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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED MARCH 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period
from _______to______ .
Commission file number 0-15895
DIGITAL MICROWAVE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0016028
(State incorporation) (I.R.S. Employer Identification No)
170 ROSE ORCHARD WAY, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-0777
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK-PAR VALUE $0.01 PER SHARE
(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 a 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 the Form 10-K or any
amendment to this Form 10-K. / /
State the aggregate market value of voting stock held by non-affiliates
of Registrant (based on the last reported sale price of $12.00 per share on the
Nasdaq National Market) as of June 1, 1995: Approximately $149,050,944.
As of June 1, 1995, there were 13,509,985 shares of Common Stock, par
value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Document Form 10-K Reference
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<S> <C>
Definitive Proxy Statement Part III, Items 10-13
Annual Report to Stockholders Part I, Item 1 and 3
for fiscal year ended Part II, Items 5-8
March 31, 1995 Part IV, Item 14
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TABLE OF CONTENTS
DIGITAL MICROWAVE CORPORATION
1995 FORM 10-K ANNUAL REPORT
PART I
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Item 1 Business......................................................... 3
Item 2 Properties ...................................................... 13
Item 3 Legal Proceedings................................................ 13
Item 4 Submission of Matters to a Vote of Security Holders ............. 13
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters......................... 14
Item 6 Selected Financial Data ......................................... 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 14
Item 8 Financial Statements and Supplementary Data ..................... 14
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................ 14
PART III
Item 10 Directors and Executive Officers of the Registrant .............. 15
Item 11 Executive Compensation .......................................... 16
Item 12 Security Ownership of Certain Beneficial
Owners and Management .................................. 16
Item 13 Certain Relationships and Related Transactions .................. 16
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..................................... 17
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PART I
ITEM 1. BUSINESS
Digital Microwave Corporation (the "Company" or "DMC") designs,
manufactures and markets advanced and high-performance digital microwave
equipment for a wide variety of short- and medium-haul communication
applications worldwide. The Company's comprehensive portfolio of technologically
advanced products is designed for use by telecommunication operators providing
Personal Communication Services ("PCS")/Personal Communication Networks ("PCN"),
mobile telephone services, and local access, as well as for use in private
networks worldwide. The Company offers its products to wireless service
providers such as Panafon in Greece, Piltel in the Philippines, Airtouch
Cellular, E-Plus in Germany and U.S. West New Vector; telephone companies and
common carriers such as British Telecom and Mercury Communications Ltd.; and
private networks such as the State of California and the United States Forestry
Service. In addition, the Company forms alliances with major international
telecommunications equipment providers such as AT&T, Bell South, Motorola,
Northern Telecom, Ericsson, and Siemens AG as a means of accessing market
opportunities. With approximately 87% of the Company's fiscal 1995 net sales
generated from international sales, the Company has a worldwide sales and
service organization operating through 13 sales and service offices in nine
countries to address DMC customers' individualized geographic, regulatory and
infrastructure requirements.
INDUSTRY BACKGROUND
Over the past decade, there has been a significant increase in
worldwide demand for rapid, reliable, high-quality telecommunications equipment
for voice, data, facsimile, and video image information. This trend is expected
to continue. This demand has been fueled by changes in the regulatory
environment in many developed countries; technological advances, particularly in
the wireless communications arena; the rapid establishment of telecommunications
infrastructures in many developing countries; and the growth in private
communications networks. These developments have resulted in significant
worldwide construction of new telecommunications infrastructures.
MICROWAVE PRODUCTS
The Company's digital microwave radios consist of three basic
components: a digital modem for interfacing with digital terminal equipment, a
radio frequency ("RF") unit for converting a low frequency carrier signal from
the modem to a high frequency microwave signal, and an antenna to radiate
transmitting signals and capture receiving signals.
The Company manufactures digital microwave products that operate within
the 2, 6, 7, 8, 10, 11, 13, 15, 18, 23, and 38 GHz frequency bands. These radios
are used in point-to-point applications by cellular phone companies, telephone
operating companies, Fortune 1000 companies, utilities, and government and
military agencies.
CURRENT PRODUCTS
The Company currently offers several product families each of which is
designed to suit the requirements of specific telecommunications applications.
The principal product families are the Quantum Series, the M Series, the
SPECTRUM(TM) Series and the DMC Net(TM). The Quantum Series is designed
primarily to serve as the backbone of a customer's transmission network by
meeting all of that customer's medium-haul (20-60 miles) needs. The M-Series is
designed to meet a variety of short- to medium-haul (5-20 miles) customer needs,
while the SPECTRUM(TM) II Series is designed primarily as a microcell (under 5
miles) solution. In addition, the Company offers its NSL-15, In-Flight Phone and
LC radio products on a selective basis. Each of these product lines and the
Company's principal other products are described below.
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THE QUANTUM SERIES. This family of radios provides the Company with
access to markets requiring high performance transmission of medium to
high capacity signals over long distances and more difficult terrain.
The radio is designed to operate in the North American bands at 2, 6,
10, and 11 GHz, the International bands at 2, 7, 8, 13, 15 GHz and has
many features that ensure a high grade of transmission on long
paths or over water paths where microwave transmission can be impaired.
The typical deployment of the radio is in back haul transmission for
cellular networks in developing countries and for the private networks
supporting control of gas or electric utility operations. Development
of the Quantum Series products will continue in fiscal 1996 with the
planned addition of a higher capacity version (aggregate of 80 Mbit/s)
for international markets.
THE M SERIES AND M-SE SERIES. The M-Series has grown to be the
Company's biggest selling product todate. First introduced in 1989 at
18 GHz for the Northern American market, the platform has been
significantly expanded and enhanced to become the choice of new
cellular operators worldwide for cell site interconnections. Available
in 7, 8, 13, 15, 18, and 23 GHz band, this radio allows a common
product family to be used throughout an entire network even where
different frequency bands are necessary to meet licensing or path
distance requirements. The DMC-M Series is a low-to-medium capacity
digital microwave radio family of products that is used for
applications such as linking cell sites and connecting them back to
central switching locations. The DMC-M Series products are designed to
include user-convenient test features and built-in multiplexer options
to simplify the work of both the network designer and the network
operator. The high system gain of the DMC-M Series ensures reliable
operation on longer paths and in adverse weather conditions. The
Company expanded this product line to include the DMC M-SE Series of
products which provide more efficient use of spectrum space by
utilizing a more sophisticated digital modulation technique. As is the
case for many of the Company's products, a synthesized frequency source
is available, enabling an operator to easily change radio frequency in
the event of a system relocation or when installing spare parts,
resulting in reduced sparing costs and ease of system planning. Recent
focus has been on performance enhancements and cost improvements to
keep the product competitive. The M-Series has an excellent in service
reliability record in some of the worlds largest GSM networks.
THE SPECTRUM(TM) SERIES. The SPECTRUM(TM) product was conceived to
provide lower cost, short haul interconnections for cellular and
PCS/PCN applications. The Company initially launched the first
SPECTRUM(TM) product in 1991 with a version operating in the
millimeter waveband at 38GHz and targeted at the European PCN market.
The rapid growth in this market segment worldwide and the demand of
the operators and infrastructure suppliers has led to the second
generation of the SPECTRUM(TM) product which is broadened to cover all
the frequency bands typically utilized for low to medium capacity
transmission application. The SPECTRUM(TM) II contains design
enhancements over the Company's earlier products that make it a more
natural choice for the wireless network market (Cellular, PCS/PCN) as
well as the local access markets of new public telecommunications
operators (PTO). SPECTRUM II is designed for more rapid manufacture
and deployment allowing shorter lead times and lower installation
costs.
The completion dates for the release of SPECTRUM(TM) II products have
been delayed from the originally scheduled dates for various reasons
related to difficulties in design, development and manufacture of these
products. The delays resulted in the imposition on the Company of
substantial product discounts on Interim Equipment and related
costs in the fourth quarter of fiscal 1995 as provided for under the
E-Plus Supply Agreement as amended. The substantial discounts on
Interim Equipment resulted in negative margins for these sales, and
accordingly the Company has accrued these losses and other related
costs as of March 31, 1995. Currently the Company is awaiting E-Plus's
acceptance of the product in field tests being conducted. There is no
assurance that the customer will accept the results of the field tests.
If the field tests are not successfully completed, E-Plus may assess
additional substantial penalties and or cancel some or all of the
orders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future
Financial Results" incorporated herein by reference, "E-Plus Contract"
and "Manufacturing and Suppliers."
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OTHER PRODUCTS
The Company manufactures a number of other products some of which are
still supported because of their low cost, reliability and popularity
and others which are supplied uniquely to certain customers.
The 23 Classic is the current implementation of the Company's first
product which was originally designed and introduced in 1985. Its
simplicity, low cost and dependability generates modest on-going
business primarily with existing users. The 23 Classic finds
applications in private networks and is suited to emergency restoration
systems where its small size and low power consumption allow easy
transportation and compatibility with solar power systems.
The LC Series operates in the 23 GHz and 18 GHz bands, with up to 8T1
or 8E1 capacity. The 23 LC with 8E1 capacity provides a very economical
medium capacity transmission facility ideally suited for applications
not requiring high bandwidth efficiency.
The NSL-15 is a specialized radio operating in the 15 GHz frequency
band that is sold to military or other government users. With a
capacity of 2 megabits per second, the NSL-15 is built to very
stringent military specifications and is supplied to end-users both
directly by the Company and in partnership with NERA in Norway.
IFPC radios are specialized air-to-ground digital microwave radios
developed for the In-Flight Phone Corporation ("IFPC") for use on
commercial and general aviation aircraft. The IFPC radios are designed
to permit digital voice and data communications between airline
passengers and the ground- based public switched telephone network.
DMC Net(TM) is a network monitoring and control system designed to
manage a network of Company products from a single location. Network
management has become an essential part of the very large networks
being installed by cellular based telephone companies. DMC Net(TM)
allows customers to monitor equipment and path performance to detect
problems before they disrupt the network, and to dispatch repair crews
equipped with the correct spare parts and test equipment to make
repairs. Second and third trips can often be avoided, reducing costs
and maximizing network availability. DMC Net(TM) has in many cases been
integrated into an overall network management system, allowing the
monitoring of the status of a complete cellular system, including
microwave, UHF, power system and switching equipment. DMC Net(TM) can
be used with almost any mix of DMC products. In recognition of its
importance, the Company continues to invest development resources in
the expansion and improvement of DMC Net(TM).
PRODUCTS UNDER DEVELOPMENT
The Company's current product development efforts are principally focused on the
development of the following products:
QUANTUM(TM) . The Company is continuing product development
efforts in fiscal 1996 to enhance the QUANTUM(TM) product line. These
efforts are intended to provide higher capacity options and operation
in additional frequency bands. It is expected that the portion of the
Company's sales attributable to QUANTUM(TM) products will continue to
increase as a result of these product development efforts.
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SPECTRUM(TM) II. The Company is continuing substantial product
development efforts in fiscal 1996 to enhance and expand the
SPECTRUM(TM) II product line. These efforts are intended to provide
higher capacity options and operations in additional frequency bands.
DMC Net(TM). An improved version of DMC Net(TM) is under development.
The objective of this development is to allow the use of DMC Net(TM) on
networks comprised of several thousand radio terminals and to provide a
graphical user interface making DMC Net(TM) easier to operate.
There can be no assurance that the Company will be successful in
developing and marketing these products, that the Company will not
experience difficulties that could further delay or prevent the
successful development, introduction and sale of future products, or
that these products will adequately meet the requirements of the
marketplace and achieve market acceptance. See "Management's
Discussions and Analysis of Financial Condition and Results
Operations - Factors That May Affect Future Financial Results"
incorporated herein by reference.
MARKETING, CUSTOMERS AND APPLICATIONS
The Company markets its products across most sectors of the
telecommunications industry. A number of the Company's major customers are joint
ventures or consortiums whose members include Bell South, AT&T, Siemens AG,
Nokia Cellular Systems OY, and Ericsson. The principal market segment addressed
by the Company, and examples of applications within those markets, are set forth
below:
WIRELESS SERVICE PROVIDERS
Customers include cellular telephone companies and PCN/PCS
companies in the United States and abroad which use the Company's microwave
radios to connect cell sites and link them back to switching centers for
connection to the public switched telephone network. Cellular technology has
become the medium of choice in many developing countries where upgrading the
telecommunication infrastructure is an urgent priority. The Company believes
that a substantial majority of its products sold are used in cellular, PCN, PCS
or similar applications.
Typical of customers in this segment, Panafon, one of the
Company's Global Systems Mobile Communications ("GSM") cellular telephone
customers, is using the Company's products to interconnect cells and switching
equipment for a cellular telephone network being constructed to cover the major
metropolitan areas in Greece. E-Plus, a GSM cellular and PCN provider in
Germany, has ordered the Company's digital microwave equipment for a mobile
telecommunications network being created throughout certain regions of Germany.
TELEPHONE COMPANIES AND COMMON CARRIERS
Customers include domestic and foreign telephone companies and
long distance and inter-exchange carriers desiring to provide their customers
with a greater variety of services, including direct access to long distance
networks. Typical customer applications include trunking and local distribution.
PRIVATE NETWORKS
Customers include corporations, institutions, various agencies of
the United States and foreign governments and other organizations seeking
greater control over the cost and availability of their communications services.
Typical applications in this segment range from a single transmission link
connecting two buildings to complex major networks comprised of dozens of
microwave terminals.
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BANAMEX, a private banking institution, has established a private
network using the Company's products to connect several of the banks throughout
Mexico to facilitate the rapid communication of information.
The State of California uses the Company's products to
interconnect several data centers throughout California.
The following is a list of representative customers, for the past
three fiscal years, within each of the Company's principal segments:
- --------------------------
WIRELESS SERVICE PROVIDERS
- --------------------------
Panafon (Greece)
Comviq (Sweeden)
Advance Information System (Thailand)
Grupo Iusacell (Mexico)
Celumobil (Colombia)
Bell Cellular (Canada)
Cantel (Canada)
U.S. West New Vector
Airtouch
AT & T
Siemens AG
- -------------------------------------------
TELEPHONE COMPANIES AND COMMON CARRIERS
- -------------------------------------------
TELMEX (Mexico)
Impsat (Colombia/Argentina)
Regional Bell Operating Companies (USA)
British Telecom plc (United Kingdom)
Mercury Communications Ltd. (United Kingdom)
MCI
Bell of Canada
Piltel (Philippines)
- -------------------------
PRIVATE NETWORKS
- -------------------------
BANAMEX (Mexico)
Americatel (Colombia)
Bancomer (Mexico)
State of California
Seattle Post-Intelligence
CUSTOMER CONCENTRATION
The Company has historically relied upon major orders from a small
number of customers for a large portion of its net sales and these key customers
have changed from period to period. As of March 31, 1995, the Company's three
largest customers accounted for approximately 42% of the approximate $93.2
million backlog. For fiscal 1995, there were however, no customers that
accounted for 10% or more of the Company's net sales of $153.6 million. While
management considers the Company's relationships with each of its major
customers to be good, there can be no assurance that the Company's principal
customers will continue to purchase products from the Company at current levels,
if at all, and the loss of any one key customer could have a material adverse
effect on the Company's results of operations.
BACKLOG
The Company's backlog at March 31, 1995 was approximately $93.2
million, as compared with approximately $71.8 million at March 31, 1994. The
Company includes in backlog only orders scheduled for delivery within 12 months.
Because of the timing of orders, delivery intervals, customer and product mix
and the possibility of changes in delivery schedules and additions to or
cancellation of orders, the Company's backlog at any particular date may not be
representative of actual sales for any succeeding period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
incorporated herein by reference.
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The Company's major contractual awards are often subject to the receipt
of firm orders, which in turn may be subject to many conditions including that
the equipment purchased be competitive in the telecommunications marketplace
with respect to technology, price, quantity, and other commercial concerns. In
addition, because the Company's major orders often require deliveries for
periods over 12 months, such products are subject to risks associated with
obsolescence due to rapidly changing technological advances. There can be no
assurance that the Company will be able to continue to provide competitive
products. See "E-Plus Contract".
E-PLUS CONTRACT
In November 1993, the Company entered into a Teaming Agreement (the
"E-Plus Teaming Agreement") with Siemens AG ("Siemens") to supply digital
microwave radios and network management software to E-Plus, a GSM cellular and
PCN operator in Germany whose partners include Bell South, a United States
company, Vodaphone plc, a United Kingdom company, and Thyssen and Veba, both
German companies. Concurrent with executing the E-Plus Teaming Agreement,
Siemens entered into a supply agreement with E-Plus (the "E-Plus Supply
Agreement") wherein Siemens agreed to act as the prime contractor for the
supply, installation and commissioning of certain digital microwave equipment
and related services to E-Plus. The Company and Siemens have agreed, under the
terms of the E-Plus Teaming Agreement, to divide responsibilities for
satisfaction of the E-Plus Supply Agreement. The Company's responsibilities to
Siemens under the E-Plus Teaming Agreement for the Company's portion of the
equipment and services generally correspond to Siemens' obligations under the
E-Plus Supply Agreement.
The Company is responsible for delivering approximately 80% of the
value of the equipment and associated services called for under the E-Plus
Supply Agreement. Siemens is responsible for providing all other services. Of
the Company's approximately $92.3 million in backlog at March 31, 1995,
approximately $15.6 million was attributable to the E-Plus Teaming Agreement.
The products forecasted to be delivered periodically are subject to the release
of confirmation orders from E-Plus. E-Plus is allowed to terminate any
confirmation order in whole or in part for justified reasons and, subject to
cure, E-Plus may terminate any confirmation order at its discretion without
liability if the Company/Siemens team commits a material breach of the
confirmation order.
E-Plus has agreed to purchase 100% of the microwave equipment it
requires for the regions of Frankfurt, Nurnberg, Karlsruhe and Munchen until the
end of 1997 from the Company/Siemens team. E-Plus's commitment to buy equipment
under the E-Plus Teaming Agreement is conditional upon the equipment purchased
being competitive in the telecommunications marketplace with respect to the
technology, software, hardware, support, price and other commercial concerns.
The E-Plus Teaming Agreement contains significant penalty provisions
for delays in the delivery of specified products. If a delay, attributable to
the Company/Siemens team, occurs in (i) the successful and satisfactory
completion of the system testing and integration of the Company's product into
the E-Plus network; (ii) the satisfactory completion of link testing of the
Company's products; or (iii) the delivery of any other items subject to the
contract, the Company/Siemens team could be subject to liquidated damages
assessed at up to 15% of the value of the undelivered portion of a confirmation
order. The E-Plus Teaming Agreement stipulates that the Company is responsible
for that portion of a penalty attributable to its contract share.
The E-Plus Teaming Agreement provides for delivery of the Company's 23
GHz M-Series and SPECTRUM(TM) I-38 series products as an interim solution (the
"Interim Equipment") until the Company's SPECTRUM(TM) II series equipment
("SPECTRUM(TM) II Equipment") is available. The Company commenced initial
shipments of the Interim Equipment in December 1993. The E-Plus Teaming
Agreement states that after the SPECTRUM(TM) II series equipment becomes
available, E-Plus may choose to either leave the Interim Equipment installed or
replace it with the SPECTRUM(TM) II equipment. In October 1994, the Company,
Siemens and E-Plus entered into an amendment to the E-Plus Teaming Agreement
under which the maximum percentage of Interim Equipment installed by February
28, 1995 that can be replaced with SPECTRUM(TM) II product free of charge will
not exceed 20% of the installed base. In addition, the amendment extended the
cutover date for the installation of the SPECTRUM(TM) II product to
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March 1, 1995. Delivery of Interim Equipment after this date will
result in substantial sales price discounts on the product and cause negative
margins on the sales. The Company also agreed to provide E-Plus certain
products and other equipment free of charge, and E-Plus agreed to waive
contractual liquidated damages related to the delayed delivery of the
SPECTRUM(TM) II product. As a result of this amendment, in the third quarter of
fiscal 1995 the Company recorded $11.4 million of revenue with nominal margins,
representing 80% of the Interim Equipment shipped through December 31, 1994.
The remaining 20% of Interim Equipment has not been recognized as revenue but
is carried as inventory and deferred revenue on the Company's balance sheet.
The Company makes an ongoing assessment of the obsolescence exposure related to
the Interim Equipment.
Acceptance tests of the SPECTRUM(TM) II product under the E-Plus
Teaming Agreement have not yet been completed. As a result of these delays, in
the fourth quarter of fiscal 1995 the Company recorded significant reserves for
losses on product discounts and other costs related to additional Interim
Equipment that the Company estimates will be ordered by E-Plus through the
anticipated date of final acceptance of the Spectrum II product. These reserves
contributed to the Company's lower margins and net loss of $5.0 million in the
fourth quarter.
Continued delays in the acceptance of the SPECTRUM(TM) II product by
E-Plus could result in the imposition on the Company of additional product
discounts, penalties, and other related costs and/or the cancellation of
orders. To the extent that the SPECTRUM(TM) II product is delivered later than
currently scheduled, the Company's obligation to deliver substantially
discounted Interim Equipment could be increased. The Company's profitability in
fiscal 1996 will be affected by its ability to deliver in large quantities the
SPECTRUM(TM) II products which carry higher margins than the current product
line. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Factors that May Affect Future Financial Results:" and
Notes 2 and 9 of Notes to the Consolidated Financial Statements in the
Company's fiscal 1995 Annual Report, incorporated herein by reference.
The Company is working closely with Siemens AG and E-Plus to resolve
the remaining issues precluding acceptance. However, there can be no assurance
that the Company will be successful in securing E-Plus acceptance.
SALES AND SERVICE
The Company believes that a direct and continuing relationship with its
customers is a competitive advantage in attracting new customers and satisfying
existing ones. The Company offers its products and services principally through
its own sales and service organization. To closely monitor the needs of its
customers, the Company has designed a sales and service organization that
maintains 13 sales or service offices in nine countries. The Company has five
regional sales offices and service centers in North America located near
Seattle, Washington; Chicago, Illinois; Toronto, Canada; Atlanta, Georgia; and
San Jose, California, where the Company's North America sales organization is
headquartered. The Company also has sales and/or service centers in the United
Kingdom, Germany, Sweden, Mexico, Colombia, Singapore and the Philippines. In
addition, the Company uses independent agents, distributors and international
resellers worldwide in concert with its direct sales operation.
The Company considers its ability to create and maintain long-term
customer relationships an important component of its overall strategy in each of
its markets. The Company employs over 106 people in its sales and service
organization, approximately 70% of whom primarily support sales outside North
America. Sales personnel are highly trained to provide the customer with
assistance in selecting and configuring a digital microwave system suitable for
the customer's particular needs. The Company's service and customer support
personnel provide customers with training, installation, customer service and
maintenance of the Company's systems under contract. The Company generally
offers a standard two-year warranty for all customers. The Company provides
warranty and post-warranty services from its San Jose manufacturing location and
service centers in the United Kingdom and Canada.
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FOREIGN EXCHANGE/INTERNATIONAL SALES
Total international sales for fiscal 1995 and 1994 were 87.0% and 90.5%
of total net sales, respectively. The Company expects that international sales
will continue to account for the majority of its net sales in the foreseeable
future. The Company is subject to the risks of foreign currency fluctuations,
and the changing value of the dollar in relationship to foreign currencies could
negatively impact its operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 2 of Notes
to Consolidated Financial Statements incorporated herein by reference.
International operations and sales may also be adversely affected by the
imposition of government controls, export licensing requirements, restrictions
on the export of critical technology, political and economic instability, trade
restrictions, changes in tariffs and taxes, and general economic conditions,
including inflation.
