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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, 1996
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 .
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Commission file number 0-15895
DIGITAL MICROWAVE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0016028
(State of 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. /X/
State the aggregate market value of voting stock held by non-affiliates
of Registrant (based on the last reported sale price of $15.75 per share on the
Nasdaq National Market) as of June 1, 1996: Approximately $240,737,427.
As of June 1, 1996, there were 15,897,406 shares of Common Stock, par
value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended March 31, 1996 are incorporated by reference into Parts I and
II of this Form 10-K Report. With the exception of those portions which are
incorporated by reference, the Registrant's fiscal 1996 Annual Report is not
deemed filed as part of this Report.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on August 8, 1996 are incorporated by reference into
Part III of this Form 10-K Report.
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TABLE OF CONTENTS
DIGITAL MICROWAVE CORPORATION
1996 FORM 10-K ANNUAL REPORT
PART I
Item 1 The Business................................................ 3
Item 2 Properties ................................................. 14
Item 3 Legal Proceedings .......................................... 14
Item 4 Submission of Matters to a Vote of Security Holders ........ 14
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters ........................ 15
Item 6 Selected Financial Data .................................... 15
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 15
Item 8 Financial Statements and Supplementary Data ................ 15
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ............................... 15
PART III
Item 10 Directors and Executive Officers of the Registrant .............. 16
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 Statements, Schedules, and
Reports on Form 8-K .................................... 17
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PART I
ITEM 1. THE BUSINESS
Digital Microwave Corporation (the "Company" or "DMC") designs,
manufactures and markets advanced, high-performance digital microwave equipment
for a variety of short and medium-haul communications applications worldwide.
This equipment, which is based on microwave and millimeter wave technologies, is
the primary alternative to fiber optic and copper cables for these applications,
and may be used for the high speed transport of digital signals within
telecommunications networks. The transported signals may be digitized voice,
video, or data signals generated by computers or facsimile machines.
Telecommunications service providers utilize the Company's technology to connect
major clients to their networks; cellular and Personal Communications Service
(PCS) providers utilize the technology to interconnect base station and
switching equipment locations; large corporations, transportation authorities,
government agencies and public utility companies utilize the technology as an
alternative to leased wireline services in order to create cost efficient,
private telecommunications networks.
The Company serves a worldwide client base, and in fiscal 1996
approximately 88% of its net sales were to customers located outside of the
United States.
INDUSTRY BACKGROUND
Over the past decade, there has been a significant increase in
worldwide demand for rapid, reliable, high-quality telecommunications equipment
for transmission of voice, data, facsimile, and video information. 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 requirements of private communications networks.
Wireless solutions are highly attractive to new ventures establishing competing
telecommunications service in highly developed countries, and to operators in
developing countries seeking to rapidly increase the availability, quality, and
choice of telecommunications services.
MICROWAVE AND MILLIMETER WAVE RADIO 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.
From its inception, the Company has used technology and innovation to
create quality products that are highly reliable, simple to install, easy to
operate, and require minimal maintenance. Focused initially on short-haul
microwave products operating at 23 GHz, the Company has progressively developed
its range of product offerings and today sells products operating in frequency
bands at 2, 6, 7, 8, 10, 11, 13, 15, 18, 23, 26, and 38 GHz, opening access to
markets worldwide. To meet a wide range of interconnection applications, the
Company currently offers products that are available to carry different digital
signal capacities from the low end equivalent to 1XDS-1 or 1XE1 to multiples
thereof, up to a maximum of 1XDS-3 or 2XE3. Frequency bands between 2 GHz and 30
GHz are typically classified as "Microwave," while bands between 30 GHz and 60
GHz are classified as "Millimeter Wave."
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The basic architecture of the Company's products has consistently
followed the innovation of its first designs and has subsequently been adopted
as a standard format by many of the Company's competitors.
CURRENT PRODUCTS
During fiscal 1996, the Company sold products from several product
families. Each product family has characteristics designed to meet the needs of
specific markets or applications. The principal product families currently in
production are the Quantum(TM), M Series, SPECTRUM(TM) II, and DMC Net(R). Other
products include the LC, Classic/Classic II. These product families are
described further below.
SPECTRUM(TM) II
During fiscal 1996 the Company commenced volume production of
a new family of wireless products named SPECTRUM(TM)II. Designed to
closely match the demands of the rapidly growing cellular, PCS and
wireless local loop markets, the initial shipments were in 23 GHz and
38 GHz bands to European based clients. Additional options at 13, 15
and 18 GHz SPECTRUM(TM) II were also introduced and delivered by the
Company during fiscal 1996. By the end of fiscal 1996 over 3,000
SPECTRUM(TM) II radios had been shipped to more than 20 customers
worldwide.
The SPECTRUM(TM) II draws from the innovation of earlier DMC
products and by incorporating newer technologies adds many new features
that make the product more flexible in both customer applications and
manufacturing. The breadth of coverage of the SPECTRUM(TM) II product
family will allow the Company to enhance its competitive position with
regard to product features and performance. Significantly more
functionality is available in the SPECTRUM(TM) II because of software
configuration and control when compared to earlier generation products,
a trend that the Company expects will continue for future products.
Delayed in its initial deliveries to E-Plus, a major PCS
client in Germany, the SPECTRUM(TM) II was fully technically approved
and installations began in the second quarter of fiscal 1996. E-Plus
has since committed to deliveries through the end of fiscal 1997.
QUANTUM(TM)
Designed for the lower frequency bands (2 to 15 GHz) and
higher transmission capacities, the QUANTUM(TM) incorporates
sophisticated circuitry to provide high quality transmission
performance even over terrain that is hostile towards radio
transmission techniques. Examples of difficult applications are long
links across water, flat wetlands, or desert terrain where radio
transmission quality can be adversely affected by weather conditions.
In the U.S., the QUANTUM(TM) has been supplied at 6, 10 and 11 GHz for
high performance private network applications of gas and electric
utility companies. Internationally, the principal application of the
QUANTUM(TM) is in backhaul transmission for cellular networks utilizing
frequencies in the 7 and 8 GHz range.
M SERIES
The M Series has been the Company's biggest selling product.
First introduced in 1989 at 18 GHz for the North American market, the M
Series was progressively expanded and
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enhanced to cover 7, 13, 15, 18 and 23 GHz applications. By 1994, the M
Series had become one of the world's most utilized microwave radios for
interconnection in cellular networks. The product's architecture
consists of a common indoor interface unit and a range of outdoor
microwave transmitter/receivers, which simplifies training, operation
and maintenance wherever operators are required to use more than one
frequency band for regulatory or licensing reasons, or simply to
fulfill applications over varying distances. The M Series was the first
commercialized microwave radio to incorporate multiplexing of up to
16XE1 or 16XDS-1 signals, eliminating the need for standalone
multiplexing equipment to perform the same functions. The M Series has
an excellent in-service reliability record in a wide variety of network
applications worldwide.
DMC NET(R) is a sophisticated network monitoring and control
system designed to facilitate remote operation and maintenance of
microwave radio networks. DMC Net(R) is a custom software application
running under the Solaris operating system of SUN Microsystems that
accesses digital status and control information integral to all DMC
wireless products. DMC Net(R) is currently in use in networks ranging
in size from small regional systems containing a few microwave radio
links to large nationwide systems containing several thousand microwave
radio links. Centralized management and control allows early warning of
fault conditions, and rapid diagnosis of problems, and helps to reduce
down time and lower the cost of maintenance. Network management
capability is a key requirement for all modern telecommunications
network applications and is a key differentiator in many of the
Company's targeted opportunities.
OTHER PRODUCTS
CLASSIC/CLASSIC II and LC SERIES RADIOS are derivatives of the
original DMC product design that, due to simplicity of design,
dependability and low manufacturing cost, continue to generate modest
ongoing revenues primarily from existing users.
PRODUCT DEVELOPMENT ACTIVITIES
The Company's current product development efforts are principally
focused on the development of the following products:
QUANTUM(TM) - The Company is redirecting product development
efforts in fiscal 1997 to enhance its position in the markets currently
addressed by the QUANTUM(TM) product line, and to begin to address
higher capacity applications.
SPECTRUM(TM) II - The Company is also continuing substantial
product development efforts in fiscal 1997 to add to the available
frequencies in this product line. Continued enhancement of the software
for user interface applications is also underway.
DMC NET(R) - The Company's current software development
efforts are focused on enhancement of the Company's network monitoring
and control capabilities. This network software is a significant part
of the Company's product offerings, and provides the capability to
monitor up to 5,000 radios on a network, as well as certain base
station functions.
There can be no assurance that the Company will be successful in
developing and marketing any of 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
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will adequately meet the requirements of the marketplace and achieve market
acceptance. See "Factors That May Affect Future Financial Results."
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 BellSouth, Ameritech, Airtouch,
Vodafone and Motorola. The principal market segments addressed by the Company,
and examples of applications within those markets, are set forth below:
MOBILE COMMUNICATIONS SERVICE PROVIDERS
Customers in this segment include cellular telephone companies
and PCN/PCS companies in the United States and abroad which use the
Company's wireless solutions to connect cell sites and link them to
switching centers for connection to the public switched telephone
network. Although it is a premium or secondary personal communications
service in developed countries, cellular/PCS service may often be the
primary choice in many developing countries where upgrading the
telecommunications 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 the Company's customers in this segment, Panafon,
one of the Company's Global Systems Mobile Communications ("GSM")
cellular telephone customers, is using the Company's product families
to interconnect cells and switching equipment for a cellular telephone
network being constructed to cover the major metropolitan areas in
Greece. E-Plus, a DCS 1800 PCN operator in Germany, is extensively
deploying SPECTRUM(TM) II products managed by DMC Net(R), the Company's
network monitoring and control system. In the United States, similar
solutions are being provided to BellSouth PCS. The Company has also had
significant sales in China, Malaysia, India, and the Philippines
providing solutions to mobile communications network operators.
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 of broadband signals. IONICA, a UK
based provider of wireless local loop services, uses the Company's
products for trunking applications to build its network.
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 performance 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. BANAMEX, a
private banking institution, has established a private network using
the Company's products to connect several of its banks throughout
Mexico to facilitate the rapid communication of information.
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For the past several years the majority of the Company's sales have
been in the first two categories described above. The following is a list of
representative end user customers in the last year within each of these major
segments:
<TABLE>
<CAPTION>
MOBILE COMMUNICATIONS SERVICE PROVIDERS TELEPHONE COMPANIES AND COMMON CARRIERS
<S> <C>
Sterling (India) TELMEX (Mexico)
Panafon (Greece) Regional Bell Operating Companies (USA)
Comviq GSM (Sweden) Piltel (Philippines)
Smart (Philippines) Mercury Communications Ltd.(United Kingdom)
Libertel (Netherlands) IONICA (United Kingdom)
Sapura (Malaysia) Isla Communications Co., Inc. (Philippines)
Airtouch Communications (USA) Impsat (Colombia)
BellSouth PCS (USA)
E-Plus Mobilfunk GmbH (Germany)
Jordan Mobile (Jordan)
</TABLE>
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. For fiscal 1996, the top four
customers accounted for approximately 38% of net sales. One of these customers,
Siemens AG, accounted for 22% of the Company's net sales. No other customer
accounted for more than 10% of the Company's net sales. At March 31, 1996, four
customers accounted for 49% of the Company's $84 million backlog, of which 16%
was attributable to orders under the Siemens/E-Plus contract. 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, 1996 was $84 million, as compared
with $93 million at March 31, 1995. The Company includes in backlog only orders
scheduled for delivery within 12 months. Product orders in the Company's current
backlog are subject to changes in delivery schedules or to cancellation at the
option of the purchaser without significant penalty. Accordingly, although
useful for scheduling production, backlog as of any particular date may not be a
reliable measure of sales for any future period. See "Factors That May Affect
Future Financial Results."
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 develop
and provide competitive products.
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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 ten countries. The Company has four
regional sales offices and service centers in North America located near
Chicago, Illinois; Toronto, Canada; Atlanta, Georgia; and San Jose, California,
where the Company's North American sales organization is headquartered. The
Company also has sales and/or service centers in the United Kingdom, Germany,
Sweden, Mexico, Colombia, China, 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 179 people in its sales and service
organization, approximately 66% 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, 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, Canada, Mexico, the Philippines, and Germany.
FOREIGN EXCHANGE/INTERNATIONAL SALES
Total international sales were 88% and 87% of net sales for fiscal 1996
and 1995, respectively. The Company expects that international sales will
continue to account for the majority of its 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 the Company's 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 and/or changes in government controls and regulatory requirements,
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 and
trade relationships.
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 $11.1 million was invested in research and development in fiscal
1996, compared to $11.4 million in fiscal 1995. Research and development
expenses in fiscal 1995 were higher than fiscal 1996 because of major
development efforts on the second generation SPECTRUM(TM) II products. As a
percentage of net sales, research and development expenses were 7.4% for both
fiscal 1996 and 1995. The Company will continue to invest in research and
development because it 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
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products. See "Factors That May Affect Future Financial Results" and
"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. The Company is reliant on the timely delivery of
certain key components to meet its manufacturing plan. 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 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.
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
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considers its primary competitors to be Alcatel, NEC, California Microwave
Corporation, 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, they will be successful.
E-PLUS CONTRACT
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, equipment returns and other related costs (See Note 9 of
Notes to Consolidated Financial Statements --"Customer Agreement" incorporated
herein by reference.). In July 1995, the Company received product acceptance
from E-Plus, and began delivery and installation of the SPECTRUM(TM) II
equipment. During the third quarter of fiscal 1996, the Company provided
additional reserves of approximately $1.0 million related to the final
resolution of other remaining open issues on this contract.
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.
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
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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
The Company is a defendant in various suits and is subject to various
claims which arise in the normal course of business. In the opinion of
management, the ultimate disposition of these claims will not have a material
effect on the consolidated financial position, liquidity or results of
operations of the Company.
EMPLOYEES
As of March 31, 1996, the Company employed 576 full-time and temporary
employees. 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.
EXECUTIVE OFFICERS OF DIGITAL MICROWAVE
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>
Frank Carretta, Jr. 51 Vice President, Worldwide Sales and Service
Carol A. Goudey 48 Treasurer and Assistant Secretary
Timothy R. Hansen 36 Vice President and General Manager,
SPECTRUM(TM) Division
Jack Hillson 45 Vice President and General Manager,
Quantum(TM)/Magnum Division
Paul A. Kennard 45 Vice President, Engineering
Shaun McFall 36 Vice President, Corporate Marketing
John P. O'Neil 58 Vice President, Personnel
Carl A. Thomsen 51 Vice President, Chief Financial Officer & Secretary
--------------------------------------------------------------------------------------------------------
</TABLE>
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Frank Carretta, Jr.
