ 266,373
==========================
</TABLE>
See Notes to Consolidated Financial Statements
17
<PAGE> 3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
Three years ended June 30, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
CAPITAL
COMMON STOCK IN EXCESS OF TREASURY RETAINED
SHARES AMOUNT PAR VALUE STOCK EARNINGS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 15,718,872 $ 1,572 $84,034 -- $68,720
Common stock issued under:
Stock option, restricted stock
and stock purchase plans 312,176 31 4,754
Net income 11,623
------------------------------------------------------------------------
Balance at June 30, 1996 16,031,048 1,603 88,788 -- 80,343
------------------------------------------------------------------------
Common stock issued under:
Stock option, restricted stock
and stock purchase plans 375,425 38 4,461
Net loss (56,766)
------------------------------------------------------------------------
Balance at June 30, 1997 16,406,473 1,641 93,249 -- 23,577
------------------------------------------------------------------------
Common stock issued under:
Stock option, restricted stock
and stock purchase plans 222,558 22 2,424
Treasury stock purchases
(1,595,500 shares) (34,104)
Common stock issued from
treasury shares (310,420 shares) 6,273 (769)
Net loss (7,760)
------------------------------------------------------------------------
Balance at June 30, 1998 16,629,031 $ 1,663 $95,673 $(27,831) $15,048
========================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
UNAMORTIZED
RESTRICTED TOTAL SHARE-
STOCK PLAN HOLDERS'
EXPENSE EQUITY
- ----------------------------------------------------------------
<S> <C> <C>
Balance at June 30, 1995 $(462) $153,864
Common stock issued under:
Stock option, restricted stock
and stock purchase plans (260) 4,525
Net income 11,623
---------------------------
Balance at June 30, 1996 (722) 170,012
---------------------------
Common stock issued under:
Stock option, restricted stock
and stock purchase plans 279 4,778
Net loss (56,766)
---------------------------
Balance at June 30, 1997 (443) 118,024
---------------------------
Common stock issued under:
Stock option, restricted stock
and stock purchase plans 443 2,889
Treasury stock purchases
(1,595,500 shares) (34,104)
Common stock issued from
treasury shares (310,420 shares) 5,504
Net loss (7,760)
---------------------------
Balance at June 30, 1998 -- $ 84,553
===========================
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations $ 7,299 $ 2,579 $ 13,358
Adjustments to reconcile income from continuing operations
to net cash provided by (used in) operating activities:
Gain on sale of business units (6,290) (2,744) --
Depreciation and amortization 9,285 8,064 5,789
Amortization of intangible assets 1,377 1,394 1,381
Benefit for previously reserved income tax deductions (2,500) -- --
Deferred income taxes 2,847 2,096 5,577
Debt issuance costs 286 378 210
Net effect of changes in:
Accounts receivable (13,446) 520 (4,270)
Income tax refund 10,085 -- --
Inventories 10,280 (414) (10,393)
Prepaid expenses (287) (209) (907)
Accounts payable (6,720) 11,672 3,093
Other assets, accrued liabilities and
other long-term liabilities 7,125 2,024 (13,388)
- ---------------------------------------------------------------------------------- ------------------------
Net cash provided by continuing operations 19,341 25,360 450
Net cash provided by (used in) discontinued operations -- (21,384) 11,686
- ---------------------------------------------------------------------------------- ------------------------
Net cash provided by operating activities 19,341 3,976 12,136
INVESTING ACTIVITIES
Capital expenditures (10,421) (7,141) (16,907)
Proceeds from sale of discontinued operations 58,498 -- --
Proceeds from sale of business units and assets 8,228 3,551 4,833
Other (1,459) (766) (1,218)
- ---------------------------------------------------------------------------------- ------------------------
Net cash provided by (used in) continuing
operations investing activities 54,846 (4,356) (13,292)
Net cash provided by (used in) discontinued
operations investing activities (16,595) 1,336 (11,052)
- ---------------------------------------------------------------------------------- ------------------------
Net cash provided by (used in) investing activities 38,251 (3,020) (24,344)
- ---------------------------------------------------------------------------------- ------------------------
FINANCING ACTIVITIES
Payments on long-term debt (334) (325) (328)
Net borrowings (repayments) under bank
credit facilities (6,000) (4,500) 10,500
Repayments of subordinated notes (5,700) -- --
Borrowings of long-term debt -- -- 1,124
Purchases of treasury stock (34,104) -- --
Issuance of common stock 7,546 4,483 3,589
- ---------------------------------------------------------------------------------- ------------------------
Net cash provided by (used in) continuing
operations financing activities (38,592) (342) 14,885
Net cash used in discontinued operations
financing activities -- (200) (100)
- ---------------------------------------------------------------------------------- ------------------------
Net cash provided by (used in) financing
activities (38,592) (542) 14,785
- ---------------------------------------------------------------------------------- ------------------------
Net increase in cash and cash equivalents 19,000 414 2,577
Cash and cash equivalents at beginning of year 4,974 4,560 1,983
- ---------------------------------------------------------------------------------- ------------------------
Cash and cash equivalents at end of year $ 23,974 $ 4,974 $ 4,560
================================================================================== ========================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 3,868 $ 5,874 $ 4,247
Income taxes -- -- 2,353
Supplemental Disclosure of Non-Cash Discontinued
Operating Activities:
Purchased intangibles written off -- 17,939 --
Accrued loss on disposal of discontinued
operations 5,064 12,538 --
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Tax benefit of stock options exercised 769 118 687
</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 consolidated financial statements include the accounts of California
Microwave, Inc. and its subsidiaries (the Company). All significant intercompany
balances and transactions have been eliminated. Certain prior year amounts have
been reclassified to conform to the current year presentation.
USE OF ESTIMATES; RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Significant estimates are used in determining the collectibility of accounts
receivable, warranty costs, inventory realization, profitability on long-term
contracts, accounting for income taxes, restructuring reserves, recoverability
of property, plant and equipment, recoverability of purchased intangibles,
amounts to be realized on a sale of discontinued operations, and contingencies.
Actual results could differ from estimates.
FISCAL YEAR
During fiscal 1998, the Company changed its fiscal year end to June 30 from a
52-53 week fiscal year ending on the Saturday closest to June 30. For clarity,
all fiscal periods are reported on a calendar month end. This change did not
have a significant impact on the Company's consolidated financial statements.
REVENUE RECOGNITION, RECEIVABLES AND CREDIT RISK
Product revenue is generally recognized upon shipment. Revenue on certain
long-term contracts is recognized upon completion of project milestones, which
are generally contract line items.
The Company generally requires no collateral prior to shipment, but does
require letters of credit denominated in U.S. dollars from its international
customers. The Company also maintains a credit insurance program to insure
international receivables where a confirmed letter of credit may neither be cost
effective nor available. Additionally, from time to time the Company sells
certain insured international receivables, without recourse, at prevailing
discount rates.
In fiscal 1998, 1997 and 1996, the Company provided $719,000, $465,000, and
$177,000 for its allowance for doubtful accounts.
INVENTORIES AND COST OF PRODUCTS SOLD
Inventories are stated at the lower of cost (which approximates first-in,
first-out) or market. Project inventories on certain long-term contracts are
charged to cost of revenue at the time revenue is recognized, based on the
estimated total manufacturing costs and total contract prices under each
contract. A loss on a contract is provided when such a loss becomes probable and
determinable.
As of June 30, inventory was comprised of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(Dollars in thousands) 1998 1997
---------------------
<S> <C> <C>
Projects in process $12,474 $ 7,795
Less: Progress billings 622 1,938
---------------------
11,852 5,857
Work-in process and finished goods 8,766 21,915
Raw materials 16,944 22,581
---------------------
$37,562 $50,353
=====================
</TABLE>
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are carried at cost, which approximates market, and consist of
highly liquid investments with original maturities of 90 days or less.
Short-term investments consist of money market instruments, investments in
municipal bonds and mutual funds with carrying values which approximate their
market values. The Company has not experienced losses from these investments.
FOREIGN CURRENCY EXCHANGE CONTRACTS
The majority of the Company's revenue is denominated in U.S. dollars. The
Company is engaged in minimal foreign currency hedging activity. No foreign
currency exchange contracts were outstanding at June 30, 1998 or 1997, and the
net currency gains and losses have not been material.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated 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.
As of June 30, property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -----------------------------------------------------------------------------
Life
(in years) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 449 $ 449
Buildings 40 3,135 3,135
Machinery and equipment 3-10 36,239 27,074
Office and computer equipment 3-7 17,152 17,906
Leasehold improvements Lease term 3,490 4,345
Vehicles 5 409 551
---------------------
60,874 53,460
Less: accumulated depreciation and
amortization 35,486 30,648
---------------------
$25,388 $22,812
=====================
</TABLE>
Included in other assets at June 30, 1998, is approximately $456,000 of test
equipment to be completed and placed in service. Depreciation and amortization
expense on property, plant and equipment was $8.8 million, $7.9 million, and
$5.6 million for the fiscal years 1998, 1997 and 1996.
INTANGIBLE ASSETS OF BUSINESSES ACQUIRED
The excess of purchase price over the fair value of net tangible assets acquired
is amortized on a straight line basis over periods of five to 30 years. The
carrying value of this excess purchase price is reviewed if the facts and
circumstances suggest that the asset may be impaired. If this review indicates
that the excess purchase price is not recoverable, the Company's carrying value
is reduced appropriately. In the fourth quarter of fiscal 1997, upon reviewing
the carrying value of the purchased intangible assets of the two discontinued
operations, the remaining net book value totaling $17,939,000 was determined to
be impaired and was expensed. Accumulated amortization of intangible assets was
$9,146,000 and $7,769,000 at June 30, 1998 and 1997.
