<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1997
REGISTRATION NO. 333-19907
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
--------------------------
DIGITAL MICROWAVE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 77-0016028
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
170 ROSE ORCHARD WAY
SAN JOSE, CALIFORNIA 95134
(408) 943-0777
(Address and telephone number of principal executive offices and principal place
of business)
CHARLES D. KISSNER
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
170 ROSE ORCHARD WAY
SAN JOSE, CALIFORNIA 95134
(408) 943-0777
(Name, Address, and Telephone Number of Agent for Service)
--------------------------
COPIES TO:
BRUCE ALAN MANN, ESQ. STEVEN E. BOCHNER, ESQ.
TAMRA D. BROWNE, ESQ. JEFFREY A. HERBST, ESQ.
VALERIE A. VILLANUEVA, ESQ. GIL LABRUCHERIE, ESQ.
Morrison & Foerster LLP Wilson Sonsini Goodrich & Rosati,
425 Market Street A Professional Corporation
San Francisco, CA 94105 650 Page Mill Road
Palo Alto, CA 94304
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
--------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THE PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 13, 1997
PROSPECTUS
2,150,000 SHARES
[LOGO]
COMMON STOCK
------------------
All of the 2,150,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock"), offered hereby, are being issued and sold by Digital Microwave
Corporation ("DMC" or the "Company").
The Company's Common Stock is traded on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "DMIC." The last reported
sale price of the Company's Common Stock on the Nasdaq National Market on March
12, 1997 was $24.00 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THE PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS TO BE CONSIDERED BY PROSPECTIVE PURCHASERS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total (3)..................... $ $ $ $
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $325,000, payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 322,500 additional shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Company will be $ , $ and $ , respectively.
------------------------
The shares of Common Stock are being offered by the Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that certificates for the shares of Common
Stock offered hereby will be available for delivery on or about ,
1997, at the offices of Smith Barney Inc., 333 W. 34th Street, New York, N.Y.,
10001.
------------------------
SMITH BARNEY INC.
OPPENHEIMER & CO., INC.
COWEN & COMPANY
, 1997
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, and at the
Commission's Regional Offices at Seven World Trade Center, Suite 1300, New York,
New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials also can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a web site
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding the Company. The Common Stock of the Company is
quoted on the Nasdaq National Market. Reports and other information concerning
the Company may be inspected at the offices of the Nasdaq Stock Market at 1735 K
Street, N.W., Washington, D.C. 20006.
INFORMATION INCORPORATED BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference: (1) Annual
Report on Form 10-K for the year ended March 31, 1996, (2) Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996, (3) Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, (4) Quarterly Report on Form 10-Q for
the quarter ended December 31, 1996, and (5) the descriptions of the Company's
Common Stock and Preferred Share Purchase Rights contained in the Company's
Registration Statements on Form 8-A filed under the Exchange Act with the
Commission on May 29, 1987 and November 5, 1991, as amended on December 27,
1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Common Stock hereunder shall be deemed to
be incorporated by reference herein and to be a part hereof form the date of
filing of such reports and documents. The Company will provide without charge to
each person to whom this Prospectus is delivered, a copy of any and all of such
documents (exclusive of exhibits unless such exhibits are specifically
incorporated by reference herein), upon written or oral request to Carl A.
Thomsen, Vice President, Chief Financial Officer and Secretary, at the corporate
headquarters of the Company, 170 Rose Orchard Way, San Jose, California 95134
(telephone number (408) 943-0777).
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document that also is or is deemed to
be incorporated by reference herein modified or superseded such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE
COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
This Prospectus includes trademarks and registered service marks of the
Company and trademarks and registered service marks of other companies.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO,
APPEARING ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS.
EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." THIS
PROSPECTUS AND CERTAIN INFORMATION INCORPORATED BY REFERENCE HEREIN CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE EXCHANGE
ACT. DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE
MATERIAL SET FORTH UNDER "PROSPECTUS SUMMARY -- THE COMPANY," "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," AND "BUSINESS -- INTRODUCTION; -- THE DMC SOLUTION; -- STRATEGY; --
PRODUCTS; -- RESEARCH AND DEVELOPMENT," AS WELL AS IN THE PROSPECTUS GENERALLY.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE
INTO, THIS PROSPECTUS.
THE COMPANY
Digital Microwave Corporation ("DMC" or the "Company") designs, manufactures
and markets advanced wireless solutions for worldwide telephone network
interconnection and access. The Company provides its customers with a broad
product line, which contains products that operate using a variety of
transmission frequencies, ranging from 2 GigaHertz ("GHz") to 38 GHz, and a
variety of transmission capacities, typically ranging from T-1 (1.5 Megabits per
second) to DS-3 (45 Megabits per second). The Company's broad product line
allows it to market and sell its products to service providers in many locations
worldwide with varying interconnection and access requirements. The Company
designs its products to meet the requirements of mobile communications networks
and fixed access networks worldwide. The Company's products typically enable its
customers to deploy and expand their wireless infrastructure and market their
services rapidly to subscribers, so that service providers can realize a return
on their investments in frequency allocation licenses and network equipment.
The Company believes that it is well-positioned to address worldwide market
opportunities for wireless infrastructure suppliers. For example, there are
substantial telecommunications infrastructures being built for the first time in
many Asian countries; infrastructures are being expanded in Europe; and personal
communications services ("PCS") interconnect networks are being constructed in
the United States. The Company believes that maintaining close proximity to its
customers provides it with a competitive advantage in securing orders for its
products and in servicing its customers. Local offices enable the Company to
understand the local issues and requirements of its customers and to address its
customers' individual geographic, regulatory, and infastructure requirements. As
a result, the Company has developed a global sales, service and support
organization, with offices in North America, South America, Europe, the Middle
East and Asia. With its 16 sales or support offices in 12 countries, the Company
can respond quickly to its customers' needs and can provide prompt on-site
technical support.
The Company has sold approximately 70,000 radios, which have been installed
in over 60 countries. The Company markets its products to service providers
directly, as well as indirectly through its relationships with original
equipment manufacturers ("OEMs") of base stations, such as Motorola, Inc.,
Siemens AG, and L.M. Ericsson. Between December 31, 1995 and December 31, 1996,
the Company sold its products to service providers, including Beijing Telecom,
Heibei Unicom, Pilipino Telephone Corp., Sterling Cellular, and SMART
Communications, Inc. in the Asia/Pacific region; Panafon SA, E-Plus Mobilfunk
GmbH, Comviq GSM AB, Jordan Mobile Telephone Services, and IONICA in Europe and
the Middle East; and BellSouth PCS, Pacific Bell Mobile Services, Avantel S.A.
and Rogers Network Services in the Americas.
The Company's strategy is to build on the strength of its current products,
which offer point-to-point solutions, and its strong global sales, service and
support organization to become a leading worldwide
3
<PAGE>
supplier of wireless network connectivity solutions. To achieve this strategy,
the Company intends to leverage its core technical competencies and reputation
for service and support to capitalize on emerging market opportunities, such as
wireless local loop, wireless data transport and alternative local telephone
facilities access. The Company also intends to continue to pursue the operating
efficiency improvements that it instituted with a formal process improvement
program, entitled Operation NewWave, during 1996.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 2,150,000 shares (1)
Common Stock to be Outstanding after the
Offering................................... 18,285,175 shares (1)(2)
Use of Proceeds.............................. For general corporate purposes, including
working capital, the development and
marketing of new products, and for possible
future acquisitions of complementary
technologies, businesses or products.
Nasdaq National Market Symbol................ DMIC
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
---------------------------------- ----------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales............................................ $ 116,010 $ 153,650 $ 150,419 $ 114,183 $ 126,092
Gross profit......................................... 37,136 38,890 30,501 20,602 41,545
Income (loss) from operations........................ (22,518) 2,748 (8,023) (8,244) 8,407
Net income (loss).................................... $ (22,495) $ 1,982 $ (5,955) $ (6,210) $ 7,168
Net income (loss) per share.......................... $ (1.81) $ 0.14 $ (0.40) $ (0.43) $ 0.43
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
ACTUAL AS ADJUSTED (3)
-------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $ 44,858 $ 93,424
Total assets................................................ 107,109 155,675
Long-term liabilities, net of current maturities............ 280 280
Stockholders' equity........................................ 59,419 107,985
</TABLE>
- ------------------------
(1) Excludes up to 322,500 shares of Common Stock that may be sold by the
Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Based on shares outstanding as of December 31, 1996. Excludes 2,392,876
shares of Common Stock issuable upon exercise of stock options outstanding
as of December 31, 1996 at a weighted average exercise price of $13.58 per
share.
(3) As adjusted to give effect to the sale by the Company of 2,150,000 shares of
Common Stock offered hereby at an assumed public offering price of $24.00
per share, less underwriting discounts and estimated offering expenses
payable by the Company. See "Use of Proceeds."
4
<PAGE>
THE COMPANY
The Company's executive offices are located at 170 Rose Orchard Way, San
Jose, California 95134. Its telephone number at that address is (408) 943-0777.
As used in this Prospectus, except as otherwise specified or where the context
requires otherwise, references to the Company include the Company and its
consolidated subsidiaries.
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF
FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE
IN, OR INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS. IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY
THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER INFORMATION PRESENTED IN
THIS PROSPECTUS.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results vary significantly depending on
several factors, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. In
particular, the Company's quarterly results of operations can vary due to the
volume and timing of product orders received and delivered during the quarter,
the ability of the Company and its key suppliers to respond to changes made by
customers in their orders, and the timing of new product introductions by the
Company and its competitors. The Company's quarterly operating results may also
vary significantly depending on other factors, including the mix of products
sold; the cost and availability of components and subsystems; relative prices of
the Company's products; adoption of new technologies and industry standards;
competition; fluctuations in foreign currency exchange rates; regulatory
developments; and general economic conditions. In addition, wireless
infrastructure suppliers 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 pressure 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 ability to
maintain its gross profit margins depends upon its ability to continue to
improve manufacturing efficiencies, lower material costs of products and to
continue to introduce new products and product enhancements. Any inability of
the Company to respond to increased price competition would have a material
adverse effect on the Company's business, financial condition and results of
operations. Since the Company's customers frequently negotiate supply
arrangements far in advance of delivery dates, the Company often must commit to
price reductions for its products before it is aware of how, or if, such cost
reductions can be obtained. As a result, such current or future price reduction
commitments could have, and any inability of the Company to respond to increased
price competition would have, a material adverse effect on the Company's
business, financial condition and results of operations. In addition, because of
these factors, through December 31, 1996, the Company had not been in a position
to utilize any portion of its deferred tax asset. The Company expects to begin
to reduce the valuation reserve against its deferred tax asset during the fourth
quarter of fiscal 1997. However, the Company's ability to record additional
deferred tax assets in future periods will depend on continued operating
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
IMPORTANCE OF NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapidly changing
technologies and evolving industry standards. Accordingly, the Company's future
performance depends on a number of factors, including its ability to identify
emerging technological trends in its target markets, to develop and to maintain
competitive products, to enhance its products by adding innovative features that
differentiate its products from those of its competitors and to manufacture and
to bring products to market quickly at cost-effective prices. For the three
months ended December 31, 1996, net sales derived from the
5
<PAGE>
Company's latest generation of products, the SPECTRUM II product line,
represented approximately 45% of the Company's net sales, and the Company
expects that net sales from the SPECTRUM II product line will continue to
account for a significant portion of the Company's net sales for the foreseeable
future. However, the Company believes that to remain competitive in the future
it will need to continue to develop new products, which will require the
investment of significant financial resources in product development. There can
be no assurance, however, that the Company will successfully complete the
development of any future products, that such products will achieve market
acceptance or that such products will be capable of being manufactured at
competitive prices in sufficient volumes. In the event that such products are
not timely developed, do not gain market acceptance or are not manufacturable at
competitive prices, the Company's business, financial condition and results of
operations could be materially adversely affected. In some instances, the
Company enters into agreements to supply products to customers where the
products are not fully developed at the time of entering into the agreement. The
failure of the Company to develop products required for timely performance under
such agreements can have a material impact on the Company's business, financial
condition and results of operations. Although the Company extensively tests its
products prior to their introduction, design errors may be discovered after
initial product sampling, resulting in delays in volume production or recalls of
products sold. The occurrence of such errors could have a material adverse
effect on the Company's business, financial condition and results of operations.
Any significant delay or failure to develop, manufacture or ship new or enhanced
products could also have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Research and
Development; -- Competition."
MARKETS FOR THE COMPANY'S PRODUCTS ARE HIGHLY COMPETITIVE
The microwave interconnection and access business is a specialized segment
of the wireless telecommunications industry and is extremely competitive. The
Company expects such competition to increase in the future. Several established
and emerging companies offer a variety of microwave, fiber optic and other
connectivity 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. In addition, many of the
Company's competitors have greater name recognition, a larger installed base of
products and longer-standing customer relationships. The Company considers its
primary competitors to be L.M. Ericsson, Siemens AG, California Microwave, Inc.,
P-COM, Inc., and the Farinon Division of Harris Corporation. In addition, other
existing competitors include Alcatel, Nokia, SIAE, NEC, and NERA. Both L.M.
Ericsson and Siemens AG have product lines that compete with those of the
Company, and are also OEMs through which the Company markets and sells its
products. Some of the Company's largest customers could develop the capability
to manufacture products similar to those manufactured by the Company. The
Company believes that competition in its markets is based primarily on customer
service and support, breadth of product line, price, performance, rapid
delivery, and reliability. The Company's future success will depend upon its
ability to address the increasingly sophisticated needs of its customers by
enhancing its current products, by developing and introducing new products in a
timely manner that keep pace with technological developments and emerging
wireless telecommunications services, and by providing such products at
competitive prices. 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 wireless
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 technology. There can
be no assurance that the Company will have the financial resources, technical
expertise, or marketing, sales, distribution, and customer service and support
capabilities to compete successfully. See "Business -- Competition."