Mr. Frank Carretta, Jr. joined the Company as Vice President, Worldwide
Sales and Service in October 1995. Prior to joining DMC, Mr. Carretta served as
Area Sales Director of M/A-Com, Inc., a manufacturer of radio and microwave
communications products, from July 1992 to September 1995. From 1988 to June
1992, Mr. Carretta was Vice President of Ward Davis Associates, a manufacturers'
representative company selling electronic test instrumentation and software
development tools.
Carol A. Goudey
Ms. Carol A. Goudey joined the Company as Treasurer in April 1996 and
was additionally appointed Assistant Secretary in May 1996. Prior to joining
Digital Microwave, she served as Acting Treasurer of California Micro Devices
Corporation, a manufacturer of semiconductor devices, since 1994. Ms. Goudey has
also previously held the position of Corporate Treasurer at both Ungermann-Bass,
Inc., a network systems company, and System Industries, Inc., a computer
peripheral company.
Timothy R. Hansen
Mr. Timothy R. Hansen has served as Vice President and General Manager,
SPECTRUM(TM) Division of the Company since February 1995. Mr. Hansen previously
served as Vice President and Program Manager of the SPECTRUM(TM) product line.
He joined the Company in August 1984 as product manager, and has held management
positions in marketing, planning, sales and order management
Jack Hillson
Mr. Jack Hillson was appointed Vice President and General Manager,
Quantum(TM)/Magnum Division of the Company in December 1995. Prior to joining
DMC, Mr. Hillson was with M/A-Com, Inc. for over eleven years, serving in
various technical and management positions with the Semiconductor and
Microelectronics Divisions. Most recently, Mr. Hillson served as the Director of
Operations for M/A Com, Inc.'s Power Hybrids Division, which manufactures
transistors and amplifier modules for the wireless communications market.
Paul Kennard
Mr. Paul Kennard joined the Company as Vice President, Engineering in
April 1996. From 1989 to March 1996, Mr. Kennard was with California Microwave
Corporation, a satellite and wireless communications company, serving as
Director of the Signal Processing Technology Department until his promotion in
1994 to Vice President of Engineering, and then to Senior Vice President of
Engineering in 1995 for the Microwave Network Systems Division.
Shaun McFall
Mr. Shaun McFall has served as Vice President, Corporate Marketing of
the Company since February 1995. He joined the Company's UK operations in
January 1989, and has held several management positions in marketing. Prior to
joining DMC, he worked for GEC Telecommunications Ltd. in Germany and Ferranti
Industrial Electronics PLC, in Edinburgh, Scotland, both of which are
telecommunications companies.
John O'Neil
Mr. John O'Neil joined the Company as Vice President, Personnel 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.
Page 12
<PAGE> 13
Carl A. Thomsen
Mr. Carl A. Thomsen joined the Company as Vice President, Chief
Financial Officer and Secretary in February 1995. Prior to joining the Company,
he was Senior Vice President and Chief Financial Officer of Measurex
Corporation, a manufacturer of sensor based process control systems. Mr. Thomsen
joined Measurex Corporation in 1983 as Corporate Controller, was promoted to
Vice President in 1986, to Chief Financial Officer in 1992, and to Senior Vice
President in 1993.
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS
The statements in the Annual Report to the Stockholders and this Form
10-K concerning the Company's future products, expenses, revenue, liquidity and
cash needs as well as the Company's plans and strategies contain forward-looking
statements concerning the Company's future operations and financial results.
These forward-looking statements are based on current expectations and the
Company assumes no obligations to update this information. Numerous factors such
as economic and competitive conditions, incoming order levels, shipment volumes,
product margins, and foreign exchange rates, could cause actual results to
differ from those described in these statements and prospective investors and
stockholders should carefully consider the factors set forth below in evaluating
these forward-looking statements.
Sales of the Company's products are concentrated in a small number of
customers. For fiscal 1996, the top four customers accounted for 38% of the net
sales. As of March 31, 1996, four of the Company's customers accounted for 49%
of the backlog, of which 16% was attributable to orders under the E-Plus
contract. The worldwide telecommunications industry is dominated by a small
number of large corporations and the Company expects that a significant portion
of its future product sales will continue to be concentrated in a limited number
of customers. The loss of any existing customer, a significant reduction in the
level of sales to any existing customer, or the failure of the Company to gain
additional customers could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, a
substantial portion of shipments may occur near the end of each quarter.
Accordingly, the Company's 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 and from quarter to quarter.
The markets for the Company's products are extremely competitive and
the Company expects that competition will increase. The Company's existing and
potential competitors include large and emerging domestic and international
companies, such as California Microwave Corporation, Alcatel, Ericsson, Siemens
AG, Harris Corporation, Nokia, NEC, and P-Com, many of which have significantly
greater financial, technical, manufacturing, marketing, sales and distribution
resources and management expertise than the Company. The Company believes that
its ability to compete successfully will depend on a number of factors both
within and outside its control, including price, quality, availability, product
performance and features; timing of new product introductions by the Company,
its customers and its competitors; the ability of its customers to obtain
financing; and customer service and technical support.
The Company expects that international sales will continue to account
for the majority of its net product sales for the foreseeable future. As a
result, the Company is subject to the risks of doing business internationally,
including unexpected changes in regulatory requirements; fluctuations in foreign
currency rates; imposition of tariffs and other barriers and restrictions; the
burdens of complying with a variety of foreign laws and general economic and
geopolitical conditions, including inflation and trade relationships.
Page 13
<PAGE> 14
Manufacturers of digital microwave telecommunications equipment are
experiencing, and are likely to continue to experience, intense price pressure,
which has resulted, and is expected to continue to result, in downward pricing
competition on the Company's products. As a result, the Company has experienced,
and expects to continue to experience, declining average sales prices for its
products. The Company's future profitability is dependent upon its ability to
reduce costs in line with or faster than declines in prices.
The Company's manufacturing operations are highly dependent upon the
delivery of materials by outside suppliers in a timely manner. From time to time
the Company has experienced delivery delays from key suppliers which impacted
sales. There can be no assurance that the Company will not experience material
supply problems or component or subsystem delays in the future.
ITEM 2. PROPERTIES
The Company's corporate offices and principal research, development and
manufacturing facilities are located in San Jose, California in four leased
buildings aggregating approximately 170,000 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 until the year 2004. The Company also
leases 17,000 square feet in Coventry, England. The Company leases two sales
offices located in Chicago, Illinois and Atlanta, Georgia, and approximately
23,000 aggregate square feet of international sales and customer service
offices. The Company believes these facilities are adequate to meet its
anticipated needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
See "Business - Litigation" and Notes 4 and 8 of "Notes to Consolidated
Financial Statements" incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 14
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The section labeled "Stock Information" appearing on the inside front
cover of the Company's 1996 Annual Report to Stockholders is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "Selected Consolidated Financial Data" appearing on
page 14 of the Company's 1996 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" on pages 10
through 14 of the Company's 1996 Annual Report to Stockholders is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data, and
related notes and independent auditor's report appearing on pages 15 through 28
of the Company's 1996 Annual Report to Stockholders are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 15
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers under the
caption "Election of Directors," "Directors, Executive Officers and Key
Personnel," "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 August 8, 1996 (the "Proxy Statement"), is
incorporated herein by reference. In addition, see the discussion under the
caption "Employees -- Executive Officers of Digital Microwave" under Item 1 of
this Form 10-K.
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 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 Supplier" and Note 7 of "Notes to Consolidated
Financial Statements" of the Company's 1996 Annual Report incorporated herein by
reference.
Page 16
<PAGE> 17
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 1996 Annual Report to Stockholders
and are incorporated herein by reference pursuant to Item 8:
1. Consolidated Balance Sheets as of March 31,
1996 and 1995.
2. Consolidated Statements of Operations for
each of the three years in the period ended
March 31, 1996.
3. Consolidated Statements of Stockholders'
Equity for each of the three years in the
period ended March 31, 1996.
4. Consolidated Statements of Cash Flows for
each of the three years in the period ended
March 31, 1996.
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, 1996 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, 1996.
(c) See Item 14 (a) 3 above.
(d) See Item 14 (a) 2 above.
Page 17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 26, 1996.
DIGITAL MICROWAVE CORPORATION
By: /s/ Charles D. Kissner
------------------------------------------
Charles D. Kissner
President and Chief Executive Officer
Page 18
<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 Charles D. Kissner 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/ Charles D. Kissner President and Chief Executive Officer June 26, 1996
- ------------------------------
Charles D. Kissner
/s/ Carl A. Thomsen Vice President, Chief Financial Officer June 26, 1996
- ------------------------------ & Secretary
Carl A. Thomsen (Principal Financial and Accounting Officer)
/s/Richard C. Alberding Director June 26, 1996
- ------------------------------
Richard C. Alberding
/s/William E. Gibson Director June 26, 1996
- ------------------------------
William E. Gibson
/s/ Clifford H. Higgerson Director June 26, 1996
- ------------------------------
Clifford H. Higgerson
/s/ James D. Meindl Director June 26, 1996
- ------------------------------
James D. Meindl
/s/Billy B. Oliver Director June 26, 1996
- ------------------------------
Billy B. Oliver
</TABLE>
Page 19
<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 to stockholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated April 22, 1996. Our audits
were made for the purpose of forming an opinion on those 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 financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
April 22, 1996
Page 20
<PAGE> 21
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, 1996
Allowance for
doubtful accounts $1,413 $580 $ 620 $1,373
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 $ 706 $ --
</TABLE>
Page 21
<PAGE> 22
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 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)).
10.5 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).
10.9 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)).
10.11 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)).
Page 22
<PAGE> 23
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).
10.22 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).
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 between the Company and Heller Financial 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 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1994).
Page 23
<PAGE> 24
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 Agreement dated March 21, 1995 between the Company and Bank of the
West incorporated by reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1995.
10.35 Amendment to Loan Agreement dated March 31, 1995 between the Company
and Heller Financial, Inc. incorporated by reference to Exhibit 10.35
to the Company's Annual Report on Form 10-K for the year ended
March 31, 1995.
10.36 Employment Agreement dated May 1, 1996 between the Company and Charles
D. Kissner.
10.37 Form of Employment Agreement between the Company and certain Executive
Officers.
13.1 Annual Report to Stockholders.
21.1 List of subsidiaries.
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
granted.
Page 24
<PAGE> 1
EXHIBIT 10.36
E M P L O Y M E N T A G R E E M E N T
This Agreement, dated as of May 1, 1996, is between Digital Microwave
Corporation, a California corporation ("Employer"), and Charles D. Kissner
("Employee").
RECITALS
* Employee is and has been employed by Employer and is currently serving as
the President and Chief Executive Officer.
* Employer desires to continue to employ Employee and to assure itself of the
continued services of Employee for the Period of Employment provided for in
this Employment Agreement, and Employee desires to be employed by Employer for
such period, upon the following terms and conditions.
ACCORDINGLY, the parties agree as follows:
1. Period of Employment.
(a) Basic Term. Employer shall employ Employee to render services to Employer in
the position and with the duties and responsibilities described in Section 2 for
the period (the "Period of Employment") commencing on the date of this Agreement
and ending on the date upon which the Period of Employment is terminated in
accordance with Section 4.
2. Position and Responsibilities.
(a) Position. Employee shall continue employment with Employer and
shall perform all services as may be assigned by Employer. Employee shall
devote his best efforts and full-time attention to the performance of his
duties. Employee shall be subject to the direction of Employer, which shall
retain full control of the means and methods by which he performs the above
services and of the place(s) at which all services are rendered. Employee shall
report to the Board of Directors of Employer. Employee shall be expected to
travel if necessary or advisable in order to meet the obligations of his
position.
<PAGE> 2
(b) Other Activity. Except upon the prior written consent of Employer, Employee
(during the Period of Employment) shall not (i) accept any other employment; or
(ii) engage, directly or indirectly, in any other business, commercial, or
professional activity (whether or not pursued for pecuniary advantage) that is
or may be competitive with Employer, that might create a conflict of interest
with Employer, or that otherwise might interfere with the business of Employer,
or any Affiliate. An "Affiliate" shall mean any person or entity that directly
or indirectly controls, is controlled by, or is under common control with
Employer. Notwithstanding the foregoing, upon reasonable notice to Employer,
Employee may serve as a director of one for profit entity and one not for profit
entity so long as such entity is not competitive with Employer or any Affiliate
and where such service does not otherwise create a conflict of interest.
3. Compensation and Benefits.
(a) Compensation. In consideration of the services to be rendered under this
Agreement, Employer shall pay Employee a base salary of $330,000 per year,
payable semi-monthly, pursuant to the procedures regularly established, and as
they may be amended, by Employer in its sole discretion, during the Period of
Employment. Employer shall review annually Employee's compensation and shall
determine, in its sole discretion, whether and how much the existing
compensation shall be adjusted, without regard to any policy or practice
Employer may have for adjusting salaries. In addition to base salary, Employee
shall be eligible to participate in the Employer's executive management
incentive bonus and stock option plans according to the terms of those plans.
(b) Benefits. Employee shall be entitled to vacation leave in accordance with
Employer's standard policies. As Employee becomes eligible therefor, Employee
shall have the right to participate in and to receive benefits from all present
and future benefit plans specified in Employer's policies and generally made
available to similarly situated employees of Employer. The amount and extent of
benefits to which Employee is entitled shall be governed by the specific benefit
plan, as amended. Employee also shall be entitled to any benefits or
compensation tied to termination as described in Section 4. Nothing stated in
this Agreement shall prevent Employer from changing or eliminating any benefit
during the Period of Employment as Employer, in its sole discretion, may deem
necessary or desirable. No statement concerning benefits or compensation to
which Employee is entitled shall alter in any way the term of this Agreement,
any renewal thereof, or its termination. All compensation and comparable
payments to be paid to Employee under this Agreement shall be less withholdings
required by law.
(c) Expenses. Employer shall reimburse Employee for reasonable travel and other
business expenses incurred by Employee in the performance of his duties, in
accordance with Employer's policies, as they may be amended in Employer's sole
discretion.
2
<PAGE> 3
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate automatically upon the
death of Employee. Employer shall pay to Employee's beneficiaries or estate, as
appropriate, any, compensation then due and owing, including payment for accrued
unused vacation, if any, and will when due make a payment of any incentive bonus
to which the Employee would have been entitled prorated based on the number of
months the Employee was employed during the incentive bonus period. Thereafter,
all obligations of Employer under this Agreement shall cease. Nothing in this
Section shall affect any entitlement of Employee's heirs to the benefits of any
life insurance plan or other applicable benefits.
(b) By Disability. If, by reason of any physical or mental incapacity, Employee
has been or will be prevented from properly performing his duties under ther
Agreement for more than ninety (90) consecutive days, then, to the extent
permitted by law, Employer may terminate the Period of Employment without any
advance notice. Employer shall pay Employee all compensation to which he is
entitled up through the day notice of termination is provided, and, in addition,
Employer shall when due make a payment of any incentive bonus to which the
Employee would have been entitled prorated based on the number of months the
Employee was employed during the incentive bonus period; thereafter, all
obligations of Employer under this Agreement shall cease. Nothing in this
Section shall affect Employee's rights under any applicable Employer disability
plan.