20
<PAGE> 6
CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE
During fiscal 1998, the Company adopted Statement of Financial Accounting
Standard No. 128 (SFAS 128), "Earnings Per Share." In accordance with SFAS 128,
basic earnings (loss) per share are calculated using the weighted average number
of common shares outstanding during the period. Diluted earnings (loss) per
common share are calculated using the weighted average number of common shares
outstanding during the period and the dilutive effect of stock options
calculated using the treasury stock method. Options to purchase 484,005 shares
of common stock and shares issuable upon the conversion of the Company's
convertible subordinated notes were excluded from the calculation of diluted
earnings (loss) per share as their effect is antidilutive. All prior period
earnings (loss) per share have been restated to conform with SFAS 128.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," was issued by the Financial Accounting Standards Board
(FASB) in June 1997. This Statement establishes standards for the reporting and
display of comprehensive income and its components. SFAS 130 will be effective
for the Company's fiscal year 1999 and requires restatement of all previously
reported information for comparative purposes. This statement will require
additional disclosure but will not have a material impact on the Company's
financial position, results of operations or cash flow.
In June 1998, FASB issued Statement of Financial Accounting Standards No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities,"
which will be effective for the Company's fiscal year 1999. Due to the Company's
minimal use of derivatives, management does not anticipate that the adoption of
the new Statement will have a material impact on the Company's financial
position, results of operations or cash flow.
2. SEGMENT REPORTING
During fiscal 1998, the Company reorganized its continuing operations into three
divisions, and elected early adoption of segment reporting for the reorganized
continuing divisions in accordance with the provisions of FASB Statement of
Financial Accounting Standard No. 131 (SFAS 131), "Disclosures about Segments of
an Enterprise and Related Information."
California Microwave's three continuing reportable segments are business units
that develop, manufacture, and distribute products and solutions for distinct
markets.
1. The Satellite Communications Division (Satellite) consists of EF Data
and provides products and services principally to telecommunications
carriers and Internet service providers. The products enable customers
to provide voice, video, and data services via satellite.
2. The Terrestrial Wireless Division (Terrestrial) represents the
combination of Microwave Radio Communications (MRC) and Microwave Data
Systems (MDS), which provide products and services primarily to the
television broadcast, oil, gas and utility industries. The products of
both of these operations are based upon microwave radio technology.
3. The Government Division (Government) includes the Government
Electronics Division (GED) and the Airborne Systems Integration Division
(ASID). These operations contract principally with the United States
Department of Defense and provide products and services principally in
the areas of communications, reconnaissance, and surveillance systems.
SEGMENT INFORMATION
<TABLE>
<CAPTION>
(Dollars in millions)
1998 SATELLITE TERRESTRIAL GOVERNMENT OTHER[1] TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bookings:
Domestic $ 40.4 $ 54.9 $ 91.4 $ 1.3 $ 188.0
International 54.0 30.7 -- 1.2 85.9
----------------------------------------------------------------------
94.4 85.6 91.4 2.5 273.9
Revenue:
Domestic 40.3 51.1 85.7 3.2 180.3
International 53.9 33.7 -- 1.3 88.9
----------------------------------------------------------------------
94.2 84.8 85.7 4.5 269.2
Operating income 6.0 10.4 6.5 (0.5) 22.4
Depreciation[2] 4.2 2.6 1.7 0.3 8.8
Operating assets[3] 52.3 32.4 29.6 -- 114.3
Expenditures for
long-lived assets[4] $ 5.0 $ 1.4 $ 2.7 $ 1.3 $ 10.4
</TABLE>
<TABLE>
<CAPTION>
1997 SATELLITE TERRESTRIAL GOVERNMENT OTHER[1] TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bookings:
Domestic $ 38.0 $ 48.4 $ 86.3 $ 1.6 $ 174.3
International 47.7 25.3 -- 0.8 73.8
----------------------------------------------------------------------
85.7 73.7 86.3 2.4 248.1
Revenue:
Domestic 35.5 50.2 95.2 0.4 181.3
International 47.4 23.9 -- 1.6 72.9
----------------------------------------------------------------------
82.9 74.1 95.2 2.0 254.2
Operating income 1.8 9.7 9.2 (3.1) 17.6
Depreciation[2] 3.5 2.5 1.3 0.6 7.9
Operating asset [3] 50.8 35.3 23.4 4.9 114.4
Expenditures for
long-lived assets[4] $ 3.3 $ 2.2 $ 1.3 $ 0.3 $ 7.1
</TABLE>
<TABLE>
<CAPTION>
1996 SATELLITE TERRESTRIAL GOVERNMENT OTHER[1] TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bookings:
Domestic $ 23.1 $ 52.1 $ 72.9 $ 6.4 $ 154.5
International 43.5 18.3 -- 1.2 63.0
----------------------------------------------------------------------
66.6 70.4 72.9 7.6 217.5
Revenue:
Domestic 25.4 50.0 84.1 7.8 167.3
International 52.4 16.7 -- 3.6 72.7
----------------------------------------------------------------------
77.8 66.7 84.1 11.4 240.0
Operating income 16.3 11.5 9.0 (2.0) 34.8
Depreciation[2] 2.8 1.5 1.1 0.2 5.6
Operating assets[3] 51.8 32.5 20.4 6.9 111.6
Expenditures for
long-lived assets[4] $ 8.7 $ 4.0 $ 1.5 $ 2.7 $ 16.9
</TABLE>
[1] Includes Services Division, for all years, and Digital Radio
Technologies (DRT) and Cal Nav for 1997 and 1996.
[2] Corporate depreciation of $0.3 in 1998 and 1997 and $0.2 in 1996 is
included in "Other".
[3] No significant operating assets are held outside of the United States.
[4] Corporate expenditures for long-lived assets of $0.1 in 1998, $0.3 in
1997 and $1.8 in 1996 are included in "Other".
21
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
RECONCILIATION TO INCOME FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
(Dollars in millions)
- ----------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income from
reportable segments $ 22.4 $ 17.6 $ 34.8
Corporate expenses (11.6) (9.2) (8.2)
Amortization of intangible assets (1.4) (1.4) (1.4)
Restructuring and other charges (4.6) -- --
Interest expense, net (3.6) (5.9) (4.3)
Gain on sale of business units 6.3 2.7 --
---------------------------------------------
Income from continuing operations
before income taxes $ 7.5 $ 3.8 $ 20.9
=============================================
</TABLE>
RECONCILIATION TO TOTAL ASSETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating assets from
reportable segments $ 114.3 $ 114.4 $ 111.6
Corporate assets 27.3 6.9 10.5
Income tax refunds and deferred
income taxes 32.2 35.9 12.4
Net intangible assets from
businesses acquired 27.9 29.5 30.9
Net assets of discontinued
operations -- 79.7 127.0
---------------------------------------------
Total assets $ 201.7 $ 266.4 $ 292.4
=============================================
</TABLE>
International revenue was $88.9 million, $72.9 million, and $72.7 million for
fiscal years 1998, 1997 and 1996. The following table sets forth the geographic
components of international revenue expressed as a percentage of the total.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Latin America 43% 42% 34%
Asia 28% 33% 37%
Europe, Africa, Middle East 23% 19% 19%
Canada 6% 6% 10%
- --------------------------------------------------------------------------------------
100% 100% 100%
=======================================
</TABLE>
3. DISCONTINUED OPERATIONS AND DIVESTITURES
In June 1997, the Company's board of directors adopted a formal plan to sell the
Microwave Networks (MN) and Satellite Transmission Systems (STS) divisions. The
Company recorded a loss from operations of the discontinued businesses of $51.0
million (after related tax benefit of $21.4 million) and provided $8.4 million
(after related tax benefit of $4.2 million) for anticipated operating losses
prior to disposal and for expected losses on their eventual sale.
STS was sold to L-3 Communications Corporation (L-3) on February 5, 1998, for
$27 million in cash, and MN was sold to Tadiran Ltd. (Tadiran) on April 21,
1998, for $31.5 million in cash. The Company recorded an additional provision of
$15.1 million (after related tax benefit of $8.5 million) for additional losses
on disposal of these divisions. The provision was primarily due to adjustments
to the combined losses on sale, and higher than anticipated operating losses
prior to disposal of both divisions. The operating results, loss on disposal,
and financial position of these divisions have been classified separately as
discontinued operations in the Company's financial statements for all periods
presented. Revenue from the discontinued operations was $83.2 million in 1998
for the period prior to disposal and $170.3 million and $220.7 million for
fiscal years 1997 and 1996.
During the fourth quarter of fiscal 1998, the Company completed the sale of its
Services Division to Telscape International, Inc. (Telscape) for $8.2 million in
cash, with a pre-tax gain of $6.3 million. Final accounting for these
divestitures is subject to completion of the post-closing procedures provided
for in the Tadiran, L-3 and Telscape agreements.