6
<PAGE>
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
In fiscal year 1995, fiscal year 1996 and the nine-months ended December 31,
1996, sales to international customers accounted for 88%, 87% and 95%,
respectively, of the Company's net sales. The Company expects that international
sales will continue to account for the majority of its net 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 trade barriers and restrictions; the burdens of complying with
a variety of foreign laws; and general economic conditions, including inflation.
The Company is also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with its international operations. Potential markets for the
Company's products exist in developing countries that may deploy wireless
communications networks. Such countries may decline to construct wireless
communications networks, experience delays in the construction of such networks
or use the products of a competitor of the Company to construct such networks.
As a result, any demand for the Company's products in such countries will be
similarly limited or delayed. In addition, the Company may experience more
volatile political, economic and foreign currency fluctuations in developing
countries. There can be no assurance that currency fluctuations, changes in the
rate of inflation or any of the aforementioned factors will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON COMPONENT AVAILABILITY, SUBCONTRACTOR PERFORMANCE AND KEY
SUPPLIERS
The Company's manufacturing operations are highly dependent upon the
delivery of materials by outside suppliers in a timely manner. In addition, the
Company depends, in part, upon subcontractors to assemble major components and
subsystems used in its products in a timely and satisfactory manner. For
example, the Company has an agreement with one of its suppliers,
Microelectronics Technology, Inc., a Taiwanese company ("MTI"), which provides
MTI with certain preferential rights to manufacture certain of the Company's
integrated circuits. Although the Company has entered into contracts with MTI,
the Company currently purchases components from MTI on an individual purchase
order basis. 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. The failure of an
outside supplier or subcontractor to deliver such materials, components or
subsystems in a timely and satisfactory manner could have a material adverse
effect on the Company's business, financial condition and results of operations.
In the future, the Company may increase its reliance on outside suppliers and
subcontractors to provide materials, components and subsystems. The Company does
not generally enter into long-term or volume purchase agreements with any of
these suppliers, and no assurance can be given that such materials, components
and subsystems will be available in the quantities required by the Company, if
at all. 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 in a timely manner. There can be
no assurance that the Company will not experience material supply problems or
component or subsystem delays in the future. See "Business -- Manufacturing and
Suppliers."
MANAGEMENT OF GROWTH; EXPANSION STRATEGY
The growth in the Company's business has placed, and is expected to continue
to place, a significant strain on the Company's management and operations. To
manage its growth, the Company must continue to implement and improve its
operational, financial and management information systems and expand, train and
manage its employees. The Company's failure to manage growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Future growth of the Company's operations depends, in part, on its ability
to introduce new products and product enhancements to meet the emerging trends
in the wireless telecommunications industry. The
7
<PAGE>
Company has pursued, and will continue to pursue, growth opportunities through
internal development and acquisitions of complementary businesses and
technologies. The Company is unable to predict whether and when any prospective
acquisition candidate will become available or the likelihood that any
acquisition will be completed. The Company competes for acquisition and
expansion opportunities with many entities that have substantially greater
resources than the Company. In addition, acquisitions may involve difficulties
in the retention of personnel, diversion of management's attention, unexpected
legal liabilities, and tax and accounting issues. There can be no assurance that
the Company will be able to successfully identify suitable acquisition
candidates, complete acquisitions, integrate acquired businesses into its
operations, or expand into new markets. Once integrated, acquired businesses may
not achieve comparable levels of revenues, profitability, or productivity as the
existing business of the Company or otherwise perform as expected. The
occurrence of any of these events could have a material adverse effect on the
Company's business, financial condition and results of operation.
CUSTOMER CONCENTRATION
During any given quarter, a small number of customers account for a
significant portion of the Company's net sales. During fiscal 1996 and the nine
months ended December 31, 1996, Siemens AG accounted for 22% and 14%,
respectively, of the Company's net sales. At December 31, 1996, three customers
each accounted for approximately 11% of the Company's $85 million backlog. There
can be no assurance that the Company's current customers will continue to place
orders with the Company, that orders by existing customers will continue to be
at levels of previous periods, or that the Company will be able to obtain orders
from new customers. The Company's customers typically are not contractually
obligated to purchase any quantity of products in any particular period and
product sales to major customers have varied widely from period to period. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business --
Customers; -- Competition."
MULTIPLE REGULATORY ENVIRONMENTS
Radio communications are subject to regulation by United States and foreign
laws and international treaties. Generally, the Company's products must conform
to a variety of United States and international requirements established to
avoid interference among users of transmission frequencies and to permit
interconnection of telecommunications equipment. In addition, both in the United
States and internationally, the Company is affected by the allocation and
auction of the radio frequency spectrum by governmental authorities.
Historically, in many developed countries, the unavailability of frequency
spectrum has inhibited the growth of wireless telecommunications networks. In
addition, to operate in a jurisdiction, the Company must obtain regulatory
approval for its products. Each jurisdiction in which the Company markets its
products has its own regulations governing radio communications. Products that
support emerging wireless telecommunications services can be marketed in a
jurisdiction only if permitted by suitable frequency allocations, auctions and
regulations, and the process of establishing new regulations is complex and
lengthy. Failure by the governmental regulatory authorities to allocate suitable
frequency spectrum or to establish suitable regulations for emerging wireless
telecommunications services could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that governmental authorities, both in the United States and
internationally, will allocate sufficient radio frequency spectrum for use by
the Company's products or that the Company will be successful in obtaining
approval for its products from such authorities. See "Business -- Government
Regulation."
8
<PAGE>
NO ASSURANCE OF PRODUCT QUALITY; PERFORMANCE AND RELIABILITY
The Company's customers typically require demanding specifications for
quality, performance and reliability. There can be no assurance that problems
will not occur with respect to the quality, performance and reliability of the
Company's systems or related software tools. If such problems occur, the Company
could experience increased costs, delays in or cancellations or reschedulings of
orders or shipments, delays in collecting accounts receivable and product
returns and discounts, any of which would have a material adverse effect on the
Company's business, financial condition and results of operations.
RELIANCE ON KEY OEM RELATIONSHIPS
The Company has informal relationships with OEM base station suppliers. Such
relationships increase the Company's ability to pursue the limited number of
major contract awards each year. In addition, such relationships provide the
Company's customers with easier access to financing and to integrated systems
providers with a variety of equipment and service capabilities. There can be no
assurance that the Company will continue to be able to maintain and develop such
relationships or that, if such relationships are developed, they will be
successful. In selected countries, the Company also markets its products through
independent agents and distributors.
DEPENDENCE ON KEY PERSONNEL; NEW MANAGEMENT
Due to the specialized nature of the Company's business, the Company's
future performance is highly dependent upon the continued services of its key
engineering personnel and executive officers, including Charles D. Kissner, who
currently serves as the Company's Chairman of the Board, President and Chief
Executive Officer. The loss of any key personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's Chief Executive Officer, Chief Financial Officer, Senior Vice
President of Operations and Senior Vice President of Worldwide Sales, Service
and Marketing joined the Company in 1995. In addition, the Company's Treasurer
and Vice President of Engineering joined the Company in 1996. The Company's
prospects depend upon its ability to attract and retain qualified engineering,
manufacturing, marketing, sales and management personnel for its operations.
Competition for such personnel is intense and there can be no assurance that the
Company will be successful in attracting or retaining such personnel. The
failure of any key employee to perform in his or her current position or the
Company's inability to attract and retain qualified personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management."
IMPORTANCE OF INTELLECTUAL PROPERTY
The Company's ability to compete will depend, in part, on its ability to
obtain and enforce intellectual property protection for its technology in the
United States and internationally. The Company relies upon a combination of
trade secrets, trademarks, copyrights and contractual rights to protect its
intellectual property. The Company does not have any patents covering its
products. The Company enters into confidentiality and invention assignment
agreements with its employees, and enters into non-disclosure agreements with
its suppliers and appropriate customers so as to limit access to and disclosure
of its proprietary information. There can be no assurance that any steps taken
by the Company will be adequate to deter misappropriation or impede independent
third party development of similar technologies. In the event that such
intellectual property arrangements are insufficient, the Company's business,
financial condition and results of operations could be materially adversely
affected. Moreover, there can be no assurance that the protection provided to
the Company's intellectual property by the laws and courts of foreign nations
will be substantially similar to the remedies available under United States law
or that third parties will not assert infringement claims against the Company.
The wireless telecommunications industry is characterized by numerous
allegations of patent infringement among competitors and considerable related
litigation. Accordingly, the Company may in the future be notified that it is
infringing certain patent or other intellectual property rights of others.
Although there
9
<PAGE>
are no such pending lawsuits against the Company or unresolved notices that the
Company is infringing upon intellectual property rights of others, there can be
no assurance that litigation or infringement claims will not occur in the
future. Such litigation or claims could result in substantial costs and
diversion of resources and could have a material adverse effect on the Company's
business, financial condition and results of operations. The wireless
telecommunications industry is subject to frequent litigation regarding patent
and other intellectual property rights. Certain companies and organizations in
the wireless telecommunications industry have patents that protect their
intellectual property rights in these areas. In the event of an adverse result
of any such litigation, the Company could be required to expend significant
resources to develop non-infringing technology or to obtain licenses to the
technology which is the subject of the litigation. There can be no assurance
that the Company would be successful in such development or that any such
license would be available on commercially reasonable terms. See "Business --
Intellectual Property."
POSSIBLE VOLATILITY OF STOCK PRICE
The Company believes that factors such as announcements of developments
related to the Company's business, announcements by competitors, quarterly
fluctuations in the Company's financial results and general conditions in the
telecommunications industry in which the Company competes or the national
economies in which the Company does business, and other factors could cause the
price of the Company's Common Stock to fluctuate, perhaps substantially. In
addition, in recent years the stock market in general, and the market for shares
of small capitalization technology stocks in particular, have experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of affected companies. Such fluctuations could have a material
adverse effect on the market price of the Company's Common Stock.
DISCRETIONARY USE OF PROCEEDS OF THIS OFFERING
The Company has no current specific plans for the use of the net proceeds of
this offering. As a consequence, the Company's management will retain broad
discretion in the allocation of the net proceeds of this offering. There can be
no assurance that the proceeds will be utilized in a manner that the
stockholders deem optimal or that the proceeds can or will be invested to yield
a significant return upon the completion of this offering. Upon completion of
this offering, the Company will have more than $48.6 million of cash and cash
equivalents (assuming no exercise of the Underwriters' over-allotment option and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company), substantially all of which will be invested in
investment-grade, short- or medium-(two years or less) term, interest-bearing
securities for an indefinite period. See "Use of Proceeds."
EFFECT OF ANTITAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of the Company. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the Common
Stock. Such provisions may also inhibit fluctuations in the market price of the
Common Stock that could result from takeover attempts. In addition, the Board of
Directors of the Company, without further stockholder approval, may issue
Preferred Stock, with such terms as the Board of Directors may determine, that
could have the effect of delaying or preventing a change in control of the
Company. The issuance of Preferred Stock could also adversely affect the voting
power of the holders of Common Stock, including the loss of voting control to
others. The Company also has a stockholders' rights plan that is triggered by
certain change in control transactions and is afforded the protections of
Section 203 of the Delaware General Corporation Law, each of which could delay
or prevent a change in control of the Company or could impede a merger,
consolidation, takeover or other business combination involving the Company or
discourage a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company. See "Description of Capital Stock."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,150,000 shares of
Common Stock offered by the Company hereby, at an assumed public offering price
of $24.00 are estimated to be approximately $48.6 million ($55.9 million if the
Underwriters' over-allotment option is exercised in full), after deducting the
estimated underwriting discount and estimated offering expenses. The net
proceeds will be used for general corporate purposes, including working capital,
the development and marketing of new products, and for possible future
acquisitions of complementary technologies, businesses or products. The amounts
actually expended by the Company for working capital purposes will vary
significantly depending upon a number of factors, including future revenue
growth, if any, the amount of cash generated by the Company's operations, and
the progress of the Company's product development efforts. Hence, the Company's
management will retain broad discretion in the allocation of the net proceeds of
this offering. From time to time, in the ordinary course of business, the
Company evaluates potential acquisitions of complementary businesses, products
or technologies, for which a portion of the net proceeds may be used. However,
the Company currently has no understandings, commitments or agreements with
respect to any material acquisition of other businesses, products or
technologies. Pending use of the net proceeds for the above purposes, the
Company intends to invest the funds in investment-grade, short- or medium- (two
years or less) term, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and, therefore, does not currently
anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded publicly on the Nasdaq National Market
under the trading symbol DMIC since May 19, 1987. The following table sets
forth, for the periods indicated, the high and low closing sales prices of the
Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal Year Ended March 31, 1995
First Quarter....................................................... $ 15.500 $ 8.875
Second Quarter...................................................... 18.750 10.250
Third Quarter....................................................... 20.625 12.125
Fourth Quarter...................................................... 20.125 12.125
Fiscal Year Ended March 31, 1996
First Quarter....................................................... $ 13.875 $ 9.625
Second Quarter...................................................... 14.500 10.750
Third Quarter....................................................... 12.625 9.813
Fourth Quarter...................................................... 11.000 8.375
Fiscal Year Ended March 31, 1997
First Quarter....................................................... $ 18.250 $ 8.000
Second Quarter...................................................... 24.125 12.250
Third Quarter....................................................... 29.188 20.125
Fourth Quarter (through March 12, 1997)............................. 37.625 23.500
</TABLE>
On March 12, 1997, the last reported sale price reported on the Nasdaq
National Market for the Common Stock was $24.00 per share. On March 11, 1997,
there were approximately 208 holders of record of the Common Stock.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 and as adjusted to give effect to the receipt by the Company
of the estimated net proceeds from the sale by the Company of the 2,150,000
shares of Common Stock offered hereby at an assumed public offering price of
$24.00 per share. This table should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in, or
incorporated by reference into, this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term liabilities, net of current maturities...................... $ 280 $ 280
Stockholders' equity
Preferred Stock, $0.01 par value; 5,000,000 shares authorized; none
outstanding....................................................... -- --
Common Stock, $0.01 par value; 30,000,000 shares authorized,
16,135,175 shares issued and outstanding actual; and 18,285,175
shares issued and outstanding as adjusted (1)..................... 161 183
Additional paid-in capital.......................................... 67,882 116,448
Accumulated deficit............................................... (8,624) (8,624)
--------- -----------
Total stockholders' equity........................................ 59,419 107,985
--------- -----------
Total capitalization............................................ $ 59,699 $ 108,265
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Excludes 2,392,876 shares of Common Stock issuable upon exercise of stock
options outstanding as of December 31, 1996 at a weighted average exercise
price of $13.58 per share.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere herein. The financial information as of March 31, 1995 and 1996 and
for each of the three fiscal years in the period ended March 31, 1996 has been
derived from the Company's consolidated financial statements, which were audited
by Arthur Andersen LLP, independent public accountants, and are included
elsewhere in this prospectus. The financial information as of March 31, 1992,
1993 and 1994 and for the years ended March 31, 1992 and 1993 has been derived
from the Company's audited consolidated financial statements, not included
herein. The financial information as of December 31, 1996 and for the nine
months ended December 31, 1995 and 1996 has been derived from the Company's
unaudited interim consolidated financial statements included elsewhere herein.