RESEARCH AND DEVELOPMENT
The Company has a continuing program of research and development
directed toward the enhancement of existing products in response to customer
needs and the introduction of new products to broaden its product line.
Approximately 7.4%, or $11.4 million of the Company's net sales were invested in
research and development in fiscal 1995, compared to 8.0% of net sales, or $9.3
million, in fiscal 1994. The increase in research and development expenses in
fiscal 1995 from fiscal 1994 was due to increased development efforts on the
second generation SPECTRUM(TM) II products. The Company expects research and
development spending to increase because the Company believes that its future
performance will depend on its ability to continue to enhance its existing
products and to develop new products that meet market needs. There can be no
assurance, however, that the Company's product development efforts will result
in commercially successful products. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" incorporated herein by
reference.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist primarily of final
assembly, test and quality control of materials and components. The
manufacturing process, performed at the Company's San Jose, California facility
consists primarily of materials management, extensive unit and environmental
testing of components and subassemblies at each stage of the manufacturing
process, final assembly of the terminals and, prior to shipment, quality
assurance testing and inspection of all products.
The Company's manufacturing operations are highly dependent upon the
delivery of materials by outside suppliers in a timely manner. The Company uses
local and offshore subcontractors to assemble major components and subassemblies
used in its microwave products. In the future, the Company expects to continue
to increase the extent to which outside suppliers and subcontractors provide
completed product components. The Company is reliant on the timely delivery of
certain key components to meets its manufacturing plan. In particular, the
development and manufacture of the Company's generation SPECTRUM(TM) II products
have been delayed due to among other things, component development and
associated delivery delays. The inability of the Company to develop alternative
sources of supply quickly and on a cost-effective basis could materially impair
the Company's ability to manufacture and deliver its products. There can be no
assurance that the Company will not experience component delays or other supply
problems.
Certain microwave integrated circuit subassemblies which are used in
all of the Company's microwave radio products, are supplied primarily by
Microelectronics Technology, Inc. ("MTI") of Taiwan. These subassemblies, which
are manufactured by MTI in Taiwan, form the nucleus of the RF Unit. The
Company's relationship with MTI commenced in March 1984, at which time the
Company and MTI entered into an agreement (the "Development Agreement") pursuant
to which MTI performed development engineering work for the Company. The
Development Agreement provides MTI with the right to manufacture up to 75% of
the Company's production requirements for microwave integrated circuit
subassemblies designed by MTI for the Company as long as MTI is able to meet
cost, quality and delivery standards available to the Company from other
sources. The Development Agreement also provides MTI with a right of first
refusal to manufacture certain of the Company's microwave products
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<PAGE> 11
if the Company determines to subcontract the manufacturing of these products.
During the term of the Development Agreement and for a period of one year after
termination thereof, MTI may not design, develop, manufacture or cause to be
manufactured or sold, for other persons or companies who are, or may become,
competitors to the Company, any proprietary designs or components that are
similar to certain of the Company's products. The Development Agreement may only
be terminated by either party in the event of a breach by the other.
From time to time, the Company has experienced delays and other supply
problems with MTI, but such delays and other problems have not had a significant
impact on the Company's results of operations. To avoid any future problems
associated with delays, the Company has contracted for component and subassembly
parts from additional sources. The Company and MTI maintain a high level of
communication at all levels of their respective management to ensure that
production requirements and constraints are taken into account in each company's
respective production plans. The Company does not currently anticipate any
future delays or other supply problems with MTI, although there can be no
assurance in this regard.
COMPETITION
The short-haul and medium-haul transmission business is a specialized
segment of the telecommunications equipment market and is intensely competitive.
A substantial number of established and emerging companies offer a variety of
microwave, fiber optic and other transmission products for applications similar
to those of the Company's products. Many of the Company's competitors have more
extensive engineering, manufacturing and marketing capabilities and
substantially greater financial, technical and personnel resources than the
Company. The Company considers its primary competitors to be Alcatel, NEC,
California Microwave, Inc., P-Com, Inc. and the Farinon Division of Harris
Corporation. In addition, other existing competitors include L.M. Ericsson,
Siemens AG, Nokia, SIAE, and NERA. Some of the Company's largest customers could
develop the capability to manufacture products similar to those manufactured by
the Company. Existing and potential competition in the industry has resulted in
and will continue to result in significant price competition and pressure on
gross margins. The Company believes that competition in its markets is based
primarily on technological capability, performance, on-time delivery, price,
reliability and customer support. The Company's future success will depend upon
its ability to address the increasingly sophisticated needs of its customers by
enhancing its current products, by the development and timely introduction of
new products that keep pace with technological developments and emerging
industry standards, and by providing such products at competitive prices.
The Company often forms alliances, or teaming arrangements, with major
international telecommunications equipment providers as a means of increasing
the Company's ability to pursue these limited number of major awards each year.
These alliances are necessary for the Company where the customer requires a
single system provider with a variety of equipment and service capabilities, as
well as for financial strength. There can be no assurance that the Company will
be able to continue to develop such alliances, or that if such alliances are
developed, that such alliances will be successful.
PATENTS
The Company does not presently have any patents covering its products.
The Company believes that its success is not dependent on the ownership of
patents but rather on its innovative skills, technical expertise and timely
introduction of new products.
GOVERNMENT REGULATIONS
Radio transmission in the United States is controlled by federal
regulation and all microwave radio links installed in the United States, except
for those utilizing certain frequencies operating under FCC part 15 rules, must
be licensed by the FCC. Since microwave radios all share the same transmission
medium, the FCC requires that every prospective microwave radio licensee assure
that it will not interfere with the operation of any existing system. This
requirement, known as frequency coordination, must be satisfied before
permission for operation will be granted by the FCC.
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The FCC and similar foreign regulatory bodies require that the
Company's products comply with certain rules and regulations governing their
performance when operating within their jurisdiction. The Company has complied
with such rules and regulations with respect to its existing products. Any
delays in compliance with respect to future products could delay their
introductions.
In the United States, Federal deregulation, which allows common
carriers greater flexibility in establishing rates which may be charged for
common carrier services, is likely to continue to affect the relative cost
effectiveness of private telecommunications networks versus common carrier
telecommunication networks. Each state has jurisdiction over the common carrier
aspects of intrastate radio and wireline communications, and the nature of this
regulation varies widely among the states. Internationally, similar control over
rates charged to customers of common carriers is exerted by central governments.
User uncertainty as to future government regulatory policies may affect the
demand for private network telecommunications products, including the Company's
products.
In addition, radio transmission is subject to regulation by foreign
laws and international treaties. The Company's equipment must conform to
international requirements established to avoid interference among users of
microwave frequencies and to permit interconnection of equipment. In many
developed countries, the unavailability of frequency spectrum has historically
inhibited the growth of microwave systems. However, current regulatory efforts
by international regulatory authorities are directed at providing microwave
frequencies for new PCS. Equipment to support these services can be marketed
only if permitted by suitable frequency allocations and regulations.
LITIGATION
In connection with the six class action lawsuits alleging securities
law violations in fiscal 1994, the Company reached an agreement under which the
Company and its Directors would be released from any further liabilities. In
fiscal 1994, the Company recorded a charge to earnings for the settlement of the
litigation of $20.0 million, which included the settlement amount, certain
attorneys' fees, estimated interest and other costs related to the litigation.
The Company paid the settlement amount of the litigation and obtained the final
judgment and order of dismissal of the litigation in fiscal 1995 from the United
States District Court of Northern California.
DMC TELECOM (MALAYSIA) SDN BHD
In fiscal 1991, the Company expanded its presence in the Asia Pacific
market with the formation of DMC TeleCom (Malaysia) Sdn Bhd ("DMCT(M)"). The
Company's partners in this joint venture were two Malaysian companies. However,
in the third quarter of fiscal 1994, the Company wrote down its investment in
DMC Malaysia resulting in a charge to earnings of $7.0 million. The Company's
net investment in DMC Malaysia was $4.0 million which consisted of receivables
outstanding from DMC Malaysia of approximately $6.0 million at March 31, 1994,
reduced by a reserve of $2.0 million for deferred margin on sales to the joint
venture. The Company was also the guarantor of approximately $2.0 million of DMC
Malaysia indebtedness to a bank, which was due in July, 1994. This charge to
earnings took into account the full amount of the receivables, the guarantee of
indebtedness to the bank, anticipated legal fees, and other charges associated
with the anticipated liquidation of the joint venture less applicable reserves.
On December 23, 1994, the Company reached an agreement with the shareholders of
DMCT(M) related to the liquidation of the joint venture. The Company paid
approximately $2.1 million for its 45% share of the cost of liquidating the
joint venture, and received inventory and fixed assets valued at approximately
$600,000 and $300,000 respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 7 of the Notes to
Consolidated Financial Statement of the Company's fiscal 1995 annual report
incorporated herein by reference.
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EMPLOYEES
As of March 31, 1995, the Company employed 606 full-time and temporary
employees, including approximately 50 employees in the United Kingdom. None of
the Company's employees are represented by a collective bargaining agreement.
The Company's future performance will depend in large measure on its ability to
attract and retain highly skilled employees. The Company believes that it has
good relations with its employees and has never experienced a work stoppage.
ITEM 2. PROPERTIES
The Company's corporate offices, and principal research, development
and manufacturing facilities are located in San Jose, California, in three
leased buildings aggregating approximately 160,000 square feet. The Company owns
20,000 square feet of office and manufacturing space in East Kilbride, Scotland,
1,500 square feet of which has been sublet for eight years. The Company also
leases four sales offices located throughout the North America and a 17,000
square foot customer service and marketing office in Coventry, England. The
Company believes these facilities are adequate to meet its anticipated need for
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
See "Business - Litigation" and Note 7 and 8 of Notes to Consolidated
Financial Statements incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information regarding price range per share in the Company's 1995
Annual Report to Stockholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information regarding selected financial data from fiscal 1991
through fiscal 1995 in the Company's 1995 Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information appearing under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
1995 Annual Report to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data in the
Company's 1995 Annual Report to Stockholders are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers under the
caption "Election of Directors," "Board Meetings and Committees," "Security
Ownership of Certain Beneficial Owners and Management" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 26, 1995
(the "Proxy Statement"), is incorporated herein by reference. In addition to
executive officers who are also directors of the Company, the following
executive officers are not directors:
<TABLE>
<CAPTION>
Name Age Position
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mark A. Byington 43 Vice President, Engineering
Hal E. Edmondson 65 Vice President, Manufacturing
Timothy R. Hansen 34 Vice President, SPECTRUM(TM) Business Unit
Shaun McFall 35 Vice President, Corporate Marketing
John P. O'Neil 57 Vice President, Personnel
Graham J. Powell 48 Vice President, Worldwide Sales
Carl A. Thomsen 50 Vice President, Chief Financial Officer & Secretary
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Mr. Byington has served as Vice President of Engineering from April
1989 to November 1990 and from January 1993 to present. During the interim
period of November 1990 to January 1993, Mr. Byington participated in the design
of the Company's SPECTRUM(TM) and QUANTUM(TM) radio products. From February 1984
to April 1989, Mr. Byington served as Senior Development Engineer and Director
of Digital Signal Processing in Engineering. From 1976 to 1984, Mr. Byington
held various positions at the Farinon Division of Harris Corporation. Mr.
Byington holds a BSEE degree from Stanford University.
Mr. Hal E. Edmondson joined the Company as Vice President of
Manufacturing in January, 1995. He was most recently the Corporate Vice
President of Worldwide Manufacturing for Hewlett Packard ("HP"). His tenure with
Hewlett Packard spans over 30 years of increasing responsibility in
Manufacturing at several HP divisions including the General Manager of the
Microwave Product Division. Mr. Edmondson holds a B.S. degree in Mechanical
Engineering from the University of Kansas and an MBA from Harvard.
Mr. Timothy R. Hansen was promoted to Vice President SPECTRUM(TM)
Business Unit in February, 1995. Prior to this promotion, he was Vice President
and Program Manager of the Spectrum Product line. He joined Digital Microwave
Corporation in August, 1984 as product line manager, and has held management
positions in marketing, planning, sales and order management. Mr. Hansen holds a
B.S. degree in Electrical Engineering from the University of Illinois, and a MBA
from UCLA.
Mr. Shaun McFall was promoted to Vice President, Corporation Marketing
in February, 1995. Prior to his promotion, he was the Director of Marketing. He
joined Digital Microwave UK operations in January, 1989 and has held several
management positions in Marketing. Prior to joining Digital Microwave, he worked
for GEC Telecommunication Ltd. in Germany, and Ferranti Ltd in Edinburgh,
Scotland. Mr. McFall holds a B.S. degree in Electrical Engineering from the
University of Strathclyde in Scotland.
Mr. John O'Neil joined the Company as Vice President of Human Resources
of the Company in May, 1993. Mr. O'Neil was Vice President of Personnel and
Administration of BEI Electronics, Inc., a defense electronics firm, from
January 1989 to April 1993. From 1987 to 1988 Mr. O'Neil was Human Resources
Vice President at C.P. National Corporation, a communication and energy company.
Mr. O'Neil holds a B.S. degree in Business Administration from the University of
San Francisco and a M.B.A. degree from Pepperdine University.
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Mr. Graham J. Powell was promoted to Vice President, of Worldwide Sales
in February, 1995. Prior to this promotion, he was Vice President for Sales in
Europe, Africa and the Middle East. Mr. Powell joined Digital Microwave in
Coventry, England in July 1990 as Vice President of Sales in the United Kingdom.
Previously he worked for GEC Telecommunications Ltd and was Group Marketing
Director for Vanderhoff plc. He holds a degree in Electrical Engineering from
Lanchester College.
Mr. Carl A. Thomsen joined the Company as Vice President, Chief
Financial Officer and Secretary in February, 1995. Prior to joining Digital
Microwave, he was Senior Vice President and Chief Financial Officer of Measurex
Corporation. Mr. Thomsen joined Measurex Corporation in 1983 as Corporate
Controller, was promoted to Vice President in 1986, to Vice President Finance in
1991, to Chief Financial Officer in 1992, and to Senior Vice President in 1993.
Mr. Thomsen holds a B.S. degree in Business Administration from Valparaiso
University and an MBA from the University of Michigan.
ITEM 11. EXECUTIVE COMPENSATION
The information included in the Company's Proxy Statement under the
captions "Compensation of Directors," "Executive Compensation and Other
Information," "Stock Options," "Option Exercises and Holdings" "Compensation
Committee Interlocks and Insider Participation" and "Employment and
Termination Arrangements" is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information is included in the Company's Proxy Statement under the
captions "Security Ownership of Certain Beneficial Owners and Management" and
"Employment and Termination Arrangements" is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Manufacturing and Suppliers." and Note 7 of Notes to Consolidated
Financial Statements of the Company's 1995 Annual Report incorporated herein by
reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements are contained
in the Company's fiscal 1995 Annual Report to Stockholders:
1. Consolidated Balance Sheets as of March 31,
1995 and 1994
2. Consolidated Statements of Operations for
each of the three years in the period ended
March 31, 1995
3. Consolidated Statements of Stockholders'
Equity for each of the three years in the
period ended March 31, 1995
4. Consolidated Statements of Cash Flows for
each of the three years in the period ended
March 31, 1995
5. Notes to Consolidated Financial Statements
6. Report of Independent Public Accountants
2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules for
each of the three years in the period ended March 31, 1994 are
submitted herewith:
II Valuation and Qualifying Accounts and
Reserves
Schedules not listed above have been omitted because they are not
applicable or required, or information required to be set forth therein is
included in the Consolidated Financial Statements, including the Notes thereto,
incorporated herein by reference.
3. EXHIBITS
The Exhibit Index begins on Page 22 hereof.
(b) No reports on Form 8-K were filed by the Registrant during the
quarter ended March 31, 1995.
(c) See Item 14 (a) 3 above.
(d) See Item 14 (a) 2 above.
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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.
Date: June 28, 1995.
DIGITAL MICROWAVE CORPORATION
By: /s/ Richard C. Alberding By: /s/Clifford H. Higgerson
- --------------------------------- --------------------------------
Richard C. Alberding Clifford H. Higgerson
Co-Chief Executive Officer Co-Chief Executive Officer
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<PAGE> 19
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Digital Microwave
Corporation do hereby constitute and appoint Richard C. Alberding, Clifford H.
Higgerson and Carl A. Thomsen, and each of them, the lawful attorney and agent
or attorneys and agents with power and authority to do any and all acts and
things and to execute any and all instruments which said attorneys and agents,
or either of them, determine may be necessary or advisable or required to enable
Digital Microwave Corporation to comply with the Securities and Exchange Act of
1934, as amended, and any rules or regulations or requirements of the Securities
and Exchange Commission in connection with this Form 10-K Report. Without
limiting the generality of the foregoing power and authority, the powers include
the power and authority to sign the names of the undersigned officers and
directors in the capacities indicated below to this Form 10-K report or
amendment or supplements thereto, and each of the undersigned hereby ratifies
and confirms all that said attorneys and agents or either of them, shall do or
cause to be done by virtue hereof. This Power of Attorney may be signed in
several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney
as of the date indicated opposite his name.
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 dates as indicated.
<TABLE>
<CAPTION>
Signatures Signing Capacity Date
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Richard C. Alberding Co-Chief Executive Officer, Director, June 28, 1995
--------------------- (Principal Executive Officer)
Richard C. Alberding
/s/ Clifford H. Higgerson Co-Chief Executive Officer, Director, June 28, 1995
---------------------- (Principal Executive Officer)
Clifford H. Higgerson
/s/ Carl A. Thomsen Vice President, Chief Financial Officer & Secretary June 28, 1995
---------------------- (Principal Financial and Accounting Officer)
Carl A. Thomsen
/s/ William E. Gibson President, DMC Telecom and Director June 28, 1995
----------------------
William E. Gibson
/s/ Jack M. Gill Director June 28, 1995
----------------------
Jack M. Gill
/s/ Billy B. Oliver Director June 28, 1995
----------------------
Billy B. Oliver
</TABLE>
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<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To: Digital Microwave Corporation:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in Digital Microwave
Corporation's Annual Report incorporated by reference in this Form 10-K, and
have issued our report thereon dated May 8, 1995. Our audits were made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The schedule listed in item 14a(2) is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
consolidated financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
May 8, 1995
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SCHEDULE II
DIGITAL MICROWAVE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------------------
Balance at Charged to Balance
Beginning of Costs and Deductions/ at End
Description Period Expenses Write-off of Period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended March 31, 1995
Allowance for
doubtful accounts $3,240 $276 $2,103 $1,413
Year Ended March 31, 1994
Allowance for
doubtful accounts $3,067 $300 $ 127 $3,240
Accrued restructuring
charge $ 617 $ 89 $ 617 --
Year Ended March 31, 1993
Allowance for
doubtful accounts $2,430 $650 $ 13 $3,067
Accrued restructuring
charge $1,546 $ -- $ 929 $ 617
</TABLE>
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1
(File No. 33-13431) (reference is also made to Exhibit 4.2).
3.2 Amended and Restated Bylaws. (incorporated by reference to Exhibit
3.2 to the Company's Annual Report on Form 10-K for the year ended
March 31, 1993.)
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Annual Report on Form 10-K for the
year ended March 31, 1988).
4.2 Rights Agreement dated as of October 24, 1991 between the Company
and Manufacturers Hanover Trust Company of California, including
the Certificate of Designations for the Series A Junior
Participating Preferred Stock (incorporated by reference to
Exhibit 1 to the Company's Current Report on 8-K filed on November
5, 1991).
10.1+ Digital Microwave Corporation 1984 Stock Option Plan, as amended
and restated on June 11, 1991. (incorporated by reference to
Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
year ended March 31, 1991).
10.2+ Form of Installment Incentive Stock Option Agreement (incorporated
by reference to Exhibit 28.2 to the Company's Registration
Statement on Form S-8 (File No. 33-43155).
10.3+ Form of installment Non-qualified Stock Option Agreement
(incorporated by reference to Exhibit 28.3 to the Company's
Registration Statement on Form S-8 (File No. 33-43155)).
10.4* Private Label Agreement dated January 16, 1990 between the Company
and the Network Systems Division of American Telephone & Telegraph
Company. (incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended March 31,
1990).
10.5 Lease of premises located at 170 Rose Orchard Way, San Jose,
California (incorporated by reference to Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the year-ended March 31,
1991).
10.6 Lease of premises located at 130 Rose Orchard Way, San Jose,
California. (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended March 31,
1991).
10.7 Lease of premises located at 110 Rose Orchard Way, San Jose,
California. (incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended March 31,
1991).
10.8 Microelectronics Technology, Inc. Stock Purchase Agreement dated
as of March 9, 1984 (incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1 (File No.
33-13431).
10.9 Microelectronics Technology, Inc. Development Agreement dated as
of March 9, 1984 (incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (File No. 33-13431).
10.10* Agreement dated July 17, 1990 between the Company and In-Flight
Phone Corporation. (incorporated by reference to Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the year ended March
31, 1991).
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10.11 Form of Indemnification Agreement between the Company and its
directors and certain officers (incorporated by reference to
Exhibit 10.16 to the Company's Registration Statement on Form S-1
(File No. 33-13431).
10.12* Technology Transfer & Marketing Agreement dated October 2, 1987
between Microelectronics Technology Inc. and the Company
(incorporated by reference to Exhibit 10.17 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1988).
10.13* Business Agreement dated August 28, 1987 between Sungmi Telecom
Electronics Co., Ltd. and the Company (incorporated by reference
to Exhibit 10.18 to the Company's Annual Report on Form 10-K for
the year ended March 31, 1988).
10.14* Technical License Agreement dated August 28, 1987 between Sungmi
TeleCom Electronics Co., Ltd. and the Company (incorporated by
reference to Exhibit 10.19 to the Company's Annual Report on Form
10-K for the year ended March 31, 1988).
10.15 Agreement of Purchase and Sale of Stock dates as of March 29, 1989
between Optical Microwave Networks Inc. and the Company
(incorporated by reference to Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1989).
10.16 Agreement of Purchase and Sale of Stock dated as of March 30, 1989
between the Company and Microelectronics Technology, Inc. (Taiwan)
and Microelectronics Technology, Inc. (USA) (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the year ended March 31, 1989).
10.17 Shareholders' Agreement of Optical Microwave Networks Inc. dated
as of March 30, 1989 (incorporated by reference to Exhibit 10.22
to the Company's Annual Report on Form 10-K for the year ended
March 31, 1989).
10.18 License Agreement dated as of March 30, 1989 among the Company,
Optical Microwave Networks, Inc., Microelectronics Technology,
Inc. (Taiwan) and Microelectronics Technology, Inc. (USA)
(incorporated by reference to Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1989).
10.19 Shareholders' Agreement of DMC TeleCom (Malaysia) Sdn.Bhd .dated
as of February 9, 1991. (incorporated by reference to Exhibit
10.19 to the Company's Annual Report on Form 10-K for the year
ended March 31, 1991).
10.20 Technology Transfer Agreement dates as of February 9, 1991 between
the Company and DMC TeleCom (Malaysia) Sdn. Bhd. (incorporated by
reference to Exhibit 10.20 to the Company's Annual Report on Form
10-K for the year ended March 31, 1991).
10.21* Teaming Agreement dated November 20, 1991 between DMC TeleCom U.K.
Ltd. and AT&T Network Systems Deutschland GmbH. (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the year ended March 31, 1992).
10.22 Loan and Security Agreement dated June 25, 1992 between the
Company and CoastFed Business Credit Corporation. (incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form
10-K for the year ended March 31, 1992).