(c) By Employer Not For Cause. At any time, Employer may terminate the
Period of Employment Not for Cause for any reason, by providing Employee ten
(10) days' advance written notice, provided that Employee shall be paid, in
addition to all compensation due and owing through the last day actually
worked, severance in an amount equal to twelve months of the Employee's then
current base salary. Such severance shall be paid by Employer to Employee in 12
equal monthly installments, commencing one month from the date of termination,
or, at Employer's discretion, in a single lump sum on the termination date.
Employer shall also pay the Employer's share of health insurance premiums for a
period of up to 12 months, or until Employee is eligible to participate in
another employer's plan, whichever comes first, should Employee elect to
convert his health insurance benefits under COBRA. Employer shall also pay when
due any incentive bonus to which the Employee would have been entitled prorated
based on the number of months the Employee was employed during the incentive
bonus period and will permit Employee's stock options, if any, to continue to
vest for 12 months following the termination date. If Employer terminates the
Period of Employment Not for Cause within eighteen (18) months following a
Change of Control as defined in subparagraph 4(f), Employee shall receive the
severance benefits set forth in subparagraph 4(f)(i)-(iv) rather than the
severance benefits set forth in this subparagraph 4(c). Employer shall have the
option, in its complete discretion, to terminate the Period of Employment at
any time prior to the end of such notice period, provided Employer pays
3
<PAGE> 4
Employee all compensation due and owing through the last day actually
worked plus an amount equal to the base salary Employee would have earned
through the balance of the above notice period in addition to the severance
benefits described above; thereafter, all of Employer's obligations under this
Agreement shall cease. Employer may dismiss Employee without cause
notwithstanding anything to the contrary contained in or arising from any
statements, policies, or practices of Employer relating to the employment,
discipline, or termination of its employees.
(d) By Employer For Cause. At any time, and without prior notice, Employer may
terminate the Period of Employment for Cause (as defined below). Employer shall
pay Employee all compensation then due and owing; thereafter, all of Employer's
obligations under this Agreement shall cease. Termination shall be for "Cause"
if Employee: (i) acts in bad faith and to the detriment of Employer; (ii)
exhibits in regard to his employment willful misconduct, dishonesty, habitual
neglect of duties, or any willful act or omission that may materially and
adversely affect the Employer's business or that involves fraud, embezzlement or
misappropriation of any property or proprietary information of the Employer;
(iv) is convicted of a crime involving dishonesty, breach of trust, or physical
or emotional harm to any person; or (v) breaches any material term of this
Agreement. If termination is due to Employee's disability, Section 4(b) above
shall control, and not this subsection on termination for Cause.
(e) By Employee Not for Cause. At any time, Employee may terminate the Period of
Employment for any reason, with or without cause, by providing Employer ten (10)
days' advance written notice. Employer shall have the option, in its complete
discretion, to make termination of the Period of Employment effective at any
time prior to the end of such notice period, provided Employer pays Employee all
compensation due and owing through the last day actually worked, plus an amount
equal to the base salary Employee would have earned through the balance of the
above notice period, not to exceed ten (10) days; thereafter, all of Employer's
obligations under this Agreement shall cease.
(f) By Employee for Good Reason Upon a Change of Control. Employee may
terminate, without liability, the Period of Employment for Good Reason upon a
Change of Control (as defined below), provided Employee gives Employer sixty
(60) days' advance written notice of the reason for termination and his intent
to terminate this Agreement. During this period, Employer shall have an
opportunity to correct the condition constituting Good Reason. If the condition
is remedied within this period, Employee's notice to terminate shall be
rescinded automatically; if not remedied, termination of the Period of
Employment shall become effective upon expiration of the above notice period. In
this event, Employer shall pay Employee all compensation due and owing through
the last day actually worked. Employer shall also have the option, in its
complete discretion, to make termination effective at any time prior to the end
of the notice period, provided that Employer pays Employee all compensation due
and owing through the balance of the notice period (not to exceed sixty (60)
days).
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<PAGE> 5
Employee shall be entitled to exercise his right to terminate this Agreement for
Good Reason only if he gives the required notice not more than forty-five (45)
days after the occurrence of the event that is the basis for the Good Reason. If
Employee terminates the Period of Employment for Good Reason upon a Change of
Control, Employee shall receive the following:
(i) A severance payment equal to twenty-four (24) months of the
Employee's then base salary. At the discretion of the Employer, the severance
payment may be made in the form of salary continuation over the equivalent pay
periods that the severance covers or in a lump sum payment.
(ii) A payment when due of the incentive bonus to which the Employee
would have been entitled prorated based on the number of months the Employee was
employed during the incentive bonus period.
(iii) A payment equal to the annual incentive bonus payments received
by Employee, if any, for the previous two years, divided by two.
(iv) Payment of the Employee's share of health insurance premiums for a
period of up to eighteen (18) months, or until Employee is eligible to
participate in another Employer's plan, whichever comes first, should Employee
elect to convert his/her health insurance benefits under COBRA.
"Change of Control" shall mean the occurrence of any of the following events as
used herein, after the Effective Date: (i) any "person" (as such term is used in
Sections 13 (d) and 14 (d) of the Securities Exchange Act of 1934, as amended)
other than Digital Microwave or its affiliates (a "Third Party") is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Employer representing fifty percent (50%) or
more of the total voting power represented by the Employer's then outstanding
voting securities; (ii) the stockholders of the Employer approve a merger or
consolidation of the Employer with any other corporation that is a Third Party,
other than a merger or consolidation which would result in the voting securities
of the Employer outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Employer or such surviving entity
outstanding immediately after such merger or consolidation; or (iii) the
stockholders of the Employer approve a plan of complete liquidation or
dissolution of the Employer or an agreement for the sale or disposition by the
Employer of all or substantially all the Employer's assets to a Third Party.
"Change of Control" shall also mean a change in the composition of the Board
over a period of thirty-six (36) months or less such that a majority of the
Board members (rounded up to the next whole number) ceases, by reason of one or
more contested elections for Board membership, to be comprised of individuals
who either (i) have
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<PAGE> 6
been Board members continuously since the beginning of such period or
(ii) have been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause (i) who
were still in office at the time such election or nomination was approved by
the Board.
Termination shall be for "Good Reason" if: (i) there is a material and
adverse change in Employee's position, duties, responsibilities, or status with
Employer; (ii) there is a reduction in Employee's salary then in effect, other
than a reduction comparable to reductions generally applicable to similarly
situated employees of Employer; (iii) there is a material reduction in
Employee's benefits, other than a reduction comparable to reductions generally
applicable to similarly situated employees of Employer; (iv) the Employer
involuntarily relocates the Employee; or (v) Employer materially breaches this
Agreement.
(g) Termination Obligations.
(i) Employee agrees that all property, including, without limitation, all
equipment, tangible Proprietary Information (as defined below), documents,
books, records, reports, notes, contracts, lists, computer disks (and other
computer-generated files and data), and copies thereof, created on any medium
and furnished to, obtained by, or prepared by Employee in the course of or
incident to his employment, belongs to Employer and shall be returned promptly
to Employer upon termination of the Period of Employment.
(ii) All benefits to which Employee is otherwise entitled shall cease upon
Employee's termination of the Period of Employment, unless explicitly continued
either under this Agreement or under any specific written policy or benefit plan
of Employer.
(iii) Upon termination of the Period of Employment, Employee shall be
deemed to have resigned from all offices and directorships then held with
Employer or any Affiliate.
(iv) The representations and warranties contained in this Agreement and
Employee's obligations under this Section 4(g) on Termination Obligations and
Section 5 on Proprietary Information shall survive the termination of the Period
of Employment and the expiration of this Agreement.
(v) Following any termination of the Period of Employment, Employee shall
fully cooperate with Employer in all matters relating to the winding up of
pending work on behalf of Employer and the orderly transfer of work to other
employees of Employer. Employee shall also cooperate in the defense of any
action brought by any third party against Employer that relates in any way to
Employee's acts or omissions while employed by Employer.
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<PAGE> 7
5. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and any idea in
whatever form, tangible or intangible, pertaining in any manner to the business
of Employer, or any Affiliate, or its employees, clients, consultants, or
business associates, which was produced by any employee of Employer, or any
Affiliate, in the course of his or her employment or otherwise produced or
acquired by or on behalf of Employer, or any Affiliate. All Proprietary
Information not generally known outside of Employer's organization, and all
Proprietary Information so known only through improper means, shall be deemed
"Confidential Information." Without limiting the foregoing definition,
Proprietary and Confidential Information shall include, but not be limited to:
(i) formulas, teaching and development techniques, processes, trade secrets,
computer programs, electronic codes, inventions, improvements, and research
projects; (ii) information about costs, profits, markets, sales, and lists of
customers or clients; (iii) business, marketing, and strategic plans; and (iv)
employee personnel files and compensation information. Employee should consult
any Employer procedures instituted to identify and protect certain types of
Confidential Information, which are considered by Employer to be safeguards in
addition to the protection provided by this Agreement. Nothing contained in
those procedures or in this Agreement is intended to limit the effect of the
other.
(b) General Restrictions on Use. During the Period of Employment, Employee shall
use Proprietary Information, and shall disclose Confidential Information, only
for the benefit of Employer and as is necessary to carry out his
responsibilities under this Agreement. Following termination, Employee shall
neither, directly or indirectly, use any Proprietary Information nor disclose
any Confidential Information, except as expressly and specifically authorized in
writing by Employer. The publication of any Proprietary Information through
literature or speeches must be approved in advance in writing by Employer.
6. Arbitration.
(a) Arbitrable Claims. All disputes between Employee (and his attorneys,
successors, and assigns) and Employer (and its Affiliates, shareholders,
directors, officers, employees, agents, successors, attorneys, and assigns)
relating in any manner whatsoever to the employment or termination of Employee,
including, without limitation, all disputes arising under this Agreement,
("Arbitrable Claims") shall be resolved by arbitration. All persons and entities
specified in the preceding sentence (other than Employer and Employee) shall be
considered third-party beneficiaries of the rights and obligations created by
this Section on Arbitration. Arbitrable Claims shall include, but are not
limited to, contract (express or implied) and tort claims of all kinds, as well
as all claims based on any federal, state, or local law, statute, or regulation,
excepting only claims under applicable workers' compensation law and
unemployment insurance claims. By way of example
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<PAGE> 8
and not in limitation of the foregoing, Arbitrable Claims shall include any
claims arising under Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act, the Americans with Disabilities Act, and the
California Fair Employment and Housing Act, as well as any claims asserting
wrongful termination, breach of contract, breach of the covenant of good faith
and fair dealing, negligent or intentional infliction of emotional distress,
negligent or intentional misrepresentation, negligent or intentional
interference with contract or prospective economic advantage, defamation,
invasion of privacy, and claims related to disability. Arbitration shall be
final and binding upon the parties and shall be the exclusive remedy for all
Arbitrable Claims, except that Employer may, at its option, seek injunctive
relief and damages in court for any breach of Section 5 of this Agreement.
Subject to the foregoing sentence, THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY
HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS.
(b) Procedure. Arbitration of Arbitrable Claims shall be in accordance with the
Employment Dispute Resolution Rules of the American Arbitration Association
("AAA Employment Rules"), except as provided otherwise in this Agreement.
Arbitration shall be initiated by providing written notice to the other party
with a statement of the claim(s) asserted, the facts upon which the claim(s) are
based, and the remedy sought. The burden of proof in any arbitration shall be
allocated as provided by applicable law, unless otherwise specified in this
Agreement. Either party may bring an action in court to compel arbitration under
this Agreement and to enforce an arbitration award. Otherwise, neither party
shall initiate or prosecute any lawsuit or administrative action in any way
related to any Arbitrable Claim. The Federal Arbitration Act shall govern the
interpretation and enforcement of this Section 6.
(c) Arbitrator Selection and Authority. All disputes involving Arbitrable Claims
shall be decided by a single arbitrator. The arbitrator shall be selected by
mutual agreement of the parties within thirty (30) days of the effective date of
the notice initiating the arbitration. If the parties cannot agree on an
arbitrator, then the complaining party shall notify the AAA and request
selection of an arbitrator in accordance with the AAA Employment Rules. The
arbitrator shall have only such authority to award equitable relief, damages,
costs, and fees as a court would have for the particular claim(s) asserted. The
fees of the arbitrator shall be split between both parties equally. The
arbitrator shall have exclusive authority to resolve all Arbitrable Claims,
including, but not limited to, any claim that all or any part of ther Agreement
is void or unenforceable.
(d) Confidentiality. All proceedings and all documents prepared in connection
with any Arbitrable Claim shall be confidential and, unless otherwise required
by law, the subject matter thereof shall not be disclosed to any person other
than the parties to the proceedings, their counsel, witnesses and experts, the
arbitrator, and, if involved, the court and court staff. All documents filed
with the arbitrator or with a court shall be filed under seal. The parties shall
stipulate to all arbitration and
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<PAGE> 9
court orders necessary to effectuate fully the provisions of this subsection
concerning confidentiality.
(e) Continuing Obligations. The rights and obligations of Employee and Employer
set forth in this Section on Arbitration shall survive the termination of
Employee's employment and the expiration of this Agreement.
7. Notices.
Any notice under this Agreement must be in writing and shall be effective upon
delivery by hand, upon facsimile transmission to the number provided below (if
one is provided), or three (3) business days after deposit in the United States
mail, postage prepaid, certified or registered, and addressed to Employer or to
Employee at the corresponding address below. Employee shall be obligated to
notify Employer in writing of any change in his address. Notice of change of
address shall be effective only when done in accordance with this Section.
Employer's Notice Address:
Vice President, Personnel
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, California 95134
Fax Phone No.: (408)944-1701
Employee's Notice Address:
Charles D. Kissner
27778 Stirrup Way
Los Altos Hills, California 94022
Fax No.:_______________________
8. Action by Employer.
All actions required or permitted to be taken under this Agreement by Employer,
including, without limitation, exercise of discretion, consents, waivers, and
amendments to this Agreement, shall be made and authorized only by the President
or by his or her representative specifically authorized to fulfill these
obligations under this Agreement.
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<PAGE> 10
9. Integration.
This Agreement is intended to be the final, complete, and exclusive statement of
the terms of Employee's employment by Employer. This Agreement supersedes all
other prior and contemporaneous agreements and statements pertaining in any
manner to the employment of Employee, and it may not be contradicted by evidence
of any prior or contemporaneous statements or agreements. To the extent that the
practices, policies, or procedures of Employer, now or in the future, apply to
Employee and are inconsistent with the terms of this Agreement, the provisions
of this Agreement shall control.
10. Amendments; Waivers.
This Agreement may not be modified, amended, or terminated except by an
instrument in writing, signed by each of the parties. No failure to exercise and
no delay in exercising any right, remedy, or power under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, or power under this Agreement preclude any other or further
exercise thereof, or the exercise of any other right, remedy, or power provided
herein or by law or in equity.