In the opinion of management, such unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position and results of operations for the period. The operating
results for the nine months ended December 31, 1996 are not indicative of the
results that may be expected for the year ended March 31, 1997 or in future
periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales................................ $ 86,097 $ 103,937 $ 116,010 $ 153,650 $ 150,419 $ 114,183 $ 126,092
Cost of sales............................ 67,436 79,622 78,874 114,760 119,918 93,581 84,547
--------- --------- --------- --------- --------- --------- ---------
Gross profit........................... 18,661 24,315 37,136 38,890 30,501 20,602 41,545
--------- --------- --------- --------- --------- --------- ---------
Operating expenses
Research and development............... 12,854 10,086 9,316 11,379 11,108 8,567 7,433
Selling, general and administrative.... 25,265 21,641 23,338 24,763 27,416 20,279 25,705
Non-recurring charges.................. 2,685 -- 27,000 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses............. 40,804 31,727 59,654 36,142 38,524 28,846 33,138
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations........ (22,143) (7,412) (22,518) 2,748 (8,023) (8,244) 8,407
Other income (expense)
Interest and other income (expense),
net.................................. (473) 1,768 1,718 (16) 1,975 1,609 401
Interest (expense)..................... (1,316) (1,064) (603) (530) (1,860) (1,528) (844)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision for
income taxes......................... (23,932) (6,708) (21,403) 2,202 (7,908) (8,163) 7,964
Provision (credit) for income taxes...... (4,262) -- 1,092 220 (1,953) (1,953) 796
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)........................ $ (19,670) $ (6,708) $ (22,495) $ 1,982 $ (5,955) $ (6,210) $ 7,168
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share.............. $ (1.64) $ (0.55) $ (1.81) $ 0.14 $ (0.40) $ (0.43) $ 0.43
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of common and
common equivalent shares outstanding... 11,965 12,090 12,448 13,845 14,895 14,592 16,678
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
DECEMBER 31,
1996
-------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 2,312 $ 3,801 $ 3,362 $ 1,919 $ 8,299 $ 6,489
Property and equipment, net......................... 14,450 11,075 11,413 13,977 15,061 14,841
Total current assets................................ 72,763 61,915 72,590 88,608 80,736 92,268
Total current liabilities........................... 33,580 26,454 54,940 61,612 43,280 47,410
Long-term liabilities, less current portion......... 629 201 459 6,362 2,782 280
Total stockholders' equity.......................... 53,004 46,335 28,604 34,611 49,735 59,419
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS.
OVERVIEW
DMC designs, manufactures and markets advanced wireless solutions for
worldwide telephone network interconnection and access. The Company was founded
in 1984 and since its inception has shipped approximately 70,000 microwave
radios.
In July 1995, the Company began commercial shipments of its SPECTRUM II
product line. SPECTRUM II has rapidly gained market acceptance and accounted for
approximately 45% of quarterly revenue in the quarter ended December 31, 1996.
The Company has expanded this product line from the original 23 and 38 GHz
versions to also include 7/8, 13, 15, 18 and 26 GHz versions. The introduction
of the SPECTRUM II product line along with the Company's focus on improving
manufacturing efficiency and reducing costs has resulted in significant
improvements in the Company's gross profit during each of the four quarters in
the period ended December 31, 1996. The Company believes that an ongoing product
development effort is needed to remain competitive in the wireless
telecommunications market and expects to expend significant funds to develop new
and enhanced products. In addition, the Company has experienced and expects to
continue to experience significant price pressure from competitors. Thus the
Company's ability to maintain its current gross profit is dependent upon its
ability to continue to improve manufacturing processes, reduce product costs and
introduce new products.
During the past 18 months, the Company has assembled a new management team
that has focused on financial performance and, with the assistance of an outside
consulting group, instituted a formal process improvement program, entitled
Operation NewWave, designed to improve manufacturing operations, product
development cycle time and asset utilization. The Company had incurred a decline
in orders in the first half of fiscal 1996 and a decline in net sales in the
second part of fiscal 1996. In the third quarter of fiscal 1996, the Company had
a reduction in work force, recorded a $7.5 million charge, primarily for
inventory write-downs and reported a net loss of $6.7 million. Subsequently,
during each of the four quarters in the period ended December 31, 1996, the
Company had steadily improving financial results. These improved results were
driven by the Company's new product introductions and process improvement
program.
The Company has equipment installed in over 60 countries and a significant
portion of the Company's revenue is derived from sales outside the United
States. In the first nine months of fiscal 1997 and in fiscal 1996, 95% and 87%,
respectively, of the Company's revenues were from sales for equipment to be
installed outside the United States. Consequently, the Company is exposed to
international political and economic risks, governmental regulations, foreign
exchange fluctuations and other risks of doing business outside the United
States. Most of the Company's contracts are denominated in U.S. dollars.
However, in certain situations, when contracts are not denominated in U.S.
dollars, the Company has obtained foreign exchange coverage to limit its
exposure to foreign currency fluctuations. Nonetheless, the Company has and
expects to continue to be exposed to risks related to foreign currency and other
foreign issues due to the nature of its business.
During the last two years, the Company has sold its products or provided
services to over 300 customers. During any given quarter, a small number of
customers account for a significant portion of the Company's net sales. During
fiscal 1996 and the nine months ended December 31, 1996, Siemens AG accounted
for 22% and 14%, respectively, of the Company's net sales. At December 31, 1996,
three customers each accounted for approximately 11% of the Company's $85
million backlog. It is often difficult to forecast sales due to the
concentration of revenue in a few customers in a particular period,
14
<PAGE>
changes in installation schedules, changing government regulations and the
availability of financing. The Company's customers typically are not
contractually obligated to purchase any quantity of products in any particular
period and product sales to major customers have varied widely from period to
period. As a result, the Company has experienced and expects to continue to
experience fluctuations in receipt of orders and recording of revenue from
quarter to quarter. Generally, the Company recognizes revenue upon shipment of
product to the customer; however, in situations where the Company is responsible
for installation and a significant portion of payment is dependent upon
installation and site acceptance, the Company defers revenue until these
contractual obligations have been satisfied.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships of certain items
from the Company's consolidated statements of operations as a percentage of net
sales for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED,
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------- -------------------
1994 1995 1996 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 68.0 74.7 79.7 82.0 67.0
------- ------- ------- ------- -------
Gross profit...................................... 32.0 25.3 20.3 18.0 33.0
Research and development.......................... 8.0 7.4 7.4 7.5 5.9
Selling, general and administrative............... 20.1 16.1 18.2 17.7 20.4
Non-recurring charges............................. 23.3 -- -- -- --
------- ------- ------- ------- -------
Operating income (loss)........................... (19.4) 1.8 (5.3) (7.2) 6.7
Interest and other income (expense), net.......... 1.5 (0.1) 1.3 1.4 0.3
Interest (expense)................................ (0.5) (0.3) (1.2) (1.3) (0.7)
------- ------- ------- ------- -------
Income (loss) before provision for income taxes... (18.4) 1.4 (5.2) (7.1) 6.3
Provision (credit) for income taxes............... 1.0 0.1 (1.3) (1.7) 0.6
------- ------- ------- ------- -------
Net income (loss)................................. (19.4)% 1.3% (3.9)% (5.4)% 5.7%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1995
NET SALES: Net sales for the first nine months of fiscal 1997 were $126.1
million, compared to net sales of $114.2 million for the same period in fiscal
1996. The increase in net sales was due to higher sales in all regions. For the
first nine months of fiscal 1997, net sales were $36.9 million in the
Asia/Pacific region, $58.8 million in Europe and $30.4 million in the Americas,
compared to $28.8 million, $55.7 million and $29.7 million, respectively, in the
same period in fiscal 1996.
The Americas reported new orders of $13.0 million, or an increase of 60%, as
compared to $8.1 million in the same period in fiscal 1996. Europe reported
$20.8 million in new orders, or a 28% increase, as compared to $16.2 million in
the same period in fiscal 1996. These increases were partially offset by a $1.5
million decrease in new orders in the Asia/Pacific region, which reported $14.8
million in new orders as compared to $16.3 million in the same period in fiscal
1996. Backlog at December 31, 1996 was $85 million, which was the same as at
September 30, 1996.
GROSS PROFIT: Gross profit in the first nine months of fiscal 1997 was
higher than the gross profit in the same period in fiscal 1996 primarily due to
the Company's SPECTRUM II product line which began shipping in July 1995. Also
contributing to higher gross profit were lower manufacturing expenses of
approximately $1.0 million due to improved manufacturing efficiency and a shift
in product mix. In addition, the first three quarters of fiscal 1996 were
negatively impacted by the shipments of approximately $9.0 million of M Series
and other products to E-Plus at no margin due to delays in completion of the
15
<PAGE>
SPECTRUM II product. The third quarter of fiscal 1996 also included provisions
for excess and obsolete inventory of approximately $7.0 million, unabsorbed
manufacturing expenses due to lower production volume, rework expenses and other
costs related to the startup of SPECTRUM II production. The additional inventory
reserves were necessary as a result of the changes in the Company's product line
focus with the introduction of the SPECTRUM II product line, as well as changes
in customer requirements. Net sales for the first nine months of fiscal 1997 of
SPECTRUM II increased to $51.2 million from $11.6 million for the same period of
fiscal 1996. Net sales for the first nine months of fiscal 1997 of QUANTUM
increased to $17.1 million from $8.7 million for the same period of fiscal 1996.
Net sales for the first nine months of fiscal 1997 of the M Series product line,
which has been largely replaced by the SPECTRUM II product line, decreased to
$25.9 million from $51.7 million for the same period in fiscal 1996. Net sales
for other products and services for the first nine months of fiscal 1997
amounted to $31.9 million compared to $42.2 million in the same period of fiscal
1996.
The Company has seen its gross profit improve recently. However, there can
be no assurance that the Company will be able to maintain its gross profit at
current levels. Of particular concern is the intense competitive price pressure
of the telecommunications market which will result in downward pricing pressure
on the Company's products. See "Risk Factors -- Fluctuations in Quarterly
Operating Results."
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses for
the first nine months of fiscal 1997 of $7.4 million were $1.2 million lower
than the $8.6 million reported in the same period of fiscal 1996. This decrease
was primarily attributable to lower project material costs of approximately $0.5
million in connection with the SPECTRUM II product as it transitioned from its
initial development stage to production. The Company will continue to invest in
the development of new products and features in order to maintain and enhance
its competitive position and expects research and development spending to
increase in connection with the development of new products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses for the first nine months of fiscal 1997 increased by
$5.4 million to $25.7 million from $20.3 million in the same period of fiscal
1996. These increases were mostly attributable to an increase in personnel,
sales office and related travel expenses, as the Company continued to increase
its worldwide sales and customer support structure. In addition, the Company
accrued consulting fees related to the company-wide process improvement program
of approximately $0.8 million. Also contributing to the increase was a higher
provision for uncollectable accounts receivable, primarily related to one
customer in Asia, as well as profit sharing and management bonus expenses of
approximately $1.4 million due to the improved profitability of the Company
during the period.
INTEREST AND OTHER INCOME, NET: Interest and other income, net for the
first nine months of fiscal 1997 was $0.4 million compared to $1.6 million in
the same period of fiscal 1996. The third quarter of fiscal 1996 included
interest income related to income tax refunds of $0.4 million and gain on the
sale of investments of $0.3 million. There were no similar items in fiscal 1997.
In addition, in the first nine months of fiscal 1997, the Company recorded
foreign exchange gains of $0.2 million primarily related to receivables
denominated in foreign currencies, compared to foreign exchange gains of $0.5
million in the same period of fiscal 1996.
INTEREST EXPENSE: Interest expense for the first nine months of fiscal 1997
was $0.8 million compared to $1.5 million in the same period in fiscal 1996. The
decrease in interest expense was primarily attributable to lower average
principal balances outstanding on the Company's line of credit and note payable
in fiscal 1997.
PROVISION (CREDIT) FOR INCOME TAXES: The Company recorded an income tax
provision in the first nine months of fiscal year 1997 at an effective rate of
10%. This was less than the statutory rate primarily due to the utilization of
the net operating loss and tax credit carry forwards. The Company expects,
assuming continued operating profitability, that the effective tax rate will
reflect a benefit in future periods as the Company begins to utilize its
deferred tax asset, which benefit has not been previously reflected in the
16
<PAGE>
effective tax rate. For the first nine months of fiscal 1996, the Company
recorded a tax benefit of $2.0 million 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 to carryback and obtain a refund for certain net tax operating losses
incurred in fiscal 1995.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
NET SALES: 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
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: 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 and costs related to the start up of SPECTRUM II production. The
additional inventory reserves were necessary as a result of the changes in the
Company's product line focus with the introduction of the SPECTRUM II product
line, as well as changes in customer 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 II products at the start of the year. Competitive price
pressures on major contracts also continued to contribute to the lower gross
margins. See "Risk Factors -- Fluctuations in Quarterly Operating Results" and
Note 9 to Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT EXPENSES: 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: 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
customer service and support 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: Interest and other income
(expense), net of interest expense 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.