In May 1995, the Company's MN division entered into certain agreements with
Nokia Telecommunications Oy (Nokia) pursuant to which MN was to provide to Nokia
certain microwave radios and related software and services, and was to carry out
certain development programs. In September 1997, Nokia informed MN of a
purported failure of certain of the products sold to Nokia to meet certain
contractual specifications. MN was sold to Tadiran in April 1998 and under the
terms of the sale agreement, Tadiran assumed and indemnified the Company with
respect to the Nokia claims. While Tadiran has now taken the position that the
Company is responsible for the Nokia claims, Tadiran has not provided support
for its position. Also, the Company, in September 1998, received notices from
Nokia that Nokia has decided to terminate the May 1995 agreements and has begun
arbitration proceedings to recover damages which Nokia provisionally claims are
$9.6 million. The Company believes that it has good defenses and will vigorously
defend against the Nokia and Tadiran claims. No accruals have been recorded for
expenses which may be incurred to resolve the dispute, and the Company believes
final resolution of this matter will not have a material impact on the Company's
financial position, results of operations, or cash flow.
4. RESTRUCTURING AND OTHER CHARGES
During fiscal 1998, the Company reviewed and refocused its operations and
business processes in connection with its strategic and operational initiatives
and recorded pre-tax charges of $14.3 million. These charges consist of $9.7
million primarily for inventory write-downs and $4.6 million for restructuring
and other charges, primarily for severance and excess facilities. The inventory
charges include excess inventory on older, slow-moving product configurations at
both MRC and EF Data, and a charge related to a fixed-price government contract.
As part of the review, California Microwave also examined its income tax accrual
requirements and recorded a benefit for previously reserved tax deductions of
$2.5 million. (See Note 9.)
During fiscal 1997, the Company recorded inventory write-downs, contract
expenses due to a major retrofit program, and other charges of approximately
$39.3 million, primarily for MN and STS, and restructuring charges of $7.8
million, primarily for excess facilities and severances at MN.
22
<PAGE> 8
CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
The following table summarizes the 1998 and 1997 charges:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------
ASSET WRITE-
DOWNS AND
PAYMENTS FUTURE
1998 1997 THROUGH CASH
PROVISION PROVISION JUNE 30,1998 OUTLAYS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other charges:
Inventory
write-downs $ 9,063 $31,677 $40,740 --
Contract termination
and related costs -- 5,770 5,770 --
Other 626 1,850 2,476 --
----------------------------------------------------------
9,689 39,297 48,986 --
----------------------------------------------------------
Restructuring and other:
Excess facilities
and equipment
write-downs $ 800 $ 6,980 $ 3,184 $ 4,596
Severance costs 2,925 500 500 2,925
Other 860 300 1,160 --
----------------------------------------------------------
4,585 7,780 4,844 7,521
----------------------------------------------------------
Intangible assets
write-down -- 17,939 17,939 --
----------------------------------------------------------
$14,274 $65,016 $71,769 $ 7,521
==========================================================
Applicable to:
Continuing operations $14,274 $ 7,130
Discontinued operations -- 57,886
==========================================================
$14,274 $65,016
==========================================================
</TABLE>
5. ACCRUED AND OTHER LIABILITIES
As of June 30, accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Salaries, bonuses, and commissions $10,308 $ 7,541
Restructuring reserves 5,521 3,522
Accrued loss on disposal of
discontinued operations 5,064 12,538
Other payroll related 3,824 4,170
Vacation 3,472 3,345
Advance payments 2,754 2,030
Warranties 2,098 1,841
Accrued income taxes -- 3,211
Other 2,976 6,846
------------------------
$36,017 $45,044
========================
</TABLE>
In addition, accrued restructuring expenses applicable to non-utilized
facilities of $2.0 million and $4.0 million at June 30, 1998 and 1997 are
included in other long-term liabilities.
6. BORROWING ARRANGEMENTS
As of June 30, long-term debt consisted of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Bank credit facilities $ -- $ 6,000
Industrial development bonds and other 3,100 3,434
------------------------
3,100 9,434
Less: Current portion 352 333
------------------------
$ 2,748 $ 9,101
========================
Convertible subordinated notes:
5.25% notes due 2003 $57,500 $57,500
5% notes due 1999 -- 5,700
------------------------
$57,500 $63,200
========================
</TABLE>
Debt maturing in each of the next five years and thereafter is as follows: 1999
- - $352,000; 2000 - $315,000; 2001 - $259,000; 2002 - $271,000; 2003 - $288,000;
2004 and thereafter - $59,115,000.
The Company has available a committed asset-based bank credit facility totaling
$30 million. The facility is secured by the Company's accounts receivable,
inventory, intangible assets and capital equipment not previously encumbered.
The facility expires in June 2000. Availability is calculated daily based on a
formula of eligible accounts receivable. The facility requires a 0.25% annual
commitment fee on the unused portion of the facility and the interest rates for
borrowings will not exceed the bank's reference rate plus one percent, 9.5% at
June 30, 1998. At June 30, 1998, there were no borrowings, and $0.9 million of
standby letters of credit and bank guarantees outstanding under this facility.
The calculated borrowing limit at June 30, 1998 was approximately $17.0 million,
leaving $16.1 million of available credit.
The industrial development bonds are payable in annual installments through June
2013, may be prepaid at any time without penalty, and bear interest at a
floating rate (3.5% at June 30, 1998), based upon prevailing market conditions,
which is redetermined every seven days. The other long-term debt represents
notes which are payable through 2005. The industrial development bonds and the
other long-term debt are secured by mortgages on the equipment and properties
involved. The carrying value of the industrial development bonds and other
long-term debt approximates their fair value based on discounted contractual
cash flows using rates currently offered for debt with similar terms and
maturities.
At June 30, 1998, the Company was not in compliance with certain covenants of
its bank and other debt agreements. These lenders have waived such
non-compliance at June 30, 1998 and the covenants are in the process of being
amended to bring the Company into compliance.
On December 15, 1993, the Company issued $57.5 million of 5.25%, convertible
subordinated notes due December 15, 2003. These notes are convertible at any
time prior to maturity, at the option of the holder, into shares of the
Company's common stock at a price of $28.4375 per share. These notes are
redeemable at any time on or after January 1, 1997, at the option of the
Company. Interest is payable semi-annually. 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 30,1998, the fair value of the
outstanding notes was $48.8 million which approximates the average fair value
during fiscal 1998, based on the quoted market prices (which reflect the market
value of the underlying securities into which the notes are convertible, as well
as current prevailing interest rates).
23
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
During fiscal 1998, the Company repaid a $5.7 million, five-year, 5% convertible
subordinated note. The note was issued for cash to Motorola, Inc. concurrent
with the close of a 1993 acquisition.
7. COMMON STOCK
STOCK REPURCHASE PROGRAM
On February 5, 1998, the Company announced that its board of directors had
authorized the repurchase of up to 3.0 million shares of its common stock, on
the open market. As of June 30, 1998, the Company has repurchased approximately
1.6 million shares since the commencement of the repurchase program. Repurchased
shares are available for use under the Company's stock options and stock plans
and for other corporate purposes.
SHAREHOLDER RIGHTS
In October 1989, the board of directors of the Company approved a rights
agreement under which the Company's shareholders received the right to buy, for
$35, one share of common stock for each share of common stock held. The rights
expire in October 1999. The rights will become exercisable only 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.
OPTIONS AND OTHER STOCK PLANS
Stock options have been granted to officers, directors, key employees and
consultants under the Company's stock option plans with exercise prices equal to
the fair market value of the Company's common stock on the date of grant. Most
options currently outstanding become exercisable in annual installments of 25%
beginning one year after the date of grant. Certain options granted in fiscal
1998 vest upon attainment of increases in the stock price or after five years.
Options granted to the Company's directors become 100% exercisable upon grant.
Options granted under the 1986 and 1992 stock option plans expire after ten
years.
In April 1996, the board of directors offered non-officer employees holding
stock options with exercise prices over $21 per share (the current option) the
opportunity of canceling those stock options in exchange for new options (the
replacement options) issued with exercise prices of $21 per share, which
exercise price was approximately 120% of the then current fair market value of
the Company's common stock. The number of shares covered by the replacement
option was equal to the number of outstanding shares covered by the current
option reduced in the same proportion as the reduction in the exercise price.
Included in the table below are options for 425,672 shares that were granted and
options for 513,707 shares that were canceled under this program during fiscal
1996. In May 1997, the board of directors approved an increase of 1,500,000
shares to the 1992 Stock Option Plan which was approved by the shareholders in
July, 1997.