11. Assignment; Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate, or otherwise
dispose of, whether voluntarily or involuntarily, or by operation of law, any
rights or obligations under this Agreement. Any such purported assignment,
transfer, or delegation shall be null and void. Nothing in this Agreement shall
prevent the consolidation of Employer with, or its merger into, any other
entity, or the sale by Employer of all or substantially all of its assets, or
the otherwise lawful assignment by Employer of any rights or obligations under
this Agreement. Subject to the foregoing, this Agreement shall be binding upon
and shall inure to the benefit of the parties and their respective heirs, legal
representatives, successors, and permitted assigns, and shall not benefit any
person or entity other than those specifically enumerated in this Agreement.
12. Severability.
If any provision of this Agreement, or its application to any person, place, or
circumstance, is held by an arbitrator or a court of competent jurisdiction to
be invalid, unenforceable, or void, such provision shall be enforced to the
greatest extent permitted by law, and the remainder of this Agreement and such
provision as applied to other persons, places, and circumstances shall remain in
full force and effect.
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<PAGE> 11
13. Attorneys' Fees.
In any legal action, arbitration, or other proceeding brought to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees and costs.
14. Governing Law.
This Agreement shall be governed by and construed in accordance with the law of
the State of California.
15. Interpretation.
This Agreement shall be construed as a whole, according to its fair meaning, and
not in favor of or against any party. By way of example and not in limitation,
this Agreement shall not be construed in favor of the party receiving a benefit
nor against the party responsible for any particular language in this Agreement.
Captions are used for reference purposes only and should be ignored in the
interpretation of this Agreement.
16. Employee Acknowledgment.
Employee acknowledges that he has had the opportunity to consult legal counsel
in regard to this Agreement, that he has read and understands this Agreement,
that he is fully aware of its legal effect, and that he has entered into it
freely and voluntarily and based on his own judgment and not on any
representations or promises other than those contained in this Agreement.
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<PAGE> 12
The parties have duly executed this Agreement as of the date first written
above.
- ------------------------------
Charles D. Kissner
Digital Microwave Corporation
- -------------------------------
By: Clifford H. Higgerson
Its: Chairman of the Board
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<PAGE> 1
Exhibit 10.37
DIGITAL MICROWAVE CORPORATION
FORM OF EMPLOYMENT AGREEMENT
Attached is a form of employment agreement between the Company and
certain executive officers as listed below:
<TABLE>
<CAPTION>
Name Position Annual Salary
---- -------- -------------
<S> <C> <C>
Timothy R. Hansen Vice President and General Manager, $127,200
SPECTRUM(TM) Division
Shaun McFall Vice President, Corporate Marketing $132,500
John O'Neil Vice President, Personnel $144,768
Carl A. Thomsen Vice President, Chief Financial $190,800
Officer and Secretary
</TABLE>
<PAGE> 2
E M P L O Y M E N T A G R E E M E N T
This Agreement, dated as of _________, 1996, is between Digital Microwave
Corporation, a California corporation ("Employer"), and ___________
("Employee").
RECITALS
* Employee is and has been employed by Employer and is currently serving as
the ___________________.
* Employer desires to continue to employ Employee and to assure itself of the
continued services of Employee for the Period of Employment provided for in
this Employment Agreement, and Employee desires to be employed by Employer
for such period, upon the following terms and conditions.
ACCORDINGLY, the parties agree as follows:
1. Period of Employment.
(a) Basic Term. Employer shall employ Employee to render services to Employer in
the position and with the duties and responsibilities described in Section 2 for
the period (the "Period of Employment") commencing on the date of this Agreement
and ending on the date upon which the Period of Employment is terminated in
accordance with Section 4.
2. Position and Responsibilities.
(a) Position. Employee shall continue employment with Employer and shall perform
all services as may be assigned by Employer. Employee shall devote his best
efforts and full-time attention to the performance of his duties. Employee shall
be subject to the direction of Employer, which shall retain full control of the
means and methods by which he performs the above services and of the place(s) at
which all services are rendered. Employee shall report to the _____________ or
another officer of Employer. Employee shall be expected to travel if
necessary or advisable in order to meet the obligations of his position.
<PAGE> 3
(b) Other Activity. Except upon the prior written consent of Employer, Employee
(during the Period of Employment) shall not (i) accept any other employment; or
(ii) engage, directly or indirectly, in any other business, commercial, or
professional activity (whether or not pursued for pecuniary advantage) that is
or may be competitive with Employer, that might create a conflict of interest
with Employer, or that otherwise might interfere with the business of Employer,
or any Affiliate. An "Affiliate" shall mean any person or entity that directly
or indirectly controls, is controlled by, or is under common control with
Employer. Notwithstanding the foregoing, upon reasonable notice to Employer,
Employee may serve as a director of one for profit entity and one not for profit
entity so long as such entity is not competitive with Employer or any Affiliate
and where such service does not otherwise create a conflict of interest.
3. Compensation and Benefits.
(a) Compensation. In consideration of the services to be rendered under this
Agreement, Employer shall pay Employee a base salary of $___________ per year,
payable semi-monthly, pursuant to the procedures regularly established, and as
they may be amended, by Employer in its sole discretion, during the Period of
Employment. Employer shall review annually Employee's compensation and shall
determine, in its sole discretion, whether and how much the existing
compensation shall be adjusted, without regard to any policy or practice
Employer may have for adjusting salaries. In addition to base salary, Employee
shall be eligible to participate in the Employer's executive management
incentive bonus and stock option plans according to the terms of those plans.
(b) Benefits. Employee shall be entitled to vacation leave in accordance with
Employer's standard policies. As Employee becomes eligible therefor, Employee
shall have the right to participate in and to receive benefits from all present
and future benefit plans specified in Employer's policies and generally made
available to similarly situated employees of Employer. The amount and extent of
benefits to which Employee is entitled shall be governed by the specific benefit
plan, as amended. Employee also shall be entitled to any benefits or
compensation tied to termination as described in Section 4. Nothing stated in
this Agreement shall prevent Employer from changing or eliminating any benefit
during the Period of Employment as Employer, in its sole discretion, may deem
necessary or desirable. No statement concerning benefits or compensation to
which Employee is entitled shall alter in any way the term of this Agreement,
any renewal thereof, or its termination. All compensation and comparable
payments to be paid to Employee under this Agreement shall be less withholdings
required by law.
(c) Expenses. Employer shall reimburse Employee for reasonable travel and other
business expenses incurred by Employee in the performance of his duties, in
accordance with Employer's policies, as they may be amended in Employer's sole
discretion.
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<PAGE> 4
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate automatically upon the
death of Employee. Employer shall pay to Employee's beneficiaries or estate, as
appropriate, any, compensation then due and owing, including payment for accrued
unused vacation, if any, and will when due make a payment of any incentive bonus
to which the Employee would have been entitled prorated based on the number of
months the Employee was employed during the incentive bonus period. Thereafter,
all obligations of Employer under this Agreement shall cease. Nothing in this
Section shall affect any entitlement of Employee's heirs to the benefits of any
life insurance plan or other applicable benefits.
(b) By Disability. If, by reason of any physical or mental incapacity, Employee
has been or will be prevented from properly performing his duties under this
Agreement for more than ninety (90) consecutive days, then, to the extent
permitted by law, Employer may terminate the Period of Employment without any
advance notice. Employer shall pay Employee all compensation to which he is
entitled up through the day notice of termination is provided, and, in addition,
Employer shall when due make a payment of any incentive bonus to which the
Employee would have been entitled prorated based on the number of months the
Employee was employed during the incentive bonus period; thereafter, all
obligations of Employer under this Agreement shall cease. Nothing in this
Section shall affect Employee's rights under any applicable Employer disability
plan.
(c) By Employer Not For Cause. At any time, Employer may terminate the Period of
Employment Not for Cause for any reason, by providing Employee ten (10) days'
advance written notice, provided that Employee shall be paid, in addition to all
compensation due and owing through the last day actually worked, severance in an
amount equal to six months of the Employee's then current base salary. Such
severance shall be paid by Employer to Employee in 6 equal monthly installments,
commencing one month from the date of termination, or, at Employer's discretion,
in a single lump sum on the termination date. Employer shall also pay the
Employer's share of health insurance premiums for a period of up to 6 months, or
until Employee is eligible to participate in another employer's plan, whichever
comes first, should Employee elect to convert his health insurance benefits
under COBRA. Employer shall also pay when due any incentive bonus to which the
Employee would have been entitled prorated based on the number of months the
Employee was employed during the incentive bonus period and will permit
Employee's stock options, if any, to continue to vest for 6 months following the
termination date. If Employer terminates the Period of Employment Not for Cause
within eighteen (18) months following a Change of Control as defined in
subparagraph 4(f), Employee shall receive the severance benefits set forth in
subparagraph 4(f)(i)-(iv) rather than the severance benefits set forth in this
subparagraph 4(c). Employer shall have the option, in its complete discretion,
to terminate the Period of Employment at any time prior to the end of such
notice period, provided Employer pays
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<PAGE> 5
Employee all compensation due and owing through the last day actually
worked plus an amount equal to the base salary Employee would have earned
through the balance of the above notice period in addition to the severance
benefits described above; thereafter, all of Employer's obligations under this
Agreement shall cease. Employer may dismiss Employee without cause
notwithstanding anything to the contrary contained in or arising from any
statements, policies, or practices of Employer relating to the employment,
discipline, or termination of its employees.
(d) By Employer For Cause. At any time, and without prior notice, Employer may
terminate the Period of Employment for Cause (as defined below). Employer shall
pay Employee all compensation then due and owing; thereafter, all of Employer's
obligations under this Agreement shall cease. Termination shall be for "Cause"
if Employee: (i) acts in bad faith and to the detriment of Employer; (ii)
exhibits in regard to his employment willful misconduct, dishonesty, habitual
neglect of duties, or any willful act or omission that may materially and
adversely affect the Employer's business or that involves fraud, embezzlement or
misappropriation of any property or proprietary information of the Employer;
(iv) is convicted of a crime involving dishonesty, breach of trust, or physical
or emotional harm to any person; or (v) breaches any material term of this
Agreement. If termination is due to Employee's disability, Section 4(b) above
shall control, and not this subsection on termination for Cause.
(e) By Employee Not for Cause. At any time, Employee may terminate the Period of
Employment for any reason, with or without cause, by providing Employer ten (10)
days' advance written notice. Employer shall have the option, in its complete
discretion, to make termination of the Period of Employment effective at any
time prior to the end of such notice period, provided Employer pays Employee all
compensation due and owing through the last day actually worked, plus an amount
equal to the base salary Employee would have earned through the balance of the
above notice period, not to exceed ten (10) days; thereafter, all of Employer's
obligations under this Agreement shall cease.
(f) By Employee for Good Reason Upon a Change of Control. Employee may
terminate, without liability, the Period of Employment for Good Reason upon a
Change of Control (as defined below), provided Employee gives Employer sixty
(60) days' advance written notice of the reason for termination and his intent
to terminate this Agreement. During this period, Employer shall have an
opportunity to correct the condition constituting Good Reason. If the condition
is remedied within this period, Employee's notice to terminate shall be
rescinded automatically; if not remedied, termination of the Period of
Employment shall become effective upon expiration of the above notice period. In
this event, Employer shall pay Employee all compensation due and owing through
the last day actually worked. Employer shall also have the option, in its
complete discretion, to make termination effective at any time prior to the end
of the notice period, provided that Employer pays Employee all compensation due
and owing through the balance of the notice period (not to exceed sixty (60)
days).
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<PAGE> 6
Employee shall be entitled to exercise his right to terminate this
Agreement for Good Reason only if he gives the required notice not more than
forty-five (45) days after the occurrence of the event that is the basis for
the Good Reason. If Employee terminates the Period of Employment for Good
Reason upon a Change of Control, Employee shall receive the following:
(i) A severance payment equal to twenty-four (24) months of the
Employee's then base salary. At the discretion of the Employer, the severance
payment may be made in the form of salary continuation over the equivalent pay
periods that the severance covers or in a lump sum payment.
(ii) A payment when due of the incentive bonus to which the Employee
would have been entitled prorated based on the number of months the Employee was
employed during the incentive bonus period.
(iii) A payment equal to the annual incentive bonus payments received
by Employee, if any, for the previous two years, divided by two.
(iv) Payment of the Employee's share of health insurance premiums for a
period of up to eighteen (18) months, or until Employee is eligible to
participate in another Employer's plan, whichever comes first, should Employee
elect to convert his/her health insurance benefits under COBRA.
"Change of Control" shall mean the occurrence of any of the following events as
used herein, after the Effective Date: (i) any "person" (as such term is used in
Sections 13 (d) and 14 (d) of the Securities Exchange Act of 1934, as amended)
other than Digital Microwave or its affiliates (a "Third Party") is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Employer representing fifty percent (50%) or
more of the total voting power represented by the Employer's then outstanding
voting securities; (ii) the stockholders of the Employer approve a merger or
consolidation of the Employer with any other corporation that is a Third Party,
other than a merger or consolidation which would result in the voting securities
of the Employer outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Employer or such surviving entity
outstanding immediately after such merger or consolidation; or (iii) the
stockholders of the Employer approve a plan of complete liquidation or
dissolution of the Employer or an agreement for the sale or disposition by the
Employer of all or substantially all the Employer's assets to a Third Party.
"Change of Control" shall also mean a change in the composition of the Board
over a period of thirty-six (36) months or less such that a majority of the
Board members (rounded up to the next whole number) ceases, by reason of one or
more contested elections for Board membership, to be comprised of individuals
who either (i) have
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<PAGE> 7
been Board members continuously since the beginning of such period or (ii) have
been elected or nominated for election as Board members during such period by
at least a majority of the Board members described in clause (i) who were still
in office at the time such election or nomination was approved by the Board.
Termination shall be for "Good Reason" if: (i) there is a material and
adverse change in Employee's position, duties, responsibilities, or status with
Employer; (ii) there is a reduction in Employee's salary then in effect, other
than a reduction comparable to reductions generally applicable to similarly
situated employees of Employer; (iii) there is a material reduction in
Employee's benefits, other than a reduction comparable to reductions generally
applicable to similarly situated employees of Employer; (iv) the Employer
involuntarily relocates the Employee; or (v) Employer materially breaches this
Agreement.
(g) Termination Obligations.
(i) Employee agrees that all property, including, without limitation, all
equipment, tangible Proprietary Information (as defined below), documents,
books, records, reports, notes, contracts, lists, computer disks (and other
computer-generated files and data), and copies thereof, created on any medium
and furnished to, obtained by, or prepared by Employee in the course of or
incident to his employment, belongs to Employer and shall be returned promptly
to Employer upon termination of the Period of Employment.
(ii) All benefits to which Employee is otherwise entitled shall cease upon
Employee's termination of the Period of Employment, unless explicitly continued
either under this Agreement or under any specific written policy or benefit plan
of Employer.