PROVISION (CREDIT) FOR INCOME TAXES: 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 from net
17
<PAGE>
operating losses incurred in fiscal 1995 and allowed the Company 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.
YEAR ENDED MARCH 31, 1995 COMPARED TO YEAR ENDED MARCH 31, 1994
NET SALES: 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: 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 II radios under the E-Plus contract. Under this
contract, the Company was required to ship M Series and SPECTRUM I products
("interim equipment") pending final acceptance of the SPECTRUM 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.
Inasmuch as future shipments of interim equipment were subject to substantial
discounts, which were expected to result in losses on these shipments, 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: 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 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: Selling, general and
administrative expenses increased to $24.8 million in fiscal 1995 from $23.3
million in fiscal 1994. The increase in expenses was principally due to the
expansion of customer service and support in Asia Pacific and the Americas. 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
of 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: 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).
PROVISION (CREDIT) FOR INCOME TAXES: 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.
18
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information for each of the Company's last seven quarters. The data has been
prepared on a basis consistent with the Company's audited consolidated financial
statements included elsewhere in this Prospectus and include all necessary
adjustments, consisting only of normal recurring accruals that management
considers necessary for a fair presentation. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1996 1996 1996 1996
-------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales.................................... $39,693 $41,792 $32,698 $36,236 $36,807 $41,525 $47,760
Cost of Sales................................ 29,708 31,544 32,329 26,337 24,902 27,783 31,862
-------- --------- -------- -------- -------- --------- --------
Gross Profit............................... 9,985 10,248 369 9,899 11,905 13,742 15,898
-------- --------- -------- -------- -------- --------- --------
Operating Expenses
Research and development................... 2,952 2,884 2,731 2,541 2,461 2,467 2,505
Selling, general and administrative........ 6,473 6,870 6,936 7,137 7,927 8,702 9,076
-------- --------- -------- -------- -------- --------- --------
Total operating expenses................. 9,425 9,754 9,667 9,678 10,388 11,169 11,581
-------- --------- -------- -------- -------- --------- --------
Income (loss) from operations............ 560 494 (9,298) 221 1,517 2,573 4,317
Other income expense
Interest and other income (expense), net... 380 376 853 366 13 83 305
Interest (expense)......................... (671) (570) (287) (332) (282) (299) (263)
-------- --------- -------- -------- -------- --------- --------
Income (loss) before provision for
income taxes............................... 269 300 (8,732) 255 1,248 2,357 4,359
Provision (credit) for income taxes.......... 27 30 (2,010) -- 125 235 436
-------- --------- -------- -------- -------- --------- --------
Net income (loss)............................ $ 242 $ 270 $(6,722) $ 255 $ 1,123 $ 2,122 $ 3,923
-------- --------- -------- -------- -------- --------- --------
-------- --------- -------- -------- -------- --------- --------
Net income (loss) per share.................. $ 0.02 $ 0.02 $ (0.43) $ 0.02 $ 0.07 $ 0.13 $ 0.23
-------- --------- -------- -------- -------- --------- --------
-------- --------- -------- -------- -------- --------- --------
Weighted average number of common and common
equivalent shares outstanding.............. 13,823 14,784 15,772 15,952 16,242 16,611 17,060
-------- --------- -------- -------- -------- --------- --------
-------- --------- -------- -------- -------- --------- --------
</TABLE>
Net sales during the quarters ended June 30, 1996, September 30, 1996 and
December 31, 1996 were $36.8 million, $41.5 million and $47.8 million,
respectively. The 12.8% increase in net sales from the quarter ended June 30,
1996 to the quarter ended September 30, 1996, and the 15.0% increase in net
sales from the quarter ended September 30, 1996 to the quarter ended December
31, 1996, were due to higher sales in all regions, especially with respect to
the Company's SPECTRUM II product line. Despite these recent increases in the
Company's quarterly net sales, there can be no assurance that the Company will
experience similar increases, if at all, over future quarters.
The Company's quarterly operating results vary significantly depending on
several factors, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. In
particular, the Company's quarterly results of operations can vary due to the
volume and timing of product orders received and delivered during the quarter,
the ability of the Company and its key suppliers to respond to changes made by
customers in their orders, and the timing of new product introductions by the
Company and its competitors. The Company's quarterly operating results may also
vary significantly depending on other factors, including the mix of products
sold; the cost and availability of components and subsystems; relative prices of
the Company's products; adoption of new technologies and industry standards;
competition; fluctuations in foreign currency exchange rates; regulatory
developments; and general economic conditions. In addition, wireless
infrastructure suppliers 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 pressure 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 ability to
maintain its gross profit margins depends upon its ability to continue to
improve manufacturing efficiencies, lower material costs of products and to
continue to introduce new products and
19
<PAGE>
product enhancements. Any inability of the Company to respond to increased price
competition would have a material adverse effect on the Company's business,
financial condition and results of operations. Since the Company's customers
frequently negotiate supply arrangements far in advance of delivery dates, the
Company often must commit to price reductions for its products before it is
aware of how, or if, such cost reductions can be obtained. As a result, such
current or future price reduction commitments could have, and any inability of
the Company to respond to increased price competition would have, a material
adverse effect on the Company's business, financial condition and results of
operations.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1996 1996 1996 1996
-------- --------- -------- -------- -------- --------- --------
(AS A PERCENTAGE OF NET SALES)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales................................ 74.8 75.5 98.9 72.7 67.7 66.9 66.7
-------- --------- -------- -------- -------- --------- --------
Gross Profit............................... 25.2 24.5 1.1 27.3 32.3 33.1 33.3
-------- --------- -------- -------- -------- --------- --------
Operating Expenses
Research and development................... 7.5 6.9 8.3 7.0 6.7 5.9 5.3
Selling, general and administrative........ 16.3 16.4 21.2 19.7 21.5 21.0 19.0
-------- --------- -------- -------- -------- --------- --------
Total operating expenses................. 23.8 23.3 29.5 26.7 28.2 26.9 24.3
-------- --------- -------- -------- -------- --------- --------
Income (loss) from operations............ 1.4 1.2 (28.4) 0.6 4.1 6.2 9.0
Other income (expense)
Interest and other income (expense), net... 1.0 0.9 2.6 1.0 -- 0.2 0.7
Interest (expense)......................... (1.7) (1.4) (0.9) (0.9) (0.7) (0.7) (0.6)
-------- --------- -------- -------- -------- --------- --------
Income (loss) before provision for
income taxes............................... 0.7 0.7 (26.7) 0.7 3.4 5.7 9.1
Provision (credit) for income taxes.......... 0.1 0.1 (6.1) -- 0.3 0.6 0.9
-------- --------- -------- -------- -------- --------- --------
Net income (loss)............................ 0.6% 0.6% (20.6)% 0.7% 3.1% 5.1% 8.2%
-------- --------- -------- -------- -------- --------- --------
-------- --------- -------- -------- -------- --------- --------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in the first nine months of fiscal
1997 was $6.8 million, compared to net cash provided by operating activities of
$1.6 million in the similar period of fiscal 1996. The increase in net cash
provided by operating entities was primarily due to increases in customer
advances and improved accounts receivable collections. Total assets at December
31, 1996 increased by $11.3 million to $107.1 million from $95.8 million at
March 31, 1996, principally due to increases in inventory and accounts
receivable. Inventories increased primarily to support a higher volume of net
sales, and due to an increase in finished goods shipped to customers for which
net sales have been deferred pending installation. The increase in accounts
receivable was primarily due to the higher net sales of $47.8 million, in the
third quarter of fiscal 1997 compared to $36.2 million in the fourth quarter of
fiscal 1996.
Total liabilities at December 31, 1996 of $47.7 million were $1.6 million
higher than the $46.1 million in total liabilities at March 31, 1996. The
increase was primarily due to the increase in other accrued liabilities for
payments received in advance from customers. This increase was offset by payment
in full of the note payable and a reduction in the balance outstanding under the
line of credit.
At December 31, 1996, the Company's principal sources of liquidity consisted
of $6.5 million in cash and cash equivalents and a revolving bank credit
facility that expires in June 1997. At December 31, 1996, $2.0 million was
outstanding under the credit facility with $17.0 million remaining available at
such time.
The Company's line of credit requires the Company to meet certain financial
covenants, including minimum tangible net worth and profitability requirements.
As of December 31, 1996, the Company was in compliance with the covenants.
The Company believes that the liquidity provided by existing cash balances,
anticipated future cash flows from operations, and the Company's existing
borrowing arrangements will be sufficient to meet both working capital and
capital expenditure requirements for the remainder of fiscal 1997.
20
<PAGE>
BUSINESS
THE FOLLOWING BUSINESS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS.
INTRODUCTION
DMC designs, manufactures and markets advanced wireless solutions for
worldwide telephone network interconnection and access. The Company provides its
customers with a broad product line, which contains products that operate using
a variety of transmission frequencies, ranging from 2 GHz to 38 GHz, and a
variety of transmission capacities, typically ranging from T-1 (1.5 Megabits per
second) to DS-3 (45 Megabits per second). The Company's broad product line
allows it to market and sell its products to service providers in many locations
worldwide with varying interconnection and access requirements. The Company
designs its products to meet the requirements of mobile communications networks
and fixed access networks worldwide. The Company's products typically enable its
customers to deploy and expand their wireless infrastructure and market their
services rapidly to subscribers, so that service providers can realize a return
on their investments in frequency allocation licenses and network equipment.
The Company believes that it is well-positioned to address worldwide market
opportunities for wireless infrastructure suppliers. For example, there are
substantial telecommunications infrastructures being built for the first time in
many Asian countries; infrastructures are being expanded in Europe; and PCS
interconnect networks are being constructed in the United States. The Company
believes that maintaining close proximity to its customers provides it with a
competitive advantage in securing orders for its products and in servicing its
customers. Local offices enable the Company to understand the local issues and
requirements of its customers and to address its customers' individual
geographic, regulatory, and infrastructure requirements. As a result, the
Company has developed a global sales, service and support organization, with
offices in North America, South America, Europe, the Middle East and Asia. With
its 16 sales or support offices in 12 countries, the Company can respond quickly
to its customers' needs and provide prompt on-site technical support.
The Company has sold approximately 70,000 radios, which have been installed
in over 60 countries. The Company markets its products to service providers
directly, as well as indirectly through its relationships with OEM base station
suppliers, such as Motorola, Inc., Siemens AG, and L.M. Ericsson. Between
December 31, 1995 and December 31, 1996, the Company sold its products to
service providers, including Beijing Telecom, Heibei Unicom, Pilipino Telephone
Corp., Sterling Cellular, and SMART Communications, Inc. in the Asia/Pacific
region; Panafon SA, E-Plus Mobilfunk GmbH, Comviq GSM AB, Jordan Mobile
Telephone Services, and IONICA in Europe and the Middle East; and BellSouth PCS,
Pacific Bell Mobile Services, Avantel S.A. and Rogers Network Services in the
Americas.
INDUSTRY BACKGROUND
In recent years, there has been increased worldwide demand for high
performance mobile voice telephony, high speed data communications, fixed and
mobile cellular communications, video broadcast services and paging services.
This demand continues to increase due to: (i) changes in the regulatory
environment in many countries; (ii) the rapid establishment of
telecommunications infrastructures in many developing countries; (iii)
technological advances, particularly in the wireless telecommunications market;
and (iv) the deployment of private communications networks. Given their
relatively low cost and ease of deployment, wireless solutions are attractive to
new service providers establishing competing telecommunications services in
developed countries and to telecommunications service providers in developing
countries seeking to rapidly increase the availability and quality of
telecommunications services. The upgrade and expansion of existing networks and
the deployment of new networks, such as those for PCS, are
21
<PAGE>
expected to continue to offer growth opportunities for wireless infrastructure
suppliers. Wireless infrastructure suppliers address the requirements of both
mobile communications networks and fixed access networks.
Cellular telephone and other wireless services have grown rapidly over the
past several years due to deregulation, increased competition, technological
advances, and increasing consumer demand for connectivity to telecommunications
services. According to the Office of Telecommunications of the United States
Department of Commerce, from December 1993 to December 1995, the number of
cellular subscribers worldwide increased from 33.4 million to 86.6 million. A
1996 report published by the Personal Communications Industry Association
("PCIA") estimates that there will be approximately 310.8 million cellular and
PCS subscribers worldwide by 2000. The following diagram illustrates the general
structure of mobile communications networks and the possible interconnection
applications for microwave radios within such networks:
[CHART]
The demand for fixed access networks also continues to increase for many of
the same reasons, including the privatization of public telephone operators,
deregulation and the emergence of new applications, such as wireless local loop,
wireless data transport and alternative local telephone facilities access.
22
<PAGE>
The following diagram illustrates the general structure of fixed access networks
and the possible interconnection applications for microwave radios within such
networks:
[CHART]
Wireless networks are constructed using microwave radios and other equipment
to connect cell sites, switching systems, other wireline transmission systems
and other fixed facilities. Wireless networks range in size from a single
transmission link connecting two buildings to complex networks comprised of
thousands of wireless connections. The architecture of a network is influenced
by several factors, including the available radio frequency spectrum,
coordination of frequencies with existing infrastructure, application
requirements, environmental factors and local geography. Regulatory authorities
in different jurisdictions allocate different portions of the radio frequency
spectrum for various telecommunications services. In addition, most individual
networks require radio links which operate at several frequencies and the
transmission of voice and data typically requires different transmission
capacities. Moreover, networks in different locations are constructed using
different combinations of frequencies and with different transmission
capacities. No one transmission frequency or transmission capacity predominates
in the global market.