A summary of activity for 1998, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
OUTSTANDING SHARES UNDER OPTION
YEARS ENDED JUNE 30
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year 1,692,418 1,902,123 1,716,824
Granted 1,487,800 614,500 1,170,986
Exercised (399,454) (181,234) (128,214)
Canceled (420,189) (642,971) (857,473)
----------------------------------------------------
End of year 2,360,575 1,692,418 1,902,123
====================================================
Weighted average fair value on
date of grant $ 7.95 $ 4.56 $ 6.34
====================================================
Exercisable 749,536 753,428 769,496
Available for grant 835,977 169,583 237,573
====================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
WEIGHTED AVERAGE
PRICE PER SHARE
1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Beginning of year $17.65 $18.40
Granted $17.65 $14.92
Exercised $14.49 $10.84
Cancelled $19.52 $19.26
End of year $17.88 $17.65
</TABLE>
The following table summarizes information about the Company's stock options
outstanding at June 30, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISABLE PRICE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.64 -$ 0.64 2,301 2.37 $ 0.64 2,301 $ 0.64
6.25 - 8.88 27,376 1.34 $ 7.92 27,376 $ 7.92
10.00 - 14.88 301,480 7.31 $13.41 169,931 $ 12.79
15.25 - 21.00 1,811,668 8.31 $17.79 440,048 $ 18.88
22.50 - 34.25 217,750 7.94 $26.22 109,880 $ 28.64
$0.64 -$34.25 2,360,575 8.06 $17.88 749,536 $ 18.48
</TABLE>
The Company has an employee stock purchase plan under which employees may
purchase shares, subject to certain limitations, at 85% of the lower of the fair
market value of the shares at the beginning or end of a six-month purchase
period. During 1998, 156,401 shares were issued for $1,923,581, during 1997,
200,551 shares were issued for $2,503,000 and 154,862 shares were issued for
$2,555,000 during 1996. Shares available for future issuances at June 30, 1998
were 175,643.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standard No. 123 (SFAS 123) "Accounting for Stock Based
Compensation". Accordingly, no compensation expense has been recognized for the
stock option plans. Had compensation expense for the Company's stock option and
purchase plans been determined based on the fair value at the grant date for all
options granted after June 30, 1995 under SFAS No. 123, the Company's net loss
and net loss
24
<PAGE> 10
CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
per share would have been increased and net income and net income per share
decreased to the pro forma amounts below:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $ (7,760) $ (56,766) $ 11,623
Net income (loss) - pro forma $(10,837) $ (59,712) $ 6,886
Diluted net income (loss)
per share - as reported $ (0.47) $ (3.48) $ 0.72
Diluted net income (loss)
per share - pro forma $ (0.65) $ (3.66) $ 0.43
</TABLE>
The assumptions used to estimate the fair value of these options and the 15%
discount on the employee stock purchase plan using the Black-Scholes option
pricing model were:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.75% 5.8% 5.8%
Expected volatility 0.51 0.51 0.51
Expected life for options in years 4.15 4.2 4.2
Expected life for stock
purchase plan in years 0.5 0.5 0.5
</TABLE>
Through fiscal 1998, stock grants were made to officers and other key employees
under the 1988 restricted stock plan at no charge to the employees. The Plan
expired in fiscal 1998. These grants generally vested 20% per year, beginning
one year after the date of issue. The fair market value of the shares, at the
date of grant, was charged to compensation expense over the five-year period.
Compensation expense relating to this plan was: 1998 - $79,000, 1997 - $178,000;
1996 - $250,000.
A summary of activity in the restricted stock plans was as follows:
<TABLE>
<CAPTION>
OUTSTANDING RESTRICTED SHARES
- -----------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year 28,580 52,320 44,330
Granted -- 800 34,250
Canceled (20,020) (7,160) (5,150)
Vested (8,560) (17,380) (21,110)
-------------------------------------------
End of year -- 28,580 52,320
===========================================
Available for grant -- 9,310 2,950
===========================================
Weighted average fair value on
date of grant -- $12.50 $ 17.45
===========================================
</TABLE>
8. 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 pre-tax compensation up to the lesser of 20% of total
annual compensation or the statutory calendar year limit (currently $10,000).
The Company contributes up to $1,400 to each employee based on employee
contributions up to $2,300. 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 employment. No profit sharing amounts were authorized for fiscal
1998. 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
for employees of the continuing operations were $1,250,000 in 1998, $939,000 in
1997, and $768,000 in 1996.
9. INCOME TAXES
The continuing operations provision for (benefit from) income taxes consisted of
the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 1,836 $ 7,925 $2,615
State 570 961 298
------------------------------------------------
2,406 8,886 2,913
------------------------------------------------
Deferred:
Federal (1,879) (6,734) 4,074
State (344) (884) 527
------------------------------------------------
(2,223) (7,618) 4,601
------------------------------------------------
$ 183 $ 1,268 $7,514
================================================
</TABLE>
The differences between the U.S. federal statutory income tax rate and the
Company's effective rate for continuing operations were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 3.0 2.0 2.6
Intangible assets 7.0 8.6 2.3
Foreign Sales Corporation tax benefits -- (7.0) (4.2)
Research and development tax credits (8.0) (6.1) --
Benefit of previously reserved deductions (33.4) -- --
Other (1.1) 0.5 0.3
-----------------------------------------
2.5% 33.0% 36.0%
=========================================
</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>
- -------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Inventory $ 1,844 $ 1,756
Warranty 778 753
Contracts in progress 1,259 1,353
Allowance for doubtful accounts 435 248
Compensation related 2,541 2,427
Restructuring reserves 2,859 --
Net operating loss carry forwards 20,409 5,631
Tax credits 1,051 1,535
Other 641 541
Discontinued operations 1,924 13,675
------------------------
33,741 27,919
Deferred tax liabilities: ------------------------
Depreciation 1,421 1,934
Other 158 215
------------------------
1,579 2,149
------------------------
Net deferred tax assets $32,162 $25,770
========================
</TABLE>
25
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
Although realization of the deferred tax assets is not assured, the Company
believes that it is more likely than not that all of the deferred tax assets
will be realized based on the Company's operating history in its continuing
operations and projected future results.
At June 30, 1998, the Company had federal net operating loss carry forwards of
approximately $53.7 million to offset future taxable income. These net operating
loss carry forwards begin to expire in the year 2012 through 2013. The Company
has various tax credit carry forwards of approximately $1.1 million. The
majority of the tax credits consist of alternative minimum tax credits which can
be carried forward indefinitely.
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Substantially all of the buildings occupied by the Company are occupied under
operating leases which expire in one to eight years. Certain of these leases
contain escalation clauses. Total rent expense for the three years ended June
30, 1998, 1997 and 1996 was $3,148,000, $3,405,000, and $2,919,000. Lease
commitments which are payable by the Company, exclusive of property taxes, will
be due as follows: 1999 - $3,161,000; 2000 - $2,772,000; 2001 - $2,013,000; 2002
- - $1,577,000; 2003 - $1,222,000 and thereafter - $2,045,000.
The Company has reserved lease commitments associated with non-utilized
facilities from discontinued operations of $4.0 million, payable as follows:
1999 - $2,046,000; 2000 - $1,279,000; and 2001 - $721,000.
CONTINGENT LIABILITIES
The Company is subject to legal proceedings and claims that arise in the normal
course of its business. The Company believes these proceedings will not have a
material adverse effect on the financial position or results of operations of
the Company.
11. LITIGATION SETTLEMENT
The Company announced in November 1995 that a shareholders' class action lawsuit
had been filed in the United States District Court for the northern District of
California against it and certain of its former officers on behalf of persons
who purchased shares of the Company's common stock between September 6, 1994 and
June 29, 1995. The complaint filed in the lawsuit alleged certain violations of
the federal securities laws by the Company and certain of its former officers
and sought damages in an unspecified amount. Although California Microwave did
not believe that it or its former officers committed any securities law
violations and considered the allegations made in the class action suit to be
without merit, in order to avoid the expense and distraction of protracted
litigation, the Company reached an agreement to settle the lawsuit in its fiscal
1998 second quarter. During its fiscal 1998 second quarter, the Company recorded
an expense for the settlement (including defense costs), in the amount of $1.9
million, before income taxes, or approximately $.07 per share. The court
approved the settlement on March 23, 1998.
12. RECEIVABLES FROM OFFICERS
In July 1997, the Company's Chief Executive Officer, Frederick D. Lawrence,
received two loans totaling $466,667. The interest rates on both loans are equal
to the Company's incremental borrowing rate on the loan origination date (9.0%).
For both loans, one-half of accrued interest is to be forgiven on each of the
first two anniversary dates of Mr. Lawrence's employment with the Company. In
addition, one-half of the principal amount of the $316,667 loan is to be
forgiven on each of the first two anniversary dates of employment. The principal
amount of the $150,000 loan is due in a balloon payment on the second
anniversary of Mr. Lawrence's employment.
In January 1998, the Company's Executive Vice President and Chief Financial
Officer, Donna S. Birks, received an interest-free loan of $500,000 subject to
various employment criteria. The principal amount is due in a balloon payment on
the fifth anniversary of Ms. Birks' employment. The imputed annual interest rate
is 6.0%.
13. SUBSEQUENT EVENT (UNAUDITED)
On August 19, 1998, the Company acquired Adaptive Broadband, Limited (ABL), a
United Kingdom-based wireless broadband high-speed data, Internet access
technology company. The acquisition will be accounted for under the purchase
method. The initial purchase price was $11.0 million in cash with additional
future payments of up to $7.0 million contingent on ABL's performance exceeding
certain targets. Management anticipates that a substantial portion of the
initial purchase price will be charged to purchased in-process research and
development in the first quarter of fiscal 1999.
26
<PAGE> 12
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
California Microwave, Inc.
We have audited the accompanying consolidated balance sheets of California
Microwave, Inc. at June 30, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended June 30, 1998. 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
August 10, 1998
27
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of California Microwave, Inc. (the
Company) which are included in this 1998 Annual Report. During fiscal 1998, the
Company sold its Microwave Networks (MN) and Satellite Transmission Systems
(STS) divisions. The operating results, loss on disposal, and financial position
of these divisions have been classified separately as discontinued operations
for all periods presented in the accompanying Consolidated Financial Statements.
CONSOLIDATED RESULTS OF OPERATIONS
OVERVIEW
California Microwave, Inc. reported income from continuing operations of $7.3
million or $0.44 per share on a diluted basis for fiscal year 1998, compared to
$2.6 million or $0.16 per share for fiscal year 1997 and $13.4 million or $0.82
per share for fiscal year 1996. Operating results for fiscal year 1998 include
restructuring and other items, offset by the gain on the sale of the Company's
Services Division further described below. The impact of restructuring and other
items and the full-year results of the Company's Services Division, offset by
the gain on the sale of the Company's Services Division was to decrease fiscal
year 1998 income from continuing operations by $4.1 million or $0.25 per share
on a diluted basis. Excluding these items, the Company's income from continuing
operations for fiscal year 1998 was $11.4 million or $0.69 per share on a
diluted basis.