(iii) Upon termination of the Period of Employment, Employee shall be
deemed to have resigned from all offices and directorships then held with
Employer or any Affiliate.
(iv) The representations and warranties contained in this Agreement and
Employee's obligations under this Section 4(g) on Termination Obligations and
Section 5 on Proprietary Information shall survive the termination of the Period
of Employment and the expiration of this Agreement.
(v) Following any termination of the Period of Employment, Employee shall
fully cooperate with Employer in all matters relating to the winding up of
pending work on behalf of Employer and the orderly transfer of work to other
employees of Employer. Employee shall also cooperate in the defense of any
action brought by any third party against Employer that relates in any way to
Employee's acts or omissions while employed by Employer.
6
<PAGE> 8
5. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and any idea in
whatever form, tangible or intangible, pertaining in any manner to the business
of Employer, or any Affiliate, or its employees, clients, consultants, or
business associates, which was produced by any employee of Employer, or any
Affiliate, in the course of his or her employment or otherwise produced or
acquired by or on behalf of Employer, or any Affiliate. All Proprietary
Information not generally known outside of Employer's organization, and all
Proprietary Information so known only through improper means, shall be deemed
"Confidential Information." Without limiting the foregoing definition,
Proprietary and Confidential Information shall include, but not be limited to:
(i) formulas, teaching and development techniques, processes, trade secrets,
computer programs, electronic codes, inventions, improvements, and research
projects; (ii) information about costs, profits, markets, sales, and lists of
customers or clients; (iii) business, marketing, and strategic plans; and (iv)
employee personnel files and compensation information. Employee should consult
any Employer procedures instituted to identify and protect certain types of
Confidential Information, which are considered by Employer to be safeguards in
addition to the protection provided by this Agreement. Nothing contained in
those procedures or in this Agreement is intended to limit the effect of the
other.
(b) General Restrictions on Use. During the Period of Employment, Employee shall
use Proprietary Information, and shall disclose Confidential Information, only
for the benefit of Employer and as is necessary to carry out his
responsibilities under this Agreement. Following termination, Employee shall
neither, directly or indirectly, use any Proprietary Information nor disclose
any Confidential Information, except as expressly and specifically authorized in
writing by Employer. The publication of any Proprietary Information through
literature or speeches must be approved in advance in writing by Employer.
6. Arbitration.
(a) Arbitrable Claims. All disputes between Employee (and his attorneys,
successors, and assigns) and Employer (and its Affiliates, shareholders,
directors, officers, employees, agents, successors, attorneys, and assigns)
relating in any manner whatsoever to the employment or termination of Employee,
including, without limitation, all disputes arising under this Agreement,
("Arbitrable Claims") shall be resolved by arbitration. All persons and entities
specified in the preceding sentence (other than Employer and Employee) shall be
considered third-party beneficiaries of the rights and obligations created by
this Section on Arbitration. Arbitrable Claims shall include, but are not
limited to, contract (express or implied) and tort claims of all kinds, as well
as all claims based on any federal, state, or local law, statute, or regulation,
excepting only claims under applicable workers' compensation law and
unemployment insurance claims. By way of example
7
<PAGE> 9
and not in limitation of the foregoing, Arbitrable Claims shall include any
claims arising under Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act, the Americans with Disabilities Act, and the
California Fair Employment and Housing Act, as well as any claims asserting
wrongful termination, breach of contract, breach of the covenant of good faith
and fair dealing, negligent or intentional infliction of emotional distress,
negligent or intentional misrepresentation, negligent or intentional
interference with contract or prospective economic advantage, defamation,
invasion of privacy, and claims related to disability. Arbitration shall be
final and binding upon the parties and shall be the exclusive remedy for all
Arbitrable Claims, except that Employer may, at its option, seek injunctive
relief and damages in court for any breach of Section 5 of this Agreement.
Subject to the foregoing sentence, THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY
HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS.
(b) Procedure. Arbitration of Arbitrable Claims shall be in accordance with the
Employment Dispute Resolution Rules of the American Arbitration Association
("AAA Employment Rules"), except as provided otherwise in this Agreement.
Arbitration shall be initiated by providing written notice to the other party
with a statement of the claim(s) asserted, the facts upon which the claim(s) are
based, and the remedy sought. The burden of proof in any arbitration shall be
allocated as provided by applicable law, unless otherwise specified in this
Agreement. Either party may bring an action in court to compel arbitration under
this Agreement and to enforce an arbitration award. Otherwise, neither party
shall initiate or prosecute any lawsuit or administrative action in any way
related to any Arbitrable Claim. The Federal Arbitration Act shall govern the
interpretation and enforcement of this Section 6.
(c) Arbitrator Selection and Authority. All disputes involving Arbitrable Claims
shall be decided by a single arbitrator. The arbitrator shall be selected by
mutual agreement of the parties within thirty (30) days of the effective date of
the notice initiating the arbitration. If the parties cannot agree on an
arbitrator, then the complaining party shall notify the AAA and request
selection of an arbitrator in accordance with the AAA Employment Rules. The
arbitrator shall have only such authority to award equitable relief, damages,
costs, and fees as a court would have for the particular claim(s) asserted. The
fees of the arbitrator shall be split between both parties equally. The
arbitrator shall have exclusive authority to resolve all Arbitrable Claims,
including, but not limited to, any claim that all or any part of ther Agreement
is void or unenforceable.
(d) Confidentiality. All proceedings and all documents prepared in connection
with any Arbitrable Claim shall be confidential and, unless otherwise required
by law, the subject matter thereof shall not be disclosed to any person other
than the parties to the proceedings, their counsel, witnesses and experts, the
arbitrator, and, if involved, the court and court staff. All documents filed
with the arbitrator or with a court shall be filed under seal. The parties shall
stipulate to all arbitration and
8
<PAGE> 10
court orders necessary to effectuate fully the provisions of this subsection
concerning confidentiality.
(e) Continuing Obligations. The rights and obligations of Employee and Employer
set forth in this Section on Arbitration shall survive the termination of
Employee's employment and the expiration of this Agreement.
7. Notices.
Any notice under this Agreement must be in writing and shall be effective upon
delivery by hand, upon facsimile transmission to the number provided below (if
one is provided), or three (3) business days after deposit in the United States
mail, postage prepaid, certified or registered, and addressed to Employer or to
Employee at the corresponding address below. Employee shall be obligated to
notify Employer in writing of any change in his address. Notice of change of
address shall be effective only when done in accordance with this Section.
Employer's Notice Address:
Vice President, Personnel
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, California 95134
Fax Phone No.: (408)944-1701
Employee's Notice Address:
- ----------------
- ----------------
- ----------------
8. Action by Employer.
All actions required or permitted to be taken under this Agreement by Employer,
including, without limitation, exercise of discretion, consents, waivers, and
amendments to this Agreement, shall be made and authorized only by the President
or by his or her representative specifically authorized to fulfill these
obligations under this Agreement.
9
<PAGE> 11
9. Integration.
This Agreement is intended to be the final, complete, and exclusive statement of
the terms of Employee's employment by Employer. This Agreement supersedes all
other prior and contemporaneous agreements and statements pertaining in any
manner to the employment of Employee, and it may not be contradicted by evidence
of any prior or contemporaneous statements or agreements. To the extent that the
practices, policies, or procedures of Employer, now or in the future, apply to
Employee and are inconsistent with the terms of this Agreement, the provisions
of this Agreement shall control.
10. Amendments; Waivers.
This Agreement may not be modified, amended, or terminated except by an
instrument in writing, signed by each of the parties. No failure to exercise and
no delay in exercising any right, remedy, or power under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, or power under this Agreement preclude any other or further
exercise thereof, or the exercise of any other right, remedy, or power provided
herein or by law or in equity.
11. Assignment; Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate, or otherwise
dispose of, whether voluntarily or involuntarily, or by operation of law, any
rights or obligations under this Agreement. Any such purported assignment,
transfer, or delegation shall be null and void. Nothing in this Agreement shall
prevent the consolidation of Employer with, or its merger into, any other
entity, or the sale by Employer of all or substantially all of its assets, or
the otherwise lawful assignment by Employer of any rights or obligations under
this Agreement. Subject to the foregoing, this Agreement shall be binding upon
and shall inure to the benefit of the parties and their respective heirs, legal
representatives, successors, and permitted assigns, and shall not benefit any
person or entity other than those specifically enumerated in this Agreement.
12. Severability.
If any provision of this Agreement, or its application to any person, place, or
circumstance, is held by an arbitrator or a court of competent jurisdiction to
be invalid, unenforceable, or void, such provision shall be enforced to the
greatest extent permitted by law, and the remainder of this Agreement and such
provision as applied to other persons, places, and circumstances shall remain in
full force and effect.
10
<PAGE> 12
13. Attorneys' Fees.
In any legal action, arbitration, or other proceeding brought to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees and costs.
14. Governing Law.
This Agreement shall be governed by and construed in accordance with the law of
the State of California.
15. Interpretation.
This Agreement shall be construed as a whole, according to its fair meaning, and
not in favor of or against any party. By way of example and not in limitation,
this Agreement shall not be construed in favor of the party receiving a benefit
nor against the party responsible for any particular language in this Agreement.
Captions are used for reference purposes only and should be ignored in the
interpretation of this Agreement.
16. Employee Acknowledgment.
Employee acknowledges that he has had the opportunity to consult legal counsel
in regard to this Agreement, that he has read and understands this Agreement,
that he is fully aware of its legal effect, and that he has entered into it
freely and voluntarily and based on his own judgment and not on any
representations or promises other than those contained in this Agreement.
11
<PAGE> 13
The parties have duly executed this Agreement as of the date first written
above.
- ------------------------------
EMPLOYEE'S NAME
Digital Microwave Corporation
- -------------------------------
By: Charles D. Kissner
Its: President and Chief Executive Officer
12
<PAGE> 1
EXHIBIT 13.1
PROFILE
Digital Microwave Corporation designs, manufactures, and markets advanced,
high-performance digital microwave radios and other short- and medium-haul
communications products, systems, and services. The company's comprehensive
portfolio of technologically advanced products is designed for use in cellular
telephone systems, private networks, and other wireless telecommunications
applications 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 60,000
radios, with systems installed in over 60 countries.
<PAGE> 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years Ended March 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data
and number of employees)
<S> <C> <C> <C> <C> <C>
Net sales $ 150,419 $ 153,650 $ 116,010 $ 103,937 $ 86,097
Net income (loss) $ (5,955) $ 1,982 $ (22,495) $ (6,708) $ (19,670)
Net income (loss) per share $ (0.40) $ 0.14 $ (1.81) $ (0.55) $ (1.64)
Total assets $ 95,797 $ 102,585 $ 84,003 $ 72,990 $ 87,213
Working capital $ 37,456 $ 26,996 $ 17,650 $ 35,461 $ 39,183
Stockholders' equity $ 49,735 $ 34,611 $ 28,604 $ 46,335 $ 53,004
Total employees at year-end 576 606 538 464 490
Weighted average, common
and common equivalent
shares outstanding 14,895 13,845 12,448 12,090 11,965
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
STOCK INFORMATION
The company's common stock is traded 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, 1996 March 31, 1995
High Low High Low
- ---------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1st Quarter 14 9 1/2 16 8 3/4
2nd Quarter 14 5/8 10 3/4 18 3/4 10 1/4
3rd Quarter 12 5/8 9 1/2 20 5/8 11 5/8
4th Quarter 11 1/8 8 1/8 20 3/4 11 7/8
- ---------------------------------------------------------------------------------------
</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, 1996, there were approximately 337 stockholders of
record.
<PAGE> 3
TO OUR STOCKHOLDERS
Fiscal year 1996 brought many unique changes, challenges, and opportunities to
Digital Microwave Corporation. The second half of the year was especially
dramatic, as the company dedicated itself to improving its financial performance
and customer satisfaction, and accelerating new product introductions,
particularly in the SPECTRUM(TM)II product line.
In the third quarter, we took inventory and other reserves as part of our
fundamental restructuring and improvement activities. This was largely the
reason we recorded a net loss of $6.0 million, or $0.40 per share, on sales of
$150.4 million in fiscal year 1996, compared to net income of $2.0 million, or
$0.14 per share, on sales of $153.7 million for fiscal year 1995.
While Digital Microwave recorded a loss for the year, we reported a profit of
$0.02 per share in the fourth quarter of fiscal year 1996, indicating that we
are beginning to realize the impact of our focus on company-wide improvements.
Orders activity increased in the second half of the year, due to the growing
customer reception of our new products, and the ongoing buildup of the wireless
infrastructure worldwide.
Key contract awards for the company included orders in the Philippines, the
United Kingdom, the Netherlands, Malaysia, the U.S., and China. We also expanded
our facility in Manila, and established a Beijing sales office, as well as a
joint service and support facility with the Beijing Telecommunication Equipment
Factory.
For fiscal year 1996, we received $155 million in new orders, compared to $175
million for fiscal year 1995. Orders in the second half of fiscal year 1996 were
$86 million, almost 25% above the first half level of $69 million.
Our SPECTRUM(TM)II radio was approved by its first major customer, E-Plus
Mobilfunk GmbH, in the second quarter of fiscal year 1996, and the 23 and 38 GHz
versions of this product family began shipping in volume in that quarter. In the
third quarter, we introduced 13, 15, 18, and 26 GHz frequencies in the
SPECTRUM(TM)II product family, and a 2xE3 product in the QUANTUM(TM) line. By
the end of fiscal year 1996, we had shipped SPECTRUM(TM)II radios to 20
countries.
<PAGE> 4
In the fourth quarter, we announced a software-controlled MMIC (Microwave
Monolithic Integrated Circuit) multiplier transceiver, which we are shipping in
our SPECTRUM(TM)II radios. We believe the company's product portfolio is now one
of the most complete in the industry, and that we offer the latest and best
technology to meet our customers' needs.
Key to Digital Microwave's long-term sustained success is our ongoing process
analysis and change. Company-wide programs were initiated this past fiscal year
to improve our fundamental operating processes, especially in the areas of
engineering and manufacturing. These process reviews are designed to provide
basic changes to the way we operate. We achieved some immediate results,
including manufacturing yield breakthroughs, and significantly increased
capacity in the factory.
Our San Jose, California facility received registration to the ISO 9001-94
standard. This is an upgrade for Digital Microwave, which received its original
registration in November, 1993. We are proud of this achievement, which helps
demonstrate our continuing commitment to quality.
During the second quarter, Digital Microwave raised $19.1 million with a private
placement of common stock, and used these funds to reduce long-term debt and
vendor obligations. In addition, through an ongoing focus on working capital
utilization, the company's balance sheet position improved significantly during
fiscal year 1996, and is now in its best position in some time.
In addition to my joining the company in mid-year, we made several key additions
to our management team during fiscal year 1996. Frank Carretta, Jr. joined the
company as Vice President of Worldwide Sales and Service, Jack Hillson joined as
Vice President and General Manager of the QUANTUM(TM)/Magnum Division, and Paul
Kennard joined as Vice President of Engineering.