10.23 Accounts Collateral Security Agreement dated June 25, 1992 between
the Company and CoastFed Business Credit Corporation.
(incorporated by reference to Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1992).
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<PAGE> 24
10.24 Letter of Credit Collateral Agreement dated June 25, 1992 between
the Company and CoastFed Business Credit Corporation.
(incorporated by reference to Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1992).
10.25 Letter Agreement dated June 23, 1993 between the Company and
CoastFed Business Credit Corporation (incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the
year ended March 31, 1993).
10.26* Product Acquisition Agreement dated as of September 23, 1992
between the Company and Microelectronics Technology, Inc.
(incorporated by reference to Exhibit 10.26 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1993).
10.27* Product Acquisition Agreement dated as of December 28, 1992
between the Company and Microelectronics Technology, Inc.
(incorporated by reference to Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1993).
10.28* Teaming Agreement dated as of November 16, 1993 between the
Company and Siemens AG (including the Supply Agreement dated
November 16, 1993 between Siemens AG and E-Plus Mobilfunk GmbH).
(incorporated by reference to Exhibit 10.29 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1994).
10.29 Amendment to Loan Documents between the Company and CoastFed
Business Credit Corporation dated as of July 28, 1994
(incorporated by reference to Exhibit (1) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1994).
10.30 Amended and Restated Accounts and Inventory Collateral Security
Agreement between the Company and CoastFed Business Credit
Corporation dated as of July 28, 1994 (incorporated by reference
to Exhibit (2) to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994.).
10.31 Loan Agreement dated October 28, 1994 (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994).
10.32 Agreement on Exchange of Interim Equipment dated October 27, 1994
(incorporated by reference the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1994).
10.33+ Digital Microwave Corporation 1994 Stock Incentive Plan.
(incorporated by reference to the Registration Statement on Form
S-8 filed with the Commission on October 17, 1994).
10.34 Loan and Security Agreement dated March 21, 1995 between the
Company and Bank of the West.
10.35 Amendment to Security Agreement dated March 31, 1995 between the
Company and Heller Financial, Inc.
13.1 Annual Report to Stockholders.
21.1 List of subsidiaries. (incorporated by reference to the Company's
1994 Annual Report on Form 10K for the year ended March 31, 1994).
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (included on page 19 of this Annual Report on
Form 10-K).
27.1 Financial data schedule
+ Management Contract or Compensatory Plan or Arrangement.
* Confidential treatment of certain portions of this exhibit has
been requested.
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_______________________________________________________________________________
DIGITAL MICROWAVE CORPORATION
EXPORT-IMPORT BANK
LOAN AND SECURITY AGREEMENT
_______________________________________________________________________________
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . 6
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Revolving Advances . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Overadvances . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 Interest Rates, Payments, and Calculations . . . . . . . . . . 7
2.4 Crediting Payments . . . . . . . . . . . . . . . . . . . . . . 8
2.5 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.6 Increased Costs . . . . . . . . . . . . . . . . . . . . . . . 8
2.7 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.8 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 9
3. CONDITIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.1 Conditions Precedent to Initial Advance . . . . . . . . . . . 9
3.2 Conditions Precedent to all Advances . . . . . . . . . . . . . 9
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . 10
4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . 10
4.2 Delivery of Additional Documentation Required . . . . . . . . 10
4.3 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . 10
4.4 Right to Inspect . . . . . . . . . . . . . . . . . . . . . . . 10
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . 11
5.1 Due Organization and Qualification . . . . . . . . . . . . . . 11
5.2 Due Authorization; No Conflict . . . . . . . . . . . . . . . . 11
5.3 No Prior Encumbrances . . . . . . . . . . . . . . . . . . . . 11
5.4 Bona Fide Eligible Accounts . . . . . . . . . . . . . . . . . 11
5.5 Merchantable Inventory . . . . . . . . . . . . . . . . . . . . 11
5.6 Name; Location of Chief Executive Office . . . . . . . . . . . 11
5.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.8 No Material Adverse Change in Financial Statements . . . . . . 11
5.9 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.10 Regulatory Compliance . . . . . . . . . . . . . . . . . . . . 11
5.11 Environmental Condition . . . . . . . . . . . . . . . . . . . 12
5.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.13 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.14 Government Consents . . . . . . . . . . . . . . . . . . . . . 12
5.15 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . 12
5.16 CoastFed Loan Documents . . . . . . . . . . . . . . . . . . . 12
5.17 Ex-Im Guarantee . . . . . . . . . . . . . . . . . . . . . . . 12
6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.1 Good Standing . . . . . . . . . . . . . . . . . . . . . . . . 13
6.2 Government Compliance . . . . . . . . . . . . . . . . . . . . 13
6.3 Financial Statements, Reports, Certificates . . . . . . . . . 13
6.4 Inventory; Equipment . . . . . . . . . . . . . . . . . . . . . 14
6.5 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.7 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . 14
6.8 CoastFed Loan Documents . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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<TABLE>
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6.9 Notice in Event of Filing of Action for Debtor's Relief . . . 15
6.10 Terms of Sale . . . . . . . . . . . . . . . . . . . . . . . . 15
6.11 Assignment of Letter of Credit Proceeds . . . . . . . . . . . 15
6.13 Further Assurances . . . . . . . . . . . . . . . . . . . . . . 15
7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.1 Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.2 Change in Business . . . . . . . . . . . . . . . . . . . . . . 16
7.3 Mergers or Acquisitions . . . . . . . . . . . . . . . . . . . 16
7.4 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.5 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.6 Distributions . . . . . . . . . . . . . . . . . . . . . . . . 16
7.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.8 Transactions with Affiliates . . . . . . . . . . . . . . . . . 16
7.9 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . 16
7.10 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.11 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.12 CoastFed and Heller Loan Documents . . . . . . . . . . . . . . 17
7.13 Ex-Im Guarantee . . . . . . . . . . . . . . . . . . . . . . . 17
8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.1 Payment Default . . . . . . . . . . . . . . . . . . . . . . . 17
8.2 Covenant Default; Cross Default . . . . . . . . . . . . . . . 17
8.3 Material Adverse Effect . . . . . . . . . . . . . . . . . . . 17
8.4 Attachment . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.5 Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.6 Other Agreements . . . . . . . . . . . . . . . . . . . . . . . 18
8.7 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.8 Misrepresentations . . . . . . . . . . . . . . . . . . . . . . 18
8.9 Ex-Im Guarantee . . . . . . . . . . . . . . . . . . . . . . . 18
9. BANK'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . 18
9.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . 18
9.2 Ex-Im Direction . . . . . . . . . . . . . . . . . . . . . . . 19
9.3 Ex-Im Notification . . . . . . . . . . . . . . . . . . . . . . 19
9.4 Accounts Collection . . . . . . . . . . . . . . . . . . . . . 19
9.5 Bank Expenses . . . . . . . . . . . . . . . . . . . . . . . . 19
9.6 Bank's Liability for Collateral . . . . . . . . . . . . . . . 20
9.7 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . 20
9.8 Demand; Protest; Application . . . . . . . . . . . . . . . . . 20
10. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . . . . . . . 21
12. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
12.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . 21
12.2 lndemnification . . . . . . . . . . . . . . . . . . . . . . . 21
12.3 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . 21
12.4 Severability of Provisions; Headings . . . . . . . . . . . . . 21
12.5 Amendments in Writing . . . . . . . . . . . . . . . . . . . . 21
12.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 21
12.7 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.8 Ex-Im Guarantee . . . . . . . . . . . . . . . . . . . . . . . 22
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This LOAN AND SECURITY AGREEMENT is entered into as of March 21,
1995, by and between BANK OF THE WEST ("Bank") and DIGITAL MICROWAVE
CORPORATION ("Borrower").
RECITALS
Borrower and Bank desire in this Agreement to set forth their
agreement with respect to a working capital facility to be guaranteed by
Export-Import Bank of the United States.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the
following terms shall have the following definitions:
"Accounts" means all presently existing and
hereafter arising accounts, contract rights, and all other forms of obligations
owing to Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
"Advance" or "Advances" means an Advance
under the Revolving Facility.
"Affiliate" means, with respect to any
Person, any Person that owns or controls directly or indirectly such Person,
any Person that controls or is controlled by or is under common control with
such Person, and each of such Person's senior executive officers, directors,
and partners.
"Availability Date" means the earlier of (i)
twelve (12) months after the date of the first Advance or (ii) February 29,
1996.
"Bank Expenses" means all: reasonable costs
or expenses (including reasonable attorneys' fees and expenses) incurred in
connection with the preparation, negotiation, administration, and enforcement
of the Loan Documents, including any costs incurred in relation to opposing or
seeking to obtain relief from any stay or restructioning order prohibiting Bank
from exercising its rights as a secured party, foreclosing upon or disposing of
Collateral, or such related matters; and Bank's reasonable attorneys' fees and
expenses incurred in amending, enforcing or defending the Loan Documents,
whether or not suit is brought. Bank Expenses shall not include the Coast Fee
that Bank pays pursuant to the Intercreditor Agreement of even date herewith
between Bank and CoastFed Business Credit Corporation.
"Borrower's Account" means a deposit account
maintained by Borrower with Bank upon terms mutually acceptable to Borrower and
Bank.
"Borrowing Base" has the meaning set forth in
Section 2.1 hereof.
"Borrower's Books" means all of Borrower's
books and records including: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and
all computer programs, or tape files, and the equipment, containing such
information.
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"Business Day" means any day that is not a
Saturday, Sunday, or other day on which banks in the State of California are
authorized or required to close.
"Closing Date" means the date of this
Agreement.
"CoastFed Loan Documents" means the Loan and
Security Agreement between CoastFed Business Credit Corporation and Borrower
dated June 25, 1992 as amended from time to time and the instruments and
documents executed in connection with that agreement.
"Code" means the California Uniform
Commercial Code.
"Collateral" means the property described on
Exhibit A attached hereto.
"Contingent Obligation" means, as applied to
any Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to (i) any indebtedness, lease, dividend, letter of credit
or other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or discounted
or sold with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect to
undrawn letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business. The
amount of any Contingent Obligation shall be deemed to be an amount equal to
the stated or determined amount of the primary obligation in respect of which
such Contingent Obligation is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof as determined by
such Person in good faith; provided, however, that such amount shall not in any
event exceed the maximum amount of the obligations under the guarantee or other
support arrangement.
"Contract" means the subcontract between
Siemens, A.G. ("Siemens") and Borrower dated November 16, 1993, which was
entered into to fulfill the obligations of Siemens under a contract between
Siemens and E-Plus Mobilfunk, GmbH dated November 16,1993.
"Eligible Foreign Accounts" means those
Accounts that arise in the ordinary course of Borrower's business from
Borrower's sale of Eligible Foreign Inventory (i) with respect to which the
account debtor is not a resident of the United States; (ii) that have been
validly assigned and comply with all of Borrower's representations and
warranties to Bank; (iii) that are and at all times shall continue to be
acceptable to Bank in all respects; and (iv) that have been approved by the
Ex-Im Bank under the Ex-Im Guarantee (which approval, as of the date hereof,
has been granted only with respect to Accounts arising out of the Contract);
provided, that standards of eligibility may be fixed and revised from time to
time by Bank in Bank's reasonable judgment and upon notification thereof to the
Borrower in accordance with the provisions hereof. Eligible Foreign Accounts
shall not include the following:
(a) Accounts that the account debtor
has failed to pay within ninety (90) days of the original date of the invoice;
(b) Unless pre-approved by Bank,
Accounts on which payment is due more than thirty (30) days after the original
date of the invoice (Bank acknowledges that the Contract has been
pre-approved);
(c) Accounts with respect to which the
account debtor is an officer, employee, or agent of Borrower;
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(d) Accounts with respect to which the
account debtor is an Affiliate of Borrower;
(e) Accounts with respect to which
Borrower is liable to the account debtor for goods sold or services rendered by
the account debtor to Borrower, but only to the extent of Borrower's liability
to such account debtor;
(f) Accounts with respect to which the
account debtor disputes liability or makes any claim with respect thereto (but
only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business;
(g) Accounts with respect to which the
account debtor is located in any country in which Ex-Im Bank is prohibited from
doing business;
(h) Accounts generated by the sale of
Products purchased for military purposes; and
(i) Accounts the collection of which
Bank determines after reasonable inquiry to be doubtful.
"Eligible Foreign Inventory" means Inventory
held by Borrower in the United States in connection with satisfaction of
Borrower's obligations under the Contract, other than Inventory that consists
of, or is to be incorporated into, or is used for the sale or manufacture of,
(i) Products that are destined for shipment to any countries in which Ex-Im
Bank is prohibited from doing business, (ii) Products that are purchased for
any military purpose, or (iii) Products that are destined for shipment to
countries designated in Ex-Im Bank's Country Limitation Schedule as countries
in which Ex-Im Bank cover is not available for commercial reasons.
"ERISA" means the Employment Retirement
Income Security Act of 1974, as amended, and the regulations thereunder.
"Ex-Im Bank" means Export-Import Bank of the
United States.
"Ex-Im Committed Line" means Fifteen Million
Dollars ($15,000,000).
"Ex-Im Guarantee" means that certain Working
Capital Guarantee Agreement No. APO67616XX issued by Ex-Im Bank with respect
to Borrower, including the Transaction Attachment and Special Conditions
attached thereto, as amended from time to time, the terms of which are
incorporated by reference into this Agreement.
"GAAP" means generally accepted accounting
principles as in effect from time to time.
"Heller Loan Documents" means the $10,000,000
Promissory Note dated October 28, 1994 (the "Note") executed by Borrower in
favor of Heller Financial, Inc. ("HFI") and the related Security Agreement
dated as of October 28, 1994 between the Company and HFI, as amended from time
to time and the instruments and documents executed in connection with such Note
and Security Agreement.
"Indebtedness" means (a) all indebtedness for
borrowed money or the deferred purchase price of property or services,
including without limitation reimbursement and other obligations with respect
to surety bonds and letters of credit, (b) all obligations evidenced by notes,
bonds, debentures or similar instruments, (c) all capital lease obligations and
(d) all Contingent Obligations.
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"Insolvency Proceeding" means any proceeding
commenced by or against any person or entity under any provision of the United
States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.
"Inventory" means Borrower's raw materials,
work in process and finished goods.
"Investment" means any beneficial ownership
of (including stock, partnership interest or other securities) any Person, or
any loan, advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of
1986, as amended, and the regulations thereunder.
"Lien" means any mortgage, lien, deed of
trust, security interest or other encumbrance.
"Loan Documents" means, collectively, this
Agreement, any note or notes executed by Borrower, and any other agreement
entered into between Borrower and Bank in connection with this Agreement, all
as amended or extended from time to time.
"Material Adverse Effect" means a material
adverse effect on (i) the business operations or condition of Borrower and its
Subsidiaries taken as a whole, (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents,
(iii) the validity or enforceability of the Loan Documents, or (iv) the rights
and remedies of Bank under the Loan Documents.
"Maturity Date" means August 28, 1996.
"Negotiable Collateral" means all of
Borrower's present and future letters of credit of which it is a beneficiary,
notes, drafts, instruments, securities, documents of title, and chattel paper,
and Borrower's Books relating to any of the foregoing.
"Obligations" means all debt, principal,
interest, Bank Expenses and other amounts owed to the Bank by Borrower pursuant
to this Agreement or any other agreement, whether absolute or contingent, due
or to become due, now existing or hereafter arising (including all interest
accruing after the commencement of an Insolvency Proceeding), and including any
debt, liability, or obligation owing from Borrower to others that Bank may have
obtained by assignment or otherwise.
"Periodic Payments" means all installments or
similar recurring payments that Borrower may now or hereafter become obligated
to pay to Bank pursuant to the terms and provisions of any instrument, or
agreement now or hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor
of Bank arising under this Agreement or any other Loan Document;
(b) Subordinated Debt;
(c) Capital leases or indebtedness
incurred solely to purchase equipment, which is secured in accordance with
clause (c) of "Permitted Liens" below and is not in excess of the
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lesser of the purchase price of such equipment or the fair market value of such
equipment on the date of acquisition;
(d) Indebtedness to trade creditors
incurred in the ordinary course of business; and
(e) Indebtedness incurred under the
CoastFed Loan Documents and the Heller Loan Documents, and or extensions,
renewals and refinancings of such Indebtedness, provided that the principal
amount of such Indebtedness being extended, renewed or refinanced does not
increase;
(f) guarantees of any obligations of
the Borrower's Subsidiaries and of the Borrower's joint venture in Malaysia;
(g) obligations pursuant to the
Borrower's bylaws or in indemnification agreements, to indemnify officers,
directors and employees of the Borrower; and
(h) other Indebtedness for borrowed
money not in excess of $500,000 in any fiscal year.
"Permitted Investment" means: (a)(i)
marketable direct obligations issued or unconditionally guaranteed by the
United States of America or any agency or any State thereof maturing within one
(1) year from the date of acquisition thereof, (ii) commercial paper maturing
no more than one (1) year from the date of creation thereof and currently
having the highest rating obtainable from either Standard & Poor's Corporation
or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing
no more than one (1) year from the date of investment therein issued by Bank;
and (b) Investments in the Borrower's Subsidiaries and existing joint venturers
to fund the normal operating expenses in the ordinary course of business of
such Subsidiaries and joint ventures in an amount not to exceed $500,000 in any
fiscal year.
"Permitted Liens" means the following:
(a) Any Liens arising under this
Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments
or other governmental charges or levies, either not delinquent or being
contested in good faith by appropriate proceedings, provided the same have no
priority over any of Bank's security interests;
(c) Liens upon or in any equipment
acquired by Borrower or any of its Subsidiaries after the date hereof to secure
the purchase price of such equipment or indebtedness incurred solely for the
purpose of financing the acquisition of such equipment or existing on such
equipment at the time of acquisition, provided that the Lien is confined solely
to the property so acquired and improvements thereon, and the proceeds of such
equipment;
(d) Liens under the CoastFed Loan
Documents and Heller Loan Documents;
(e) Liens incurred in connection with
the extension, renewal or refinancing of the indebtedness secured by Liens of
the type described in clauses (a) through (d) above and (i) below, provided
that any extension, renewal or replacement Lien shall be limited to the
property encumbered by the existing Lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase;
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(f) Liens of materialmen, mechanics,
warehousemen, carriers, or employees or other like Liens arising in the
ordinary course of business and securing obligations either not delinquent or
being contested in good faith by appropriate proceedings;
(g) Any judgment, attachment or
similar lien, unless the judgment it secures is not fully covered by insurance
and has not been discharged or execution thereof effectively stayed and bonded
against pending appeal with 30 days of the entry thereof;
(h) Easements, rights of way,
servitudes or zoning or building restrictions and other minor encumbrances on
real property and irregularities in the title to such property which do not in
the aggregate materially impair the use or value of such property or risk the
loss or forfeiture of title thereto; and
(i) Liens on assets of corporations
which become subsidiaries of the Borrower after the date hereof, provided that
such Liens existed at the time the respective corporations became subsidiaries
of the Borrower and were not created in anticipation thereof.
"Person" means any individual, sole
proprietorship, limited liability company, partnership, joint venture, trust,
unincorporated organization, association, corporation, institution, public
benefit corporation, firm, joint stock company, estate, entity or governmental
agency.
"Prime Rate" means the variable rate of
interest, per annum, most recently announced by Bank, as its "prime rate,"
whether or not such announced rate is the lowest rate available from Bank.
"Products" means digital microwave
equipment.
"Responsible Officer" means each of the Chief
Executive Officer, Chief Financial Officer and Corporate Controller of
Borrower.
"Revolving Facility" means the facility under
which Borrower may request Bank to issue cash advances, as specified in Section
2.1 hereof.
"Subordinated Debt" means any debt incurred
by Borrower that is subordinated to the debt owing by Borrower to Bank on terms
acceptable to Bank.
"Subsidiary" means any corporation or
partnership in which (i) any general partnership interest or (ii) more than 50%
of the stock of which by the terms thereof ordinary voting power to elect the
Board of Directors, managers or trustees of the entity shall, at the time as of
which any determination is being made, is owned by Borrower, either directly or
through an Affiliate.
"Tangible Net Worth" means at any date as of
which the amount thereof shall be determined, the consolidated total assets of
Borrower and its Subsidiaries minus, without duplication, (i) the sum of any
amounts attributable to (a) goodwill, (b) intangible items such as unamortized
debt discount and expense, patents, trade and service marks and names,
copyrights and research and development expenses except prepaid expenses, (c)
obligations owed to Borrower by Affiliates, and (d) all reserves not already
deducted from assets, and (ii) Total Liabilities.
"Total Liabilities" means at any date as of
which the amount thereof shall be determined, all obligations that should, in
accordance with GAAP be classified as liabilities on the consolidated balance
sheet of Borrower, including in any event all Indebtedness.
1.2 Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and all
calculations made hereunder shall be made in
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accordance with GAAP. When used herein, the terms "financial statements" shall
include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
2.1 Revolving Advances. Subject to the terms and
conditions of this Agreement, Bank agrees to make revolving advances
("Advances") to Borrower in an amount not to exceed the lesser of the Ex-Im
Committed Line or the Borrowing Base. For purposes of this Agreement
"Borrowing Base" shall mean an amount equal to the sum of (i) Ninety Percent
(90%) of the Eligible Foreign Accounts and (ii) Seventy Percent (70%) of
Eligible Foreign Inventory. The value of Eligible Foreign Inventory for the
purpose of calculating the Borrowing Base shall be the lesser of the cost or
the wholesale fair market value of that inventory.
To evidence the Advances, Borrower shall execute and deliver to Bank
on the date hereof a promissory note (the "Note") in substantially the form
attached hereto as Exhibit B.
Borrower may request an Advance at any time from the date hereof
until the Availability Date. Whenever Borrower desires an Advance, Borrower
will notify Bank by facsimile transmission or telephone no later than 11:00
a.m. California time, on the Business Day that the Advance is to be made.
Each such notification shall be promptly confirmed by a Borrowing Certificate
in substantially the form of Schedule 2.1 hereto. In addition to the procedure
set forth in the preceding sentence, Bank is authorized to make Advances under
this Agreement, based upon written instructions received from a Responsible
Officer or without instructions if in Bank's discretion such Advances are
necessary to meet Obligations which have become due and remain unpaid. Bank
will credit the amount of Advances made under this Section 2.1 to such deposit
account held by Bank as Bank elects. Amounts borrowed pursuant to this Section
2.1 may be repaid and re-borrowed at any time through the Availability Date so
long as no Event of Default has occurred and is continuing, and may be repaid
at any time without penalty or premium during the term of this Agreement.
2.2 Overadvances. If, at any time or for any
reason, the amount of Obligations pursuant to this Agreement owed by Borrower
to Bank pursuant to Section 2.1 of this Agreement is greater than the lesser of
(i) the Borrowing Base or (ii) the Ex-Im Committed Line, at the option of Bank,
(i) Borrower shall immediately pay to Bank, in cash, the amount of such excess,
or (ii) Borrower shall furnish additional collateral to Bank in form and amount
satisfactory to Bank and Ex-Im Bank.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as
specified to the contrary in any Loan Document, the Obligations under this
Agreement shall bear interest, on the average Daily Balance, at a rate equal to
One and One Half Percentage Point (1.5%) above the Prime Rate.
(b) Default Rate. All Obligations
shall bear interest, from and after the occurrence of an Event of Default, at a
rate equal to three (3) percentage points above the rate that applied
immediately prior to the occurrence of the Event of Default.