New orders booked from continuing operations were $273.9 million, $248.1
million, and $217.5 million for fiscal years 1998, 1997, and 1996, representing
year-to-year increases of 10% for 1998 and 14% for 1997. The 1998 increase was
from both domestic and international bookings. Revenue from continuing
operations was $269.2 million, $254.2 million, and $240.0 million for fiscal
years 1998, 1997, and 1996, representing year-to-year increases of 6% for both
1998 and 1997. The 1998 increase resulted from international growth.
International revenue was $88.9 million, $72.9 million, and $72.7 million for
fiscal years 1998, 1997 and 1996. The following table sets forth the geographic
components of international revenue expressed as a percentage of the total.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Latin America 43% 42% 34%
Asia 28% 33% 37%
Europe, Africa, Middle East 23% 19% 19%
Canada 6% 6% 10%
---------------------------
100% 100% 100%
===========================
</TABLE>
DISCONTINUED OPERATIONS
In June 1997, the Company's board of directors adopted a formal plan to sell the
MN and STS divisions, and the Company recorded a loss from operations of the
discontinued businesses of $51.0 million (net of income taxes). In addition, the
Company provided for anticipated operating losses prior to disposal and for
expected losses on their eventual sale of $8.4 million (net of income taxes).
During fiscal year 1998, STS was sold to L-3 Communications Corporation (L-3)
for $27.0 million in cash, and MN was sold to Tadiran, Ltd. (Tadiran) for $31.5
million in cash. The Company recorded an additional provision of $15.1 million
(net of income taxes) for additional losses on disposal of these divisions. The
provision was primarily due to adjustments to the combined losses on sale and to
higher than anticipated operating losses prior to disposal of both divisions.
Revenue from the discontinued operations was $83.2 million in 1998 for the
period prior to disposal and $170.3 million and $220.7 million for fiscal years
1997 and 1996. Final accounting for these divestitures is subject to completion
of certain post-closing procedures provided for in the Tadiran and L-3
agreements.
In May 1995, the Company's MN division entered into certain agreements with
Nokia Telecommunications Oy (Nokia), pursuant to which MN was to provide to
Nokia certain microwave radios and related software and services, and was to
carry out certain development programs. In September 1997, Nokia informed MN of
a purported failure of certain of the products sold to Nokia to meet certain
contractual specifications. MN was sold to Tadiran in April 1998, and under the
terms of the sale agreement, Tadiran assumed and indemnified the Company with
respect to the Nokia claims. While Tadiran has now taken the position that the
Company is responsible for the Nokia claims, Tadiran has not provided support
for its position. Also, the Company, in September 1998 received notices from
Nokia that Nokia has decided to terminate the May 1995 agreements and has begun
arbitration proceedings to recover damages which Nokia provisionally claims are
$9.6 million. The Company believes that it has good defenses and will vigorously
defend against the Nokia and Tadiran claims. No accruals have been recorded for
expenses which may be incurred to resolve the dispute, and the Company believes
final resolution of this matter will not have a material impact on the Company's
financial position, results of operations, or cash flows.
See Note 3, Discontinued Operations and Divestitures, of Notes to Consolidated
Financial Statements, for further discussion of these transactions.
RESTRUCTURING AND OTHER CHARGES
During its fiscal year 1998 fourth quarter, California Microwave reviewed and
refocused its operations and business processes in connection with its strategic
and operational initiatives, and recorded pre-tax charges of $14.3 million.
These charges consist of $9.7 million primarily for inventory write-downs and
$4.6 million for restructuring and other charges, primarily severance and excess
facilities. The inventory charges include excess inventory on older, slow-moving
product configurations at both Microwave Radio Communications (MRC) and EF Data,
and a charge related to a fixed-price government contract. As part of the
review, California Microwave also examined its income tax accrual requirements
and recorded a benefit for previously reserved tax deductions of $2.5 million.
Additionally, during its fiscal year 1998 second quarter, the Company recorded a
$1.9 million pre-tax charge (including defense costs) for a court approved class
action litigation settlement.
During fiscal 1997, the Company recorded inventory write-downs, contract
expenses due to a major retrofit program, and other charges of approximately
$39.3 million, primarily for MN and STS. Additionally, the Company recorded
restructuring charges of $7.8 million, primarily for excess facilities and
severance at MN. The charges attributable to continuing operations were $7.1
million, primarily for inventory write-downs, and are discussed in the Business
Segment Information section.
See Note 4, Restructuring and Other Charges, and Note 11, Litigation Settlement,
of Notes to Consolidated Financial Statements, for further details.
28
<PAGE> 14
CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
BUSINESS SEGMENT INFORMATION
During fiscal year 1998, the Company reorganized its continuing operations into
three divisions: the Satellite Communications Division (Satellite), the
Terrestrial Wireless Division (Terrestrial), and the Government Division
(Government). The following table sets forth certain information for these
business segments for the periods indicated. The Company's Services Division,
which was sold in the fourth quarter of fiscal 1998, is included in the "Other"
classification.
<TABLE>
<CAPTION>
(Dollars in millions)
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BOOKINGS
Satellite
Domestic $ 40.4 43% $ 38.0 44% $ 23.1 35%
International 54.0 57% 47.7 56% 43.5 65%
---------------------------------------------------------
Total 94.4 100% 85.7 100% 66.6 100%
---------------------------------------------------------
Terrestrial
Domestic 54.9 64% 48.4 66% 52.1 74%
International 30.7 36% 25.3 34% 18.3 26%
---------------------------------------------------------
Total 85.6 100% 73.7 100% 70.4 100%
---------------------------------------------------------
Government
(Domestic) 91.4 86.3 72.9
Other 2.5 2.4 7.6
Total Domestic 188.0 69% 174.3 70% 154.5 71%
Total International 85.9 31% 73.8 30% 63.0 29%
---------------------------------------------------------
Total Bookings $273.9 100% $248.1 100% $217.5 100%
---------------------------------------------------------
REVENUE
Satellite
Domestic $ 40.3 43% $ 35.5 43% $ 25.4 33%
International 53.9 57% 47.4 57% 52.4 67%
---------------------------------------------------------
Total 94.2 100% 82.9 100% 77.8 100%
---------------------------------------------------------
Terrestrial
Domestic 51.1 60% 50.2 68% 50.0 75%
International 33.7 40% 23.9 32% 16.7 25%
---------------------------------------------------------
Total 84.8 100% 74.1 100% 66.7 100%
---------------------------------------------------------
Government
(Domestic) 85.7 95.2 84.1
Other 4.5 2.0 11.4
Total Domestic 180.3 67% 181.3 71% 167.3 70%
Total International 88.9 33% 72.9 29% 72.7 30%
---------------------------------------------------------
Total Revenue $269.2 100% $254.2 100% $240.0 100%
---------------------------------------------------------
GROSS MARGIN
Satellite $ 31.3 33% $ 25.0 30% $ 35.5 46%
Terrestrial 31.3 37% 29.0 39% 28.7 43%
Government 16.8 20% 18.4 19% 16.1 19%
Other 1.9 42% 0.4 20% 1.6 14%
---------------------------------------------------------
Total $ 81.3 30% $ 72.8 29% $ 81.9 34%
---------------------------------------------------------
OPERATING INCOME
Satellite $ 6.0 6% $ 1.8 2% $ 16.3 21%
Terrestrial 10.4 12% 9.7 13% 11.5 17%
Government 6.5 8% 9.2 10% 9.0 11%
Other (0.5) (11)% (3.1) (155)% (2.0) (18)%
Corporate (13.0) -- (10.6) -- (9.6) --
Restructuring (4.6) -- -- -- -- --
---------------------------------------------------------
Total $ 4.8 2% $ 7.0 3% $ 25.2 11%
=========================================================
</TABLE>
SATELLITE COMMUNICATIONS
The Satellite Communications Division consists of EF Data which provides
products and services primarily to telecommunications carriers and Internet
service providers. The products enable customers to provide voice, video, and
data services via satellite.
Satellite revenue was $94.2 million, $82.9 million and $77.8 million for fiscal
years 1998, 1997 and 1996. The increase in 1998 over 1997 was $11.3 million or
14% and the increase in 1997 was $5.1 million or 7%. The 1998 and 1997 increases
were due to overall market conditions, the continued acceptance of satellite
wireless data communications technology as a viable alternative to wireline
technologies, and to a reduction in satellite wireless technology price points.
Growth in the Satellite division slowed in the second half of fiscal 1998, due
to financial conditions in Asia and to a delay in the deregulation of
telecommunications in Brazil. While the Company does not expect conditions to
improve in Asia in the near future, the Company anticipates that business
volumes in Brazil will increase in the second half of fiscal 1999. Satellite
book to bill ratios were 100%, 103% and 86% for 1998, 1997, and 1996.
Satellite gross margins were $31.3 million, $25.0 million and $35.5 million, or
as a percentage of revenue, 33%, 30% and 46% for fiscal years 1998, 1997 and
1996. The 1998 gross margin includes charges primarily for inventory write-downs
of $2.5 million. The 1997 gross margin includes inventory write-downs of $3.7
million. Excluding the 1998 charges and the 1997 inventory write-downs, 1998
gross margin increased to $33.8 million or 36% of revenue from $28.7 million or
35% of revenue for 1997. The 1998 increase was due to the introduction of new,
lower cost satellite products. The decrease in 1997 from 1996 of $6.8 million or
19% was from a reduction in average selling prices for satellite modems and
transceivers.