In the case of mobile communications networks, such as PCS, service
providers typically invest significant funds to obtain licenses for allocations
of the authorized radio frequency spectrum and are required to provide services
within a specified time period to retain their licenses. For example, in the
United States, service providers have spent over $17 billion to obtain A, B and
C block licenses for allocations of radio frequency spectrum. In addition,
service providers expend substantial funds to purchase equipment and construct
their networks. Therefore, service providers must put their networks into
service quickly to realize a return on their investment and retain their
licenses.
Whether expanding existing networks or deploying new networks, service
providers must choose between constructing such networks using traditional
wireline infrastructure or wireless infrastructure. Traditional wireline
connectivity solutions typically require significant installation periods and
may be relatively expensive to install. In developed countries where wireline
infrastructure is in place, new service providers may have the option to lease
networks from traditional service providers, but in many instances choose not to
do so because leasing arrangements must be entered into with their competitors,
may be comparatively expensive and do not allow control over the network. In
developing countries, many service
23
<PAGE>
providers are initially installing wireless networks because such networks are
generally faster to install and may be less expensive than traditional wireline
networks. As a result, many service providers are deploying wireless networks as
an alternative to the construction or leasing of traditional wireline networks.
THE DMC SOLUTION
DMC designs, manufactures and markets advanced, wireless solutions for
worldwide telephone network interconnection and access. The Company provides its
customers with a broad product line, which contains products that operate using
a variety of transmission frequencies, ranging from 2 GHz to 38 GHz, and a
variety of transmission capacities, typically ranging from T-1 (1.5 Megabits per
second) to DS-3 (45 Megabits per second), carrying voice, data and video
signals. The Company's broad product line allows it to market and sell its
products to service providers in many locations worldwide with varying
interconnection and access requirements. The Company has sold approximately
70,000 radios, which have been installed in over 60 countries. During the last
two years, the Company has sold its products and provided services to over 300
customers.
The Company has established offices worldwide, with locations in North
America, South America, Europe, the Middle East and Asia. These offices enable
the Company to understand the local issues and requirements of its customers and
to address its customers' individual geographic, regulatory and infrastructure
requirements. In addition, its global sales, service and support organization
allows the Company to respond quickly to its customers' needs and to provide
prompt on-site technical support.
The Company believes that the use of standard design platforms for both
hardware and software components in the development of its products enables the
Company to more rapidly introduce and commercially ship new products and product
enhancements to address changing market demands. For example, during the last
eighteen months, the SPECTRUM II product line has expanded from 23 and 38 GHz to
include 13, 15, 18 and 26 GHz due to the use of standard design platforms and
software configurable features. In addition, the Company has announced that it
will begin commercial shipments of SPECTRUM II products using 7/8 GHz. The use
of standard design platforms also enables the Company to manufacture its
products in a more cost-effective manner. The software features of the SPECTRUM
II product line provide the Company's customers with a greater degree of
flexibility in installing, operating and maintaining their networks.
The Company certifies its products to comply with various standards, such as
European Telecom Standards Institute ("ETSI") and International
Telecommunications Union ("ITU") regulations, which allow the Company to market
and sell its products in Europe and other locations worldwide. In addition, the
Company's manufacturing facility in San Jose, California is certified to
International Standards Organization ("ISO") 9001, a recognized international
quality standard.
STRATEGY
The Company's strategy is to build on the strength of its current products,
which offer point-to-point solutions, and its strong customer sales, service and
support organization to become a leading worldwide supplier of wireless network
connectivity solutions. Key elements of the Company's strategy include the
following:
MAINTAIN BROAD PRODUCT LINE. The Company anticipates that the requirements
of its customers will continue to evolve as the telecommunications services
market changes and expands. In this regard, since the Company's customers often
do not know the exact frequency band and capacity needs of their networks at the
time they are awarded franchises, the Company's broad product line provides them
with the flexibility to respond to individual market needs, and to coordinate
frequencies with existing infrastructure and other significant variables. The
Company believes that the use of standard design platforms for both hardware and
software components in its products enables the Company to quickly introduce and
commercially ship new products and product enhancements to address changing
market demands. The
24
<PAGE>
Company intends to continue to expand its product line in response to the
varying worldwide requirements of wireless networks.
PURSUE WORLDWIDE MARKET OPPORTUNITIES. The Company believes that the
deployment of new wireless telecommunications networks and the upgrade and
expansion of existing networks provide it with many global market opportunities.
In many emerging markets in Asia, substantial telecommunications networks are
being built for the first time; in Europe, infrastructures are being expanded;
and in the United States, PCS interconnect networks are being constructed. The
Company intends to continue to pursue global market opportunities through its
established worldwide sales, service and support organization, as well as
through its relationships with OEM base station suppliers.
ENHANCE GLOBAL SALES, SERVICE AND SUPPORT ORGANIZATION. The Company
believes that maintaining close proximity to its customers provides it with a
competitive advantage in securing orders and in servicing its customers. Local
offices provide the Company with a better understanding of its customers' needs
and enable the Company to respond to local issues and unique local requirements.
As a result, the Company has developed a global sales, service and support
organization, with offices in North America, South America, Europe, the Middle
East and Asia. The Company intends to continue to provide its customers with
direct sales, service and support from local offices.
LEVERAGE DISTRIBUTION CHANNELS. The Company markets its products to service
providers directly, as well as indirectly through its relationships with OEM
base station suppliers, such as Motorola, Inc., Siemens AG, and L.M. Ericsson.
The Company also markets its products through independent agents and
distributors in certain countries. The Company intends to leverage upon such
relationships, and its direct worldwide presence with service providers, to
expand its customer base and enhance its global presence.
CONTINUE OPERATING EFFICIENCY IMPROVEMENTS. During 1996, the Company
instituted a formal process improvement program, entitled Operation NewWave,
designed to improve manufacturing operations, product development, and asset
utilization. The resulting improvements have contributed to lower operating
costs. For example, the Company has implemented a continuous flow manufacturing
system that triggers material requests and sets the level of work-in-process
inventories, resulting in reduced cycle times, shortened time-to-market, and
lower work-in-process inventories. The Company is also improving its inventory
management through better coordination with its suppliers. The Company is
designing products through the use of standard design platforms with
manufacturability in mind. The Company intends to continue to pursue operating
and manufacturing efficiencies.
FOCUS ON BUSINESS EXPANSION INTO EMERGING APPLICATIONS. The Company
believes that it can leverage its core technical competencies and its global
sales, service and support organization to enter into emerging applications,
including wireless local loop, wireless data transport and alternative local
telephone facilities access. The Company intends to migrate and expand its
product line from a full point-to-point product line to offer multipoint
distribution products with a broader range of traffic handling capacities to
meet emerging market demands.
PRODUCTS
The Company's principal product families include the SPECTRUM II, M Series,
QUANTUM, and DMC Net. Each product family has characteristics designed to meet
the needs of specific markets or applications and are described further below.
25
<PAGE>
EXISTING PRODUCTS
As the following table illustrates, the Company has products that operate at
commonly used frequencies worldwide:
[CHART]
SPECTRUM II. The SPECTRUM II product line is the latest generation of
products offered by the Company and supercedes the M Series product line. The
SPECTRUM II product line is smaller in size, less expensive and easier to
install than the M Series product line. In addition, significantly more
functionality is available in the SPECTRUM II product line because of its
enhanced software configurability which provides the Company's customers with
greater flexibility and control. The SPECTRUM II family consists of products
that operate at 13, 15, 18, 23, 26 and 38 GHz. In addition, the Company has
announced that it will begin commercial shipments of SPECTRUM II products
operating at 7/8 GHz.
M SERIES. The M Series product line was the principal product family of the
Company until the second quarter of fiscal 1996 when the Company began
commercial shipment of the SPECTRUM II product line. As of December 31, 1996,
the Company has sold over 30,000 units in the M Series product line. The M
Series was the first commercialized microwave radio to incorporate multiplexing
of up to 16XE1 or 16XDS-l signals, eliminating the need for standalone
multiplexing equipment to perform the same functions. The M Series product line
covers 7, 10, 13, 15, 18 and 23 GHz applications.
QUANTUM. The QUANTUM product line complements the SPECTRUM II and M Series
products and is used in conjunction with these products. The QUANTUM product
line is used in trunking applications within a network. The QUANTUM product line
features lower transmission frequencies (2 to 15 GHz) and higher transmission
capacities (up to 68 Megabits per second) than the SPECTRUM II and M Series
product lines.
DMC NET. DMC Net is a sophisticated network monitoring and control system
that is designed to facilitate remote operation and maintenance of microwave
radio networks. DMC Net contains a Unix-based software system that is capable of
monitoring up to several thousand radios on a network, as well as certain base
station functions. DMC Net 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, which help to reduce down time and lower the cost
of maintenance.
26
<PAGE>
NEW PRODUCT DEVELOPMENT
The Company intends to continue to focus significant resources on product
development to maintain its competitiveness and to support its entry into new
wireless opportunities, including those in wireless local loop, wireless data
transport and alternative local telephone facilities access. Programs currently
in progress, if successfully completed, could result in new products which are
both point-to-point and point-to-multipoint and could have the capability to
handle greater amounts of voice and data traffic at increased
cost-effectiveness.
There can be no assurance that the Company will be successful in developing
and marketing any of the products currently being developed, that the Company
will not experience difficulties that could further delay or prevent the
successful development, introduction and sale of future products, or that these
products will adequately meet the requirements of the marketplace and achieve
market acceptance. See "Risk Factors -- Importance of New Products; Rapid
Technological Change; -- Markets for the Company's Products are Highly
Competitive."
CUSTOMERS
The Company markets its products to customers in the telecommunications
industry worldwide. The Company's customers include service providers, which
incorporate the Company's products into their telecommunications networks to
deliver services directly to consumers, and OEMs, which provide and install
integrated systems to service providers. The following is a representative list
of customers to which the Company has shipped its products for the period from
December 31, 1995 to December 31, 1996:
[CHART]
During the last two years, the Company has sold its products or provided
services to over 300 customers. During any given quarter, a small number of
customers account for a significant portion of the Company's net sales. In
certain circumstances, the Company sells its products to service providers
through OEMs, which provide the service providers with access to financing and
the Company, in some instances, with protection from fluctuations in foreign
currency exchange rates. During fiscal 1996 and the nine months ended December
31, 1996, Siemens AG accounted for 22% and 14%, respectively, of the Company's
net sales. At December 31, 1996, three customers each accounted for
approximately 11% of the Company's $85 million backlog. 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 current customers will
continue to place orders with the Company, that orders by existing customers
will continue to be at levels
27
<PAGE>
of previous periods, or that the Company will be able to obtain orders from new
customers. The Company's customers typically are not contractually obligated to
purchase any quantity of products in a particular period and product sales to
major customers have varied widely from period to period. 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.
SALES, MARKETING AND SERVICE
The Company believes that a direct and continuing relationship with service
providers is a competitive advantage in attracting new customers and satisfying
existing ones. As a result, the Company offers its products and services
principally through its own sales, service and support organization, which
allows the Company to closely monitor the needs of its customers. The Company
has offices in the United States, Canada, the United Kingdom, Germany, Jordan,
Mexico, Colombia, India, China, Singapore, and the Philippines. The Company's
local offices provide it with a better understanding of its customers' needs and
enable the Company to respond to local issues and unique local requirements. The
Company has informal relationships with OEM base station suppliers. Such
relationships increase the Company's ability to pursue the limited number of
major contract awards each year. In addition, such relationships provide the
Company's customers with easier access to financing and to integrated system
providers with a variety of equipment and service capabilities. There can be no
assurance that the Company will continue to be able to maintain and develop such
relationships or, if such relationships are developed, they will be successful.
In selected countries, the Company also markets its products through independent
agents and distributors.
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. As of December 31, 1996, the Company employed approximately 230 people
in its sales, service and support organization, approximately 65% of whom
primarily support sales outside the United States. 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 customer service and 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, California manufacturing location and its full-service centers in the
United Kingdom and the Philippines.
RESEARCH AND DEVELOPMENT
The Company believes that its ability to enhance its current products,
develop and introduce new products on a timely basis, maintain technological
competitiveness and meet customer requirements is essential to the Company's
continued success. Accordingly, the Company allocates, and intends to continue
to allocate, a significant portion of its resources to research and development
efforts. During fiscal 1995, fiscal 1996 and the nine months ended December 31,
1996, the Company invested $11.4 million, $11.1 million, and $7.4 million,
respectively, or approximately 7.4%, 7.4%, and 5.9% of net sales, respectively,
on research and development. While research and development has decreased as a
percentage of net sales, the Company believes the efficiency of its efforts
improved as a result of Operation NewWave, the Company's formal process
improvement program, which, among other things, focused development efforts.
The market for the Company's products is characterized by rapidly changing
technologies and evolving industry standards. Accordingly, the Company's future
performance depends on a number of factors, including its ability to identify
emerging technological trends in its target markets, to develop and to maintain
competitive products, to enhance its products by adding innovative features that
differentiate its products from those of its competitors and to manufacture and
to bring products to market quickly at cost-effective prices. The Company
believes that to remain competitive in the future it will need to
28
<PAGE>
continue to develop new products, which will require the investment of
significant financial resources in product development. There can be no
assurance, however, that the Company will successfully complete the development
of any future products, that such products will achieve market acceptance or
that such products will be capable of being manufactured at competitive prices
in sufficient volumes. In the event that such products are not developed in a
timely manner, do not gain market acceptance or are not manufacturable at
competitive prices, the Company's business, financial condition and results of
operations could be materially adversely affected.
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 operation in San Jose, California is
certified to ISO 9001, a recognized international quality standard.
During 1996, the Company instituted a formal process improvement program,
entitled Operation NewWave, designed in part to improve manufacturing
operations. In connection with Operation NewWave, the Company has implemented a
continuous flow manufacturing system that triggers material requests and sets
the level of work-in-process inventories, resulting in reduced cycle times,
shortened time-to-market, and lower work-in-process inventories. The Company is
also improving its inventory management through better coordination with its
suppliers.