(c) Payments. Interest hereunder
shall be due and payable on the last Business Day of each calendar month during
the term hereof. Bank shall, at its option, upon notice to Borrower, charge
such interest, all Bank Expenses, and all Periodic Payments against Borrower's
deposit account or against the Ex-Im Committed Line, in which case those
amounts shall thereafter accrue interest at the rate then applicable hereunder.
Any interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate
then applicable hereunder.
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(d) Computation. In the event the
Prime Rate is changed from time to time hereafter, the applicable rate of
interest hereunder shall be increased or decreased contemporaneously with such
change by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments. The receipt by Bank of
any wire transfer of funds, check, or other item of payment shall be
immediately applied to conditionally reduce Obligations, but shall not be
considered a payment on account unless such wire transfer is of immediately
available federal funds and is made to the appropriate deposit account of Bank
or unless and until such check or other item of payment is honored when
presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 11:00 a.m.
California time shall be deemed to have been received by Bank as of the
opening of business on the immediately following Business Day.
2.5 Fees. Borrower shall pay to Bank the
following fees:
(a) Financial Examination and
Appraisal Fees. Bank's reasonable fees and reasonable out-of-pocket expenses
for Bank's initial audit of Borrower's Accounts and Inventory, and for each
subsequent appraisal of Collateral and financial analysis and examination of
Borrower performed from time to time by Bank or its agents;
(b) Facility and Collateral Management
Fee. A facility fee equal to Thirty Thousand Dollars ($30,000) and a
collateral management fee equal to Five Thousand Dollars ($5,000), which fees
shall be due and fully earned upon Bank's receipt of the Ex-Im Guarantee;
(c) Ex-Im Fee. A fee to Ex-Im Bank
equal to Two Hundred Twenty Five Thousand Dollars ($225,000), which fee shall
be due upon Bank's demand or, if no demand is made, then on February 28, 1995;
and
(d) Bank Expenses. On the Closing
Date, Bank Expenses incurred through the Closing Date and, after the Closing
Date, all Bank Expenses as they become due.
2.6 Increased Costs. In case any law,
regulation, treaty or official directive or the interpretation or application
thereof by any court or any governmental authority charged with the
administration thereof or the compliance with any guideline or request of any
central bank or other governmental authority (whether or not having the force
of law):
(a) subjects Bank to any tax with
respect to payments of principal or interest or any other amounts payable '
hereunder by Borrower or otherwise with respect to the transactions
contemplated hereby (except for taxes on the overall net income of Bank imposed
by the United States of America or any political subdivision thereof); or
(b) imposes, modifies or deems
applicable any deposit insurance, reserve, special deposit or similar
requirement against assets held by, or deposits in or for the account of, or
loans by, Bank; or
(c) imposes upon Bank any other
condition with respect to their performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
within thirty (30) days following demand the amount of such increase in cost,
reduction in income or additional expense as and when such cost, reduction or
expense is
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incurred or determined, upon presentation by Bank of a statement in the amount
and setting forth Bank's calculation thereof, which statement shall be deemed
true and correct absent manifest error.
2.7 Term. This Agreement shall become effective
upon acceptance by Bank and shall continue in full force and effect for a term
ending on the Maturity Date, on which date all Obligations shall become
immediately due and payable. Notwithstanding the foregoing, Bank shall have
the right, upon notice, to terminate this Agreement immediately during the
existence of an Event of Default and Borrower shall have the right, upon
notice, to terminate this Agreement immediately upon payment in full of its
Obligations then outstanding hereunder. Notwithstanding any termination of
this Agreement, all of Bank's security interest in all of the Collateral and
all of the terms and provisions of this Agreement shall continue in full force
and effect until all Obligations have been paid and performed in full, and no
termination shall impair any right or remedy of Bank, nor shall any such
termination relieve Borrower of any Obligation to Bank until all of the
Obligations have been paid and performed in full.
2.8 Use of Proceeds. Borrower will use the
proceeds of Advances only for the purpose of financing the cost of
manufacturing or selling the Products for sale outside of the United States.
The proceeds shall not be used to finance (i) that part of the cost of any
Products that has been charged to foreign labor, materials or services, unless
such part is not greater than fifty percent (50%) of the cost of the Products
and is incorporated into such Product in the United States or (ii) the
manufacture or sale of goods and services destined for military use. Borrower
shall not use the proceeds to service any existing or future Indebtedness of
Borrower unrelated to the Advances made pursuant to this Agreement.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance. The
obligation of Bank to make the initial Advance is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, the following:
(a) this Agreement and the Note, each
duly executed by Borrower;
(b) a certificate of the secretary of
Borrower with respect to incumbency and resolutions authorizing the execution
and delivery of this Agreement;
(c) an opinion of Borrower's counsel;
(d) the Ex-Im Guarantee;
(e) Intercreditor Agreements among
Heller Financial, Inc., Bank and Borrower and among CoastFed Business Credit
Corporation, Bank and Borrower;
(f) an audit of the Collateral;
(g) such other documents, and
completion of such other matters, as Bank may deem reasonably necessary or
appropriate.
3.2 Conditions Precedent to all Advances. The
obligation of Bank to make each Advance, including the initial Advance, is
further subject to the following conditions:
(a) timely receipt by Bank of the
Notice of Borrowing as provided in Section 2.1;
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(b) a copy of the executed firm
written export purchase order and an assignment relating to the requested
Advance, the payment terms of which shall be acceptable to Bank;
(c) a statement and breakdown of costs
demonstrating that Advances are only for documented U.S. costs associated with
sales that will generate Eligible Foreign Accounts; and
(d) the representations and warranties
contained in Section 5 shall be true and accurate in all material respects on
and as of the date of such Notice of Borrowing and on the effective date of
each Advance as though made at and as of each such date, and no Event of
Default shall have occurred and be continuing, or would result from such
Advance.
The making of each Advance shall be deemed to be a representation
and warranty by Borrower on the date of such Advance as to the accuracy of the
facts referred to in subsection (b) of this Section 3.2.
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower hereby
assigns and grants to Bank a continuing security interest in all presently
existing and hereafter acquired or arising Collateral (including all rights
under the Contract) in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents.
4.2 Delivery of Additional Documentation
Required. Borrower shall from time to time execute and deliver to Bank, at the
request of Bank, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Power of Attorney. Borrower hereby
irrevocably appoints Bank (and any of Bank's designated officers, or employees)
as Borrower's true and lawful attorney, with power to: (a) send requests for
verification of Accounts; (b) endorse Borrower's name on any checks or other
forms of payment or security that may come into Bank's possession; (c) sign the
name of Borrower on any of the documents described in Section 4.2; (d) sign
Borrower's name on any invoice or bill of lading relating to any Account,
drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (e) make, settle,
and adjust all claims under and decisions with respect to Borrower's policies
of insurance; and (f) settle and adjust disputes and claims respecting the
accounts directly with account debtors, for amounts and upon terms which Bank
determines to be reasonable. The appointment of Bank as Borrower's
attorney-in-fact, and each of Bank's rights and powers, being coupled with an
interest, is irrevocable until all of the Obligations have been fully repaid
and performed and Bank's obligation to provide advances hereunder is
terminated.
4.4 Right to Inspect. Bank (through any of its
officers, employees, or agents) shall have the right, upon reasonable prior
notice, from time to time during Borrower's usual business hours, to inspect
Borrower's Books, facilities and activities, and to check, test, inspect, value
and appraise the Collateral in order to verify Borrower's financial condition
or the amount, condition of, or any other matter relating to, the Collateral.
Bank shall conduct quarterly accounts receivable audits and physical
inspections of the Inventory relating to the Contract at Borrower's expense,
the results of which audits shall be satisfactory to Bank. Borrower will cause
its officers and employees to give their full cooperation and assistance in
connection therewith.
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5. REPRESENTATIONS AND WARRANTIES
Borrower represents, warrants and covenants as follows:
5.1 Due Organization and Qualification. Borrower
and each Subsidiary is a corporation duly existing and in good standing under
the laws of its state of incorporation and qualified and licensed to do
business in, and is in good standing in, any state in which the conduct of its
business or its ownership of property requires that it be so qualified.
5.2 Due Authorization; No Conflict. The
execution, delivery, and performance of the Loan Documents are within Borrower's
powers, have been duly authorized, and are not in conflict with nor constitute
a breach of any provision contained in Borrower's Certificate of Incorporation
or Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which Borrower is bound. Borrower
is not in default under any agreement to which it is a party or by which it is
bound, which default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and
indefeasible title to the Collateral, free and clear of Liens, except for
Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible
Foreign Accounts are or will be bona fide existing obligations of Borrower's
account debtors, created by the sale or lease of goods, the licensing of
rights, or the rendition of services to account debtors in the ordinary course
of Borrower's business, and, except as may be provided in the Contract,
unconditionally owed to Borrower. The property giving rise to such Eligible
Foreign Accounts has been delivered to the account debtor or to the account
debtor's agent for immediate shipment to and unconditional acceptance by the
account debtor. Borrower has not received notice of actual or imminent
Insolvency Proceeding of any account debtor that is included in any Borrowing
Base Certificate as an Eligible Account.
5.5 Merchantable Inventory. All Inventory is in
all material respects of good and marketable quality, free from all material
defects.
5.6 Name; Location of Chief Executive Office.
Borrower has not done business under any name other than that specified on the
signature page hereof. The chief executive office of Borrower is located at
the address indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in the
Schedule hereto, there are no actions or proceedings pending by or against
Borrower or any Subsidiary before any court or administrative agency in which
an adverse decision is reasonably likely to have a Material Adverse Effect or a
material adverse effect on Borrower's interest or Bank's security interest in
the Collateral. Borrower does not have knowledge of any such pending or
threatened actions or proceedings.
5.8 No Material Adverse Change in Financial
Statements. All consolidated financial statements related to Borrower that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.9 Solvency. Borrower is solvent and able to
pay its debts (including trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each
Subsidiary has met the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. No event has occurred resulting
from Borrower's failure to comply with ERISA that is reasonably likely to
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result in Borrower's incurring any liability that could have a Material Adverse
Effect. Borrower is not an "investment company" or a company "controlled" by
an "investment company" within the meaning of the Investment Company Act of
1940. Borrower is not engaged principally, or as one of the important
activities, in the business of extending credit for the purpose of purchasing
or carrying margin stock (within the meaning of Regulations G, T and U of the
Board of Governors of the Federal Reserve System). Borrower has complied with
all the provisions of the Federal Fair Labor Standards Act, and Borrower has
complied with all other statutes, laws, ordinances, and government rules and
regulations to which it is subject, non-compliance with which could have a
Material Adverse Effect or a material adverse effect on the Collateral or the
priority of Bank's Lien on the Collateral.
5.11 Environmental Condition. None of Borrower's
or any Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal or state governmental
agency concerning any action or omission by Borrower or any Subsidiary relating
to the release or disposal of hazardous waste or hazardous substances; except
in each case where the failure of any of the foregoing to be true and correct
could not reasonably be expected to have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of the Bank's Lien on
the Collateral.
5.12 Taxes. Borrower and each Subsidiary has
filed or caused to be filed all tax returns required to be filed, and has paid,
or has made adequate provision for the payment of, all taxes reflected therein.
5.13 Subsidiaries. Borrower does not own any
stock, partnership interest or other equity securities of any Person, except as
set forth in the Schedule and except for Permitted Investments.
5.14 Government Consents. Borrower and each
Subsidiary has obtained all consents, approvals and authorizations of, made all
declarations or filings with, and given all notices to, all governmental
authorities that are necessary for the continued operation of Borrower's
business as currently conducted; except in each case where the failure of any
of the foregoing to be true and correct could not reasonably be expected to
have a Material Adverse Effect.
5.15 Full Disclosure. No representation, warranty
or other statement made by Borrower in any certificate or written statement
furnished to Bank contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained in
such certificates or statements not misleading.
5.16 CoastFed Loan Documents. The representations
and warranties contained in the CoastFed Loan Documents are true and correct.
5.17 Ex-Im Guarantee. The Ex-Im Guarantee remains
in full force and effect.
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6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in
full of all outstanding Obligations, and for so long as Bank may have any
commitment to make an Advance hereunder, Borrower shall do all of the
following:
6.1 Good Standi. Borrower shall maintain its and
each of its Subsidiaries' corporate existence and good standing in its
jurisdiction of incorporation and maintain qualification in each jurisdiction
in which the failure to so qualify could have a Material Adverse Effect,
provided that Borrower and each of its Subsidiaries shall at all times be
permitted to merge with a Subsidiary (as long as Borrower remains the surviving
entity) and acquire substantially all the assets of a Subsidiary, and the
Borrower shall at all times be permitted to dissolve any inactive or dormant
Subsidiaries. Borrower shall maintain, and shall cause each of its
Subsidiaries to maintain, to the extent consistent with prudent management of
Borrower's business, in force all licenses, approvals and agreements, the loss
of which could have a Material Adverse Effect.
6.2 Government Compliance. Borrower shall meet,
and shall cause each Subsidiary to meet, the minimum funding requirements of
ERISA with respect to any employee benefit plans subject to ERISA. Borrower
has not withdrawn from, and no termination or partial termination has occurred
with respect to any deferred compensation plan, and Borrower has not withdrawn
from any multi-employer plan under ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates.
Borrower shall maintain a standard system of accounting in accordance with
GAAP. Borrower shall deliver to Bank: (a) within five (5) days after filing or
sending copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any holders of Subordinated
Debt and all reports on Form 10-K and 10-Q filed with the Securities and
Exchange Commission; (and, in any case with respect to Form 10-K, within
ninety-five (95) days after the end of Borrower's fiscal year and, with respect
to Form 10-Q, within fifty (50) days after the end of each fiscal quarter); (b)
promptly upon receipt of notice thereof, a report of any legal actions pending
or threatened against Borrower or any Subsidiary that could result in damages
or costs to Borrower or any Subsidiary of Five Hundred Thousand Dollars
($500,000) or more; and (c) such budgets, sales projections, operating plans or
other financial information as Bank may reasonably request from time to time.
Borrower shall maintain as Bank's custodian copies of Borrower's sales
journals, customer purchase orders and evidence of shipping arrangements in
each case with respect to the Contract, and shall deliver copies thereof to
Bank at Bank's request. Borrower shall deliver copies of the items described
in clause (a), above, to Ex-Im Bank at the same time as Borrower delivers such
items to Bank.
Within twenty (20) days after the last day of each month, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a Responsible
Officer in a form and substance acceptable to Bank, together with aged listings
of accounts receivable and accounts payable in each case with respect to the
Contract, in form and substance acceptable to Bank.
Borrower shall deliver to Bank with the reports on Form 10-K and
10-Q a Compliance Certificate signed by a Responsible Officer in form and
substance acceptable to Bank.
Bank shall have a right from time to time hereafter to audit
Borrower's Accounts and Inventory in each case with respect to the Contract at
Borrower's expense, provided that such audits will be conducted no more often
than every three (3) months unless an Event of Default has occurred and is
continuing.
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Bank may destroy or otherwise dispose of any documents delivered to
Bank six (6) months after Bank's receipt thereof, unless Borrower makes written
request therefor.
6.4 Inventory; Equipment. Borrower shall keep
all Inventory in good and marketable condition, free from all material defects.
Returns and allowances, if any, as between Borrower and its account debtors
shall be on the same basis and in accordance with the usual customary practices
of Borrower, as they exist at the time of the execution and delivery of this
Agreement. Borrower shall promptly notify Bank of all returns and recoveries
and of all disputes and claims in each case with respect to the Contract, where
the return, recovery, dispute or claim involves more than Fifty Thousand
Dollars ($50,000). Borrower shall keep accurate records with respect to the
Inventory, in accordance with Borrower's usual and customary practices, as they
exist at the time of execution and delivery of this Agreement, all of which
shall be available to Bank for inspection and copying upon Bank's request.
Borrower shall keep all equipment used in Borrower's business in good operating
condition. Borrower shall maintain records of such equipment showing date of
purchase, identifying numbers, and records of maintenance, and shall deliver
the same from time to time to Bank upon Bank's request. Bank shall have the
right from time to time during Borrower's usual business hours to inspect such
equipment.
6.5 Taxes. Borrower shall make, and shall cause
each Subsidiary to make, due and timely payment or deposit of all material
federal, state, and local taxes, assessments, or contributions required of it
by law, and will execute and deliver to Bank, on demand, appropriate
certificates attesting to the payment or deposit thereof; and Borrower will
make, and will cause each Subsidiary to make, timely payment or deposit of all
material tax payments and withholding taxes required of it by applicable laws,
including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Bank with proof satisfactory to Bank indicating that Borrower or a
Subsidiary has made such payments or deposits; provided that Borrower or a
Subsidiary need not make any payment if the amount or validity of such payment
is contested in good faith by appropriate proceedings and is reserved against
(to the extent required by GAAP) by Borrower.
6.6 Insurance.
(a) Borrower, at its expense, shall
keep the Collateral (other than Accounts) insured against loss or damage by
fire, theft, explosion, sprinklers, and all other hazards and risks, and in
such amounts, as ordinarily insured against by other owners in similar
businesses conducted in the locations where Borrower's business is conducted on
the date hereof. Borrower shall also maintain insurance relating to Borrower's
business and ownership of Borrower's property (other than Accounts) in amounts
and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance
shall be in such form, with such companies, and in such amounts as reasonably
satisfactory to Bank. All such policies of property insurance shall contain a
lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank
as an additional loss payee thereof and all liability insurance policies shall
show the Bank as an additional insured, and shall specify that the insurer must
give at least twenty (20) days notice to Bank before canceling its policy for
any reason. Borrower shall deliver to Bank certified copies of such policies
of insurance and evidence of the payments of all premiums therefor. All
proceeds payable under any such policy shall, at the option of Bank, be payable
to Bank to be applied on account of the Obligations.
6.7 Tangible Net Worth. Borrower shall maintain,
as of the last day of each fiscal quarter, a Tangible Net Worth of not less
than Thirty Million Dollars ($30,000,000).
6.8 CoastFed Loan Documents. Borrower shall
comply in all respects with the provisions of the CoastFed Loan Documents.
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6.9 Notice in Event of Filing of Action for
Debtor's Relief. Borrower shall promptly notify Bank in writing of the
occurrence of any of the following: (1) Borrower begins or consents in any
manner to any proceeding or arrangement for its liquidation in whole or in part
or to any other proceeding or arrangement whereby any of its assets are subject
generally to the payment of its liabilities or whereby any receiver, trustee,
liquidator or the like is appointed for it or any substantial part of its
assets (including without limitation the filing by Borrower of a petition for
appointment as a debtor-in-possession under Title 11 of the U.S. Code); (2)
Borrower fails to obtain the dismissal or stay on appeal within thirty (30)
calendar days of the commencement of any proceeding arrangement referred to in
(1) above; (3) Borrower begins any other procedure for the relief of
financially distressed or insolvent debtors, or such procedure has been
commenced against it, whether voluntarily or involuntarily, and such procedure
has not been effectively terminated, dismissed or stayed within thirty (30)
calendar days after the commencement thereof, or (4) Borrower begins any
procedure for its dissolution, or a procedure therefor has been commenced
against it.
6.10 Terms of Sale. Borrower shall require
payment in United States Dollars for the Products, unless Ex-Im Bank otherwise
agrees in writing. All sales financed with the proceeds of any Advances shall
be on open account not to exceed net fifty (50) days to Siemens in the Federal
Republic of Germany.
6.11 Assignment of Letter of Credit Proceeds.
(1) Borrower shall require that each
letter of credit issued for its benefit with respect to the sale of the
Products (the "Letter of Credit") shall provide that one of the required
documents for the first payment under the Letter of Credit shall be a copy of
an assignment of proceeds executed by Borrower (the beneficiary of the Letter
of Credit) in favor of Bank in substantially the same form of Schedule 6.11;
such assignment shall be for the full amount of the Letter of Credit, and shall
provide that all payments under the Letter of Credit shall be made to the Bank.
(2) Borrower will take all necessary
and advisable steps to ensure that the Letter of Credit will be delivered to
the paying or confirming bank and that said paying or confirming bank shall be
authorized to retain the Letter of Credit on behalf of Bank as the assignee of
the proceeds thereof.
(3) In the event that Borrower is
unable to obtain the assignment of the Letter of Credit in accordance with
subparagraphs (1) and (2) above, Borrower shall arrange in writing (with a copy
to Bank) with the account party under the Letter of Credit for the issuer of
such Letter of Credit to include therein a provision to the effect that payment
under such Letter of Credit shall be negotiated only at Bank's counters or,
alternatively, that payment shall be made only to the Collateral Account.
6.12 Assignment of Contact Proceeds. Borrower
assigns to Bank, effective upon receipt of each written purchase order for the
Products under the Contract, all amounts to be paid to Borrower in connection
with such purchase order. Such amounts shall be payable to Borrower's Account.
6.13 Further Assurances. At any time and from
time to time Borrower shall execute and deliver such further instruments and
take such further action as may reasonably be requested by Bank to effect the
purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any
credit hereunder shall be available and until payment in full of the
Obligations or for so long as Bank may have any commitment to
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make any Advances, Borrower will not do any of the following, or enter into any
agreement to do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer
or otherwise dispose of (collectively, a "Transfer"), or permit any of its
Subsidiaries to Transfer, all or any part of its business or property, other
than (i) Transfers of Inventory in the ordinary course of business, (ii)
Transfers of assets in the ordinary course of business which have become worm
out or obsolete or which are promptly being replaced, and (iii) other Transfers
of assets (other than Accounts) outside the ordinary course of business in an
aggregate amount not to exceed One Hundred Fifty Thousand Dollars ($150,000) in
any fiscal year.
7.2 Change in Business. Suspend or go out of
business, engage in any business, or permit any of its Subsidiaries to engage
in any business, other than the businesses currently engaged in by Borrower and
any business substantially similar or related thereto (or incidental thereto),
or suffer a material change in Borrower's ownership. Borrower will not,
without thirty (30) days prior written notification to Bank, relocate its chief
executive office.
7.3 Mergers or Acquisitions. Except as provided
in Section 6.1 above, merge or consolidate, or permit any of its Subsidiaries
to merge or consolidate, with or into any other business organization, or
acquire, or permit any of its Subsidiaries to acquire, all or a substantial
portion of the capital stock or property of another Person.
7.4 Indebtedness. Create, incur, assume or be or
remain liable with respect to any Indebtedness, or permit any Subsidiary so to
do, other than Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or
suffer to exist any Lien with respect to any of its property, or assign or
otherwise convey any right to receive income, including the sale of any
Accounts, or permit any of its Subsidiaries so to do, except for Permitted
Liens.
7.6 Distributions. Pay any dividends or make any
other distribution or payment on account of or in redemption, retirement or
purchase of any capital stock, or set apart any funds for the payment of
dividends (other than dividends payable in shares of Borrower's stock) on any
class of shares of Borrower's stock, or apply any of its funds, property or
assets for, the purchase, redemption, or other retirement of, or make any other
distribution, by reduction of capital or otherwise, in respect of any class of
shares of Borrower's stock, or with respect to any other funds or assets.
7.7 Investments. Directly or indirectly acquire
or own, or make any Investment in or to any Person, or permit any of its
Subsidiaries so to do, other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or
indirectly enter into or permit to exist any material transaction with any
Affiliate of Borrower except for transactions that are in the ordinary course
of Borrower's business, upon fair and reasonable terms that are no less
favorable to Borrower than would be obtained in an arm's length transaction
with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in
respect of any Subordinated Debt, or permit any of its Subsidiaries to make any
such payment, except in compliance with any applicable subordination agreement
or with the terms of such Subordinated Debt, or amend any provision contained
in any documentation relating to the Subordinated Debt without Bank's prior
written consent.