Satellite operating income was $6.0 million, $1.8 million and $16.3 million for
fiscal years 1998, 1997 and 1996. Excluding the 1998 inventory charges and the
1997 inventory write-downs, 1998 operating income increased 55% to $8.5 million
from $5.5 million for 1997.
TERRESTRIAL WIRELESS
The Terrestrial Wireless Division represents the combination of Microwave Radio
Communications and Microwave Data Systems (MDS), which provide products and
services primarily to the television broadcast, oil, gas and utility industries.
The products of both of these operations are based on microwave radio
technology.
Terrestrial revenue was $84.8 million, $74.1 million and $66.7 million for
fiscal years 1998, 1997 and 1996. The increase in 1998 over 1997 was $10.7
million or 14% and the increase in 1997 over 1996 was $7.4 million or 11%, which
reflect international revenue growth of $9.8 million or 41% for 1998 and $7.2
million or 43% for 1997. The growth in international revenue for 1998 and 1997
was due to a focused international sales and marketing strategy and continued
acceptance of the Company's data telemetry radio products. Revenue from the
Company's video broadcast products has been relatively flat; however, the
Company anticipates growth in the second half of fiscal 1999, due to the timing
of the FCC-mandated digital broadcast conversion. Terrestrial book to bill ratio
was 101%, 99%, and 106% for 1998, 1997, and 1996.
Terrestrial gross margin was $31.3 million, $29.0 million and $28.7 million, or
as a percentage of revenue, 37%, 39%, and 43% for fiscal years 1998, 1997 and
1996. The 1998 gross margin includes charges for inventory write-downs of $4.8
million at MRC. The 1997 gross margin includes MRC inventory write-downs of $1.0
million. Excluding the 1998 charges and the 1997 inventory write-downs, 1998
gross margin increased to $36.1 million or 43% of revenue from $30.0 million or
40% of revenue for 1997. As a percentage of revenue, gross margin has
29
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
remained relatively constant for the past three years, with the increase in
gross margin dollars resulting from volume increases.
Terrestrial operating income was $10.4 million, $9.7 million and $11.5 million
for fiscal years 1998, 1997 and 1996. Excluding the 1998 charges and the 1997
inventory write-downs, 1998 operating income increased 42% to $15.2 million from
$10.7 million for 1997.
GOVERNMENT
The Government Division includes the Government Electronics Division (GED) and
the Airborne Systems Integration Division (ASID). These operations contract
principally with the United States Department of Defense and provide products
and services principally in the areas of communications, reconnaissance, and
surveillance systems.
Government bookings were $91.4 million, $86.3 million and $72.9 million for
fiscal years 1998, 1997 and 1996. The increase in 1998 over 1997 was $5.1
million or 6% and the increase in 1997 over 1996 was $13.4 million or 18%, due
to increased strategic intelligence program wins and additional funding for the
U.S. Army Airborne Reconnaissance Low (ARL) program. Revenue was $85.7 million,
$95.2 million, and $84.1 million for fiscal years 1998, 1997, and 1996. The
fluctuation in revenue was due to government contract cycles, and the timing of
key contract milestones.
Government gross margin was $16.8 million, $18.4 million and $16.1 million, or
as a percentage of revenue, 20% for fiscal year 1998 and 19% for 1997 and 1996.
Included in 1998 gross margin is a $2.4 million charge for a fixed-price
contract. The gross margin percentage increase in 1998 was due to higher margin
contracts.
Government operating income was $6.5 million, $9.2 million and $9.0 million for
fiscal years 1998, 1997, and 1996.
OPERATING EXPENSES
Research and development expenses for continuing operations were $20.0 million,
$18.2 million, and $16.6 million for fiscal years 1998, 1997 and 1996,
representing year-to-year increases of 10% for both 1998 and 1997. Research and
development expenses as a percentage of revenue were 7.4%, 7.2%, and 6.9% in
1998, 1997 and 1996. The Company believes that the continual and rapid
introduction of new products and technologies is critical to sustaining growth
within its current and future target markets. As a result, the Company
anticipates that research and development expense will be approximately 8% of
revenue as it focuses its efforts on developing wireless broadband data network
products to address the digital voice, video, and data markets. In addition, the
Company plans to continue to add to its technologies by completing strategic
acquisitions.
Sales, marketing and administration expenses for continuing operations were
$50.4 million, $46.1 million, and $38.7 million, or as a percentage of revenue
19%, 18% and 16% for fiscal years 1998, 1997 and 1996. Sales, marketing and
administrative expenses include a $1.9 million charge (including defense costs)
for a court approved class action litigation settlement for 1998, and a $1.3
million severance charge for the Company's former chief executive officer for
1997. Excluding these charges, sales, marketing and administrative expenses were
$48.5 million or 18% of revenue for 1998 and $44.8 million or 18% of revenue for
1997. Management expects sales, marketing and administrative expenses to be
approximately 18% of revenue as it focuses its sales and marketing investment in
certain high-growth international markets.
Amortization expense associated with intangible assets in the continuing
businesses was $1.4 million for fiscal years 1998, 1997 and 1996.
INTEREST EXPENSES
Net interest expense was $3.6 million, $5.9 million, and $4.3 million for fiscal
years 1998, 1997 and 1996. The significant decrease in net interest expense for
1998 was due to $66.7 million of cash generated from the sales of MN, STS and
the Services Division, which allowed for the reduction of debt and increased
interest income from investing the excess cash. Interest expense was higher for
1997 due to the cash demands from the discontinued operations. Interest expense
has not been allocated to the discontinued operations.
GAIN ON SALE OF BUSINESS UNITS
The Company recognized a $6.3 million gain from the sale of its Services
Division during fiscal 1998 and a $2.7 million gain from the sale of its Digital
Radio Technology subsidiary during fiscal 1997.
PROVISION FOR INCOME TAXES
The provision for income taxes was $0.2 million, $1.3 million, and $7.5 million
in 1998, 1997, and 1996. Excluding the impact of the benefit for previously
reserved income tax deductions of $2.5 million, the effective income tax rate
for 1998 was 36%, as compared to 33% for 1997 and 36% for 1996. The lower
effective income tax rate recorded in 1997 was due principally to larger
research and development tax credits.
At June 30, 1998, the Company had a cumulative net deferred income tax asset of
$32.2 million that will be available to reduce payments on future federal and
state income tax liabilities. Management believes it is more likely than not
that the asset will be realized, based on the Company's operating history in its
continuing operations and projected future results.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of $73.4 million, including
cash and cash equivalents of $24.0 million, compared to working capital of
$111.5 million, including cash and cash equivalents of $5.0 million, at June 30,
1997.
Net cash provided by continuing operating activities was $19.3 million, $25.4
million, and $0.5 million in 1998, 1997 and 1996. In 1998, cash was principally
provided by operating income, a decrease in inventories and an income tax refund
offset by an increase in accounts receivable and a decrease in accounts payable.
The decrease in cash flow from continuing operating activities in 1998 from 1997
was primarily from an increase in accounts receivable and a decrease in accounts
payable. Cash flow from continuing operating activities was lower in 1996 as
increases in both accounts receivable and inventory, and a reduction in accrued
liabilities, offset operating income.
The Company's 1998 cash flow from investing activities, from continuing
operations, was $54.8 million, primarily from the sale of its MN, STS and
Services Division for approximately $66.7 million, offset by $11.9 million
primarily for capital expenditures. Total cash used in investing activities in
continuing operations for 1997 and 1996 was $4.4 million and $13.3 million.
The Company sells certain insured international accounts receivable, without
recourse, to a bank. At June 30, 1998, the outstanding balance of sold and
uncollected receivables was approximately $11.0 million.
30
<PAGE> 16
CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
On February 5, 1998, the Company announced that its board of directors had
authorized the repurchase of up to 3.0 million shares of its common stock on the
open market. During 1998, the Company repurchased approximately 1.6 million
shares for $34.1 million.
In addition to the common stock repurchased, the Company's 1998 financing
activities included the repayment of $12.0 million of debt offset by the receipt
of $7.6 million from the sale of the Company's common stock under on-going stock
option and stock purchase plans.
The Company has available a committed asset-based bank credit facility totaling
$30 million. The facility is secured by the Company's accounts receivable,
inventory, intangible assets and capital equipment not previously encumbered.
The facility expires in June 2000. Availability is calculated daily based on a
formula of eligible accounts receivable. The facility requires a 0.25% annual
commitment fee on the unused portion of the facility and the interest rates for
borrowings will not exceed the bank's reference rate plus one percent, 9.5% at
June 30, 1998. At June 30, 1998, there were no borrowings, and $0.9 million of
standby letters of credit and bank guarantees were outstanding under this
facility. The calculated availability at June 30, 1998 was approximately $17.0
million, leaving $16.1 million of available credit. At June 30, 1998, the
Company was not in compliance with certain covenants of its bank and other debt
agreements. These lenders have waived such non-compliance at June 30, 1998 and
the covenants are in the process of being amended to bring the Company into
compliance.
The Company believes that its current cash position, funds generated from
operations, and funds available from its credit facility will be adequate to
meet the Company's requirements for working capital, capital expenditures, and
debt service for the foreseeable future.