Dr. James Meindl, whose expertise in electronics spans over 30 years, joined the
company's Board of Directors. He is the Joseph M. Pettit Chair Professor of
Microelectronics at the Georgia Institute of Technology in Atlanta, Georgia.
As we move into fiscal year 1997, Digital Microwave is committed to remaining a
leader in our business. We have the management team in place and the commitment
to attain our goals. We feel our products are particularly well-suited for the
available market for microwave radio around the world.
The changes we initiated in the middle of fiscal year 1996 are beginning to show
results, and will accelerate in the next fiscal year. We believe Digital
Microwave is in an excellent position to successfully grow our business.
/s/Charles D. Kissner
-------------------------------------
CHARLES D. KISSNER
President and Chief Executive Officer
<PAGE> 5
FISCAL
YEAR
1996 was a transitional and exciting year for Digital Microwave Corporation.
The arrival of a new Chief Executive Officer and members of the management team
precipitated a number of changes throughout the company, which will accelerate
Digital Microwave's growth in fiscal year 1997 and beyond.
Change always raises questions with stockholders and customers, as well as with
a company's employees.
In this year's annual report, our goal is to answer the questions we believe are
uppermost in the minds of our stockholders with an interview with President and
Chief Executive Officer Chuck Kissner.
We have also included stories from the three key regions we serve worldwide, to
demonstrate our dedication to customer satisfaction.
<PAGE> 6
Q. WHAT AREAS HAVE YOU FOCUSED ON SINCE YOU JOINED DIGITAL MICROWAVE?
My first priority was to establish a high performance, unified management
team to lead the company in fulfilling our key objectives. Our management
team has been totally dedicated to customer satisfaction, financial
performance, and new product introduction. Each of these elements has a set
of milestones that directly impact Digital Microwave's overall company
performance, and therefore, its total value. All of these elements require
substantial improvements in processes, or in how the company accomplishes
its tasks.
These initiatives were launched in the second half of fiscal year 1996,
shortly after I joined the company. So far, the impact is encouraging. Our
basic financial performance has improved in almost every major category.
The company's balance sheet is substantially stronger than a year ago, and
customer interest in our products has accelerated, resulting in a positive
upturn in new orders.
Q. HOW DO YOU DIFFERENTIATE YOURSELVES FROM THE COMPETITION?
First, we offer one of the broadest microwave radio product lines of any
company in the world market. Second, we are intensely responsive to our
customers, who rely on us to meet their demanding requirements. Third, we
have an excellent reputation for product reliability. Finally, Digital
Microwave has a tradition of innovation in the industry, which we
demonstrated with our recent SPECTRUM(TM)II product introductions and
enhancements.
Q. DIGITAL MICROWAVE FACES MANY LARGE, GLOBAL COMPETITORS. WHAT DOES IT TAKE FOR
A COMPANY YOUR SIZE TO BE COMPETITIVE IN TODAY'S GLOBAL MARKETPLACE?
Although Digital Microwave would be considered a mid-size company, our
sales put us in the top tier of the approximately 20 companies selling
point-to-point microwave radios.
Because we are not in the business of providing wireless base stations and
switching equipment, we are better able to work with many of the global
giants in telecommunications, giving us a broad market access. Our absolute
dedication to being the best microwave radio company provides the focus we
need to stay competitive. We have developed deep worldwide expertise to
help customers apply microwave solutions to meet their unique geographic
requirements, accelerated new technology introductions, and established a
reputation for being highly responsive to customers' needs. Our experience
indicates that Digital Microwave is frequently considered the "company to
beat" by our competitors.
<PAGE> 7
Q. DIGITAL MICROWAVE SEEMS TO BE GOING THROUGH A "TURNAROUND".
WHAT IS THE COMPANY FOCUSING ON TO MAKE THIS EFFORT A SUCCESS?
Improving a company's long-term chances of success requires total
dedication to question everything it does, and then having the courage to
do whatever it takes to be the best. At Digital Microwave, we are looking
at everything we do from the customer's viewpoint to determine what we
should keep or discard.
We've asked every employee to make a set of commitments which support
teamwork and fundamental change. No existing process is sacred in our quest
to be the best, nor does this quest have an end.
Improvement also requires a totally focused management team to carry it
through. We now have a team in place with a proven track record, and we are
delivering on our commitments by promising only what we have a plan to
support.
Q. WHAT PROGRESS DID THE COMPANY MAKE IN PROCESS IMPROVEMENTS
DURING FISCAL YEAR 1996?
We implemented a number of process improvements, especially in the second
half of the fiscal year. These included a new layout of the factory floor
to increase product flow, and test procedures to improve overall quality.
These improvements are part of a major reengineering program that we have
embarked upon.
The results of these improvements started to take hold in the fourth
quarter, as we turned profitable. As we begin fiscal year 1997, we will
initiate even more dramatic programs.
Q. WHAT PROGRESS DID THE COMPANY MAKE TOWARD INTRODUCING
NEW PRODUCTS IN FISCAL YEAR 1996?
We made substantial progress throughout the year. In the third and fourth
quarters, we had the most successful new product introduction period in the
company's history. We announced 13, 15, 18, and 26 GHz versions of the
SPECTRUM(TM)II, and a 2xE3 QUANTUM(TM) product. We also introduced
significant, industry-leading new technologies into the SPECTRUM(TM)II
product line.
<PAGE> 8
Q. WHAT ARE THE MOST IMPORTANT GROWTH OPPORTUNITIES FOR THE COMPANY?
Most of the company's products will be installed in the buildup of the
worldwide wireless infrastructure. In locations where a wired
infrastructure is sparse, the buildup will be particularly rapid. Recent
expansion in the Asia Pacific region and in certain areas in Europe bear
this out. South America will offer opportunities, depending on the state of
the economies and political situations there. The U.S. market will increase
with the implementation of Personal Communications Service (PCS) deployment
and new local bypass services. With our strong international sales and
service support capabilities, we are well positioned to take advantage of
market opportunities anywhere in the world.
Q. WHAT ARE THE MAJOR CHALLENGES FACING DIGITAL MICROWAVE?
The most significant challenge is the intensity of competition, in terms of
numbers and type. There is such explosive growth in the wireless market,
and telecommunications in general, that many people want a piece of the
pie. We substantially improved our competitive position over the past six
months, and fared well in head-to-head contests. We believe our focus and
commitment to long-range technology will serve us well in remaining a
market leader.
Q. WHAT IS DIGITAL MICROWAVE'S STRATEGY FOR THE LONG TERM?
First, we intend to remain a leader in the point-to-point microwave
business - by filling out the capabilities in our product offerings, by
continuing to make fundamental architectural modifications, and by reducing
product costs to meet changes in the environments where our products are
used. We also intend to expand our business into adjacent market
opportunities which leverage our expertise. Third, we plan to utilize new
software and hardware technology to further advance our competitive
position.
Q. DOES DIGITAL MICROWAVE HAVE THE RESOURCES TO SUCCESSFULLY
DRIVE THE COMPANY'S FUTURE?
During fiscal year 1996, we significantly strengthened the balance sheet,
through additional equity and improved working capital utilization. This
stronger balance sheet provides the resources necessary to aggressively
grow the company. We expect major process improvements in fiscal year 1997
to further strengthen our financial position. We also have a $25 million
working capital line of credit to handle our day-to-day operating
requirements.
A key resource of Digital Microwave is its team of dedicated employees,
whose efforts are important for the company to achieve its goals for fiscal
year 1997 and beyond. We are confident that we now have the financial and
personnel resources to successfully drive our future.
<PAGE> 9
ASIA PACIFIC The rainy season in India was imminent as Digital Microwave
employees from San Jose and the UK worked feverishly to set up 52 links of 15
GHz M Series radios in central Bombay in just four weeks. Temperatures hovered
in the upper 90's, with over 90% humidity. The installers faced several unusual
challenges, including climbing over plumbing pipes which were installed on the
outside of buildings to get to the roofs. Other difficulties included delays in
the release of equipment from customs, long hours, and endless traffic snarls.
Despite these adverse conditions, the installation was completed on time, and
over 70 microwave links are currently up and running.
EUROPE When Digital Microwave employees in Coventry, UK managed a turnkey GSM
network installation for CelTel in the country of Uganda, they broke new ground
- - and sometimes new roads. CelTel is the first cellular telephone company to
operate in Uganda. Some installation sites could be reached only through narrow
dirt tracks, or in some cases, roads had to be cut. Outside of Kampala, the
largest city in central Uganda, there was no electricity, so diesel generators
were used at these sites. Some Digital Microwave radios were installed around
Lake Victoria, the largest lake in Africa, which flows through three countries.
AMERICAS A major fiber-based network company in Canada turned to Digital
Microwave when they needed a fast turnup for their customers in Toronto,
Vancouver, and Ottawa. This Competitive Access Provider (CAP) is augmenting its
fiber systems using microwave radio. Because approval to install fiber can take
months, this customer purchased links of 15 and 23 GHz SPECTRUM(TM)II radios to
use as the "last link", or to connect buildings off the fiber route. The end
users include Internet providers, banks, and some cellular companies.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW. Net sales for the fiscal year ended March 31, 1996 were $150.4 million
compared to $153.7 million for fiscal 1995. Net loss for fiscal 1996 was $6.0
million ($0.40 per share), compared to net income of $2.0 million ($0.14 per
share), in fiscal 1995. The results for fiscal 1996 were impacted negatively by
a one-time provision for excess and obsolete inventory of approximately $7.0
million, and $1.0 million of additional reserves related to the final resolution
of E-Plus remaining open issues, both of which were recorded in the third
quarter.
The Company received $155 million in orders shippable within a twelve month
period during fiscal 1996 compared to $175 million for fiscal 1995. The twelve
month backlog at March 31, 1996 was $84 million compared to $93 million at the
end of fiscal 1995.
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, 1996 1995 1994
- --------------------------------------------------------------------------------
(% of Net sales)
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.7 74.7 68.0
Research and development 7.4 7.4 8.0
Selling, general and administrative 18.2 16.1 20.1
Non-recurring charges -- -- 23.3
----- ----- -----
Operating income (loss) (5.3) 1.8 (19.4)
Other income (expense), net .1 (.4) 1.0
----- ----- -----
Income (loss) before
provision for income taxes (5.2) 1.4 (18.4)
Provision (credit) for income taxes (1.3) .1 1.0
----- ----- -----
Net income (loss) (3.9)% 1.3% (19.4)%
----- ----- -----
- --------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS 1996 COMPARED TO 1995. Net sales decreased 2.1% from
$153.7 million in fiscal year 1995 to $150.4 million in fiscal year 1996. Net
sales in the Americas were $36.2 million, a 32% decrease from $53.0 million
reported in fiscal 1995, and net sales in fiscal 1996 for Europe of $73.7
million were 4% lower than the $77.1 million reported in fiscal 1995. These
decreases were partly offset by an increase of 72% in sales in Asia Pacific,
from $23.6 million reported in fiscal 1995 to $40.5 million in fiscal 1996.
International sales for fiscal years 1996 and 1995 were 88% and 87% of total net
sales, respectively. The decrease in sales in the Americas was due to lower
orders from Colombia and Mexico. The economic condition in Mexico is still
affecting the orders level. The increase in sales in Asia Pacific was due to the
growth of major wireless service providers in the Philippines, Malaysia, India
and China. See Note 10 of Notes to Consolidated Financial Statements.
Cost of sales as a percentage of net sales increased to 79.7% in fiscal 1996
from 74.7% in fiscal 1995. The increased cost of sales as a percentage of sales
and lower gross margins in fiscal 1996 was primarily due to provisions for
excess and obsolete inventory of approximately $8.8 million recorded in fiscal
1996, compared to $1.0 million in fiscal 1995, unabsorbed manufacturing overhead
expenses because of lower production volume, rework expenses
10
<PAGE> 11
and costs related to the start up of SPECTRUM(TM) II production. The additional
inventory reserves were necessary as a result of the changes in the Company's
product line focus due to the introduction of SPECTRUM(TM) II products and
changes in the customer requirements, thereby requiring the need to balance
inventory on hand to the production requirements. Also, an additional reserve of
$1.0 million was recorded in the third quarter of fiscal 1996 to cover the final
resolution of E-Plus remaining open issues as a result of delays in the shipment
of the SPECTRUM(TM) II products at the start of the year. Competitive price
pressures on major contracts also continue to contribute to the lower gross
margins. See "Factors That May Affect Future Financial Results" and Note 9 of
Notes to Consolidated Financial Statements.
Research and development expenses decreased by $0.3 million, from $11.4 million
in fiscal year 1995 to $11.1 million in fiscal year 1996. As a percentage of net
sales, research and development expenses were 7.4% for both fiscal years 1996
and 1995. The Company will continue to invest in timely development of new
products and features in order to maintain and enhance its competitive position.
Selling, general and administrative expenses increased to $27.4 million in
fiscal 1996 from $24.8 million in fiscal 1995. As a percentage of net sales,
selling, general and administrative expenses were 18.2% in 1996, as compared
with 16.1% in fiscal 1995. The increase in expense was principally due to the
continued expansion of sales and sales support personnel in Asia Pacific and the
Americas, new marketing and advertising programs as well as increases in other
administrative expenses.
Interest and other income (expense), net for fiscal 1996 was $0.1 million of
income compared to $0.5 million expense in fiscal 1995. Interest expense in
fiscal 1996 was $1.9 million compared to $0.5 million in fiscal 1995. The
increase in interest expense was attributable to the higher principal balances
outstanding on the line of credit and note payable for the first half of fiscal
1996. The higher interest expense was offset by the gain on sale of investment
of $0.7 million, interest income on the income tax refunds of $0.4 million,
foreign exchange gains of $0.5 million and royalty income of $0.3 million. The
favorable exchange gains were attributable to receivables denominated in foreign
currencies.
The Company booked a tax benefit of $2.0 million in fiscal 1996 compared to a
$0.2 million tax provision in fiscal 1995. The tax benefit was recorded after
the completion of an IRS audit of the fiscal years ended March 31, 1990 through
1994 and the receipt of tax refunds resulting from a favorable IRS letter
ruling. The ruling allowed the Company a 10 year carryback for net operating
losses incurred in fiscal 1995 and to obtain federal tax refunds. Substantially
all of these refunds had not been previously recorded for financial statement
purposes as their realization was uncertain. See Note 5 of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS 1995 COMPARED TO 1994. Net sales increased 32.4% to $153.7
million in fiscal year 1995 from $116.0 million in fiscal year 1994. The Company
reported increased sales in fiscal 1995 in Europe 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. International sales for
fiscal years 1995 and 1994 were 87% and 91% of 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
11
<PAGE> 12
under the E-Plus contract. Under this contract, the Company was required to ship
M Series and SPECTRUM(TM) I products ("interim equipment") pending final
acceptance of the SPECTRUM(TM) II product. As of March 31, 1995, the Company had
recognized $12.9 million of revenue with nominal margins on shipments of interim
equipment that had been accepted by E-Plus. In as much as future shipments of
interim equipment were subject to substantial discounts, the Company recorded
significant reserves in the fourth quarter of fiscal 1995 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.