7.10 Inventory. Store the Inventory with a
bailee, warehouseman, or similar party unless Bank has received a pledge of the
warehouse receipt covering such Inventory. Except for Inventory sold in the
ordinary course of business and except for such other locations as Bank may
approve in writing, Borrower shall keep the Inventory only at the location set
forth in Section 10
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<PAGE> 20
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company"
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for
such purpose. Fail to meet the minimum funding requirements of ERISA, permit
a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur,
permit any condition to exist that would entitle any Person to obtain a decree
adjudicating that any Plan under ERISA must be terminated, fail to comply with
the Federal Fair Labor Standards Act or violate any law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral, or permit any
of its Subsidiaries to do any of the foregoing.
7.12 CoastFed and Heller Loan Documents. Violate
or otherwise fail to comply with any provision of the CoastFed Loan Documents
or the Heller Loan Documents.
7.13 Ex-Im Guarantee. Take any action, or permit
any action to be taken, that causes or, with the passage of time, could
reasonably be expected to cause, the Ex-Im Guarantee to cease to be in full
force and effect.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute
an Event of Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay
when due and payable, or when declared due and payable, any portion of the
Obligations (whether of principal, interest (including any interest which, but
for the provisions of the United States Bankruptcy Code, would have accrued on
such accounts), fees and charges due Bank, taxes, reimbursement of Bank
Expenses, or otherwise);
8.2 Covenant Default; Cross Default. If Borrower
fails or neglects to perform, keep, or observe any material term, provision,
condition, covenant, or agreement contained in this Agreement, in any of the
CoastFed Loan Documents, the Heller Loan Documents, or the Loan Documents, or
an Event of Default occurs under any of the CoastFed Loan Documents or the
Heller Loan Documents; or
8.3 Material Adverse Effect. If there occurs an
event that has a Material Adverse Effect or a material impairment of the value
or priority of Bank's security interest in the Collateral;
8.4 Attachment. If all or any portion of
Borrower's assets is attached, seized, subjected to a writ or distress warrant,
or is levied upon, or comes into the possession of any trustee, receiver or
person acting in a similar capacity and such attachment, seizure, writ or
distress warrant or levy has not been removed, discharged or rescinded within
ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented
by court order from continuing to conduct all or any part of its business
affairs, or if a judgment or other claim becomes a lien or encumbrance upon any
portion of Borrower's assets, or if a notice of lien, levy, or assessment is
filed of record with respect to any of Borrower's assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, and the same is not paid
within ten (10) days after Borrower receives notice thereof, (provided that no
Advances will be required to be made during any cure period permitted under
this section);
8.5 Insolvency. If Borrower becomes insolvent,
or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency
Proceeding is commenced against Borrower and is not
17
<PAGE> 21
dismissed or stayed within ten (10) days (provided that no Advances will be made
prior to the dismissal of such Insolvency Proceeding);
8.6 Other Agreements. If there is a default in
any agreement to which Borrower is a party with a third party or parties
resulting in a right by such third party or parties, whether or not exercised,
to accelerate the maturity of any Indebtedness in an amount in excess of Three
Hundred Thousand Dollars ($300,000), or which default could have a Material
Adverse Effect;
8.7 Judgments. If a judgment or judgments for
the payment of money in an amount, individually or in the aggregate, the
uninsured portion of which is at least Three Hundred Thousand Dollars
($300,000), shall be rendered against Borrower and shall remain unsatisfied and
unstayed for a period of ten (10) days (provided that no Advances will be made
prior to the satisfaction or stay of such judgment); or
8.8 Misrepresentations. If any material
misrepresentation or misstatement exists now or hereafter in any warranty or
representation set forth herein or in any certificate delivered to Bank by any
Responsible Officer pursuant to this Agreement or to induce Bank to enter into
this Agreement or any other Loan Document.
8.9 Ex-Im Guarantee. If the Ex-Im Guarantee
ceases for any reason to be in full force and effect, or if the Ex-Im Bank
declares the Ex-Im Guarantee void or revokes or purports to revoke its
obligations under the Ex-Im Guarantee.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and
continuation of an Event of Default, Bank may, at its election, upon notice
(except for an Event of Default specified under section 8.5, as to which no
notice shall be required), do any one or more of the following:
(a) Declare all Obligations, whether
evidenced by this Agreement, by any of the other Loan Documents, or otherwise,
immediately due and payable;
(b) Cease advancing money or extending
credit to or for the benefit of Borrower under this Agreement or under any
other agreement between Borrower and Bank;
(c) Settle or adjust disputes and
claims directly with account debtors for amounts, upon terms and in whatever
order that Bank reasonably considers advisable;
(d) Make such payments and do such
acts as Bank considers necessary or reasonable to protect its security interest
in the Collateral. Borrower agrees to assemble the Collateral if Bank so
requires, and to make the Collateral available to Bank as Bank may designate.
Borrower authorizes Bank to enter the premises where the Collateral is located,
to take and maintain possession of the Collateral, or any part of it, and to
pay, purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith. With respect to any
of Borrower's owned premises, Borrower hereby grants Bank a license to enter
into possession of such premises and to occupy the same, without charge, for up
to one hundred twenty (120) days in order to exercise any of Bank's rights or
remedies provided herein, at law, in equity, or otherwise;
(e) Set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at anytime owing to or for the credit or the account of
Borrower held by Bank;
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<PAGE> 22
(f) Ship, reclaim, recover, store,
finish, maintain, repair, prepare for sale, advertise for sale, and sell (in
the manner provided for herein) the Collateral. Bank is hereby granted a
license or other right, solely pursuant to the provisions of this section 9.1,
to use, without charge, Borrower's labels, patents, copyrights, rights of use
of any name, trade secrets, trade names, trademarks, service marks, and
advertising matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale, and selling any
Collateral and, in connection with Bank's exercise of its rights under this
section 9.1, Borrower's rights under all licenses and all franchise agreements
shall inure to Bank's benefit;
(g) Sell the Collateral at either a
public or private sale, or both, by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such places
(including Borrower's premises) as Bank determines is commercially reasonable;
(h) Bank may credit bid and purchase
at any public sale; and
(i) Any deficiency that exists after
disposition of the Collateral as provided above will be paid immediately by
Borrower.
9.2 Ex-Im Direction. Upon the occurrence of an
Event of Default, Ex-Im Bank shall have a right to: (i) direct Bank to exercise
the remedies specified in section 9.1 and (ii) request that Bank accelerate the
maturity of any other loans to Borrower as to which Bank has a right to
accelerate.
9.3 Ex-Im Notification. Bank shall have a right
immediately to notify Ex-Im Bank in writing if it has knowledge of the
occurrence of any of the following events: (1) any failure to pay any amount
due under this Agreement or the Note; (2) the Borrowing Base is less than the
sum of outstanding Advances hereunder (after giving effect to any prepayments);
(3) any failure to pay when due any amount payable to Bank by the Borrower
under any loan(s) extended by Bank to Borrower; (4) the filing of an action for
debtor's relief by, against, or on behalf of Borrower, or (5) any threatened or
pending material litigation against Borrower, or any material dispute involving
Borrower.
In the event that it sends such a notification to Ex-Im Bank, Bank
shall have a right thereafter to send Ex-Im Bank a written report on the status
of the events covered by said notification on each Business Day which occurs
every thirty (30) calendar days after the date of said notification, until such
time as Bank files a claim with Ex-Im Bank or said default or other events have
been cured.
No Advances shall be made by Bank following said notification to
Ex-Im Bank, unless Ex-Im Bank gives its written approval thereto.
If directed to do so by Ex-Im Bank, Bank shall have a right promptly
to exercise any rights it may have against Borrower to demand the immediate
repayment of all amounts outstanding under the Loan Documents.
9.4 Accounts Collection. At any time from the
date of this Agreement, Bank may notify any Person owing funds to Borrower in
connection with the Contract of Bank's security interest in such funds.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and immediately deliver such payments to Bank
in their original form as received from the account debtor, with proper
endorsements for deposit.
9.5 Bank Expenses. If Borrower fails to pay any
amounts or furnish any required proof of payment due to third persons or
entities, as required under the terms of this Agreement, then Bank may do any
or all of the following: (a) make payment of the same or any part thereof, (b)
set up such reserves under the Revolving Facility as Bank deems necessary to
protect Bank from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type discussed in
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<PAGE> 23
Section 6.6 of this Agreement, and take any action with respect to such
policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall
constitute Bank Expenses, shall be immediately due and payable, and shall bear
interest at the then applicable rate hereinabove provided, and shall be secured
by the Collateral. Any payments made by Bank shall not constitute an agreement
by Bank to make similar payments in the future or a waiver by Bank of any Event
of Default under this Agreement.
9.6 Bank's Liability for Collateral. So long as
Bank complies with reasonable banking practices, Bank shall not in any way or
manner be liable or responsible for: (a) the safekeeping of the Collateral; (b)
any loss or damage thereto occurring or arising in any manner or fashion from
any cause; (c) any diminution in the value thereof; or (d) any act or default
of any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever. All risk of loss, damage or destruction of the Collateral shall be
borne by Borrower.
9.7 Remedies Cumulative. Bank's rights and
remedies under this Agreement, the Loan Documents, and all other agreements
shall be cumulative. Bank shall have all other rights and remedies not
inconsistent herewith as provided under the Code, by law, or in equity. No
exercise by Bank of one right or remedy shall be deemed an election, and no
waiver by Bank of any Event of Default on Borrower's part shall be deemed a
continuing waiver. No delay by Bank shall constitute a waiver, election, or
acquiescence by it. No waiver by Bank shall be effective unless in writing.
9.8 Demand; Protest; Application. Borrower
waives demand, protest, notice of protest, notice of default or dishonor,
notice of payment and nonpayment, notice of any default, nonpayment at
maturity, release, compromise, settlement, extension, or renewal of accounts,
documents, instruments, chattel paper, and guarantees at any time held by Bank
on which Borrower may in any way be liable. Borrower waives any right to
direct the application of any amount received by Bank.
10. NOTICES
Unless otherwise provided in this Agreement, all notices
or demands by any party relating to this Agreement or any other agreement
entered into in connection herewith shall be in writing and (except for
financial statements and other informational documents which may be sent by
first-class mail, postage prepaid) shall be personally delivered or sent by a
recognized, overnight delivery service or by certified mail, postage prepaid,
return receipt requested, or by telefacsimile to Borrower or to Bank, as the
case may be, at its addresses set forth below:
If to Borrower: Digital Microwave Corporation
170 Rose Orchard Way
San Jose, CA 95134
Attn: Chief Financial Officer
FAX: (408) 944-1770
If to Bank: Bank of the West
50 West San Fernando
P.O. Box 1000, 7-064-2
San Jose, CA 95108
Attn: Daniel W. Corry
FAX: (408) 947-5117
The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given
to the other.
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<PAGE> 24
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to
the exclusive jurisdiction of the state and Federal courts located in the
County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH
PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall
bind and inure to the benefit of the respective successors and permitted
assigns of each of the parties; provided, however, that neither this Agreement
nor any rights hereunder may be assigned by Borrower without Bank's prior
written consent, which consent may be granted or withheld in Bank's sole
discretion. Bank shall have the right without the consent of or notice to
Borrower to sell, transfer, negotiate, or grant participations in all or any
part of, or any interest in, Bank's obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend,
indemnify and hold harmless Bank and its officers, employees, and agents
against: (a) all obligations, demands, claims, and liabilities claimed or
asserted by any other party in connection with the transactions contemplated by
this Agreement; and (b) all losses or Bank Expenses in any way suffered,
incurred, or paid by Bank as a result of or in any way arising out of,
following, or consequential to transactions between Bank and Borrower whether
under this Agreement, or otherwise (including without limitation reasonable
attorneys fees and expenses), except for losses caused by Bank's gross
negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for
the performance of all obligations set forth in this Agreement.
12.4 Severability of Provisions; Headings. Each
provision of this Agreement shall be severable from every other provision of
this Agreement for the purpose of determining the legal enforceability of any
specific provision. Headings are set forth in this Agreement for convenience
only.
12.5 Amendments in Writing. This Agreement cannot
be changed or terminated orally. Without the prior written consent of Ex-Im
Bank, no material amendment of or deviation from the terms of this Agreement or
the Note shall be made that would adversely affect the interests of Ex-Im Bank
under the Ex-Im Guarantee including without limitation the rescheduling of any
payment terms provided for in this Agreement. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties hereto with respect to the subject matter of this Agreement, if any,
are merged into this Agreement.
12.6 Counterparts. This Agreement may be executed
in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one
and the same Agreement.
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<PAGE> 25
12.7 Survival. All covenants, representations and
warranties made in this Agreement shall continue in full force and effect so
long as any Obligations remain outstanding. The obligations of Borrower to
indemnify Bank with respect to the expenses, damages, losses, costs and
liabilities described in Section 10.3 shall survive until all applicable
statute of limitations periods with respect to actions that may be brought
against Bank have run.
12.8 Ex-Im Guarantee. The terms of the Ex-Im
Guarantee are incorporated into the terms of this Agreement. Borrower
acknowledges and accepts that the Ex-Im Guarantee is effective for a 12-month
period only and shall expire not later than the Availability Date. Nothing in
the Ex-Im Guarantee shall have the effect of obligating, whether expressly or
by implication, or otherwise give rise to any real or implied liability on the
part of Ex-Im Bank to continue to extend the Ex-Im Guarantee at the end of such
12-month period or to undertake any future guarantee related to Borrower with
respect to the Contract.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
DIGITAL MICROWAVE CORPORATION
By: /s/ CARL A. THOMSEN
---------------------------------
Title: Vice President - CFO
BANK OF THE WEST
By: /s/ DANIEL W. CORRY
---------------------------------
Daniel W. Corry
Vice President
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<PAGE> 26
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired,
including, without limitation, all merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products including
such inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or
hereafter acquired, including, without limitation, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications, leases,
license agreements, franchise agreements, blueprints, drawings, purchase
orders, customer lists, route lists, infringements, claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, design rights,
income tax refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts,
contract rights, royalties, license rights and all other forms of obligations
owing to Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned by
performance, and any and all credit insurance, guaranties, and other security
therefor, as well as all merchandise returned to or reclaimed by Borrower and
Borrower's Books relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities,
letters of credit, certificates of deposit, instruments and chattel paper now
owned or hereafter acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter
acquired; all trade secret rights, including all rights to unpatented
inventions, know-how, operating manuals, license rights and agreements and
confidential information, now owned or hereafter acquired; all mask work or
similar rights available for the protection of semiconductor chips, now owned
or hereafter acquired; all claims for damages by way of any past, present and
future infringement of any of the foregoing, and
(g) Any and all claims, rights and interests in any of the
above and all substitutions for, additions and accessions to and proceeds
thereof.
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<PAGE> 27
Exhibit B
Revolving Promissory Note
(Export-Import Line)
$15,000,000 San Jose, California
March , 1995
FOR VALUE RECEIVED, the undersigned, Digital Microwave Corporation
(the "Borrower"), promises to pay to the order of Bank of the West ("Bank"), at
such place as the holder hereof may designate, in lawful money of the United
States of America, the aggregate unpaid principal amount of all advances
("Advances") made by Bank to Borrower under the terms of this Note, up to a
maximum principal amount of Fifteen Million Dollars ($15,000,000). Borrower
shall also pay interest on the aggregate unpaid principal amount of such
Advances at the rates and in accordance with the terms of the Loan and Security
Agreement between Borrower and Bank of even date herewith, as amended from time
to time (the "Loan Agreement") on the last Business Day of each month after an
Advance has been made. The entire principal amount and all accrued interest
shall be due and payable on August 28, 1996, or on such earlier date, as
provided for in the Loan Agreement.
Borrower irrevocably waives the right to direct the application of
any and all payments at any time hereafter received by Bank from or on behalf
of Borrower, and Borrower irrevocably agrees that Bank shall have the
continuing exclusive right to apply any and all such payments against the then
due and owing obligations of Borrower as Bank may deem advisable. In the
absence of a specific determination by Bank with respect thereto, all payments
shall be applied in the following order: (a) then due and payable fees and
expenses; (b) then due and payable interest payments and mandatory prepayments;
and (c) then due and payable principal payments and optional prepayments.
Bank is hereby authorized by Borrower to endorse on Bank's books and
records each Advance made by Bank under this Note and the amount of each
payment or prepayment of principal of each such Advance received by Bank; it
being understood, however, that failure to make any such endorsement (or any
errors in notation) shall not affect the obligations of Borrower with respect
to Advances made hereunder, and payments of principal by Borrower shall be
credited to Borrower notwithstanding the failure to make a notation (or any
errors in notation) thereof on such books and records.
Borrower promises to pay Bank all reasonable costs and reasonable
expenses of collection of this Note and to pay all reasonable attorneys' fees
incurred in such collection or in any suit or action to collect this Note or in
any appeal thereof. Borrower waives presentment, demand, protest, notice of
protest, notice of dishonor, notice of nonpayment, and any and all other
notices and demands in connection with the delivery, acceptance, performance,
default or enforcement of this Note, as well as any applicable statute of
limitations. No delay by Bank in exercising any power or right hereunder shall
operate as a waiver of any power or right. Time is of the essence as to all
obligations hereunder.
This Note is issued pursuant to the Loan Agreement, which shall
govern the rights and obligations of Borrower with respect to all obligations
hereunder.
This Note shall be deemed to be made under, and shall be construed
in accordance with and governed by, the laws of the State of California,
excluding conflicts of laws principles.
DIGITAL MICROWAVE CORPORATION
By: _________________________________
Title: ______________________________
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<PAGE> 28
SCHEDULE 2.1
BORROWING CERTIFICATE
The undersigned hereby certifies as follows:
I, ____________, am the duly elected and acting _______________ of
Digital Microwave Corporation ("Borrower").
This certificate is delivered pursuant to Section 2.1 of that
certain Loan and Security Agreement (Export-Import Bank) dated as of March ___,
1995 (the "Loan Agreement") by and between Borrower and Bank of the West
("Bank"). The terms used in this Borrowing Certificate which are defined in
the Loan Agreement have the same meaning herein as ascribed to them therein.
Borrower is confirming its telephone request made on ___________,
19__ for an Advance as follows:
(a) The date on which the Advance is to be made is
_______________, 19__.
(b) The amount of the Advance is to be $__________.
As of the date of the telephone request for and Advance confirmed by
this Borrowing Certificate, all representations and warranties of Borrower
stated in the Loan Agreement are true, accurate and complete in all material
respects and Borrower is in compliance with all terms and conditions of the
Ex-Im Guarantee; provided, however, that those representations and warranties
expressly referring to another date shall be true, accurate and complete in all
material respects as of such date.
IN WITNESS WHEREOF, this Borrowing Certificate is executed by the
undersigned as of this ____ day of __________, 199_.
DIGITAL MICROWAVE CORPORATION
By: _________________________________
Title: ______________________________
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<PAGE> 29
SCHEDULE 6.11
Request to Pay Proceeds to Third Party
_____________________, 19__
Letter of Credit no. _____________________
Issued by: _______________________________
Advice no. _______________________________
(Issuing Bank)
__________________________
__________________________
__________________________
Gentlemen:
We hereby authorize and direct you to pay the proceeds of each Draft
drawn us, payable to your order, under and in compliance with the terms and
conditions of the above Letter of Credit (herein called the "Credit"), if and
when such draft is honored by you, as follows:
(1) __________%, not exceeding $__________ or
(2) at the rate $__________ per __________; not exceeding
$__________ or
(3) $__________
Please pay proceeds to:
Name: Bank of the West (the "Designated Payee")
________________________
________________________
Account No. ____________
and pay the balance, if any to us.
This instrument, and your acceptance thereof is an assignment of the
credit, does not give to the Designated Payee any interest therein and does not
affect our right or your right to agree to amendments, cancellation, or
substitution or direction to make any payment to any third party except through
you.
Please advise Designated Payee you have received this instrument
without engagements on your part.
We are enclosing the original credit advice, including any
amendments for retention by you. We request you to note on it our
authorization to pay the proceeds to the Designated Payee.
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<PAGE> 30
We also agree to pay you on demand any expenses which may incurred
have incurred by you in connection with this instrument.
Very truly yours,
______________________________________
Name of Beneficiary
______________________________________
Name of Authorized Signee and Title
______________________________________
Authorized Signature
The above signature and title conform
with those shown in our files as
authorized to sign for the beneficiary.
______________________________________
Name of Bank
______________________________________
Authorized Signature and Title
We accept the above instrument:
Bank of the West
By: __________________________________
Authorized Signature
Date: ________________________________
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<PAGE> 31
TO: BANK OF THE WEST
FROM: DIGITAL MICROWAVE CORPORATION
BORROWING BASE CERTIFICATE
AS OF
<TABLE>
<S> <C> <C> <C>
1. Export Accounts Receivable Balance $_________
Minus: Ineligible Accounts:
Amounts over 60 days past due $_________
Credit balances over 90 days $_________
Contra accounts $_________
Intercompany and Affiliate accounts $_________
Disputed accounts $_________
Shipments to countries not covered by
Ex-Im Bank $_________
Shipments to be used for military purposes $_________
Other
2. Total Ineligible Accounts $_________
3. Eligible Export Accounts Receivable (line 1
minus line 2) $_________
4. Funds Available vs Export Accounts Receivable
(90% of line 3) $_________
5. Contract-related Inventory (Valued at lower
of cost or market) $_________
Minus: Ineligible Inventory:
Contract-related Inventory not located
in U.S. $_________
Other $_________
6. Total Ineligible Amounts $_________
7. Eligible Inventory (line 5 minus line 6) $_________
8. Total Firm Written Export Purchase Orders
and Sales Contracts $_________
9. Funds available vs. Inventory
(Enter the lesser of line 8, or 70% of
line 7) $_________
10. Total Funds Available (line 4 plus line 9) $_________
11. Loan Balance Presently Outstanding $_________
12. Reserve Position (line 10 minus line 11) $_________
</TABLE>
The Borrowing Base Certificate is made to induce Bank of the West to make a
loan to the undersigned, pursuant to a Revolving Promissory Note and a Loan and
Security Agreement. The undersigned certifies that the foregoing information
is true, and that all calculations have been made with the terms and
requirements of the Export-Import Working Capital Guaranteee Agreement.
DIGITAL MICROWAVE CORPORATION
By: _________________________________
Title: ______________________________
Date: _______________________________
28
<PAGE> 1
[LOGO] Heller Financial
FIRST AMENDMENT
TO
SECURITY AGREEMENT
1. Parties and Date. This First Amendment to Security Agreement (the
"Amendment") is entered into effective as of March 31, 1995, by and between
Digital Microwave Corporation, a Delaware corporation ("Debtor"), and Heller
Financial, Inc., a Delaware corporation ("Secured Party").
2. Facts. Secured Party has made a loan to Debtor (the "Loan") that is
evidenced by a Promissory Note dated October 28, 1994, made by Debtor in favor
of Secured Party in the amount of Ten Million and 00/100 Dollars
($10,000,000.00) (the "Note"). The Note is secured by a Security Agreement
dated October 28, 1994, between Debtor and Secured Party (the "Security
Agreement") covering certain collateral. Debtor's failure to satisfy various
financial conditions set forth in the Security Agreement would constitute a
default thereunder. If the Security Agreement were not amended as set forth
herein effective as of March 31, 1995, Debtor would not be able to satisfy
certain of those financial conditions and therefore would be in default under
the Security Agreement. In order to avoid that result, Debtor has requested
and Secured Party has agreed that the Security Agreement be amended on the
terms and conditions set forth in this Amendment. The parties therefore agree
as follows.