YEAR 2000 SYSTEMS COSTS
The Company utilizes software and related technologies throughout its businesses
that will be affected by the date change in the Year 2000. The Company has
substantially completed an initial evaluation of the costs that will be incurred
to insure that the Company's systems continue to meet its internal needs. Based
upon its initial evaluation, the Company does not expect this issue to have a
material impact on the Company's operations, consolidated financial position,
results of operations and cash flows. However, the Company cannot evaluate the
impact that the Year 2000 issue will have on its vendors, suppliers, customers
and other parties with which it conducts business or the extent to which the
Company is vulnerable to third party Year 2000 issues.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," was issued by the Financial Accounting Standards Board in
June 1997. This Statement establishes standards for the reporting and display of
comprehensive income and its components. SFAS 130 will be effective for the
Company's fiscal year 1999 and requires restatement for all previously reported
information for comparative purposes. This statement will require additional
disclosure but will not have a material impact on the Company's financial
position, results of operations, or cash flow.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for the Company's
fiscal year 1999. Due to the Company's minimal use of derivatives, management
does not anticipate that the adoption of the new Statement will have a material
impact on the Company's financial position, results of operations, or cash flow.
FORWARD-LOOKING STATEMENTS
Statements included herein and elsewhere in this Annual Report that are not
historical facts, including any statements about expectations for fiscal year
1999 and beyond, involve risks and uncertainties. Factors that could cause the
Company's actual results to differ materially from management's projections,
estimates, and expectations include, but are not limited to, delays in the
receipt of orders or in the shipment of products, the Company's successful
implementation of its strategic plan, and other factors referred to under
"Information Regarding Forward-Looking Statements" in the Company's Form 10-K
Annual Report for its fiscal year ended June 30, 1998, and in the Company's
Consolidated Financial Statements and Notes to Consolidated Financial
Statements. The Consolidated Financial Statements should be read in conjunction
with this Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
31
<PAGE> 17
SELECTED FINANCIAL DATA (UNAUDITED) CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
Five years ended June 30, 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1998(A) 1997(B) 1996 1995(C)(D) 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Revenue $ 269,189 $ 254,161 $ 239,964 $ 216,419 $ 180,379
Operating income 4,841 7,042 25,186 25,380 25,567
Income from continuing
operations 7,299 2,579 13,358 15,029 14,968
Net income (loss) (7,760) (56,766) 11,623 (7,895) 16,598
Diluted income from continuing
operations per share 0.44 0.16 0.82 0.93 0.94
Diluted net income (loss) per share $ (0.47) $ (3.48) $ 0.72 $ (0.49) $ 1.04
Average shares and equivalents 16,640 16,333 16,200 16,231 15,890
FINANCIAL POSITION:
Total assets $ 201,705 $ 266,373 $ 292,375 $ 280,495 $ 261,630
Net debt(E) 36,626 67,660 72,898 64,179 58,189
Net debt to capitalization(F) 0.30 0.36 0.30 0.29 0.27
Shareholders' equity per share $ 5.51 $ 7.19 $ 10.60 $ 9.78 $ 10.13
OTHER (CONTINUING OPERATIONS ONLY):
Year-end backlog $ 95,787 $ 91,082 $ 97,108 $ 110,518 $ 112,549
Year-end employees 1,528 1,412 1,359 1,112 947
Year-end facilities (thousands
of square feet) 518 515 544 421 429
</TABLE>
(A) In fiscal 1998, the Company recorded approximately $14.3 million of
restructuring and other charges, a $1.9 million litigation settlement
charge, a $2.5 million benefit for previously reserved tax deductions, and
sold its Services Division for an after-tax gain of $6.3 million. Excluding
these items and the full-year results of the Services Division, the
Company's income from continuing operations was $11.4 million, or $0.69 per
share, on a diluted basis. See Notes 3,4 and 11 of Notes to Consolidated
Financial Statements for further discussion of these items. In addition,
the Microwave Networks (MN) and the Satellite Transmission Systems (STS)
divisions were sold. The Company also recorded losses on disposal of
discontinued operations of $15.1 million (after income taxes). MN and STS
have been accounted for as discontinued operations for all periods.
(B) In fiscal 1997, the Company recorded approximately $47.1 million of
restructuring, inventory and other charges of which $7.1 million were
attributed to continuing operations. In addition, the Company expensed
$17.9 million of unamortized intangible assets associated with MN and STS
and recorded losses on disposal of these discontinued operations of $8.4
million (after income taxes).
(C) In May 1995, the Company acquired Microwave Networks, Inc. (MNI), later
combined into MN, 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.
(D) In fiscal 1995, the Company recorded approximately $36.4 million of
restructuring and other charges, of which $34.9 million is included in
discontinued operations.
(E) Net debt is total long-term debt, including current portion, less cash and
cash equivalents.
(F) Net debt to capitalization is year-end net debt divided by year-end net
debt plus shareholders' equity.
32
<PAGE> 18
FINANCIAL RESULTS BY FISCAL QUARTER (UNAUDITED) CALIFORNIA MICROWAVE, INC.
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
BASIC EARNINGS PER SHARE
--------------------------------------------------------------------
INCOME(LOSS) INCOME(LOSS)
FROM FROM NET
FISCAL GROSS CONTINUING DISCONTINUED INCOME
QUARTER REVENUE MARGIN OPERATIONS OPERATIONS (LOSS)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998(A)
Q1 $ 64,427 $20,503 $ 2,312 $ -- $ 2,312
Q2 66,554 23,466 1,872 -- 1,872
Q3 66,631 22,569 3,105 (12,500) (9,395)
Q4 71,577 14,743 10 (2,559) (2,549)
--------------------------------------------------------------------
$269,189 $81,281 $ 7,299 $(15,059) $ (7,760)
1997(B)
Q1 $ 61,777 $18,277 $ 990 $ (2,863) $ (1,873)
Q2 62,754 12,371 (2,828) (22,567) (25,395)
Q3 58,559 18,362 1,855 (7,859) (6,004)
Q4 71,071 23,747 2,562 (26,056) (23,494)
--------------------------------------------------------------------
$254,161 $72,757 $ 2,579 $(59,345) $(56,766)
--------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE
----------------------------- -------------------------------------------------------------
NET NET
FISCAL CONTINUING DISCONTINUED INCOME CONTINUING DISCONTINUED INCOME
QUARTER OPERATIONS OPERATIONS (LOSS) OPERATIONS OPERATIONS (LOSS)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998(A)
Q1 $0.14 $ -- $0.14 $0.14 $ -- $ 0.14
Q2 0.11 -- 0.11 0.11 -- 0.11
Q3 0.19 (0.76) (0.57) 0.19 (0.75) (0.56)
Q4 -- (0.16) (0.16) -- (0.16) (0.16)
------------------------------------------------------------------------------------------------
$0.45 $(0.92) $(0.47) $0.44 $(0.90) $(0.47)
1997(B)
Q1 $0.06 $(0.18) $(0.12) $0.06 $(0.18) $(0.12)
Q2 (0.18) (1.40) (1.57) (0.18) (1.40) (1.57)
Q3 0.11 (0.48) (0.37) 0.11 (0.48) (0.37)
Q4 0.16 (1.59) (1.44) 0.16 (1.59) (1.43)
------------------------------------------------------------------------------------------------
$0.16 $(3.66) $(3.50) $0.16 $(3.63) $(3.48)
------------------------------------------------------------------------------------------------
</TABLE>
(A) Fiscal 1998 second-quarter income from continuing operations includes a
pre-tax charge of $1.9 million for a court-approved class action litigation
settlement.
Fiscal 1998 fourth-quarter gross margin includes $9.7 million of pre-tax
charges primarily for inventory write-downs. Fiscal 1998 fourth-quarter
income from continuing operations include pre-tax charges of $14.3 million
consisting of $9.7 million primarily for inventory write-downs and $4.6
million for restructuring and other charges. Additionally, the fourth
quarter includes a $2.5 million benefit for previously reserved tax
deductions and a gain on the sale of the Services Division of $6.3 million.
(B) Fiscal 1997 second-quarter gross margin includes $6.6 million of pre-tax
inventory charges. Including the inventory charges, income from continuing
operations was reduced by pre-tax charges of $7.1 million.
STOCK AND QUARTERLY DATA (UNAUDITED)
California Microwave, Inc. has one series of $.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 reinvests earnings to
finance expansion of its business, has paid no cash dividends, and does not
anticipate changing this policy in the foreseeable future. At June 30, 1998, the
number of California Microwave shareholders totaled approximately 12,500, of
which approximately 1,800 were holders of record. California Microwave stock is
traded in the Nasdaq National Market under the trading symbol CMIC. The
following table sets forth for the fiscal periods indicated the high and low
stock prices.
Stock Prices By Quarter Fiscal Years 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 21 1/8 21 3/4 22 1/4 24 1/4 15 5/8 18 1/4 19 15
Low 14 16 1/16 16 1/2 14 3/8 11 7/8 12 5/8 13 9/16 11 3/4
</TABLE>
33
<PAGE> 1
EXHIBIT 21
List of Subsidiaries
<TABLE>
<CAPTION>
Name Place of Incorporation
- ---- ----------------------
<S> <C>
California Microwave Foreign Barbados,
Sales Corporation West Indies
Adaptive Broadband Limited England and Wales
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of California Microwave, Inc. of our report dated August 10, 1998 included in
the 1998 Annual Report to Shareholders of California Microwave, Inc.
Our audits also included the financial statement schedule of California
Microwave, Inc. listed in Item 14(a2). 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, 33-86968,
333-19015 and 333-35025) pertaining to the 1992 Stock Option Plan, 1992
Restricted Stock Plan, Employee Stock Purchase Plan, and 1986 Stock Option Plan
of California Microwave, Inc.; the Non-Qualified Stock Option Agreement between
California Microwave, Inc. and Frederick Lawrence dated effective as of July 16,
1997; of our report dated August 10, 1998, with respect to the financial
statements incorporated herein by reference.