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) II 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. The increase in expense 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. 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 was attributable to the higher sales volume in fiscal
1995.
In fiscal 1994, the Company recorded a non-recurring charge of $27.0 million for
costs related to the settlement of certain stockholders' class action lawsuits
of $20.0 million and costs associated with the liquidation of a 45% interest in
the joint venture, DMC Telecom (Malaysia) Sdn. Bhd., of $7.0 million. See Notes
7 and 8 of Notes to Consolidated Financial Statements.
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 a joint venture with Optical Microwave
Network, Inc. (OMNI).
The Company recorded an income tax provision in fiscal 1995 at an effective tax
rate of 10% which was less than the statutory rate due to the realization of
certain temporary differences.
LIQUIDITY AND CAPITAL RESOURCES. Net cash provided by operating activities in
fiscal 1996 was $8.2 million, compared to net cash used for operating activities
of $17.2 million in fiscal 1995. Total assets at March 31, 1996 of $95.8 million
decreased by $6.8 million from $102.6 million at March 31, 1995, principally due
to decreases in inventory and other current assets. Inventories decreased
primarily as a result of increases in inventory reserves. The decrease in other
current assets was caused by the collection of income tax refunds and reduction
of other prepaid items. These decreases were partially offset by increases in
accounts receivable. The increase in accounts receivable was caused by higher
sales levels in the fourth quarter of fiscal 1996 compared with the fourth
quarter of fiscal 1995.
Total liabilities at March 31, 1996 of $46.1 million were $21.9 million lower
than the $68.0 million at March 31, 1995. The decrease was primarily due to a
reduction of $12.2 million in outstanding balances on the line of credit and
note payable and a reduction of
12
<PAGE> 13
$10.1 million in accounts payable. The reductions were funded primarily from the
proceeds of approximately $19.1 million from an overseas private placement of
the Company's common stock which was received in the form of a reduction in the
Company's trade payable to one investor of $5.0 million and cash proceeds of
$14.1 million from the remaining investors. The private placement was the
primary factor in the increase in stockholders' equity from $34.6 million at
March 31, 1995 to $49.7 million at March 31, 1996, partly offset by the net loss
of $6.0 million in fiscal 1996. The private placement was completed on August
22, 1995 and 2,063,982 shares of common stock were sold to the investors.
At March 31, 1996 the Company's principal sources of liquidity consisted of $8.3
million in cash and a revolving bank credit facility that provides up to $20.0
million in credit (which was increased to $25.0 million in May 1996). At March
31, 1996, $3.1 million was outstanding under this line. See Note 3 of Notes to
Consolidated Financial Statements.
The Company believes that the liquidity provided by existing cash balances,
anticipated future cash flows from operations, and the Company's existing
borrowing arrangement will be sufficient to meet both working capital and
capital expenditure requirements for the foreseeable future.
The Company leases certain property, equipment and facilities under operating
and capital leases. Rent expense under the operating leases was approximately
$3.7 million in fiscal 1996. See Note 4 of Notes to Consolidated Financial
Statements.
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS. The stockholders' letter and
discussions in this annual report concerning the Company's future products,
expenses, revenue, liquidity and cash needs as well as the Company's plans and
strategies contain forward-looking statements concerning the Company's future
operations and financial results. These forward-looking statements are based on
current expectations and the Company assumes no obligation to update this
information. Numerous factors, such as economic and competitive conditions,
incoming order levels, shipment volumes, product margins, and foreign exchange
rates, could cause actual results to differ from those described in these
statements and prospective investors and stockholders should carefully consider
the factors set forth below in evaluating these forward-looking statements. The
Company's backlog may not be representative of actual sales for any succeeding
period because of the timing of orders, delivery intervals, customer and product
mix and the possibility of changes in delivery schedules and additions or
cancellation of orders.
Sales of the Company's products are concentrated in a small number of customers.
For fiscal 1996, the top four customers accounted for 38% of the net sales. As
of March 31, 1996, four of the Company's customers accounted for 49% of the
backlog, of which 16% was attributable to orders under the E-Plus contract. The
worldwide telecommunications industry is dominated by a small number of large
corporations and the Company expects that a significant portion of its future
product sales will continue to be concentrated in a limited number of customers.
The loss of any existing customer, a significant reduction in the level of sales
to any existing customer, or the failure of the Company to gain additional
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, a substantial
portion of shipments may occur near the end of each quarter. Accordingly, the
Company's 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 and from quarter to quarter.
13
<PAGE> 14
The markets for the Company's products are extremely competitive and the Company
expects that competition will increase. The Company's existing and potential
competitors include large and emerging domestic and international companies,
such as California Microwave, Alcatel, Ericsson, Siemens AG, Harris Corporation,
Nokia, NEC, and P-Com, many of which have significantly greater financial,
technical, manufacturing, marketing, sales and distribution resources and
management expertise than the Company. The Company believes that its ability to
compete successfully will depend on a number of factors both within and outside
its control, including price, quality, availability, product performance and
features; timing of new product introductions by the Company, its customers and
its competitors; the ability of its customers to obtain financing; and customer
service and technical support.
The Company expects that international sales will continue to account for the
majority of its net product sales for the foreseeable future. As a result, the
Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements; fluctuations in foreign currency
exchange rates; imposition of tariffs and other barriers and restrictions; the
burdens of complying with a variety of foreign laws; and general economic and
geopolitical conditions, including inflation and trade relationships.
Manufacturers of digital microwave telecommunications equipment are
experiencing, and are likely to continue to experience, intense price pressure,
which has resulted, and is expected to continue to result, in downward pricing
competition on the Company's products. As a result, the Company has experienced,
and expects to continue to experience, declining average sales prices for its
products. The Company's future profitability is dependent upon its ability to
reduce costs in line with or faster than declines in prices.
The Company's manufacturing operations are highly dependent upon the delivery of
materials by outside suppliers in a timely manner. From time to time the Company
has experienced delivery delays from key suppliers which impacted sales. There
can be no assurance that the Company will not experience material supply
problems or component or subsystem delays in the future.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended March 31, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales $ 150,419 $ 153,650 $ 116,010 $ 103,937 $ 86,097
Net income (loss) $ (5,955) $ 1,982 $ (22,495) $ (6,708) $ (19,670)
Net income (loss) per share $ (0.40) $ 0.14 $ (1.81) $ (0.55) $ (1.64)
CONSOLIDATED BALANCE
SHEETS DATA:
Total assets $ 95,797 $ 102,585 $ 84,003 $ 72,990 $ 87,213
Long-term liabilities $ 2,782 $ 6,362 $ 459 $ 201 $ 629
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1996 1995
- ----------------------------------------------------------------------------------------
(In thousands, except share and per share amounts)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,299 $ 1,919
Restricted cash 719 1,100
Accounts receivable, net of allowance of
$1,373 in 1996 and $1,413 in 1995 33,398 32,513
Inventories, net 35,347 46,732
Tax refund receivable -- 1,820
Other current assets 2,973 4,524
--------- ---------
Total current assets 80,736 88,608
--------- ---------
PROPERTY AND EQUIPMENT:
Machinery and equipment 36,609 32,450
Land and buildings 1,262 1,262
Furniture and fixtures 7,602 6,668
Leasehold improvements 2,262 2,139
--------- ---------
47,735 42,519
Accumulated depreciation and amortization (32,674) (28,542)
--------- ---------
Net property and equipment 15,061 13,977
--------- ---------
$ 95,797 $ 102,585
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 3,106 $ 11,731
Current maturities of note payable 3,334 3,333
Current maturities of capital lease obligations 1,025 776
Accounts payable 16,252 26,373
Income taxes payable 973 1,629
Other accrued liabilities 18,590 17,770
--------- ---------
Total current liabilities 43,280 61,612
LONG-TERM LIABILITIES:
Note payable, net of current maturities 1,944 5,556
Capital lease obligations, net of current maturities 838 806
--------- ---------
Total liabilities 46,062 67,974
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 15,820,783 shares in 1996 and 13,467,693
shares in 1995 issued and outstanding 159 135
Additional paid-in capital 65,368 44,313
Accumulated deficit (15,792) (9,837)
--------- ---------
Total stockholders' equity 49,735 34,611
--------- ---------
$ 95,797 $ 102,585
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
15
<PAGE> 16
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
NET SALES $ 150,419 $ 153,650 $ 116,010
Cost of Sales 119,918 114,760 78,874
--------- --------- ---------
Gross profit 30,501 38,890 37,136
--------- --------- ---------
OPERATING EXPENSES:
Research and development 11,108 11,379 9,316
Selling, general and administrative 27,416 24,763 23,338
Non-recurring charges -- -- 27,000
--------- --------- ---------
Total operating expenses 38,524 36,142 59,654
--------- --------- ---------
Income (loss) from operations (8,023) 2,748 (22,518)
OTHER INCOME (EXPENSE):
Interest and other income (expense), net 1,975 (16) 1,718
Interest (expense) (1,860) (530) (603)
--------- --------- ---------
Income (loss) before provision for
income taxes (7,908) 2,202 (21,403)
Provision (credit) for income taxes (1,953) 220 1,092
--------- --------- ---------
Net income (loss) $ (5,955) $ 1,982 $ (22,495)
========= ========= =========
Net Income (Loss) Per Share $ (0.40) $ 0.14 $ (1.81)
========= ========= =========
Weighted Average Number of
Common and Common
Equivalent Shares Outstanding 14,895 13,845 12,448
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Total
----------------------- Paid-In (Accumulated Stockholders'
Years Ended March 31, 1996, 1995, and 1994 Shares Amount Capital Deficit) Equity
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
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
Sale of stock to private
investors 2,063,982 21 19,071 -- 19,092
Stock options exercised 289,108 3 1,929 -- 1,932
Tax benefits related to
employee stock transaction -- -- 55 -- 55
Net loss -- -- -- (5,955) (5,955)
---------- ---------- ---------- ---------- ----------
Balance, March 31, 1996 15,820,783 $ 159 $ 65,368 $ (15,792) $ 49,735
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,955) $ 1,982 $(22,495)
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 6,332 6,356 6,448
Provision for non-recurring charges -- -- 27,000
Provision for uncollectible accounts 580 276 300
Provision for inventory reserves 8,795 958 117
Provision for warranty reserves 1,678 1,911 1,285
Gain on sale of product lines -- -- (1,089)
Gain on sale of investment in OMNI -- -- (371)
Changes in assets and liabilities:
(Increase) decrease in restricted cash 381 200 281
(Increase) decrease in accounts receivable (1,492) (5,774) (6,880)
(Increase) decrease in inventories 904 (12,212) (13,232)
(Increase) decrease in tax refund receivable 1,820 778 1,691
(Increase) decrease in other current assets 1,559 (1,503) (73)
Increase (decrease) in accounts payable (5,144) 5,398 13,607
Increase (decrease) in accrued litigation -- (19,900) --
Increase (decrease) in other accrued liabilities (1,241) 4,287 203
-------- -------- --------
Net cash provided by (used for)
operating activities 8,217 (17,243) 6,792
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,527) (8,111) (5,840)
-------- -------- --------
Net cash used for investing activities (4,527) (8,111) (5,840)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from banks 16,188 36,744 21,858
Repayments to banks (28,423) (16,124) (23,084)
Payments of note payable to MTI -- -- (3,075)
Payments of capital lease obligations (1,019) (695) (946)
Sale of common stock 15,812 4,025 4,002
-------- -------- --------
Net cash provided by (used for)
financing activities 2,558 23,950 (1,245)
-------- -------- --------
Effect of Exchange Rate Changes on Cash 132 (39) (146)
-------- -------- --------
Net Increase (Decrease) in Cash and
Cash Equivalents 6,380 (1,443) (439)
Cash and Cash Equivalents at Beginning of Year 1,919 3,362 3,801
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 8,299 $ 1,919 $ 3,362
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
Digital Microwave Corporation (the "Company") designs, manufactures and markets
advanced high-performance digital microwave equipment for a wide variety of
short and medium-haul communications applications worldwide. This comprehensive
family of technologically advanced products is designed for use in cellular
telephone systems, private networks, and other wireless telecommunications.
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.
ESTIMATES. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
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, 1996 and
1995, the Company was required to segregate and maintain $0.7 million and $1.1
million, respectively, which are included as restricted cash in the accompanying
consolidated balance sheets.
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, 1996 1995 1994
- ---------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Interest $1,753 $1,556 $ 603
Income taxes $ 172 $ 62 $ 245
- ---------------------------------------------------------------------------
</TABLE>
The following non-cash transactions occurred during the fiscal years ended:
<TABLE>
<CAPTION>
March 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Tax benefit related to employee
stock transactions $ 55 $ -- $ 762
Property purchased under capital leases $1,324 $ 1,314 $ 966
Reduction of accounts payable to MTI
in connection with the sale of stock
(See Note 7) $5,000 $ -- $ --
Reduction of accounts payable to MTI
in connection with the sale of OMNI $ -- $ -- $ 400
- -----------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
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, 1996 1995
- ---------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Raw materials $11,840 $16,506
Work in process 16,342 20,977
Finished goods 7,165 9,249
------- -------
$35,347 $46,732
======= =======
- ---------------------------------------------------------------------------
</TABLE>
Inventories contained components and assemblies in excess of the Company's
current estimated requirements and were reserved at March 31, 1996 and 1995.
Also, as a result of product transitions in the third quarter of fiscal 1996,
the Company charged cost of sales for approximately $7.0 million for excess and
obsolete inventories. Due to competitive pressures, it is possible that these
estimates could change in the foreseeable future.
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 three to five years for
equipment and furniture, and forty years for buildings) or the lease term.
Included in property and equipment are assets held under capital leases with a
cost of $3,641,000 and $2,503,000 for fiscal years 1996 and 1995, respectively.
Accumulated amortization on leased assets was $1,044,000 and $712,000 as of
March 31, 1996 and 1995, respectively.
OTHER ACCRUED LIABILITIES. Other accrued liabilities included the following:
<TABLE>
<CAPTION>
March 31, 1996 1995
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Customer deposits $ 4,839 $ 1,095
Accrued contract obligations (See Note 9) 3,759 4,045
Accrued commissions 3,246 1,873
Deferred revenue -- 3,431
Accrued warranty 3,076 3,075
Closing costs - DMC TeleCom (Malaysia) Sdn. Bhd. (See Note 7) 367 1,029
Other 3,303 3,222
------- -------
$18,590 $17,770
======= =======
- -----------------------------------------------------------------------------------------
</TABLE>
Accrued contract obligations primarily relate to product and other equipment to
be provided to E-Plus, as well as discounts on shipments of interim equipment
and other customer obligations.
Deferred revenue consisted principally of shipments of interim equipment to
E-Plus that were 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.