3. Amendment to Security Agreement. Debtor and Secured Party hereby
agree that the Security Agreement shall be and hereby is amended effective as
of March 31, 1995, as follows:
(i) The amount set forth in clause (aa) of Section 4 of the
Security Agreement shall be and hereby is changed from Twenty Million and
00/100 Dollars ($20,000,000) to Thirty Million and 00/100 Dollars
($30,000,000).
(ii) The last paragraph of Section 4 of the Security
Agreement shall be and hereby is deleted in its entirety and shall be of no
further force or effect. Accordingly, clauses (bb) and (cc) of Section 4 of
the Security Agreement shall be in full force and effect for all applicable
periods as long as any indebtedness under the Note, Security Agreement or other
Loan Documents (as defined in the Security Agreement) remains outstanding. The
paragraph hereby deleted and of no further force or effect reads as follows:
Notwithstanding the foregoing, if at any time the Net
Worth of Debtor exceeds Thirty-Five Million and 00/100
Dollars
1
<PAGE> 2
($35,000,000.00), the Net Worth requirement under clause
(aa) above, shall thereafter be Thirty-Five Million and
00/100 Dollars ($35,000,000.00), and clauses (bb) and
(cc) above, shall thereafter not be applicable.
(iii) Reserves in the amount of Three Million Two Hundred
Sixty-Five Thousand and 00/100 Dollars ($3,265,000.00) that Debtor has recorded
in its fiscal quarter ending March 31, 1995, for product discounts in
connection with the late delivery of its Spectrum II product to Siemens/E-Plus
shall not be considered for purposes of determinating EBITDA (as defined in the
Security Agreement) for any applicable calculation under clause (dd) of Section
4 of the Security Agreement (i.e., the calculations involving Debtor's EBITDA
on a trailing twelve month basis to be made as of the end of Debtor's fiscal
quarters ending March 31, 1995, June 30, 1995, September 30, 1995, and December
31, 1995).
4. Acknowledgments, Ratifications and Reaffirmations by Debtor. Debtor
hereby acknowledges, ratifies and reaffirms that (i) as of March 31, 1995, the
outstanding principal balance under the Note is Eight Million Eight Hundred
Eighty-Eight Thousand Eight Hundred Eight-Eight and 00/100 Dollars
($8,888,888.00), (ii) no Event of Default (as defined in the Security
Agreement) or other event or circumstance which, with the passage of time or
the giving of notice, or both, would constitute an Event of Default, has
occurred or exists, (iii) Debtor has no defense, offset or counterclaim to any
of Debtor's obligations under the Note, Security Agreement or other Loan
Documents, and (iv) the Note, Security Agreement (as amended by this Amendment)
and other Loan Documents are in full force and effect and are fully enforceable
against Debtor in accordance with their respective terms.
5. Fee. In consideration for Secured Party's agreement to amend the
Security Agreement as set forth herein, Debtor shall promptly pay to Secured
Party the amount of Eight Thousand Eight Hundred Eight-Eight and 88/100 Dollars
($8,888.88).
6. Effectiveness of Loan Documents. Except as expressly amended by
this Amendment, the Security Agreement, as well as the Note and all of the
other Loan Documents shall remain in full force and effect.
7. No Waiver of Remedies. Secured Party expressly reserves any and all
rights and remedies at any time available to it in connection with the Loan,
whether arising under the Note, Security Agreement and/or any of the other Loan
Documents, at law, in equity or otherwise. No failure to exercise, or delay by
secured Party in exercising, any right, remedy, power or privilege under or in
connection with the Note, Security Agreement and/or any of the other Loan
Documents shall preclude any other or further exercise thereof, or the exercise
of any other right, remedy, power or privilege at any time, and all such
rights, remedies, powers and privileges shall be cumulative and not exclusive
of one another.
8. Enforcement. This Amendment shall be governed by and construed in
accordance with the laws and decisions of the State of Illinois. At Secured
Party's election and without limiting Secured Party's right to commence an
action in any other jurisdiction, Debtor
2
<PAGE> 3
hereby submits to the exclusive jurisdiction and venue of any court (federal,
state or local) having situs within the State of Illinois, expressly waives
personal service of process and consents to service by certified mail, postage
prepaid, directed to the last known address of Debtor, which service shall be
deemed completed within ten (10) days after the date of mailing thereof.
9. Entire Agreement. The parties acknowledge and agree that there are
no other agreements or representations, either oral or written, express or
implied, in connection with the Loan, that are not embodied in this Amendment,
the Note, the Security Agreement and the other Loan Documents, which, together
represent a complete integration of all prior and contemporaneous agreements
and understandings of Debtor and Secured Party in any way related to the Loan.
The Security Agreement (as amended by this Amendment) may not be altered,
modified or terminated in any manner except by a writing duly executed by
Debtor and Secured Party. If any provision of the Security Agreement (as
amended by this Amendment) is held to be invalid or unenforceable, the
remaining provisions shall remain in effect without impairment.
10. Binding on Successors. Debtor shall not assign any of its rights,
duties or obligations under the Note, the Security Agreement (as amended by
this Amendment) or any of the other Loan Documents and any purported such
assignment shall be void. Secured Party may transfer or assign the Note or the
Indebtedness (as defined in the Security Agreement) and the other Loan
Documents, either together or separately, in accordance with the Security
Agreement. Without in any way limiting the foregoing, the Note, Security
Agreement (as amended by this Amendment) and other Loan Documents shall be
binding upon the successors and legal representatives of Debtor.
11. Construction. The parties acknowledge and agree that each of them
and their respective counsel have reviewed and contributed substantively and
materially to the content of this Amendment and, as a result, this Amendment,
and any ambiguities it might contain, shall not be construed more strictly
against or in favor of either party on the basis that this Amendment, or any
provision herein, was drafted by one or the other party.
IN WITNESS WHEREOF, Debtor and Secured Party have each executed this Agreement
to be effective as of the day and year first above written.
"DEBTOR" "SECURED PARTY"
Digital Microwave Corporation, a Heller Financial, Inc., a
Delaware corporation Delaware corporation
By: CARL A. THOMSEN By: DAVID KETCHUM
------------------------------ ------------------------------
Name: /s/ Carl A. Thomsen Name: /s/ David Ketchum
---------------------------- ----------------------------
Title: UP--CFO Title: Assistant Vice President
--------------------------- ---------------------------
3
<PAGE> 1
DIGITAL MICROWAVE CORPORATION
Annual Report 1995
<PAGE> 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years Ended March 31, 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data
and number of employees)
Net sales $153,650 $116,010 $103,937 $ 86,097 $130,779
Net income (loss) $ 1,982 $(22,495) $ (6,708) $(19,670) $ 3,765
Net income (loss) per share $ 0.14 $ (1.81) $ (0.55) $ (1.64) $ 0.30
Total assets $102,585 $ 84,003 $ 72,990 $ 87,213 $108,472
Working capital $ 26,996 $ 17,650 $ 35,461 $ 39,183 $ 55,856
Stockholders' equity $ 34,611 $ 28,604 $ 46,335 $ 53,004 $ 72,588
Total employees at year-end 606 538 464 490 608
Common and common
equivalent shares outstanding 13,845 12,448 12,090 11,965 12,365
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
TO OUR STOCKHOLDERS
Fiscal year 1995 provided significant opportunities for Digital Microwave
Corporation. We experienced strong demand for our products in a global
marketplace that is increasingly active and competitive. We focused our efforts
to capitalize on the advantages we bring to customers, and integrated advanced
technology into our product line with the introduction of the SPECTRUM(TM) II
radio.
For fiscal year 1995, we recorded net income of $2.0 million, or $0.14 per
share, on sales of $153.6 million, compared to a net loss of $22.5 million, or
$1.81 per share, on sales of $116.0 million for fiscal year 1994.
Our results for fiscal year 1995 are indicative of the considerable
challenges we faced in the past 12 months. Our financial performance improved in
the first nine months of the year, reflecting the growth in the cellular
industry around the world. In the fourth quarter, however, we reported a loss of
$0.37 per share, due to a lower than anticipated level of shipments,
insufficient lead time to respond to late incoming orders, and reserves for
product discounts and other costs on several programs, including the supply of
additional interim equipment to E-Plus Mobilfunk GmbH.
Also during the fourth quarter, we made our final payment to settle the
class action lawsuit filed against the company and its directors in the Spring
of 1990.
Customer demand remained robust for our products throughout fiscal year
1995. Digital Microwave won several important new contracts worldwide, including
awards in Colombia, Mexico, Germany, Malaysia, and the Philippines. New orders
increased 32%, to $175.0 million in bookings in fiscal year 1995, from $133.0
million in fiscal year 1994.
During the fourth quarter, we introduced the SPECTRUM(TM) II digital
micro-wave radio, a significant new product platform designed to address the
needs of the emerging PCS (Personal Communications Services) market.
In response to the requirements of the dynamic global marketplace we serve,
and our desire to focus on meeting customer
1
<PAGE> 4
performance and delivery expectations for SPECTRUM(TM) II, we set up a
SPECTRUM(TM) Business Unit in fiscal year 1995. The SPECTRUM(TM) Business Unit's
initial focus is on improving SPECTRUM(TM) family manufacturability, and related
yield and costs, and on completing enhancements to the product.
One measure of a company's strength is its fundamentals - the processes and
procedures that determine how well it executes and meets the needs of its
customers. During the second half of fiscal year 1995, we focused on improving
Digital Microwave's fundamentals, especially in the areas of engineering and
manufacturing.
We also concentrated on improving our order process functions, to reduce
overall inventory levels and to provide faster delivery to customers. In this
regard, the SPECTRUM(TM) Business Unit is serving as a test bed for process
improvement throughout the company.
In the coming fiscal year, process improvement will continue to receive the
strong attention and emphasis of senior management. We recognize that
strengthening the company's fundamentals is an essential requirement for our
future success.
In fiscal year 1995, we gave additional emphasis to our marketing efforts,
as increasing competition worldwide demands that we become more market driven.
To this end, we are creating an inventory of "standard products", to provide
even faster response to customers who need to rapidly build out a cellular
network, for example.
Also during the year, Digital Microwave added to its senior management
staff with three key promotions. Graham Powell was appointed Vice President of
Worldwide Sales, Shaun McFall was named Vice President of Corporate Marketing,
and Tim Hansen was appointed Vice President, SPECTRUM(TM) Business Unit.
In our effort to ensure that we maintain a strong management team, we added
two experienced and talented senior managers. Hal Edmondson joined Digital
Microwave as Corporate Vice President of Manufacturing, and Carl Thomsen as Vice
President and Chief Financial Officer. Before joining the company, Hal was Vice
President, Corporate Manufacturing for the Hewlett Packard Company. Carl was
previously Senior Vice President and Chief Financial Officer for Measurex
Corporation.
As this annual report goes to press, we are completing our search for a new
Chairman of the Board and Chief Executive Officer, a strategist and leader who
will guide our future direction and help us remain focused on our goals.
We approach the next fiscal year with optimism, and confidence in the
continuing market demand for Digital Microwave's products. While we recognize
that we face many challenges in our business, we believe that we have the talent
and resources necessary to responsibly and successfully drive the company's
future.
/s/ R.C. Alberding
- -------------------------------
Richard C. Alberding
Co-Chairman of the Board
and Co-Chief Executive Officer
/s/ Clifford H. Higgerson
- -------------------------------
Clifford H. Higgerson
Co-Chairman of the Board
and Co-Chief Executive Officer
2
<PAGE> 5
INTRODUCTION
For the past 11 years, Digital Microwave Corporation has been a leader in
demonstrating the many benefits of digital microwave communications systems. In
fact, our name has become synonymous with advanced, wireless communications
solutions that are easy to install and use. Our microwave radios work reliably -
24 hours a day, 7 days a week - and often in areas where cable-based systems
couldn't even be considered. - In addition to manufacturing advanced products,
Digital Microwave must aggressively market to the world. We currently have
customers in over 55 countries. Cultural differences, government regulations,
time zones, and customers who may be new to the process of building a
telecommunications network are all challenges we deal with constantly. - To be
competitive in our worldwide marketplace, we must also be present everywhere
there are serious customer requests for quotations. Many of our competitors are
large, global companies with deep pockets, or small firms striving to establish
a reputation. We must be continually on the alert and ready to respond to
requirements and changes - carefully developing and nurturing relationships
which will carry our business into the future. - In the following pages, we
focus on the three key regions of the world that Digital Microwave serves:
Europe, the Americas, and Asia Pacific. During fiscal year 1995, over 70% of our
total revenue was generated by the growth of cellular and PCS/PCN (Personal
Communications Services/Networks) or similar networks in each region. Europe
represented 50% of our total sales, the Americas 35%, and Asia Pacific 15%. - We
will discuss the opportunities and challenges of the three regions, along with
what we believe is Digital Microwave's winning business strategy.
3
<PAGE> 6
[GRAPHIC 1]
<PAGE> 7
AMERICAS
Personal Communications Services (PCS) is synonymous with the emerging
telecommunications market in the U.S. After years of limited growth for digital
microwave radio in this country, due mainly to a built out cellular network, the
potential impact of PCS is enormous. PCS promises a new generation of wireless
devices which will stimulate choice for the consumer and competition in the
telephone industry. PCS operates much like the current cellular systems, with
the exception of a smaller cell size and shorter radio path lengths. - There is
considerable speculation and little agreement about the potential size of the
market for PCS, and the timing of the installation of these networks. But most
experts believe that the impact of PCS will be felt in the next 3-5 years,
because prospective PCS service providers paid substantial sums to secure radio
spectrum and need to generate revenues as soon as possible. - One type of
anticipated service would assign each customer one number and one handset that
would function as a cordless phone at home and at work, as well as a cellular
phone on the road. Incoming calls would find the customer wherever the handset
happened to be. - Applications for digital microwave radio for PCS networks are
two-fold: the first is to link individual cell sites and the mobile telephone
switching office. The second is to address the FCC's "relocation plan" that
requires PCS operators to provide comparable facilities for the incumbent
microwave licensees, if the PCS operator interferes with the current frequencies
in use. - Digital Microwave is well positioned to take a leadership role in both
the PCS roll out and frequency relocations, with a mature sales/support
organization, our new compact SPECTRUM(TM) II radio, advanced network management
capabilities, and worldwide reputation for customer service and reliability.
- - In Latin and South America, the market growth is primarily in the cellular
industry, as evidenced by Digital Microwave's fiscal year 1995 contract award
from Celumovil S.A., a new franchise cellular operator in Colombia.
5
<PAGE> 8
[GRAPHIC 2]
<PAGE> 9
EUROPE
Digital Microwave has maintained a presence in Europe since 1988, when we opened
our facility in East Kilbride, Scotland, then established our European sales
office in Coventry, England. - The market for microwave radio in Western Europe
today is primarily driven by the growth of digital mobile services. Further
deregulation is focused on 1998, when competition among the PTTs (national
telephone companies) will be introduced throughout the market. - The main driver
for the Western European market is enhancements to basic telecommunications
services; to date only a handful of carriers provide a full range of services.
Current projections indicate that digital technology will replace analog phones
before the year 2000, offering features such as call routing, call waiting, call
forwarding, and voice messaging. - Eastern Europe, on the other hand, is an
emerging market, with considerable opportunities to supply basic phone services
to businesses and homes. In Poland, for example, we have provided cellular
operator Centertel with flexible products, plus engineering and system planning
support. - To address the growing telecommunications needs of Russia and the CIS
states, we opened a sales office in Moscow in fiscal year 1995. Digital
Microwave's radios are used to connect hotels and businesses to long distance
carriers in Moscow and St. Petersburg. - A key highlight of fiscal year 1995 was
the introduction of the SPECTRUM(TM) II, our new "smart radio", at tradeshows in
Europe and the U.S. The SPECTRUM(TM) II will impact our business in every part
of the world. SPECTRUM(TM) II is a versatile, adaptable, and configurable radio
family that makes microwave communications easy and affordable. - The
SPECTRUM(TM) II's design and compact size is ideal for the base stations and
cell sites of cellular and PCS/PCN phone systems. Digital Microwave's first
customer for the SPECTRUM(TM) II is E-Plus, a PCS cellular network provider in
the Federal Republic of Germany.
7
<PAGE> 10
[GRAPHIC 2]
<PAGE> 11
ASIA PACIFIC
Telecommunications growth in the Asia Pacific region is accelerating. Leading
the way is increasing demand for basic telephone services, fueled by
deregulation and new operator licensing, and the ensuing competition between
service providers. Wireless services offer developing countries a means to
rapidly install large-scale telephone systems, and boost their nation's economy.
- - The growth opportunities for Digital Microwave's business in the Asia Pacific
region are significant, based on the sizable investments being made for
infrastructure build-outs, and the need for systems to reach smaller cities and
towns, or provide basic telephone services in highly populated areas. - One
example is wireless local loop, where microwave radio can be used to set up the
communications channel between the telephone subscriber's location and the local
telephone company's office. - Evidence of substantial opportunity abounds. Only
a small percentage of the population has access to a phone; in fact, half of the
people in the world have never made a phone call. As of June 1994, only 2% of
the population in Indonesia had telephone service. In China, although cellular
penetration in 1994 increased 245%, there are just 1.5 million subscribers,
leaving considerable room for future growth. - The Asia Pacific region has some
unique challenges. Business is complicated by multi-level relationships:
government regulators, existing and newly licensed operators, consortia of
foreign investors, major foreign suppliers, technology partners, local
manufacturers' requirements, and complex distribution channels. Digital
Microwave's participation in this area's tremendous growth requires relationship
building in many areas simultaneously. - Digital Microwave has been increasingly
active in the Asia Pacific region, cultivating and supporting customers, as well
as expanding strategic partnerships and alliances in several countries. We
currently have sales/support offices in Singapore, India, and the Philippines.
Our awards in this region include a contract won during fiscal year 1995 for a
nationwide PCN network for Electronics and Telematique (Malaysia) Sdn. Bhd.
(ETM).
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW Net sales for the fiscal year ended March 31, 1995 increased by 32.4%
to $153.6 million from $116.0 million for fiscal 1994. Net income for fiscal
1995 was $2.0 million ($0.14 per share), compared to a net loss of $22.5 million
($1.81 per share), in fiscal 1994.
Through the first three quarters of fiscal 1995, the Company experienced
increased revenue and profitability. Sales and net income through the first nine
months of fiscal 1995 were $120.3 million and $7.0 million, respectively,
compared to sales of $84.5 million and a net loss of $24.0 million in the
similar period of fiscal 1994. In the fourth quarter of fiscal 1995, sales
declined due to insufficient lead time to respond to late incoming orders, and
customer-driven changes, resulting in lower than expected revenue of $33.4
million. In addition, delay in the shipment of the SPECTRUM(TM) II product
resulted in additional shipments of interim equipment. As a result, the Company
recorded significant reserves for product discounts and other related costs,
resulting in low margins for the quarter. The net effect of these events was a
net loss of $5.0 million ($0.37 per share) in the fourth quarter of fiscal 1995,
compared to $1.5 million of net income ($0.11 per share) in the similar period
of fiscal 1994.
The following table sets forth items from the Company's consolidated
statements of operations, expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Years Ended March 31, 1995 1994 1993
- --------------------------------------------------------------------
(% of Net sales)
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 74.7 68.0 76.6
Research and development 7.4 8.0 9.7
Selling, general and administrative 16.1 20.1 20.8
Non-recurring charges -- 23.3 --
----- ----- -----
Operating income (loss) 1.8 (19.4) (7.1)
Other income (expense), net (.4) 1.0 0.7
----- ----- -----
Income (loss) before
provision for income taxes 1.4 (18.4) (6.4)
Provision for income taxes .1 1.0 --
----- ----- -----
Net income (loss) 1.3% (19.4)% (6.4)%
===== ===== =====
- --------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS 1995 Compared to 1994. Net sales increased 32.4% to $153.6
million in fiscal year 1995 from $116.0 million in fiscal year 1994. The Company
reported increased sales in Europe/Africa and the Americas of 45% and 41%,
respectively, compared to the prior fiscal year. These increases were partly
offset by a decline of 7% in sales in Asia Pacific. Total international sales
for fiscal years 1995 and 1994 were 87.0% and 90.5% of total net sales,
respectively.
Cost of sales as a percentage of net sales increased to 74.7% in fiscal
1995 from 68.0% in fiscal 1994. The increased cost of sales as a percentage of
sales and lower gross margins in fiscal 1995 were primarily due to delays in
shipments of SPECTRUM(TM) II radios under the E-Plus contract. Under this
contract, the Company is required to ship M Series and SPECTRUM(TM) I products
("interim equipment") pending
10
<PAGE> 13
final acceptance of the SPECTRUM(TM) II product. As of March 31, 1995, the
Company has recognized $12.9 million of revenue with nominal margins on
shipments of interim equipment that has been accepted by E-Plus. Future
shipments of interim equipment are subject to substantial discounts. As a
result, the Company has recorded significant reserves related to such discounts,
based on the estimated acceptance schedule, and other contract related costs.
Competitive price pressures on major contracts also contributed to the lower
gross margins. In the event of further delays in delivery of the SPECTRUM(TM) II
product, the Company's results of operations could be adversely impacted in
fiscal 1996. The Company expects its gross margin in fiscal 1996 will continue
to be under significant pressure due to the intensely competitive nature of its
business. See "Factors That May Affect Future Financial Results" and Note 9 of
Notes to Consolidated Financial Statements.
Research and development expenses increased by $2.1 million, from $9.3
million in fiscal year 1994 to $11.4 million in fiscal year 1995. The increase
in expenses was attributable to the increased development efforts on the second
generation SPECTRUM(TM) products. As a percentage of net sales, research and
development expenses in fiscal year 1995 were 7.4% compared to 8.0% in fiscal
1994. The decrease in research and development as a percentage of net sales was
due to higher sales in fiscal 1995 compared to fiscal 1994.
Selling, general and administrative expenses increased to $24.8 million in
fiscal 1995 from $23.3 million in fiscal 1994. As a percentage of net sales,
selling, general and administrative expenses were 16.1% in 1995, as compared
with 20.1% in fiscal 1994. The decrease in selling, general and administrative
expenses as a percentage of net sales is attributable to the higher sales volume
in fiscal 1995. The increase in absolute dollars was principally due to the
expansion of sales and sales support personnel in Asia Pacific and the Americas,
as well as increases in other expenses associated with the sales function.
In fiscal 1994, the Company recorded non-recurring charges of $27.0 million
for costs related to the settlement in principle of the class action lawsuits
and costs associated with the anticipated liquidation of its 45% interest in its
joint venture, DMC Telecom (Malaysia) Sdn. Bhd. (DMCT (M)). See Notes 7 and 8 of
Notes to Consolidated Financial Statements.
In connection with the class action lawsuits, the Company reached an
agreement in principle in fiscal 1994 under which the Company and its Directors
would be released from any further liabilities. In fiscal 1994, the Company
recorded a charge to earnings for the settlement of the litigation of $20.0
million, which included the settlement amount, certain attorneys' fees,
estimated interest and other costs related to the litigation. The Company paid
the settlement amount of the litigation and obtained the final judgement and
order of dismissal of the litigation in fiscal 1995.