The Company's manufacturing operations are highly dependent upon the timely
delivery of materials and components by outside suppliers. The Company uses
local and offshore subcontractors to assemble major components and subassemblies
used in its microwave products. Certain microwave integrated circuit
subassemblies which are used in all of the Company's microwave radio products
are supplied by a limited number of vendors. The Company believes that most
materials and components are, and will continue to be, available from existing
or alternative suppliers. 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.
From time to time, the Company has experienced delays and other supply
problems with vendors, but such delays and other problems have not had a
significant impact on the Company's results of operations. To reduce any future
problems associated with delays, the Company has contracted for component and
subassembly parts from additional sources. The Company and key suppliers
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 of their respective production plans.
BACKLOG
The Company's backlog at December 31, 1996 was $85 million, as compared with
$74 million at December 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.
29
<PAGE>
COMPETITION
The microwave interconnection and access business is a specialized segment
of the wireless telecommunications industry and is extremely competitive. The
Company expects such competition to increase in the future. Several established
and emerging companies offer a variety of microwave, fiber optic, and other
connectivity 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. In addition, many of the
Company's competitors have greater name recognition, a larger installed base of
products and longer-standing customer relationships. The Company considers its
primary competitors to be L.M. Ericsson, Siemens AG, California Microwave, Inc.,
P-COM, Inc., and the Farinon Division of Harris Corporation. In addition, other
existing competitors include Alcatel, Nokia, SIAE, NEC, and NERA. Both L.M.
Ericsson and Siemens AG have product lines that compete with those of the
Company, and are also OEMs through which the Company markets and sells its
products. 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. The Company believes that competition
in its markets is based primarily on customer service and support, breadth of
product line, price, performance, rapid delivery, and reliability. The Company's
future success will depend upon its ability to address the increasingly
sophisticated needs of its customers by enhancing its current products, by
developing and introducing new products in a timely manner that keep pace with
technological developments and emerging wireless telecommunications services,
and by providing such products at competitive prices. There can be no assurance
that the Company will have the financial resources, technical expertise, or
marketing, sales, distribution, and customer service and support capabilities to
compete successfully.
GOVERNMENT REGULATION
Radio communications are subject to regulation by United States and 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 telecommunication
equipment. 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 the introduction of such products. In addition, radio
transmission is subject to regulation by foreign laws and international
treaties. Equipment to support these services can be marketed only if permitted
by suitable frequency allocations and 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 the United States Federal
Communications Commission ("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.
INTELLECTUAL PROPERTY
The Company's ability to compete will depend, in part, on its ability to
obtain and enforce intellectual property protection for its technology in the
United States and internationally. The Company relies upon a combination of
trade secrets, trademarks, copyrights and contractual rights to protect its
intellectual property. The Company does not have any patents covering its
products. The Company enters into confidentiality and invention assignment
agreements with its employees, and enters into non-disclosure agreements with
its suppliers and appropriate customers so as to limit access to and disclosure
of its proprietary information. There can be no assurance that any steps taken
by the Company will be adequate
30
<PAGE>
to deter misappropriation or impede independent third party development of
similar technologies. In the event that such intellectual property arrangements
are insufficient, the Company's business, financial condition and results of
operations could be materially adversely affected. Moreover, there can be no
assurance that the protection provided to the Company's intellectual property by
the laws and courts of foreign nations will be substantially similar to the
remedies available under United States law or that third parties will not assert
infringement claims against the Company.
While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the wireless telecommunications industry,
its innovative skills, technical expertise and ability to introduce new products
on a timely basis will be more important in maintaining its competitive position
than protection of its intellectual property. Trade secret, trademark and
copyright protections are important but must be supported by other factors such
as the expanding knowledge, ability and experience of the Company's personnel,
new product introductions and product enhancements. Although the Company
continues to implement protective measures and intends to defend vigorously its
intellectual property rights, there can be no assurance that these measures will
be successful.
The wireless telecommunications industry is characterized by numerous
allegations of patent infringement among competitors and considerable related
litigation. Accordingly, the Company may in the future be notified that it is
infringing certain patent or other intellectual property rights of others.
Although there are no such pending lawsuits against the Company or unresolved
notices that the Company is infringing upon intellectual property rights of
others, there can be no assurance that litigation or infringement claims will
not occur in the future. Such litigation or claims could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations. The wireless
telecommunications industry is subject to frequent litigation regarding patent
and other intellectual property rights. Certain companies and organizations in
the wireless telecommunications industry have patents that protect their
intellectual property rights in these areas. In the event of an adverse result
of any such litigation, the Company could be required to expend significant
resources to develop non-infringing technology or to obtain licenses to the
technology which is the subject of the litigation. There can be no assurance
that the Company would be successful in such development or that any such
license would be available on commercially reasonable terms.
EMPLOYEES
As of December 31, 1996, the Company employed 629 full-time and temporary
employees. None of the Company's employees is 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 has never experienced a work stoppage and believes its relationship with
its employees to be good.
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 space in East Kilbride, Scotland, 1,500 square feet of which has
been sublet until 2004. The Company also leases 17,000 square feet of office
space in Coventry, England. The Company leases two sales offices located in
Chicago, Illinois and Atlanta, Georgia aggregating approximately 700 square
feet, 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.
31
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The current executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Charles D. Kissner 49 Chairman of the Board, President and Chief Executive
Officer
Frank Carretta, Jr. 51 Senior Vice President, Worldwide Sales, Service and
Marketing
Jack Hillson 46 Senior Vice President and General Manager, Operations
Timothy R. Hansen 36 Vice President, Business Development
Paul A. Kennard 45 Vice President, Engineering
Shaun McFall 36 Vice President, Corporate Marketing
John P. O'Neil 58 Vice President, Personnel
Mark A. Sawyer 36 Vice President, Corporate Quality
Carl A. Thomsen 52 Vice President, Chief Financial Officer and Secretary
Carol A. Goudey 49 Treasurer and Assistant Secretary
Richard C. Alberding 66 Director
Clifford H. Higgerson 57 Director
James D. Meindl 63 Director
Billy B. Oliver 72 Director
</TABLE>
Mr. Charles D. Kissner joined the Company as President, Chief Executive
Officer and was elected Director of the Company in July 1995 and Chairman of the
Board in August 1996. Prior to joining the Company, he served as Vice President
and General Manager of the Microelectronics Division of M/A-COM, Inc., a
manufacturer of radio and microwave communication products, from July 1993 to
July 1995. From February 1990 to July 1993, Mr. Kissner served as President,
Chief Executive Officer, and a Director of Aristacom International, Inc., a
communications software company. Mr. Kissner currently is a director of American
Medical Flight Support, Inc., a non-profit medical transportation company.
Mr. Frank Carretta, Jr. joined the Company as Vice President, Worldwide
Sales and Service in October 1995 and was appointed Senior Vice President,
Worldwide Sales, Service and Marketing in November 1996. 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.
Mr. Jack Hillson was appointed Senior Vice President and General Manager,
Operations in November 1996. He previously served as Vice President and General
Manager, QUANTUM/Magnum Division of the Company from December 1995 to November
1996. Prior to joining DMC, Mr. Hillson was with M/A-COM, Inc. for 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.
32
<PAGE>
Mr. Timothy R. Hansen has served as Vice President, Business Development of
the Company since August 1996. He previously served as Vice President and
General Manager, SPECTRUM Division of the Company from February 1995 to August
1996, and as Vice President and Program Manager of the SPECTRUM product line. He
joined the Company in August 1984 as product manager, and has held management
positions in marketing, planning, sales and order management.
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.
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.
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.
Mr. O'Neil was Vice President, Human Resources at C.P. National Corporation, a
communication and energy company, from 1987 to 1988.
Mr. Mark A. Sawyer was named Vice President, Corporate Quality of the
Company in August 1996. He joined the Company in January 1993 as Director of
Manufacturing, and has held various positions in operations and quality
management. Prior to joining the Company, Mr. Sawyer held several positions in
quality management and operations, including Corporate Total Quality Manager at
Applied Materials, Inc., a manufacturer of semiconductor equipment from 1991 to
1992, and Senior Operations Quality Manager at Tandem Computers Inc., a global
information technology company.
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.
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 UngermannBass,
Inc., a network systems company, from 1985 to 1989, and System Industries, Inc.,
a computer peripheral company, from 1984 to 1985.
Mr. Richard C. Alberding has served as a Director of the Company since July
1993 and served as Co-Chairman of the Board and Co-Chief Executive Officer from
September 1994 to July 1995. Mr. Alberding retired from Hewlett-Packard Company
in 1991, where he had served since 1984 as an Executive Vice President with
responsibility for worldwide company sales, support and administration
activities for measurement and computation products, as well as all
corporate-level marketing activities. He also served on the corporate Executive
Committee. Mr. Alberding is a director of Kennametal Corporation, a machine tool
company, Walker Interactive Systems, a software company, Storm Technology, a
computer peripherals company, Quickturn Design Systems, a CAD tools company,
SyBase, Inc., a computer database and tools company, Digital Link Corp., a
network tools company, Paging Network, Inc., a paging services company, and
numerous private companies.
33
<PAGE>
Mr. Clifford H. Higgerson has served as a Director of the Company since
March 1984. He also served as Chairman of the Board from July 1995 to August
1996 and as Co-Chairman of the Board and Co-Chief Executive Officer from
September 1994 to July 1995. Mr. Higgerson has been a partner with Vanguard
Associates, a private venture capital investment partnership, since July 1991
and, since 1986, managing partner of Communications Ventures, a private venture
capital investment partnership.
Dr. James D. Meindl has served as a Director of the Company since November
1995. Since 1993, Dr. Meindl has held the Joseph M. Pettit Chaired Professorship
in Microelectronics at the Georgia Institute of Technology. Prior to his
professorship at the Georgia Institute of Technology, Dr. Meindl served as
Senior Vice President for Academic Affairs and Provost at Rensselaer Polytechnic
Institute from 1986 to 1993. Dr. Meindl serves as a director of SanDisk Corp.,
which designs, develops and markets flash memory data storage products, and
Zoran Corp., a semiconductor and related devices company.
Mr. Billy B. Oliver has served as a Director of the Company since February
1987. Since 1985, Mr. Oliver has been a private communications consultant. Mr.
Oliver has held various engineering and management positions with AT&T,
including Vice President, Planning and Design from 1972 until 1985. Mr. Oliver
is also a director of Communications Network Enhancements, a telecommunications
service company, and CIENA Corp, a manufacturer of light wave amplifiers and
wave division multiplexing equipment.
34
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue up to 30,000,000 shares of Common Stock,
par value $.01 per share. Holders of shares of the Company's Common Stock are
entitled to one vote per share on all matters to be voted on by stockholders.
The holders of the Company's Common Stock are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. Upon liquidation or
dissolution of the Company, the holders of Common Stock are entitled to share
ratably in the distribution of assets, subject to the rights of the holders of
Preferred Stock. Holders of Common Stock have no preemptive rights, subscription
rights or conversion rights. There are no redemption or sinking fund provisions
with respect to the Common Stock. On March 11, 1997, there were approximately
208 holders of record of the Company's Common Stock.
PREFERRED STOCK
Under its Restated Certificate of Incorporation, the Company has authority
to issue 5,000,000 shares of preferred stock, $.01 par value per share, in one
or more series as determined by the Board of Directors. No shares of preferred
stock are currently issued or outstanding. The Board of Directors may, without
further action by the stockholders of the Company, issue series of preferred
stock and fix the rights and preferences of those shares, including the dividend
rights, dividend rates, conversion rights, exchange rights, voting rights, terms
of redemption, redemption price or prices, liquidation preferences and the
number of shares constituting any series or the designation of such series. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock issued by the
Company in the future.
STOCKHOLDER'S RIGHTS AGREEMENT
In October 1991, the Company adopted a Stockholders' Rights Agreement
pursuant to which one Preferred Share Purchase Right (a "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, other than a person who
has reported or is required to report beneficial ownership of the Company's
Common Stock on Schedule 13G under the Exchange Act, with respect to whom the
threshold is 20%. 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
would 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 20% in the
case of a Schedule 13G filer) or more of the Company's Common Stock.
TRANSFER AGENT AND REGISTRAR
The Company has appointed ChaseMellon Shareholder Services, L.L.C., as the
transfer agent and registrar of its Common Stock.
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<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter, the
number of shares of Common Stock set forth opposite the name of such
Underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Smith Barney Inc.................................................................
Oppenheimer & Co., Inc...........................................................
Cowen & Company..................................................................
----------
Total........................................................................ 2,150,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to pay for and accept delivery of the shares are subject to approval of certain
legal matters by counsel and to certain other conditions. The Underwriters are
obligated to take and pay for all shares of Common Stock offered hereby (other
than those covered by the over-allotment option described below) if any such
shares are taken.
The Underwriters propose to offer part of the shares directly to the public
at the public offering price set forth on the cover page of this Prospectus and
part of the shares to certain dealers at a price which represents a concession
not in excess of $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the initial offering of the
shares to the public, the public offering price and such concessions may be
changed by the Underwriters.
The Company and its officers and directors have agreed that, for a period of
90 days from the date of this Prospectus, they will not, without the prior
written consent of Smith Barney Inc., sell, contract to sell, or otherwise
dispose of, any shares of Common Stock of the Company or any securities
convertible into, or exercisable or exchangeable for, Common Stock of the
Company.
The Company has granted to the Underwriters an option, exercisable for
thirty days from the date of this Prospectus, to purchase up to 322,500
additional shares of Common Stock at the price to the public set forth on the
cover page of this Prospectus minus the underwriting discounts and commissions.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with the offering of the shares offered
hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name in the preceding table bears to the total number of
shares listed in such table.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including certain liabilities under the Securities Act.