/s/ ERNST & YOUNG LLP
-----------------------------------
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below, being a member of the Board of Directors of California
Microwave, Inc. (the "Company"), hereby constitutes and appoints Frederick D.
Lawrence and Kenneth J. Wees, and each of them, as his true and lawful
attorney-in-fact and agent, each 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, 1998, and to execute any amendments thereto, 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: August 20, 1998
/s/ FREDERICK D. LAWRENCE /s/ WILLIAM B. MARX, JR.
- ---------------------------------- ----------------------------------
Frederick D. Lawrence William B. Marx, Jr.
/s/ ALFRED M. GRAY /s/ TERRY W. WARD
- ---------------------------------- ----------------------------------
Alfred M. Gray Terry W. Ward
/s/ ARTHUR H. HAUSMAN /s/ FREDERICK W. WHITRIDGE, JR.
- ---------------------------------- ----------------------------------
Arthur H. Hausman Frederick W. Whitridge, Jr.
/s/ GEORGE JOULWAN
- ----------------------------------
George Joulwan
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that Leslie G. Denend, whose signature
appears below, being a member of the Board of Directors of California Microwave,
Inc. (the "Company"), hereby constitutes and appoints Frederick D. Lawrence and
Kenneth J. Wees, and each of them, as his true and lawful attorney-in-fact and
agent, each 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, 1998,
and to execute any amendments thereto, 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: September 14, 1998
/s/ LESLIE G. DENEND
_________________________
Leslie G. Denend
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 23,974
<SECURITIES> 2,636
<RECEIVABLES> 48,793
<ALLOWANCES> 1,166
<INVENTORY> 37,562
<CURRENT-ASSETS> 128,284
<PP&E> 60,874
<DEPRECIATION> 35,486
<TOTAL-ASSETS> 201,705
<CURRENT-LIABILITIES> 54,904
<BONDS> 60,248
0
0
<COMMON> 1,663
<OTHER-SE> 82,890
<TOTAL-LIABILITY-AND-EQUITY> 201,705
<SALES> 269,189
<TOTAL-REVENUES> 269,189
<CGS> 178,219
<TOTAL-COSTS> 178,219
<OTHER-EXPENSES> 9,689<F1>
<LOSS-PROVISION> 719
<INTEREST-EXPENSE> 4,468
<INCOME-PRETAX> 7,482<F2>
<INCOME-TAX> 183
<INCOME-CONTINUING> 7,299
<DISCONTINUED> (15,059)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,760)
<EPS-PRIMARY> (0.47)<F3>
<EPS-DILUTED> (0.47)
<FN>
<F1>Includes inventory write-downs of $9,063,000.
<F2>Includes gain on sale of business units of $6,290,000.
<F3>For purposes of this exhibit, primary means basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> JUN-30-1995 JUN-30-1996 JUN-30-1996 JUN-30-1996 JUN-30-1996
<PERIOD-START> JUL-01-1994 JUL-01-1995 JUL-01-1995 JUL-01-1995 JUL-01-1995
<PERIOD-END> JUN-30-1995 SEP-30-1995 DEC-31-1995 MAR-31-1996 JUN-30-1996
<CASH> 1,983 1,639 6,296 1,502 4,560
<SECURITIES> 613 1,017 1,126 1,247 1,504
<RECEIVABLES> 35,614 32,520 37,167 35,568 37,462
<ALLOWANCES> 943 236 759 730 798
<INVENTORY> 38,700 39,073 33,941 42,158 50,026
<CURRENT-ASSETS> 175,954 183,519 180,250 184,422 186,682
<PP&E> 34,044 47,528 52,087 53,009 58,191
<DEPRECIATION> 15,882 28,775 29,211 30,300 34,594
<TOTAL-ASSETS> 280,495 286,600 285,479 289,416 292,375
<CURRENT-LIABILITIES> 50,133 52,632 47,580 50,917 45,230
<BONDS> 73,707 72,856 72,950 70,474 77,133
0 0 0 0 0
0 0 0 0 0
<COMMON> 1,572 1,584 1,586 1,598 1,603
<OTHER-SE> 152,140 159,528 163,363 166,427 168,409
<TOTAL-LIABILITY-AND-EQUITY> 280,495 286,600 285,479 289,416 292,375
<SALES> 216,419 58,044 119,608 176,142 239,964
<TOTAL-REVENUES> 216,419 58,044 119,608 176,142 239,964
<CGS> 135,506 38,100 78,539 115,285 158,042
<TOTAL-COSTS> 135,506 38,100 78,539 115,285 158,042
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 179 40 97 137 177
<INTEREST-EXPENSE> 3,833 1,017 2,280 3,197 4,314
<INCOME-PRETAX> 21,547 5,035 11,862 16,557 20,872
<INCOME-TAX> 6,518 1,813 4,270 5,960 7,514
<INCOME-CONTINUING> 15,029 3,222 7,592 10,597 13,358
<DISCONTINUED> (22,924) 1,885 1,163 (517) (1,735)
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> (7,895) 5,107 8,755 10,080 11,623
<EPS-PRIMARY> (.51)<F1> .32<F1> .55<F1> .63<F1> .73<F1>
<EPS-DILUTED> (.49) .31 .54 .62 .72
<FN>
<F1>For purposes of this exhibit, primary means basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997 JUN-30-1997 JUN-30-1997
<PERIOD-START> JUL-01-1996 JUL-01-1996 JUL-01-1996 JUL-01-1996
<PERIOD-END> SEP-30-1996 DEC-31-1996 MAR-31-1997 JUN-30-1997
<CASH> 4,224 5,695 1,634 4,974
<SECURITIES> 1,853 1,968 1,795 2,097
<RECEIVABLES> 35,991 38,049 35,147 36,644
<ALLOWANCES> 838 1,149 871 943
<INVENTORY> 43,272 41,082 49,300 50,353
<CURRENT-ASSETS> 182,055 169,850 174,544 183,564
<PP&E> 57,895 59,257 60,946 53,460
<DEPRECIATION> 33,798 35,663 37,603 30,648
<TOTAL-ASSETS> 286,841 271,985 273,484 266,373
<CURRENT-LIABILITIES> 36,697 61,069 60,937 72,058
<BONDS> 80,599 66,564 72,318 72,301
0 0 0 0
0 0 0 0
<COMMON> 1,614 1,615 1,630 1,641
<OTHER-SE> 167,931 142,737 138,599 116,383
<TOTAL-LIABILITY-AND-EQUITY> 286,841 271,985 273,484 266,373
<SALES> 61,777 124,531 183,090 254,161
<TOTAL-REVENUES> 61,777 124,531 183,090 254,161
<CGS> 43,500 93,883 134,080 181,404
<TOTAL-COSTS> 43,500 93,883 134,080 181,404
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 40 351 393 465
<INTEREST-EXPENSE> 1,332 2,654 4,060 5,944
<INCOME-PRETAX> 1,347 (2,745)<F2> 25<F2> 3,847<F2>
<INCOME-TAX> 357 (907) 8 1,268
<INCOME-CONTINUING> 990 (1,838) 17 2,579
<DISCONTINUED> (2,863) (25,430) (33,289) (59,345)
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (1,873) (27,268) (33,272) (56,766)
<EPS-PRIMARY> (.12)<F1> (1.69)<F1> (2.06)<F1> (3.50)<F1>
<EPS-DILUTED> (.12) (1.69) (2.04) (3.48)
<FN>
<F1>For purposes of this exhibit, primary means basic.
<F2>Includes gain from sale of subsidiary of $2,744,000.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998 JUN-30-1998
<PERIOD-START> JUL-01-1997 JUL-01-1997 JUL-01-1997
<PERIOD-END> SEP-30-1997 DEC-31-1997 MAR-31-1998
<CASH> 2,132 3,408 3,265
<SECURITIES> 2,534 2,755 2,838
<RECEIVABLES> 45,724 48,330 56,335
<ALLOWANCES> 930 825 1,176
<INVENTORY> 47,553 44,390 50,819
<CURRENT-ASSETS> 176,460 176,532 175,254
<PP&E> 56,916 58,357 58,526
<DEPRECIATION> 32,504 34,287 34,830
<TOTAL-ASSETS> 258,354 257,342 247,336
<CURRENT-LIABILITIES> 66,705 66,905 77,295
<BONDS> 66,263 62,895 60,485
0 0 0
0 0 0
<COMMON> 1,650 1,653 1,665
<OTHER-SE> 119,746 121,899 105,891
<TOTAL-LIABILITY-AND-EQUITY> 258,354 257,342 247,336
<SALES> 64,427 130,981 197,612
<TOTAL-REVENUES> 64,427 130,981 197,612
<CGS> 43,924 87,012 131,074
<TOTAL-COSTS> 43,924 87,012 131,074
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 47 0 233
<INTEREST-EXPENSE> 1,113 2,161 3,476
<INCOME-PRETAX> 3,612 6,538 11,372
<INCOME-TAX> 1,300 2,354 4,083
<INCOME-CONTINUING> 2,312 4,184 7,289
<DISCONTINUED> 0 0 (12,500)<F2>
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,312 4,184<F1> (5,211)
<EPS-PRIMARY> .14<F1> .25<F1> (.32)<F1>
<EPS-DILUTED> .14 .25 (.31)
<FN>
<F1>For purposes of this exhibit, primary means basic.
<F2>Discontinued operations -- consists of additional loss on disposal of the
Microwave Networks Division.
</FN>
</TABLE>