The Company's write down in connection with the anticipated liquidation of
DMCT (M) resulted in a charge to earnings of $7.0 million in fiscal 1994. The
Company's net investment in DMCT (M) was $4.0 million, which consisted of
receivables outstanding from DMCT (M) of approximately $6.0 million, reduced by
a reserve of $2.0 million for deferred margin on sales to the joint venture. The
Company was also the guarantor of approximately $2.0 million of DMCT (M) bank
indebtedness, which was due in July 1994. This charge to earnings takes into
account the full amount of the receivables, the guarantee of indebtedness to the
bank, anticipated legal fees, and other charges associated with the liquidation
of the joint venture, less applicable reserves. The Company settled its 45%
share in the liquidation of the joint venture in fiscal 1995 by paying
approximately $2.1 million, and receiving inventory and fixed assets valued at
approximately $0.6 million and $0.3 million, respectively.
Interest and other income (expense), net for fiscal 1995 was nominal
compared to $1.7 million of other income in fiscal 1994, which included a $1.1
million gain on the sale of the Company's W-band product line and a $0.4 million
gain on the sale of the Company's interest in the joint venture with Optical
Microwave Network, Inc. (OMNI).
11
<PAGE> 14
Interest expense in fiscal 1995 was $0.5 million compared to $0.6 million
in fiscal 1994. Interest related to the class action litigation settlement was
charged to reserves previously established.
The Company recorded an income tax provision in fiscal 1995 at an
effective rate of 10% or $0.2 million, which is less than the statutory rate
due to the realization of certain temporary differences.
RESULTS OF OPERATIONS 1994 Compared to 1993. Net sales increased 11.6% to $116.0
million in fiscal year 1994 from $103.9 million in fiscal year 1993. The Company
reported increased sales in Asia Pacific and Europe/Africa of 26% and 10%,
respectively, compared to the prior fiscal year. Total international sales for
fiscal years 1994 and 1993 were 90.5% and 86.5% of total net sales,
respectively.
Cost of sales as a percentage of net sales decreased to 68.0% in fiscal
1994 from 76.6% in fiscal 1993. The improvement in cost of sales as a percentage
of net sales and gross margin in fiscal 1994 reflects higher sales volume,
improved utilization of manufacturing resources, and lower product costs. Also,
cost of sales and gross margins in fiscal year 1993 were adversely affected by
additional provisions for inventory and warranty reserves.
Research and development expenses decreased by $0.8 million, from $10.1
million in fiscal year 1993 to $9.3 million in fiscal year 1994. As a percentage
of net sales, research and development expenses in fiscal year 1994 were 8.0%
compared to 9.7% in fiscal 1993. The decrease was due to the effect of the
strategic restructuring implemented in the prior fiscal year, resulting in a
more focused product development plan which requires less research and
development expense.
Selling, general and administrative expenses increased to $23.3 million in
fiscal 1994 from $21.6 million in fiscal 1993. As a percentage of net sales,
selling, general and administrative expenses were 20.1% in 1994, as compared
with 20.8% in fiscal 1993. The decrease in selling, general and administrative
expenses as a percentage of net sales was attributable to the higher sales
volume in fiscal 1994. The increase in absolute dollars was principally due to
the expansion of sales and sales support personnel in Asia Pacific and other
expenses associated with the sales function.
The Company recorded non-recurring charges of $27.0 million for costs
related to the settlement in principle of the class action lawsuits and costs
associated with the anticipated liquidation of its 45% interest in the joint
venture, DMCT (M) as explained previously. See Notes 7 and 8 of Notes to
Consolidated Financial Statements.
Interest and other income (expense), net for fiscal 1994 was $1.7 million
of income compared to $1.8 million of income in fiscal 1993. Interest expense in
fiscal 1994 was $0.6 million, or $0.5 million lower than the fiscal 1993 amount
of $1.1 million. This reduced expense was due to lower borrowings from an
existing line of credit in fiscal 1994 and the lower interest rate associated
therewith.
The Company recorded an income tax provision in fiscal 1994 of $1.1
million, which results primarily from the writedown of a previously recorded
deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES Total assets at March 31, 1995 increased by
approximately $18.6 million from March 31, 1994. This increase was due
principally to increases in accounts receivable of $5.3 million and inventories
of $11.4 million. The increase in accounts receivable was primarily due to the
higher sales level in the fourth quarter of fiscal 1995, as compared to the
fourth quarter of fiscal 1994. Inventories increased because of lower than
expected sales in the fourth quarter of fiscal 1995, anticipation of higher
manufacturing and shipping levels in the coming fiscal year, and delay in the
SPECTRUM(TM) II product shipments. The inventory buildup resulted in an increase
in accounts payable of $5.1 million to $26.4 million at March 31, 1995 from
$21.3 million at March 31, 1994. See Note 2 of Notes to Consolidated Financial
Statements.
12
<PAGE> 15
Total liabilities increased by $12.6 million from $55.4 million in fiscal
year 1994 to $68.0 million in fiscal year 1995. This increase was principally
the result of increased borrowings of $11.7 million under lines of credit with
banks and a credit company, a $8.9 million note payable with a financial
institution, increases of $5.1 million in accounts payable, and an increase of
$7.5 million in deferred revenue and accrued contract obligations. See Note 2 of
Notes to Consolidated Financial Statements. These increases were offset by the
reduction of accrued litigation settlement. The Company's outstanding debt under
credit agreements and notes payable increased in fiscal year 1995 due to: (1)
additional working capital requirements of $9.3 million caused by increased
operations, and (2) payments totaling approximately $20.0 million related to the
settlement of stockholders' lawsuits (See Note 8 of Notes to Consolidated
Financial Statements). The note payable and the lines of credit require that the
Company maintain certain financial covenants, including minimum tangible net
worth and profitability requirements. As of March 31, 1995, the Company was in
compliance with these covenants, as amended.
At March 31, 1995, the Company's principal sources of liquidity consisted
of $1.9 million in cash and revolving bank credit facilities that provide up to
$35.0 million in credit, of which approximately $13.0 million was available. At
March 31, 1995, $11.7 million was outstanding under these lines. See Notes 1 and
3 of Notes to Consolidated Financial Statements.
The Company expects to require additional financing, including possibly
equity financing, in fiscal year 1996 to provide liquidity and to maintain
compliance with covenants in existing credit agreements. Management believes
that additional financing can be obtained; however, there can be no assurance
that financing will be available to meet future needs or that the Company will
continue to maintain compliance with its debt covenants. In the event that
additional financing is not available, management will implement plans to reduce
the Company's cash requirements through a combination of reductions in working
capital expenditures, equipment purchases and operating expenditures. Management
believes these plans combined with existing cash balances and other sources of
liquidity will be sufficient to maintain compliance with existing loan covenants
and enable the Company to meet its cash requirements through fiscal 1996.
However, there can be no assurance that the Company can implement these plans or
that it can do so without adversely impacting the Company's operations.
The Company leases certain property, equipment, and facilities under
operating and capital leases. Rent expense under the operating leases was
approximately $3.5 million in fiscal 1995. See Note 4 of Notes to Consolidated
Financial Statements.
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS Bookings for fiscal 1995
consisted of orders of $175.0 million shippable within a twelve month period,
compared to orders of $133.0 million in fiscal 1994. The Company's backlog at
March 31, 1995 was approximately $93.2 million, as compared with approximately
$71.8 million at March 31, 1994. Approximately $15.6 million of the Company's
backlog at March 31, 1995 was attributable to orders under the E-Plus contract.
The Company believes that increases in new orders are contingent upon,
among other factors, its ability to compete effectively in world markets, and to
develop and manufacture products that meet the needs of these markets. Because
of the timing of orders, delivery intervals, customer and product mix, and the
possibility of changes in delivery schedules and additions to or cancellations
of orders, the Company's backlog may not be representative of actual sales for
any succeeding period.
The Company's profitability in fiscal 1996 will be affected by its ability
to deliver in large quantities the Company's SPECTRUM(TM) II products, which
carry higher margins than the current product line. Acceptance tests of the
SPECTRUM(TM) II product under the E-Plus contract have not yet been completed.
Under the contract with E-Plus, continued delays could result in the imposition
on the Company of
13
<PAGE> 16
additional penalties, costs, and/or the cancellation of orders.
To the extent that SPECTRUM(TM) II equipment is delivered later than currently
scheduled, the Company's obligation to deliver substantially discounted interim
equipment could be increased. See Note 9 of Notes to Consolidated Financial
Statements. The contract with E-Plus is described more fully in the Company's
Annual Report on Form 10-K.
The Company's revenues are generated principally from the sale of products
and systems that have a long sales cycle but short delivery requirements. A
single order can represent a significant percentage of the Company's sales for
any quarter. In addition, a substantial portion of shipments may occur near the
end of each quarter. Accordingly, the Company's interim results are difficult to
predict and delays in product delivery or closing of a sale can cause revenues
and net income to fluctuate significantly from anticipated levels.
The telecommunications industry is characterized by rapid technological
change, frequent new product introductions, increasingly lower cost solutions,
and evolving industry standards. In addition, customers in the
telecommunications industry expect shorter product development and manufacturing
cycles, and less expensive, higher performance and smaller sized products. The
Company's future success will depend upon its ability to address the
increasingly sophisticated needs of its customers by enhancing its current
products, by developing and introducing on a timely basis new products that keep
pace with technological developments and emerging industry standards, and by
providing such products at competitive prices. As discussed above, the
SPECTRUM(TM) II product line is material to the Company from the standpoint of
its competitive position.
There can be no assurance that the Company will be successful in developing
and marketing future products, that the Company will not experience difficulties
that could further delay or prevent the successful development, introduction,
and sale of these products, or that these products will adequately meet the
requirements of the marketplace and achieve market acceptance.
No assurance can be given regarding future financial results as such
results are dependent upon many factors, including economic and competitive
conditions, incoming order levels, shipment volumes, product margins, and
foreign exchange rates.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended March 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales $ 153,650 $ 116,010 $ 103,937 $ 86,097 $ 130,779
Net income (loss) $ 1,982 $ (22,495) $ (6,708) $(19,670) $ 3,765
Net income (loss) per share $ 0.14 $ (1.81) $ (0.55) $ (1.64) $ 0.30
CONSOLIDATED BALANCE SHEETS DATA:
Total assets $ 102,585 $ 84,003 $ 72,990 $ 87,213 $ 108,472
Long-term liabilities $ 6,362 $ 459 $ 201 $ 629 $ 921
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1995 1994
- ---------------------------------------------------------------------------------------
(In thousands, except share and per share amounts)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,919 $ 3,362
Restricted cash 1,100 1,300
Accounts receivable, net of allowance of
$1,413 in 1995 and $3,240 in 1994 32,513 27,196
Inventories 46,732 35,340
Tax refund receivable 1,820 2,598
Other current assets 4,524 2,794
--------- ---------
Total current assets 88,608 72,590
--------- ---------
PROPERTY AND EQUIPMENT:
Machinery and equipment 32,450 28,442
Land and buildings 1,262 1,255
Furniture and fixtures 6,668 5,459
Leasehold improvements 2,139 1,843
--------- ---------
42,519 36,999
Accumulated depreciation and amortization (28,542) (25,586)
--------- ---------
Net property and equipment 13,977 11,413
--------- ---------
$ 102,585 $ 84,003
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Lines of credit $ 11,731 $ --
Current maturities of note payable 3,333 --
Current maturities of capital lease obligations 776 504
Accounts payable 26,373 21,274
Income taxes payable 1,629 1,474
Accrued litigation settlement -- 19,900
Other accrued liabilities 17,770 11,788
--------- ---------
Total current liabilities 61,612 54,940
LONG-TERM LIABILITIES:
Note payable, net of current maturities 5,556 --
Capital lease obligations, net of current maturities 806 459
--------- ---------
Total liabilities 67,974 55,399
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 13,467,693 shares in 1995 and 12,823,709
shares in 1994 issued and outstanding 135 128
Additional paid-in capital 44,313 40,295
Accumulated deficit (9,837) (11,819)
--------- ---------
Total stockholders' equity 34,611 28,604
--------- ---------
$ 102,585 $ 84,003
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE> 18
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31, 1995 1994 1993
- --------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
NET SALES $ 153,650 $ 116,010 $ 103,937
COST OF SALES 114,760 78,874 79,622
--------- --------- ---------
Gross profit 38,890 37,136 24,315
--------- --------- ---------
OPERATING EXPENSES:
Research and development 11,379 9,316 10,086
Selling, general and administrative 24,763 23,338 21,641
Non-recurring charges -- 27,000 --
--------- --------- ---------
Total operating expenses 36,142 59,654 31,727
--------- --------- ---------
Income (loss) from operations 2,748 (22,518) (7,412)
OTHER INCOME (EXPENSE):
Interest and other income (expense), net (16) 1,718 1,768
Interest (expense) (530) (603) (1,064)
--------- --------- ---------
Income (loss) before provision
for income taxes 2,202 (21,403) (6,708)
PROVISION FOR INCOME TAXES 220 1,092 --
--------- --------- ---------
Net income (loss) $ 1,982 $ (22,495) $ (6,708)
========= ========= =========
NET INCOME (LOSS) PER SHARE $ 0.14 $ (1.81) $ (0.55)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 13,845 12,448 12,090
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Total
Years Ended March 31, 1995, 1994, ------------------------- Paid-In (Accumulated Stockholders'
and 1993 Shares Amount Capital Deficit) Equity
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1992 11,999,414 $ 120 $ 35,500 $ 17,384 $ 53,004
Stock options exercised 133,550 1 38 -- 39
Net loss -- -- -- (6,708) (6,708)
---------- ------- ---------- ---------- ----------
BALANCE, MARCH 31, 1993 12,132,964 121 35,538 10,676 46,335
Stock options exercised 690,745 7 3,995 -- 4,002
Tax benefits related to
employee stock transactions -- -- 762 -- 762
Net loss -- -- -- (22,495) (22,495)
---------- ------- ---------- ---------- ----------
BALANCE, MARCH 31, 1994 12,823,709 128 40,295 (11,819) 28,604
Stock options and warrants exercised 643,984 7 4,018 -- 4,025
Net income -- -- -- 1,982 1,982
---------- ------- ---------- ---------- ----------
BALANCE, MARCH 31, 1995 13,467,693 $ 135 $ 44,313 $ (9,837) $ 34,611
========== ======= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,982 $(22,495) $ (6,708)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 6,356 6,448 7,696
Provision for non-recurring charges -- 27,000 --
Provision for uncollectible accounts 276 300 650
Provision for inventory reserves 958 117 5,715
Provision for warranty reserves 1,911 1,285 2,895
Equity in income of joint ventures -- -- 195
Gain on sale of product lines -- (1,089) (2,144)
Gain on sale of investment in OMNI -- (371) --
Changes in assets and liabilities:
(Increase) decrease in restricted cash 200 281 (1,423)
(Increase) decrease in accounts receivable (5,774) (6,880) (2,414)
(Increase) decrease in inventories (12,212) (13,232) 5,632
(Increase) decrease in tax refund receivable 778 1,691 1,283
(Increase) decrease in deferred income taxes -- 960 2,240
(Increase) decrease in receivable from DMC
Telecom (Malaysia) Sdn. Bhd -- -- (2,969)
(Increase) decrease in other current assets (1,503) (73) 959
Increase (decrease) in accounts payable 5,398 13,607 2,973
Increase (decrease) in income taxes payable 168 9 (203)
Increase (decrease) in accrued litigation (19,900) -- --
Increase (decrease) in other accrued liabilities 4,119 (766) (3,609)
-------- -------- --------
Net cash provided by (used for)
operating activities (17,243) 6,792 10,768
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,111) (5,864) (4,465)
Proceeds from sale of property and equipment -- 24 134
Proceeds from sale of product line -- -- 1,600
-------- -------- --------
Net cash used for investing activities (8,111) (5,840) (2,731)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from banks 36,744 21,858 78,419
Repayments to banks (16,124) (23,084) (83,033)
Payments of note payable to MTI -- (3,075) (1,025)
Payments of capital lease obligations (695) (946) (745)
Sale of common stock 4,025 4,002 39
-------- -------- --------
Net cash provided by (used for)
financing activities 23,950 (1,245) (6,345)
-------- -------- --------
Effect of Exchange Rate Changes on Cash (39) (146) (45)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (1,443) (439) 1,647
Cash and Cash Equivalents at Beginning of Year 3,362 3,801 2,154
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 1,919 $ 3,362 $ 3,801
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND RISK FACTORS
- -------------------------------------------------------------------------------
Digital Microwave Corporation (the "Company") designs, manufactures and markets
high-performance digital microwave equipment for a wide variety of short- and
medium-haul communications applications worldwide. As a result of increased
working capital requirements, payments related to the settlement of the
shareholders' lawsuit, and low profitability levels in fiscal 1995, the
Company's liquidity has declined. The Company expects to require additional
financing, including possibly equity financing, in fiscal year 1996 to provide
liquidity and to maintain compliance with covenants in existing credit
agreements. Management believes that additional financing can be obtained;
however, there can be no assurance that financing will be available to meet
future needs or that the Company will continue to maintain compliance with its
debt covenants. See discussion of "Liquidity and Capital Resources" and "Factors
That Might Affect Future Financial Results" within Management's Discussion and
Analysis of Financial Condition and Results of Operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Digital Microwave Corporation and its wholly-owned subsidiaries.
Intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS. For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
RESTRICTED CASH. The Company is required to segregate and maintain certain cash
balances as security for letters of credit provided to secure performance or bid
bonds under some of the Company's revenue contracts. As of March 31, 1995 and
1994, the Company was required to segregate and maintain $1.1 million and $1.3
million, respectively, which are included as restricted cash in the accompanying
consolidated balance sheets.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO 115. Effective April
1, 1994, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". There was no effect on the Company's financial position or results
of operations due to the adoption of this statement. As of March 31, 1995, the
Company's investments subject to the provisions of SFAS No. 115 were not
material.
SUPPLEMENTAL STATEMENTS OF CASH FLOWS DISCLOSURES. Cash paid for interest and
income taxes for each of the three fiscal years presented in the consolidated
statements of cash flows was as follows:
<TABLE>
<CAPTION>
Years Ended March 31, 1995 1994 1993
- ------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Interest $ 1,556 $ 603 $ 1,020
Income taxes $ 62 $ 245 $ 1,011
- ------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
The following non-cash transactions occurred during the years ended:
<TABLE>
<CAPTION>
March 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Tax benefit related to employee stock transactions $ -- $ 762 $ --
Property purchased under capital leases $1,314 $ 966 --
Conversion of accounts payable to notes payable for MTI $ -- -- $4,100
Reduction of accounts payable to MTI in connection
with the sale of the W-band product line $ -- -- $4,608
Reduction of accounts payable to MTI in
connection with the sale of OMNI (See Note 7) $ -- $ 400 $ --
- ------------------------------------------------------------------------------------------
</TABLE>
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out)
or market where cost includes material, labor and manufacturing overhead.
Inventories consisted of:
<TABLE>
<CAPTION>
March 31, 1995 1994
- ------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Raw materials $16,506 $ 12,889
Work in process 20,977 15,885
Finished goods 9,249 6,566
------- --------
$46,732 $ 35,340
======= ========
- ------------------------------------------------------------------------------------------
</TABLE>
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost. Depreciation
and amortization are provided using the straight-line method over the shorter of
the estimated useful lives of the assets (ranging from two to forty years) or
the lease term. Included in property and equipment are assets held under capital
leases with a cost of $2,503,000 and $4,227,000 for fiscal years 1995 and 1994,
respectively. Accumulated amortization on leased assets was $712,000 and
$2,345,000 as of March 31, 1995 and 1994, respectively.
OTHER ACCRUED LIABILITIES. Other accrued liabilities included the following:
<TABLE>
<CAPTION>
March 31, 1995 1994
- ------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Accrued contract obligations (See Note 9) $ 4,045 $ --
Deferred revenue 3,431 --
Customer deposits 1,095 2,059
Accrued warranty 3,075 2,423
Closing costs - DMC TeleCom (Malaysia) Sdn. Bhd.
(See Note 7) 1,029 3,123
Other 5,095 4,183
------- -------
$17,770 $11,788
======= =======
- -----------------------------------------------------------------------------------------
</TABLE>
Accrued contract obligations primarily relate to product and other
equipment to be provided to E-Plus, as well as estimated discounts on shipments
of interim equipment and other customer obligations.
Deferred revenue as of March 31, 1995 consists principally of shipments of
interim equipment to E-Plus, that are subject to a right of return.
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's
subsidiaries is the U.S. dollar. Accordingly, all of the monetary assets and
liabilities of these subsidiaries are remeasured into U.S. dollars at the
current exchange rate as of the applicable balance sheet date, and all
non-monetary assets and liabilities are remeasured at historical rates. Sales
and expenses are remeasured at the average exchange rate prevailing during the
period. Gains and losses resulting from the remeasurement of the subsidiaries'
financial statements are included in the consolidated statements of operations.
<PAGE> 23
Gains and losses resulting from foreign exchange transactions are included
in other income (expense) in the accompanying consolidated statements of
operations. Realized gains and losses on foreign exchange contracts designated
as hedges are included in income or expense when the underlying transaction
occurs. For fiscal years ended March 31, 1995, 1994, and 1993, the aggregate net
foreign exchange loss was $39,000, $198,000, and $531,000, respectively.
CONCENTRATION OF CREDIT RISK. Trade receivables concentrated with certain
customers and in certain geographic locations potentially subject the Company to
concentration of credit risk. In addition to sales in Western Europe and North
America, the Company actively markets and sells products in the Far East,
Eastern Europe and the Americas. During fiscal 1995, Mexico experienced a
significant decline in the value of the peso. At March 31, 1995, the Company's
trade receivables from Mexican customers, which are denominated in U.S. dollars,
totaled $2.6 million.
REVENUE RECOGNITION. Revenue from product sales is generally recognized upon
shipment. Service revenue, which is less than 10% of net revenue for each of the
three fiscal years presented, is recognized once the related services are
performed.
PRODUCT WARRANTY. The Company provides, at the time of sale, for the estimated
cost to repair or replace products under warranty.
RESEARCH AND DEVELOPMENT. All research and development costs are expensed as
incurred.
NET INCOME (LOSS) PER SHARE. Net income per share is computed using the weighted
average number of common and common equivalent shares outstanding during the
period. Net loss per share is computed using only the weighted average number of
common shares outstanding during the period. Common equivalent shares are
excluded in the calculation of the net loss per share because their effect would
be antidilutive.
NOTE 3. CREDIT ARRANGEMENTS
- -------------------------------------------------------------------------------
In April 1995, the Company extended its $20.0 million credit facility with a
U.S. bank and a credit company to June 30, 1996. Borrowings bear interest at
the prime rate (9% as of March 31, 1995) plus 1H% per annum, and are secured by
certain assets of the Company. The agreement requires the Company to maintain
certain financial covenants, including minimum tangible net worth and
profitability requirements. At March 31, 1995, $7.0 million was outstanding
under this credit facility, and $13.0 million of credit was available based on
the underlying collateral.
In March 1995, the Company obtained a working capital line of credit of
$15.0 million from a U.S. bank guaranteed by the Export-Import Bank of the
United States. Borrowings under this line bear interest at the prime rate plus
1H% per annum, and are secured by certain receivables and inventories. The
agreement requires the Company to maintain a minimum level of tangible net
worth. At March 31, 1995, $4.7 million was outstanding under this line, which
was the maximum credit available on that date based on the underlying
collateral. The line of credit expires on February 19, 1996, and any outstanding
amounts are due on August 28, 1996.
In October 1994, the Company entered into a three year, $10.0 million
promissory note, payable to a financing company in equal monthly installments of
approximately $278,000. This note is secured by all equipment located in San
Jose, California that is owned by the Company. The promissory note bears
interest at prime plus 2-1/4% per annum. The agreement requires the Company to
maintain certain financial covenants, including minimum net worth and
profitability requirements. At March 31, 1995, the outstanding balance under
this note was $8.9 million.