The Underwriters have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the Offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or selling group member in connection with the
Offering if the Common Stock originally sold by such Underwriter or selling
group member is purchased by the Representatives in a syndicate covering
transaction and has therefore not been effectively placed by such Underwriter or
selling group member. The Underwriters have advised the Company that such
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
The rules of the Commission generally prohibit the Underwriters from making
a market in the Common Stock of the Company during the two business days prior
to commencement of sales in this offering (the "Cooling Off Period"). The
Commission has, however, adopted Rule 10b-6A under the
36
<PAGE>
Exchange Act ("Rule 10b-6A") which provides an exemption from such prohibition
for certain passive market making transactions. Such passive market making
transactions must comply with applicable price and volume limits and must be
identified as passive market making transactions. In general, pursuant to Rule
10b-6A, a passive market maker must display its bid for a security at a price
not in excess of the highest independent bid for the security. If all
independent bids are lowered below the passive maker's bid, however, such bid
must then be lowered when certain purchase limits are exceeded. Further, net
purchases by a passive market maker on each day are generally limited to a
specified percentage of the passive market maker's average daily trading volume
in a security during a specified prior period and must be discontinued when such
limit is reached. Pursuant to the exemption provided by Rule 10b-6A, certain of
the Underwriters and selling group members may engage in passive market making
in the Common Stock of the Company during the Cooling Off Period. Passive market
making may stabilize the market price of the Common Stock at a level above that
which might otherwise prevail, and, if commenced, may be discontinued at any
time.
LEGAL MATTERS
Certain legal matters in connection with the offering will be passed upon
for the Company by Morrison & Foerster LLP, San Francisco, California and for
the Underwriters by Wilson, Sonsini, Goodrich & Rosati, A Professional
Corporation, Palo Alto, California.
EXPERTS
The audited consolidated financial statements and schedule included or
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included or incorporated by reference herein in reliance upon the authority of
said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock, reference is made to such Registration Statement and exhibits.
Statements made in this Prospectus as to the contents of any contract, agreement
or other documents referred to are not necessarily complete. With respect to
each such contract, agreement or other documents filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved. The Registration Statement and exhibits may
be inspected without charge and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices at Northwestern Atrium Center, 500 West
Madison, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite
1300, New York, New York 10048. Copies of such material can be obtained at
prescribed rates from the Commission's Public Reference Section at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
37
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................... F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 31, 1995, 1996, and December 31, 1996............................ F-3
Consolidated Statements of Operations for the Years Ended March 31, 1994, 1995 and 1996 and Nine Months
Ended December 31, 1995 and 1996....................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1994, 1995 and 1996........ F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1994, 1995 and 1996 and Nine Months
Ended December 31, 1995 and 1996....................................................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital Microwave Corporation:
We have audited the accompanying consolidated balance sheets of Digital
Microwave Corporation (a Delaware corporation) and subsidiaries as of March 31,
1995 and 1996, 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, 1995 and 1996, 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
F-2
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
-------------------- 31,
1995 1996 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ 1,919 $ 8,299 $ 6,489
Restricted cash.............................................. 1,100 719 1,558
Accounts receivable, net of allowance of $1,413; $1,373 and
$2,683, respectively....................................... 32,513 33,398 37,241
Inventories.................................................. 46,732 35,347 44,110
Tax refund receivable........................................ 1,820 -- --
Other current assets......................................... 4,524 2,973 2,870
--------- --------- -----------
Total current assets..................................... 88,608 80,736 92,268
--------- --------- -----------
Property and Equipment:
Machinery and equipment...................................... 32,450 36,609 35,796
Land and buildings........................................... 1,262 1,262 1,262
Furniture and fixtures....................................... 6,668 7,602 6,995
Leasehold improvements....................................... 2,139 2,262 2,041
--------- --------- -----------
42,519 47,735 46,094
Accumulated depreciation and amortization.................... (28,542) (32,674) (31,253)
--------- --------- -----------
Net property and equipment................................... 13,977 15,061 14,841
--------- --------- -----------
$ 102,585 $ 95,797 $ 107,109
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Lines of credit.............................................. $ 11,731 $ 3,106 $ 2,022
Current maturities of note payable........................... 3,333 3,334 --
Current maturities of capital lease obligations.............. 776 1,025 796
Accounts payable............................................. 26,373 16,252 17,235
Income taxes payable......................................... 1,629 973 1,444
Other accrued liabilities.................................... 17,770 18,590 25,913
--------- --------- -----------
Total current liabilities................................ 61,612 43,280 47,410
Long-Term Liabilities:
Note payable, net of current maturities...................... 5,556 1,944 --
Capital lease obligations, net of current maturities......... 806 838 280
--------- --------- -----------
Total liabilities........................................ 67,974 46,062 47,690
--------- --------- -----------
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;
13,467,693, 15,820,783, and 16,135,175 shares issued and
outstanding respectively................................... 135 159 161
Additional paid-in capital................................... 44,313 65,368 67,882
Accumulated deficit.......................................... (9,837) (15,792) (8,624)
--------- --------- -----------
Total stockholders' equity............................... 34,611 49,735 59,419
--------- --------- -----------
$ 102,585 $ 95,797 $ 107,109
--------- --------- -----------
--------- --------- -----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED MARCH 31, ENDED DECEMBER 31,
---------------------------------- ----------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales................................ $ 116,010 $ 153,650 $ 150,419 $ 114,183 $ 126,092
Cost of Sales............................ 78,874 114,760 119,918 93,581 84,547
---------- ---------- ---------- ---------- ----------
Gross profit......................... 37,136 38,890 30,501 20,602 41,545
---------- ---------- ---------- ---------- ----------
Operating Expenses:
Research and development............... 9,316 11,379 11,108 8,567 7,433
Selling, general and administrative.... 23,338 24,763 27,416 20,279 25,705
Non-recurring charges.................. 27,000 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total operating expenses............. 59,654 36,142 38,524 28,846 33,138
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ (22,518) 2,748 (8,023) (8,244) 8,407
Other Income (Expense):
Interest and other income (expense),
net.................................. 1,718 (16) 1,975 1,609 401
Interest expense....................... (603) (530) (1,860) (1,528) (844)
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes....................... (21,403) 2,202 (7,908) (8,163) 7,964
Provision (credit) for income taxes.... 1,092 220 (1,953) (1,953) 796
---------- ---------- ---------- ---------- ----------
Net income (loss)...................... $ (22,495) $ 1,982 $ (5,955) $ (6,210) $ 7,168
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net Income (Loss) Per Share.............. $ (1.81) $ 0.14 $ (0.40) $ (0.43) $ 0.43
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted Average Number of Common and
Common Equivalent Shares Outstanding... 12,448 13,845 14,895 14,592 16,678
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
------------------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
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>
See notes to consolidated financial statements.
F-5
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------- --------------------
1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)................................. $ (22,495) $ 1,982 $ (5,955) $ (6,210) $ 7,168
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating
activities:
Depreciation and amortization................... 6,448 6,356 6,332 5,095 4,200
Provision for non-recurring charges............. 27,000 -- -- -- --
Provision for uncollectible accounts............ 300 276 580 677 1,400
Provision for inventory reserves................ 117 958 8,795 8,393 3,187
Provision for warranty reserves................. 1,285 1,911 1,678 1,017 1,505
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........ 281 200 381 387 (839)
(Increase) decrease in accounts receivable.... (6,880) (5,774) (1,492) 1,112 (5,248)
(Increase) decrease in inventories............ (13,232) (12,212) 904 115 (11,955)
(Increase) decrease in tax refund
receivable.................................. 1,691 778 1,820 -- --
(Increase) decrease in other current assets... (73) (1,503) 1,559 2,669 109
Increase (decrease) in accounts payable....... 13,607 5,398 (5,144) (8,693) 984
Increase (decrease) in accrued litigation..... -- (19,900) -- -- --
Increase (decrease) in other accrued
liabilities................................. 203 4,287 (1,241) (3,009) 6,291
--------- --------- --------- --------- ---------
Net cash provided by (used for) operating
activities................................ 6,792 (17,243) 8,217 1,553 6,802
--------- --------- --------- --------- ---------
Cash Flows from Investing Activities:
Purchase of property and equipment................ (5,840) (8,111) (4,527) (3,810) (4,116)
--------- --------- --------- --------- ---------
Cash Flows from Financing Activities:
Borrowings from banks............................. 21,858 36,744 16,188 14,116 15,283
Repayments to banks............................... (23,084) (16,124) (28,423) (26,590) (21,645)
Payments of note payable to MTI................... (3,075) -- -- -- --
Payments of capital lease obligations............. (946) (695) (1,019) (726) (787)
Sale of common stock.............................. 4,002 4,025 15,812 15,627 2,514
--------- --------- --------- --------- ---------
Net cash provided by (used for) financing
activities................................ (1,245) 23,950 2,558 2,427 (4,635)
--------- --------- --------- --------- ---------
Effect of Exchange Rate Changes on Cash............. (146) (39) 132 87 139
--------- --------- --------- --------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents....................................... (439) (1,443) 6,380 257 (1,810)
Cash and Cash Equivalents at Beginning of Period.... 3,801 3,362 1,919 1,919 8,299
--------- --------- --------- --------- ---------
Cash and Cash Equivalents at End of Period.......... $ 3,362 $ 1,919 $ 8,299 $ 2,176 $ 6,489
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS
Digital Microwave Corporation (the "Company") designs, manufactures and
markets advanced wireless solutions for worldwide telephone network
interconnection and access. The Company's broad family of products is designed
to meet the requirements of mobile communications networks and fixed access
networks worldwide.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany accounts and transactions have
been eliminated.
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of December 31, 1996 and for
the nine months ended December 31, 1995 and 1996 have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial information set forth therein, in
accordance with generally accepted accounting principles. The data disclosed in
the notes to the financial statements for these periods are unaudited. The
Company believes the results of operations for the interim periods are not
necessarily indicative of the results to be expected for any future period.
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 revenues 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, 1995 and 1996 and
December 31, 1996, the Company was required to segregate and maintain $1.1
million, $0.7 million and $1.6 million, respectively, which are included as
restricted cash in the accompanying consolidated balance sheets.
F-7
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL STATEMENTS OF CASH FLOWS DISCLOSURES
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest..................................................... $ 603 $ 1,556 $ 1,753
Income taxes................................................. $ 245 $ 62 $ 172
</TABLE>
Non-cash transactions were as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit related to employee stock transactions........... $ 762 $ -- $ 55
Property purchased under capital leases...................... $ 966 1,314 $ 1,324
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>
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
where cost includes material, labor and manufacturing overhead. Inventories
consisted of:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996 DECEMBER 31, 1996
--------- --------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials........................................ $ 16,506 $ 11,840 $ 14,191
Work in process...................................... 20,977 16,342 14,634
Finished goods....................................... 9,249 7,165 15,285
--------- --------- -------
$ 46,732 $ 35,347 $ 44,110
--------- --------- -------
--------- --------- -------
</TABLE>
Inventories contained components and assemblies in excess of the Company's
current estimated requirements and were reserved at March 31, 1995 and 1996 and
December 31, 1996. 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.
F-8
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
$2,503,000 and $3,641,000 as of March 31, 1995 and 1996, respectively.
Accumulated amortization on leased assets was $712,000 and $1,044,000 as of
March 31, 1995 and 1996, respectively.
OTHER ACCRUED LIABILITIES
Other accrued liabilities included the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996 DECEMBER 31, 1996
--------- --------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Customer deposits.................................... $ 1,095 $ 4,839 $ 10,362
Accrued contract obligations (See Note 9)............ 4,045 3,759 2,306
Accrued commissions.................................. 1,873 3,246 3,520
Deferred revenue..................................... 3,431 -- --
Accrued warranty..................................... 3,075 3,076 2,962
Closing costs--DMC TeleCom (Malaysia) Sdn. Bhd. (See
Note 7)............................................ 1,029 367 66
Other................................................ 3,222 3,303 6,697
--------- --------- -------
$ 17,770 $ 18,590 $ 25,913
--------- --------- -------
--------- --------- -------
</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.
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, 1994 the aggregate net foreign exchange
gain was $198,000 and for fiscal
F-9
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years ended March 31, 1995, and 1996, the aggregate net foreign exchange loss
was $39,000 and $506,000, 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, and is net
of third party commissions, freight charges and duty charges. Service revenue,
which is less than 10% of net revenue for each of the periods 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.
(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 minimum borrowings of $2.0 million and 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.
F-10
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(3) CREDIT ARRANGEMENTS (CONTINUED)
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, with which the Company is currently in compliance.
At March 31, 1996, the outstanding balance under this note was $5.3 million, of
which $3.3 million is due in fiscal 1997.
(4) 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)
<S> <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 $2,892,000,
$3,458,000, and $3,679,000 for the years ended March 31, 1994, 1995, and 1996,
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.
(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.
F-11
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(5) INCOME TAXES (CONTINUED)
The domestic and foreign components of income (loss) before provision for
income taxes were as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1994 1995 1996
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic...................................................... $ (19,864) $ 1,182 $ (9,845)
Foreign....................................................... (1,539) 1,020 1,937
---------- --------- ---------
$ (21,403) $ 2,202 $ (7,908)
---------- --------- ---------
---------- --------- ---------
</TABLE>
The provision (credit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal......................................................... $ 95 $ 220 $ (2,018)
State........................................................... -- -- --
Foreign......................................................... 37 -- 65
--------- --------- ---------
Total current................................................. 132 220 (1,953)
--------- --------- ---------
Deferred:
Federal......................................................... 960 -- --
State........................................................... -- -- --
Foreign......................................................... -- -- --
--------- --------- ---------
Total deferred................................................ 960 -- --
--------- --------- ---------
$ 1,092 $ 220 $ (1,953)
--------- --------- ---------
--------- --------- ---------
</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,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory Federal tax provision (benefit)...................... $ (7,277) $ 749 $ (2,689)
State taxes, net of Federal benefit............................ -- -- (343)
Change in valuation allowance.................................. 8,883 (624) 3,346
Reversal of previously provided taxes upon settlement of the
IRS audit.................................................... -- -- (2,018)
Other.......................................................... (514) 95 (249)
--------- --------- ---------
$ 1,092 $ 220 $ (1,953)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-12
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(5) INCOME TAXES (CONTINUED)
The major components of the net deferred tax asset consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1995 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Inventory reserves.................................................... $ 1,820 $ 6,041
Depreciation.......................................................... 808 685
Warranty reserves..................................................... 1,183 1,158
Bad debt reserves..................................................... 842 655
Net operating loss carryforwards...................................... 6,785 3,879
Tax credits........................................................... 2,764 5,514
Other................................................................. 1,346 1,430
---------- ----------
15,548 19,362
Less: Valuation reserve--Operations................................... (15,548) (18,894)
Less: Valuation reserve--Equity....................................... -- (468)
---------- ----------
Net deferred tax asset................................................ $ -- $ --
---------- ----------
---------- ----------
</TABLE>
The valuation allowance at March 31, 1995 and 1996 provided reserves against
worldwide operating losses, deferred tax assets, and tax credit carryforwards
that may expire before the Company can utilize them. In accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," the Company believes it is more likely than not that the Company will
not realize these benefits and, accordingly, has continued to provide a
valuation allowance for them. 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.