20
<PAGE> 21
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 year ended March 31, 1996 the aggregate net foreign exchange
gain was $506,000 and for fiscal years ended March 31, 1995, and 1994, the
aggregate net foreign exchange loss was $39,000 and $198,000, respectively.
CONCENTRATION OF CREDIT RISK. Trade receivables concentrated with certain
customers primarily in the telecommunications industry 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 South America.
The Company performs on-going credit evaluations of its customers' financial
conditions and generally requires no collateral.
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, as the inclusion of common
equivalent shares would be antidilutive.
NOTE 3. CREDIT ARRANGEMENTS
At March 31, 1996, the Company had a $20.0 million credit facility with a U.S.
bank and a credit company that expires on June 30, 1996. Borrowings bear
interest at the prime rate plus 1.5% per annum (9.75% at March 31, 1996) and are
secured by certain assets of the Company. At March 31, 1996, $3.1 million was
outstanding under this credit facility, and $16.9 million of credit was
available based on the underlying collateral. The agreement requires the Company
to maintain certain financial covenants, including minimum tangible net worth
and profitability requirements. The Company was in default of the annual loss
covenant of the credit agreement for the fiscal year ended March 31, 1996 and
obtained a waiver from the lenders. In June 1996, the Company renewed the credit
arrangement increasing the facility to $25.0 million at an interest rate of
prime plus 1% under the same general terms and conditions to expire on June 30,
1997.
In October 1994, the Company signed 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 in the Company's San Jose,
California facility. The promissory note bears interest at prime plus 2.25% per
annum (10.5% at March 31, 1996). The agreement requires the Company to maintain
certain financial covenants, including minimum net worth and profitability
requirements. At March 31, 1996, the outstanding balance under this note was
$5.3 million, of which $3.3 million is due in fiscal 1997.
21
<PAGE> 22
NOTE 4. LEASE COMMITMENTS AND CONTINGENCIES
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, 1996, future minimum
payment obligations under these leases were as follows:
<TABLE>
<CAPTION>
Years Ending March 31, Capital Operating
- -----------------------------------------------------------------------------
(In thousands)
<C> <C> <C>
1997 $ 1,179 $ 2,461
1998 736 2,168
1999 162 1,936
2000 -- 1,915
2001 -- 1,920
2002 and beyond -- 2,546
------- -------
Future minimum lease payments 2,077 $12,946
=======
Less-amount representing interest (9% to 14%) (214)
-------
Present value of future minimum lease payments 1,863
Less-current maturities 1,025
-------
Long-term lease obligations $ 838
=======
- -----------------------------------------------------------------------------
</TABLE>
Rent expense under operating leases was approximately $3,679,000, $3,458,000,
and $2,892,000 for the years ended March 31, 1996, 1995, and 1994, respectively.
The Company is a defendant in various suits and is subject to various claims
which arise in the normal course of business. In the opinion of management, the
ultimate disposition of these claims will not have a material adverse effect on
the consolidated financial position, liquidity or results of operations of the
Company.
NOTE 5. INCOME TAXES
The Company provides for income taxes using an asset and liability approach,
under which deferred income taxes are provided based upon enacted tax laws and
rates applicable to periods in which the taxes become payable.
The domestic and foreign components of income (loss) before provision for income
taxes were as follows:
<TABLE>
<CAPTION>
Years Ended March 31, 1996 1995 1994
- ------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Domestic $ (9,845) $ 1,182 $(19,864)
Foreign 1,937 1,020 (1,539)
-------- -------- --------
$ (7,908) $ 2,202 $(21,403)
======== ======== ========
- ------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
The provision (credit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended March 31, 1996 1995 1994
- ---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $(2,018) $ 220 $ 95
State -- -- --
Foreign 65 -- 37
------- ------- -------
Total current (1,953) 220 132
------- ------- -------
Deferred (prepaid):
Federal -- -- 960
State -- -- --
Foreign -- -- --
------- ------- -------
Total deferred (prepaid) -- -- 960
------- ------- -------
$(1,953) $ 220 $ 1,092
======= ======= =======
- ---------------------------------------------------------------------------------
</TABLE>
The provision (credit) for income taxes differs from the amount computed by
applying the statutory Federal income tax rate as follows:
<TABLE>
<CAPTION>
Years Ended March 31, 1996 1995 1994
- --------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Expected tax (benefit) $(2,689) $ 749 $(7,277)
State taxes net of Federal benefit (343) -- --
Change in valuation allowance 3,346 (624) 8,883
Reversal of previously provided taxes upon
settlement of the IRS audit (2,018) -- --
Other (249) 95 (514)
------- ------- -------
$(1,953) $ 220 $ 1,092
======= ======= =======
- --------------------------------------------------------------------------------------
</TABLE>
The major components of the net deferred tax asset consisted of the following:
<TABLE>
<CAPTION>
March 31, 1996 1995
- -----------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Inventory reserves $ 6,041 $ 1,820
Depreciation 685 808
Warranty reserves 1,158 1,183
Bad debt reserves 655 842
Net operating loss carryforwards 3,879 6,785
Tax credits 5,514 2,764
Other 1,430 1,346
-------- --------
19,362 15,548
Less: Valuation reserve - Operations (18,894) (15,548)
Less: Valuation reserve - Equity (468) --
-------- --------
Net deferred tax asset $ -- $ --
======== ========
- -----------------------------------------------------------------------------
</TABLE>
Federal net operating loss carryforwards totaling $8.1 million will expire at
various dates from 2010 through the year 2011. State net operating loss
carryforwards totaling $13.5 million will expire at various dates from 1999
through the year 2001. The tax credit carryforwards will expire at various dates
from 2006 through the year 2011.
23
<PAGE> 24
NOTE 6. COMMON STOCK
STOCK OPTION PLANS. The Company's 1984 Stock Option Plan ("1984 Plan") provides
for the grant of both incentive and nonqualifed stock options to key employees
and certain independent contractors of the Company. At March 31, 1996, options
to purchase 756,403 common shares were outstanding under the 1984 Plan, of which
499,420 options were exercisable at prices ranging from $0.50 to $26.00 per
share. As a result of the adoption of the 1994 Stock Incentive Plan ("1994
Plan") there were no shares available for future grants under the 1984 Plan.
In July 1994, the stockholders approved the 1994 Plan. The 1994 Plan authorizes
1,183,330 shares of common stock to be reserved for issuance over a ten year
term. This share reserve automatically increases on the first trading day of
each calendar year for five years after the adoption of the 1994 Plan, beginning
January 1995, 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, 1996, options to purchase 1,053,479 shares were outstanding under
the 1994 Plan, of which 100,400 were exercisable at prices ranging from $10.00
to $18.13 per share. At March 31, 1996, the Company had 129,851 shares available
for future grant under the 1994 Plan. At March 31, 1996, the Company had
reserved 1,939,733 shares for future issuance under the 1984 and 1994 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, 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
Granted 897,293 $10.00 - $14.50
Exercised (270,705) $ .50 - $ 9.88
Canceled (280,411) $ 5.25 - $26.00
--------- ---------------
Outstanding at March 31, 1996 1,809,882 $ .50 - $26.00
========= ===============
- --------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
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.
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 1996, 1995 and 1994.
Purchases of subassemblies from MTI totaled approximately $22,246,000,
$23,509,000, and $15,636,000, for the fiscal years ended March 31, 1996, 1995,
and 1994, respectively. Trade accounts payable to MTI at March 31, 1996 and 1995
were $3,939,000 and $6,507,000 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 1996, 1995, and 1994, sales to MTI under this
agreement were $1,952,000, $1,031,000, and $2,146,000, respectively. In
addition, amounts due from MTI at March 31, 1996 and 1995 were $453,000 and
$61,800, 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.
In fiscal 1996, in connection with a private placement of the Company's common
stock, MTI bought 515,995 shares at $9.69 per share, payment of which was made
by offset of the Company's trade accounts payable to MTI.
25
<PAGE> 26
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.
DMCTELECOM (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 DMC Telecom (Malaysia) Sdn.
Bhd. (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 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 $2.0 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
judgment 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 $7.0 million relating to the write off of the Company's
receivable from the joint venture, DMCT(M). See Note 7 of Notes to Consolidated
Financial Statements.
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, equipment returns and other related costs (See Note 2 -
Other Accrued Liabilities). In July 1995, the Company received product
acceptance from E-Plus, and began delivery and installation of the SPECTRUM(TM)
II equipment. During the third quarter of fiscal 1996, the Company provided
additional reserves of approximately $1.0 million related to the final
resolution of other remaining open issues on this contract.
26
<PAGE> 27
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, 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Siemens AG 22% - -
American Telephone & Telegraph Co. - - 10%
Mercury Communications Ltd. - - 11%
- ---------------------------------------------------------------------------------------
</TABLE>
Geographic information for the fiscal years ended March 31, 1996, 1995, and 1994
is as follows:
<TABLE>
<CAPTION>
United United
States Kingdom Others Eliminations Total
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
1996
Sales to unaffiliated
customers $ 133,370 $ 13,935 $ 3,114 $ - $ 150,419
Intercompany sales 9,981 - - (9,981) -
--------- --------- --------- --------- ---------
Net sales $ 143,351 $ 13,935 $ 3,114 $ (9,981) $ 150,419
--------- --------- --------- --------- ---------
Operating income (loss) $ (10,138) $ 1,767 $ 220 $ 128 $ (8,023)
--------- --------- --------- --------- ---------
Identifiable assets $ 92,760 $ 6,539 $ 2,016 $ (5,518) $ 95,797
--------- --------- --------- --------- ---------
1995
Sales to unaffiliated
customers $ 126,171 $ 24,995 $ 2,484 $ - $ 153,650
Intercompany sales 20,287 - - (20,287) -
--------- --------- --------- --------- ---------
Net sales $ 146,458 $ 24,995 $ 2,484 $ (20,287) $ 153,650
--------- --------- --------- --------- ---------
Operating income $ 1,384 $ 1,159 $ 199 $ 6 $ 2,748
--------- --------- --------- --------- ---------
Identifiable assets $ 102,687 $ 7,269 $ 1,469 $ (8,840) $ 102,585
--------- --------- --------- --------- ---------
1994
Sales to unaffiliated
customers $ 84,956 $ 28,361 $ 2,693 $ - $ 116,010
Intercompany sales 26,961 - - (26,961) -
--------- --------- --------- --------- ---------
Net sales $ 111,917 $ 28,361 $ 2,693 $ (26,961) $ 116,010
--------- --------- --------- --------- ---------
Operating income $ (20,995) $ (1,277) $ 26 $ (272) $ (22,518)
--------- --------- --------- --------- ---------
Identifiable assets $ 96,078 $ 13,429 $ 2,229 $ (27,733) $ 84,003
--------- --------- --------- --------- ---------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
The following table represents export sales from the United States to
unaffiliated customers by geographic region:
<TABLE>
<CAPTION>
March 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Canada and South America $ 14,876 $ 30,565 $ 23,516
Europe 59,732 52,105 24,814
Asia Pacific 40,570 23,601 25,363
-------- -------- --------
Total export sales $115,178 $106,271 $ 73,693
======== ======== ========
Export sales as a % of U.S. sales 86% 84% 87%
- --------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 28
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,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Jose, California
April 22, 1996
28
<PAGE> 29
CORPORATE DIRECTORY
<TABLE>
<S> <C> <C>
OFFICERS Charles D. Kissner CORPORATE
President and HEADQUARTERS
Charles D. Kissner Chief Executive Officer
President and Digital Microwave Corporation
Chief Executive Officer Dr. James D. Meindl 170 Rose Orchard Way
Professor of Microelectronics San Jose, CA 95134
Frank Carretta, Jr. Georgia Institute of Technology United States of America
Vice President, Worldwide Sales
and Service Billy B. Oliver
A Private Communications SALES OFFICES
Carol A. Goudey Consultant
Corporate Treasurer and North American Headquarters:
Assistant Secretary San Jose, California
INDEPENDENT PUBLIC Norcross, Georgia
Timothy R. Hansen ACCOUNTANTS Schaumburg, Illinois
Vice President and Toronto, Canada
General Manager, Arthur Andersen LLP
SPECTRUM(TM) Division San Jose, California European Headquarters:
Coventry, England
Jack Hillson East Kilbride, Scotland
Vice President and GENERAL LEGAL COUNSEL Moscow, Russia
General Manager,
QUANTUM(TM)/Magnum Division Morrison & Foerster LLP Latin American Headquarters:
San Francisco, California San Jose, California
Paul A. Kennard
Vice President, Engineering Mexico City, Mexico
REGISTRAR AND Santa Fe de Bogota, Colombia
Shaun McFall TRANSFER AGENT
Vice President, Asia Pacific Headquarters:
Corporate Marketing Chemical Mellon Singapore
Shareholder Services
John P. O'Neil San Francisco, California Metro Manila, Philippines
Vice President, Personnel New Delhi, India
Beijing, China
Carl A. Thomsen PRINCIPAL SUBSIDIARIES
Vice President, Chief Financial
Officer and Secretary DMC Telecom U.K. Ltd. SEC FORM 10-K
East Kilbride, Scotland
A copy of the Company's
DIRECTORS DMC Telecom Canada Inc. Annual Report to the
Toronto, Canada Securities and Exchange
Richard C. Alberding Commission on Form 10-K
Executive Vice President (Retired) DMC de Mexico, S.A. de C.V. is available without charge
Hewlett-Packard Company Mexico City, Mexico by writing to:
William E. Gibson Digital Microwave de Digital Microwave Corporation
President, DMC Telecom (Retired) Venezuela, C.A. Attn: Corporate Communications
Digital Microwave Corporation Caracas, Venezuela 170 Rose Orchard Way
San Jose, CA 95134
Clifford H. Higgerson DMC de Colombia
Chairman of the Board of Directors Santa Fe de Bogota, Colombia
Digital Microwave Corporation
General Partner DMC Telecom Philippines, Inc.
Communications Ventures Metro Manila, Philippines
and Vanguard Associates
Private Venture Capital
Investment Partnerships
</TABLE>
<PAGE> 1
EXHIBIT 21.1
DIGITAL MICROWAVE CORPORATION
LIST OF 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
DMC Telecom Philippines, Inc.
Metro Manila, Philippines
<PAGE> 1
EXHIBIT 23.1
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 24, 1996
Page 25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) ANNUAL REPORT FILED BY
REFERENCE ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 8,299
<SECURITIES> 0
<RECEIVABLES> 33,398
<ALLOWANCES> 0
<INVENTORY> 35,347
<CURRENT-ASSETS> 80,736
<PP&E> 47,735
<DEPRECIATION> 32,674
<TOTAL-ASSETS> 95,797
<CURRENT-LIABILITIES> 43,280
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 95,797
<SALES> 150,419
<TOTAL-REVENUES> 150,419
<CGS> 119,918
<TOTAL-COSTS> 119,918
<OTHER-EXPENSES> 38,524
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,860
<INCOME-PRETAX> (7,908)
<INCOME-TAX> 1,953
<INCOME-CONTINUING> (5,955)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,955)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