The above agreements contain cross-default provisions. At March 31,1995,
the Company was in compliance with all of the financial covenants required under
the above credit arrangements, as amended.
21
<PAGE> 24
NOTE 4. LEASE COMMITMENTS
- --------------------------------------------------------------------------------
The Company leases certain property and equipment, as well as its headquarters
and manufacturing facilities, under noncancelable operating and capital leases,
which expire at various periods through 2003. At March 31, 1995, future minimum
payment obligations under these leases were as follows:
<TABLE>
<CAPTION>
Years Ending March 31, Capital Operating
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
1996 $ 927 $ 2,147
1997 662 1,867
1998 220 1,797
1999 -- 1,771
2000 - -- 1,771
2001 and beyond -- 4,273
-------- --------
Future minimum lease payments 1,809 $13,626
========
Less-amount representing interest (9% to 14%) (227)
--------
Present value of future minimum lease payments 1,582
Less-current maturities 776
--------
Long-term lease obligations $ 806
========
- --------------------------------------------------------------------------------------------------
</TABLE>
Rent expense under operating leases was approximately $3,458,000, $2,892,000,
and $5,133,000 for the years ended March 31, 1995, 1994, and 1993, respectively.
NOTE 5. INCOME TAXES
- --------------------------------------------------------------------------------
Through March 31, 1993, the Company accounted for income taxes pursuant to
Accounting Principles Board (APB) Opinion 11. Effective April 1, 1993, the
Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes".
The domestic and foreign components of income (loss) before provision for
income taxes were as follows:
<TABLE>
<CAPTION>
Years Ended March 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Domestic $ 1,182 $(19,864) $ (5,810)
Foreign 1,020 (1,539) (898)
--------- -------- ---------
$ 2,202 $(21,403) $ (6,708)
========= ======== =========
- --------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended March 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT:
Federal $ 220 $ 95 $ --
State -- -- --
Foreign -- 37 (101)
---------- --------- -----------
Total current 220 132 (101)
---------- --------- -----------
DEFERRED (PREPAID):
Federal -- 960 101
State -- -- --
Foreign -- -- --
---------- --------- -----------
Total deferred (prepaid) -- 960 101
---------- --------- -----------
$ 220 $ 1,092 $ --
========== ========= ===========
</TABLE>
<PAGE> 25
Deferred (prepaid) income taxes result from differences in the timing of certain
expense items for tax and financial reporting purposes. The tax effect of these
differences for the years reported under APB No. 11 were as follows:
<TABLE>
<CAPTION>
Year Ended March 31, 1993
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C>
Restructuring reserves $ 539
Warranty and other reserves and accruals not currently deductible 413
Tax (under) over book depreciation (374)
Effect of timing differences benefitted in prior years (571)
Other 94
----------
$ 101
==========
- ---------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate as follows:
<TABLE>
<CAPTION>
Years Ended March 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Expected tax (benefit) $ 749 $ (7,277) $ (2,281)
Change in valuation allowance (624) 8,883 --
Foreign taxes incurred -- 37 --
Foreign tax credit -- -- 61
Domestic loss which resulted in no current tax benefit -- -- 2,220
Other 95 (551) --
------ --------- ---------
$ 220 $ 1,092 $ --
====== ========= =========
- ---------------------------------------------------------------------------------------------------
</TABLE>
The major components of the net deferred tax asset consisted of the following:
<TABLE>
<CAPTION>
March 31, 1995 1994
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Inventory reserves $ 1,820 $ 942
Depreciation and asset basis differences 808 838
Warranty reserves 1,183 952
Bad debt reserves 842 2,057
Restructuring reserves 271 373
Net operating loss carryforwards 6,785 563
Accrued lawsuit settlement -- 7,499
Tax credits 2,764 1,739
Other 1,075 1,209
--------- ----------
15,548 16,172
Less: Valuation reserve (15,548) (16,172)
========= ==========
$ -- $ --
========= ==========
- ---------------------------------------------------------------------------------------------------
</TABLE>
The net operating loss carryforwards totaling $21.5 million will expire at
various dates from 2007 through the year 2010, and tax credit carryforwards will
expire at various dates from 2006 through the year 2010.
NOTE 6. COMMON STOCK
- --------------------------------------------------------------------------------
STOCK OPTION PLANS. The Company's 1984 Stock Option Plan provides for the grant
of both incentive and nonqualified stock options to key employees and certain
independent contractors of the Company. At March 31, 1995, options to purchase
1,197,705 common shares were outstanding under
23
<PAGE> 26
the 1984 Plan, of which 337,000 options were exercisable. As a result of
the adoption of the 1994 stock incentive plan, there will be no future grants
under the 1984 Plan.
In July 1994, the stockholders approved the 1994 Stock Incentive Plan. The
1994 Plan authorizes 900,000 shares of common stock to be reserved for issuance
over a ten year term. This share reserve will automatically increase on the
first trading day of each calendar year for five years after the adoption of the
1994 Plan, beginning with the 1995 calendar year, by an amount equal to one
percent (1%) of the total number of shares of common stock outstanding, but in
no event will any such annual increase exceed 150,000 shares.
The 1994 Plan contains: (i) a discretionary grant program for key employees
and consultants whereby options generally vest over five years and expire after
10 years, (ii) an automatic grant program for non-employee Board members,
whereby options vest over three years and expire after 10 years, (iii) a salary
reduction grant program under which key employees may elect to have a portion of
their base salary reduced each year in return for stock options, (iv) a stock
fee program under which the non-employee Board members may elect to apply all or
a portion of their annual retainer fee to the acquisition of shares of common
stock, and (v) a stock issuance program under which eligible individuals may be
issued shares of common stock as a bonus tied to their performance of services
or the Company's attainment of financial milestones, or pursuant to their
individual elections to receive such shares in lieu of base salary. The
implementation and use of any of these equity incentive programs (other than the
automatic grant program and the stock fee program) is within the sole discretion
of the Compensation Committee of the Board.
At March 31, 1995, options to purchase 266,000 shares had been granted
under the 1994 Plan, none of which were exercisable. The Company has reserved
approximately 2,098,000 shares for issuance under these plans.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
Number Option Price
of Shares per Share
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at March 31, 1992 2,031,043 $ .06 -$18.13
Granted 2,118,237 $ 5.25 -$ 7.50
Exercised (133,550) $ .06 -$ 9.00
Canceled (1,845,609) $ 4.50 -$18.13
---------- --------------
Outstanding at March 31, 1993 2,170,121 $ .06 -$11.75
Granted 253,150 $ 9.00 -$26.00
Exercised (690,745) $ .06 -$11.75
Canceled (370,348) $ 5.25 -$23.75
---------- --------------
Outstanding at March 31, 1994 1,362,178 $ .22 -$26.00
Granted 855,044 $ 9.87 -$18.13
Exercised (531,484) $ .22 -$13.25
Canceled (222,033) $ 5.25 -$26.00
---------- --------------
Outstanding at March 31, 1995 1,463,705 $ .50 -$26.00
========== ==============
- ---------------------------------------------------------------------------------------------------
</TABLE>
STOCKHOLDERS' RIGHTS AGREEMENT. In October 1991, the Company adopted a
Stockholders' Rights Agreement pursuant to which one Preferred Share Purchase
Right was distributed for each outstanding share of common stock. Each Right
entitles stockholders to buy one one-hundredth of a share of Series A Junior
Participating Preferred Stock at an exercise price of $50.00 upon certain
events. The Rights expire on October 23, 2001, unless earlier redeemed by the
Company.
<PAGE> 27
The Rights become exercisable if a person acquires 15% or more of the
Company's common stock or announces a tender offer that would result in such
person owning 15% or more of the Company's common stock. If the Rights become
exercisable, the holder of each Right (other than the person whose acquisition
triggered the exercisability of the Rights) will be entitled to purchase, at the
Right's then-current exercise price, a number of shares of the Company's common
stock having a market value of twice the exercise price. In addition, if the
Company were to be acquired in a merger or business combination after the Rights
became exercisable, each Right will entitle its holder to purchase, at the
Right's then-current exercise price, common stock of the acquiring company
having a market value of twice the exercise price. The Rights are redeemable by
the Company at a price of $0.01 per Right at any time within ten days after a
person has acquired 15% or more of the Company's common stock.
NOTE 7. TECHNOLOGY DEVELOPMENT, MANUFACTURING AND RELATED AGREEMENTS
MICROELECTRONICS TECHNOLOGY, INC. (MTI). The microwave integrated circuit
subassemblies which are key components in the Company's microwave radio products
are supplied primarily by MTI, which manufactures such subassemblies in Taiwan.
In 1984, the Company entered into a development agreement and stock
purchase agreement with MTI. The agreements include provisions which enable MTI
to perform development engineering work and to manufacture subassemblies for the
Company's products.
Under the development agreement, MTI has the right to manufacture up to 75%
of the Company's production requirements for microwave integrated circuit
subassemblies designed by MTI for the Company as long as MTI is able to meet
cost, quality and delivery standards available to the Company from other
sources. The agreement also provides MTI with a right to manufacture certain of
the Company's microwave products if the Company decides to subcontract the
manufacturing of these products. The agreement may be terminated by either party
only in the event of a breach by the other.
The Company did not incur any development costs for work performed by MTI
under this agreement in fiscal 1995, 1994 and 1993.
Purchases of subassemblies from MTI totaled approximately $23,509,000,
$15,636,000, and $10,712,000 for the fiscal years ended March 31, 1995, 1994,
and 1993, respectively. Trade accounts payable to MTI at March 31, 1995 and 1994
were $6,507,000 and $4,305,000, respectively.
In October 1987, the Company and MTI entered into a Technology Transfer and
Marketing Agreement whereby the Company granted MTI a license to manufacture,
use and market certain of the Company's products in the Republic of China
(Taiwan). For fiscal years 1995, 1994, and 1993, sales to MTI under this
agreement were $1,031,000, $2,146,000, and $550,000, respectively. In addition,
amounts due from MTI at March 31, 1995 and 1994 were $61,800 and $113,000,
respectively.
In fiscal 1993, in connection with a financing agreement, the Company
issued MTI warrants for the purchase of 112,500 shares of common stock at $6.50
per share. During fiscal 1995, MTI exercised all of these warrants.
OPTICAL MICROWAVE NETWORKS, INC. (OMNI). In fiscal 1989, the Company and MTI
entered into a joint venture to form Optical Microwave Networks Inc. (OMNI) to
manufacture integrated circuits in the United States. The Company invested
$400,000 for a 20% interest in OMNI and accounted for this investment using the
equity method of accounting. The Company sold its interest in OMNI to MTI for
$400,000, thereby realizing a gain of $371,000 during fiscal 1994. OMNI has
continued to supply products and services to the Company. During fiscal 1995,
1994, and 1993, purchases of components from OMNI totaled approximately
$6,239,000, $6,754,000, and $3,129,000, respectively. Trade accounts payable to
OMNI as of March 31, 1995 and 1994 were $1,521,000 and $1,302,000, respectively.
25
<PAGE> 28
SALE OF PRODUCT LINES. During fiscal 1993, the Company sold its fiber optic
product line and W-Band product line to Microelectronics Technology Inc. (MTI)
for total proceeds of $6.2 million, of which $1.6 million was paid in cash and
the remainder was remitted through a reduction of the Company's trade payable to
MTI. The total net gain resulting from the sale of these product lines of $3.2
million was recognized in other income as the transfer of technology related to
these product lines was completed. In fiscal 1994 and 1993, the Company
recognized $1.1 million and $2.1 million of total gain, respectively.
DMC TELECOM (MALAYSIA) SDN. BHD. In February 1991, the Company, together with
Alpine Resources Sdn. Bhd. and Superior Communications Sdn. Bhd., both Malaysian
corporations, formed a Malaysian corporation called DMCT(M). The Company
invested $739,000 for a 45% interest and accounted for this investment using the
equity method of accounting. In conjunction with this investment, the Company
entered into a Technology Transfer Agreement with DMCT(M) wherein DMCT(M) was
given specific license to manufacture and sell, as well as resell, certain of
the Company's products in Malaysia, Brunei, Singapore, Thailand, Philippines,
and Indonesia.
In connection with the Company's investment in DMCT(M), the Company
guaranteed up to approximately $2 million of the joint venture's debt under the
joint venture's line of credit agreement with a Malaysian bank, which was due in
July 1994.
In the quarter ended December 31, 1993, due to the continuing decline of
the financial viability of DMCT(M) and disputes regarding collection of the
outstanding receivables, the Company recorded a non-recurring charge of $7.0
million associated with the anticipated liquidation of its 45% interest in
DMCT(M). The charge related to a write-off of the Company's receivables from the
joint venture of $5,966,000, net of $1,957,000 of deferred margin previously
accrued, and an accrual for other related liabilities, including the Company's
guarantee of approximately $2 million of the joint venture's line of credit,
anticipated legal fees and other charges associated with the liquidation of the
joint venture.
On December 23, 1994, the Company reached agreement with the shareholders
of DMCT(M). The Company paid approximately $2.1 million for its 45% share of the
costs of liquidating the joint venture, and received inventory and fixed assets
valued at approximately $600,000 and $300,000, respectively.
NOTE 8. NON-RECURRING CHARGES
- --------------------------------------------------------------------------------
During the third quarter of fiscal 1994, the Company and its Directors agreed to
a settlement in principle of six class action lawsuits alleging securities law
violations. The total charge for the settlement was $20.0 million, including the
settlement amount, attorneys' fees, interest, and other related costs. The final
payment under the settlement agreement was made in fiscal year 1995, and a final
judgement and order of dismissal was received from the United States District
Court of Northern California.
Also, during the third quarter of fiscal 1994, the Company recorded a
non-recurring charge of $7 million relating to the write off of the Company's
receivable from the joint venture, DMCT(M).
NOTE 9. CUSTOMER AGREEMENT
- --------------------------------------------------------------------------------
In November 1993, the Company entered into an agreement with Siemens AG to
supply SPECTRUM(TM) II digital microwave radios to E-Plus Mobilfunk GmbH. As of
March 31, 1995, the Company had not met its product acceptance or delivery
schedule, and, as a result, recorded significant reserves for product discounts
on interim equipment and other related costs (See Note 2 - Other Accrued
Liabilities). The Company is working closely with Siemens AG and E-Plus to
resolve the remaining issues precluding the acceptance. At March 31, 1995, the
Company had recorded reserves for estimated obligations
26
<PAGE> 29
under this contract. However, there can be no assurance that the Company will
meet its remaining commitments under this contract and not incur additional
significant penalties. If the Company does not meet its current delivery
commitments under the contract, the customer can continue to order interim
equipment at a substantial discount, and can cancel the contract or individual
orders.
NOTE 10. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
- --------------------------------------------------------------------------
The Company operates in a single industry segment, the design and manufacture of
short- and medium-haul digital transmission products.
The following table summarizes customers accounting for more than 10% of
net sales in the fiscal years ended:
<TABLE>
<CAPTION>
March 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
American Telephone & Telegraph Co. -- 10% 21%
Mercury Communications Ltd. -- 11% 6%
- ---------------------------------------------------------------------------------------------------
</TABLE>
Export sales from the United States to unaffiliated customers in fiscal 1995,
1994, and 1993 were 84%, 87%, and 84% of U.S. sales, respectively.
Intercompany sales to the Company's foreign subsidiaries are transacted at
prices comparable to those offered to unaffiliated customers, after taking into
account the value-added to products and services by the subsidiaries.
Geographic information for the fiscal years ended March 31, 1995, 1994, and 1993
is as follows:
<TABLE>
<CAPTION>
United United
States Canada Mexico Kingdom Eliminations Total
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
1995
Sales to unaffiliated
customers $ 126,171 $ 1,075 $ 1,409 $ 24,995 -- $ 153,650
Intercompany sales 20,287 -- -- -- (20,287) --
--------- --------- --------- --------- --------- ---------
Net sales $ 146,458 $ 1,075 $ 1,409 $ 24,995 $ (20,287) $ 153,650
--------- --------- --------- --------- --------- ---------
Operating income $ 1,384 $ 56 $ 143 $ 1,159 $ 6 $ 2,748
--------- --------- --------- --------- --------- ---------
Identifiable assets $ 102,687 $ 314 $ 1,155 $ 7,269 $ (8,840) $ 102,585
--------- --------- --------- --------- --------- ---------
1994
Sales to unaffiliated
customers $ 84,956 $ 1,375 $ 1,318 $ 28,361 -- $ 116,010
Intercompany sales 26,961 -- -- -- (26,961) --
--------- --------- --------- --------- --------- ---------
Net sales $ 111,917 $ 1,375 $ 1,318 $ 28,361 $ (26,961) $ 116,010
--------- --------- --------- --------- --------- ---------
Operating income $ (20,995) $ (172) $ 198 $ (1,277) $ (272) $ (22,518)
--------- --------- --------- --------- --------- ---------
Identifiable assets $ 96,078 $ 777 $ 1,452 $ 13,429 $ (27,733) $ 84,003
--------- --------- --------- --------- --------- ---------
1993
Sales to unaffiliated
customers $ 87,745 $ 2,079 $ 218 $ 13,895 -- $ 103,937
Intercompany sales 11,714 -- -- -- (11,714) --
--------- --------- --------- --------- --------- ---------
Net sales $ 99,459 $ 2,079 $ 218 $ 13,895 $ (11,714) $ 103,937
--------- --------- --------- --------- --------- ---------
Operating income (loss) $ (4,913) $ (44) $ (63) $ (2,407) $ 15 $ (7,412)
--------- --------- --------- --------- --------- ---------
Identifiable assets $ 83,337 $ 834 $ 259 $ 10,983 $ (22,423) $ 72,990
--------- --------- --------- --------- --------- ---------
</TABLE>
27
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF DIGITAL MICROWAVE CORPORATION:
We have audited the accompanying consolidated balance sheets of Digital
Microwave Corporation (a Delaware Corporation) and subsidiaries as of March 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Digital Microwave
Corporation and subsidiaries as of March 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1995 in conformity with generally accepted accounting
principles.
San Jose, California ARTHUR ANDERSEN LLP
May 8, 1995
28
<PAGE> 31
OFFICERS
Richard C. Alberding
Co-Chief Executive Officer
Clifford H. Higgerson
Co-Chief Executive Officer
Mark A. Byington
Vice President, Engineering
Hal E. Edmondson
Vice President, Manufacturing
Timothy R. Hansen
Vice President, SPECTRUM(TM)
Business Unit
Shaun McFall
Vice President, Corporate Marketing
John P. O'Neil
Vice President, Personnel
Graham J. Powell
Vice President, Worldwide Sales
Carl A. Thomsen
Vice President and
Chief Financial Officer
DIRECTORS
Richard C. Alberding
Executive Vice President (Retired)
Hewlett-Packard Company
William E. Gibson
President, DMC Telecom
Dr. Jack M. Gill
General Partner
Vanguard Associates
A Private Venture Capital
Investment Partnership
Clifford H. Higgerson
General Partner
Communications Ventures
and Vanguard Associates
Private Venture Capital
Investment Partnerships
Billy B. Oliver
A Private Communications Consultant
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
San Jose, California
GENERAL
LEGAL COUNSEL
Brobeck, Phleger & Harrison
San Francisco, California
REGISTRAR AND
TRANSFER AGENT
Chemical Mellon
Shareholder Services
San Francisco, California
CORPORATE
HEADQUARTERS
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, CA 95134
United States of America
PRINCIPAL
SUBSIDIARIES
DMC Telecom U.K. Ltd.
East Kilbride, Scotland
DMC Telecom Canada Inc.
Toronto, Canada
DMC de Mexico, S.A. de C.V.
Mexico City, Mexico
Digital Microwave de
Venezuela, C.A.
Caracas, Venezuela
DMC de Colombia
Santa Fe de Bogota, Colombia
SALES OFFICES
North American Headquarters:
San Jose, California
Norcross, Georgia
Schaumburg, Illinois
Seattle, Washington
DMC Telecom Canada Inc.
Toronto, Canada
European Headquarters:
DMC Telecom
Coventry, England
DMC Telecom
East Kilbride, Scotland
DMC Moscow
Moscow, Russia
Latin American Headquarters:
San Jose, California
DMC de Mexico, S.A. de C.V. Mexico City, Mexico
DMC de Colombia
Santa Fe de Bogota, Colombia
Asia Pacific Headquarters:
Digital Microwave Corporation
Singapore
Digital Microwave Corporation
Manila, Philippines
Digital Microwave Corporation
New Delhi, India
SEC FORM 10-K
A copy of the Company's
Annual Report to the Securities
and Exchange Commission on
Form 10-K is available without
charge by writing to:
Digital Microwave Corporation
Attn: Corporate Communications
170 Rose Orchard Way
San Jose, CA 95134
<PAGE> 32
PROFILE
Digital Microwave Corporation designs, manufactures, and markets advanced, high
performance digital microwave radios for short- and medium-haul communications.
- - Digital Microwave's products are capable of transmitting and receiving
multiple digital lines, carrying voice, data and video signals, up to a total
capacity of 45 megabits per second. - The company's comprehensive portfolio of
technologically advanced products is designed for use by telecommunications
operators providing PCS/PCN, mobile telephone services, and local access, as
well as for use in private networks worldwide. - Digital Microwave Corporation
is headquartered in San Jose, California. The company has regional sales and
service headquarters in the United Kingdom, Singapore, and San Jose, with
additional sales offices in Asia, Europe, Latin America, and North America.
Digital Microwave has sold over 50,000 radios, with systems installed in over 55
countries.
[LOGO DIGITAL MICROWAVE CORPORATION]
170 ROSE ORCHARD WAY
SAN JOSE, CALIFORNIA 95134
PHONE: 408 943-0777
FAX: 408 944-1678
<PAGE> 33
STOCK INFORMATION
The company's common stock is traded over-the-counter on the Nasdaq National
Market under the symbol DMIC. The following table sets forth the high and low
closing bid quotations of the company's common stock as reported by Nasdaq for
the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1995 March 31, 1994
High Low High Low
- -------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1st Quarter 16 8 3/4 15 1/4 8 1/2
2nd Quarter 18 3/4 10 1/4 17 8 3/4
3rd Quarter 20 5/8 11 5/8 29 3/4 16 7/8
4th Quarter 20 3/4 11 7/8 29 3/8 13 1/4
- -------------------------------------------------------------------------------------------------
</TABLE>
The company has not paid dividends on its common stock and does not intend to
pay dividends in the foreseeable future in order to retain earnings for use in
its business. At March 31, 1995, there were approximately 325 stockholders of
record.
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included (or incorporated by reference) in this Form 10-K into the
Company's previously filed Registration Statements (File Nos. 33-16539,33-37173,
33-43155, and 33-85270) on Form s-8.
ARTHUR ANDERSEN LLP
San Jose, California
June 28, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000812703
<NAME> DIGITAL MICROWAVE
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-1-1994
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 1,919
<SECURITIES> 1,100
<RECEIVABLES> 32,513
<ALLOWANCES> 1,413
<INVENTORY> 46,732
<CURRENT-ASSETS> 88,608
<PP&E> 42,519
<DEPRECIATION> (28,542)
<TOTAL-ASSETS> 102,585
<CURRENT-LIABILITIES> 67,974
<BONDS> 0
<COMMON> 13,468
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 102,585
<SALES> 153,650
<TOTAL-REVENUES> 153,650
<CGS> 114,760
<TOTAL-COSTS> 114,760
<OTHER-EXPENSES> (16)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (530)
<INCOME-PRETAX> 2,202
<INCOME-TAX> 220
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,982
<EPS-PRIMARY> .14
<EPS-DILUTED> 0
</TABLE>