(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. In July 1996, the stockholders approved
an increase in the number of shares of Common Stock reserved for issuance under
the 1994 Plan to 2,183,330 shares.
F-13
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(6) COMMON STOCK (CONTINUED)
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 OF SHARES OPTION PRICE 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>
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.
F-14
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(6) COMMON STOCK (CONTINUED)
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 other than a person who
has reported or is required to report beneficial ownership of the Company's
common stock on Schedule 13G under the Exchange Act, with respect to whom the
threshhold is 20%. 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 20% in the
case of Schedule 13G filers) or more of the Company's common stock.
(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.
The development agreement provides MTI with certain preferential rights to
manufacture certain of the Company's integrated circuits. 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 1994, 1995 and 1996.
Purchases of subassemblies from MTI totaled approximately $15,636,000,
$23,509,000, and $22,246,000, for the fiscal years ended March 31, 1994, 1995,
and 1996, respectively. Trade accounts payable to MTI at March 31, 1995 and 1996
were $6,507,000 and $3,939,000 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 1994, 1995, and 1996, sales to MTI under this
agreement were $2,146,000, $1,031,000, and $1,952,000, respectively. In
addition, amounts due from MTI at March 31, 1995 and 1996 were $61,800 and
$453,000, respectively.
In fiscal 1993, in connection with a financing agreement, the Company issued
MTI warrants for the purchase of 112,500 shares of common stock at $6.50 per
share. During fiscal 1995, MTI exercised all of these warrants.
F-15
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(7) TECHNOLOGY DEVELOPMENT, MANUFACTURING AND RELATED AGREEMENTS (CONTINUED)
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 an offset of the Company's trade accounts payable to MTI.
SALE OF PRODUCT LINES
During fiscal 1993, the Company sold its fiber optic product line and W-Band
product line to 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 of $3.2 million resulting
from the sale of these product lines was recognized in other income as the
transfer of technology related to these product lines was completed. In fiscal
1993 and 1994, the Company recognized $2.1 million and $1.1 million of total
gain, respectively.
DMC TELECOM (MALAYSIA) SDN. BHD.
In February 1991, the Company, together with Alpine Resources Sdn. Bhd. and
Superior Communications Sdn. Bhd., both Malaysian corporations, formed a
Malaysian corporation called 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.
(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.
F-16
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(9) CUSTOMER AGREEMENT
In November 1993, the Company entered into an agreement with Siemens AG to
supply SPECTRUM 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 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.
(10) INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company operates in a single industry segment, the design and
manufacture of short-haul 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,
-------------------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Siemens AG............................................................ -- -- 22%
American Telephone & Telegraph Co..................................... 10% -- --
Mercury Communications Ltd............................................ 11% -- --
</TABLE>
F-17
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(10) INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION (CONTINUED)
Geographic information for the fiscal years ended March 31, 1994, 1995, and
1996 is as follows:
<TABLE>
<CAPTION>
UNITED
STATES UNITED KINGDOM OTHERS ELIMINATIONS TOTAL
------------ --------------- --------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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 (loss).......... $ (20,995) $ (1,277) $ 26 $ (272) $ (22,518)
------------ ------- --------- ------------ ----------
Identifiable assets.............. $ 96,078 $ 13,429 $ 2,229 $ (27,733) $ 84,003
------------ ------- --------- ------------ ----------
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
------------ ------- --------- ------------ ----------
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
------------ ------- --------- ------------ ----------
</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.
F-18
<PAGE>
DIGITAL MICROWAVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
(10) INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION (CONTINUED)
The following table represents export sales from the United States to
unaffiliated customers by geographic region:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------
1994 1995 1996
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
The Americas, excluding the U.S............................ $ 23,516 $ 30,565 $ 14,876
Europe..................................................... 24,814 52,105 59,732
Asia Pacific............................................... 25,363 23,601 40,570
--------- ---------- ----------
Total export sales....................................... $ 73,693 $ 106,271 $ 115,178
--------- ---------- ----------
--------- ---------- ----------
Export sales as a % of U.S. sales.......................... 87% 84% 86%
</TABLE>
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Information Incorporated by Reference..................................... 2
Prospectus Summary........................................................ 3
The Company............................................................... 5
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 11
Price Range of Common Stock............................................... 11
Capitalization............................................................ 12
Selected Consolidated Financial Data...................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 14
Business.................................................................. 21
Management................................................................ 32
Description of Capital Stock.............................................. 35
Underwriting.............................................................. 36
Legal Matters............................................................. 37
Experts................................................................... 37
Additional Information.................................................... 37
Index to Financial Statements............................................. F-1
</TABLE>
2,150,000 SHARES
[LOGO]
COMMON STOCK
--------
PROSPECTUS
, 1997
---------
SMITH BARNEY INC.
OPPENHEIMER & CO., INC.
COWEN & COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates except
for the registration fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 21,994
NASD Filing Fee................................................... 7,758
Nasdaq National Market Listing Fee................................ 17,500
Printing expenses................................................. 70,000
Legal fees and expenses........................................... 100,000
Accounting fees and expenses...................................... 70,000
Transfer agent and registrar fees................................. 2,500
Miscellaneous..................................................... 35,248
---------
Total......................................................... $ 325,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145(a) of the Delaware General Corporation Law (the "DGCL") provides
in relevant part that "a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful." With respect to
derivative actions, Section 145(b) of the DGCL provides in relevant part that
"[a] corporation may indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor.... [by
reason of his service in one of the capacities specified in the preceding
sentence] against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interest of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper."
The Company's Certificate of Incorporation provides that each person who is
or was or who had agreed to become a director or officer of the Company or who
had agreed at the request of the Company's Board of Directors or an officer of
the Company to serve as an employee or agent of the Company or as a director,
officer, employee or agent or another corporation, partnership, joint venture,
trust or other enterprise, shall be indemnified by the Company to the full
extent permitted by the DGCL or any other applicable laws. Such Certificate of
Incorporation also provides that the Company may enter into one or
II-1
<PAGE>
more agreements with any person which provides for indemnification greater or
different than that provided in such Certificate, and that no amendment or
repeal of such Certificate shall apply to or have any effect on the right to
indemnification permitted or authorized thereunder for or with respect to claims
asserted before or after such amendment or repeal arising from acts or omissions
occurring in whole or in part before the effective date of such amendment or
repeal.
The Company's Bylaws provide that the Company shall indemnify to the full
extent authorized by law any person made or threatened to be made a party to an
action or a proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he, his testator or intestate was or
is a director, officer or employee of the Company or any predecessor of the
Company or serves or served any other enterprise as a director, officer or
employee at the request of the Company or any predecessor of the Company.
The Company has entered into indemnification agreements with its directors
and certain of its officers.
The Company has purchased and maintains insurance on behalf of any person
who is or was a director or officer against loss arising from any claim asserted
against him and incurred by him in any such capacity, subject to certain
exclusions.
See also the undertakings set out in response to Item 17 herein.
ITEM 16. EXHIBITS.
(a) Exhibits.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1
to the Company's Annual Report on Form 10-K for the year ended March 31,
1988).
4.2 Rights Agreement dated as of October 24, 1991, between the Company and
Manufacturers Hanover Trust Company of California, including the
Certificate of Designations for the Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 1 of the Company's
Current Report on 8-K filed on November 5, 1991).
5.1+ Opinion of Morrison & Foerster LLP together with consent.
23.1 Consent of Independent Public Accountants (see Page II-5 of this Amendment
to the Registration Statement).
24.1+ Power of Attorney (See Page II-4 of the Registration Statement)
</TABLE>
- ------------------------
+ Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15, the Underwriting
Agreement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in the form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective, and (2) for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Jose, State of California, on this 12th day
of March, 1997.
DIGITAL MICROWAVE CORPORATION
By: /s/ CARL A. THOMSEN
-----------------------------------------
Carl A. Thomsen
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND SECRETARY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------- -------------------------------------- --------------------
<C> <C> <S> <C>
CHARLES D. KISSNER* Chairman of the Board, President
---------------------------------------- and Chief Executive Officer March 12, 1997
Charles D. Kissner
RICHARD C. ALBERDING*
---------------------------------------- Director March 12, 1997
Richard C. Alberding
CLIFFORD H. HIGGERSON*
---------------------------------------- Director March 12, 1997
Clifford H. Higgerson
JAMES D. MEINDL*
---------------------------------------- Director March 12, 1997
James D. Meindl
BILLY B. OLIVER*
---------------------------------------- Director March 12, 1997
Billy B. Oliver
CARL A. THOMSEN Vice President, Chief Financial
---------------------------------------- Officer and Secretary (Principal March 12, 1997
Carl A. Thomsen Financial and Accounting Officer)
*By: /s/ CARL A. THOMSEN
------------------------------------ March 12, 1997
Carl A. Thomsen
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
San Jose, California
March 10, 1997
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1988).
4.2 Rights Agreement dated as of October 24, 1991, between the Company and Manufacturers Hanover
Trust Company of California, including the Certificate of Designations for the Series A Junior
Participating Preferred Stock (incorporated by reference to Exhibit 1 of the Company's Current
Report on 8-K filed on November 5, 1991).
5.1+ Opinion of Morrison & Foerster LLP together with consent
23.1 Consent of Independent Public Accountants (See Page II-5 of this Amendment to the Registration
Statement)
24.1+ Power of Attorney (See Page II-4 of the Registration Statement)
</TABLE>
- ------------------------
+ Previously filed.
<PAGE>
2,150,000 Shares
DIGITAL MICROWAVE CORPORATION
Common Stock
UNDERWRITING AGREEMENT
March __, 1997
SMITH BARNEY INC.
OPPENHEIMER & CO., INC.
COWEN & COMPANY
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Digital Microwave Corporation, a Delaware corporation (the "Company"),
proposes to issue and sell an aggregate of 2,150,000 shares (the "Firm
Shares") of its common stock, $0.01 par value per share (the "Common
Stock"), to the several Underwriters named in Schedule I hereto (the
"Underwriters"). The Company also proposes to sell to the Underwriters, upon
the terms and conditions set forth in Section 2 hereof, up to an additional
322,500 shares (the "Additional Shares") of Common Stock. The Firm Shares
and the Additional Shares are hereinafter collectively referred to as the
"Shares."
The Company wishes to confirm as follows its agreement with you (the
"Representatives") and the other several Underwriters on whose behalf you are
acting, in connection with the several purchases of the Shares by the
Underwriters.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the
<PAGE>
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Act"), a registration statement on
Form S-3 under the Act (the "registration statement"), including a prospectus
subject to completion relating to the Shares. The term "Registration
Statement" as used in this Agreement means the registration statement
(including all financial schedules and exhibits), as amended at the time it
becomes effective, or, if the registration statement became effective prior
to the execution of this Agreement, as supplemented or amended prior to the
execution of this Agreement. If it is contemplated, at the time this
Agreement is executed, that a post-effective amendment to the registration
statement will be filed and must be declared effective before the offering of
the Shares may commence, the term "Registration Statement" as used in this
Agreement means the registration statement as amended by said post-effective
amendment. If an abbreviated registration statement is prepared and filed
with the Commission in accordance with Rule 462(b) under the Act ("an
Abbreviated Registration Statement"), the term "Registration Statement" as
used in this Agreement includes the Abbreviated Registration Statement. The
term "Prospectus" as used in this Agreement means the prospectus in the form
included in the Registration Statement, or, if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under the
Act and such information is included in a prospectus filed with the
Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as
used in this Agreement means the prospectus in the form included in the
Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant to
Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement
means the prospectus subject to completion in the form included in the
registration statement at the time of the initial filing of the registration
statement with the Commission, and as such prospectus shall have been amended
from time to time prior to the date of the Prospectus. Any reference in this
Agreement to the registration statement, the Registration Statement, any
Prepricing Prospectus or the Prospectus shall be deemed to refer to and
include the documents incorporated by reference therein pursuant to Item 12
of Form S-3 under the Act, as of the date of the registration statement, the
Registration Statement, such Prepricing Prospectus or the Prospectus, as the
case may be, and any reference to any amendment or supplement to the
registration statement, the Registration Statement, any Prepricing Prospectus
or the Prospectus shall be deemed to refer to and include any documents filed
after such date under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") which, upon filing, are incorporated by reference therein, as
required by paragraph (b) of Item 12 of Form S-3. As used herein, the term
"Incorporated Documents" means the documents which at the time are
incorporated by reference in the registration statement, the Registration
Statement, any Prepricing Prospectus, the Prospectus, or any amendment or
supplement thereto.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees, subject
to all the terms and conditions set forth herein, to issue and sell to each
Underwriter and, upon the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of [$_____] per
Share (the "purchase price per share"), the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto (or such
-2-
<PAGE>
number of Firm Shares increased as set forth in Section 10 hereof).
The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company herein contained
and subject to all the terms and conditions set forth herein, the
Underwriters shall have the right to purchase from the Company, at the
purchase price per share, pursuant to an option (the "over-allotment option")
which may be exercised at any time and from time to time prior to 9:00 p.m.,
New York City time, on the 30th day after the date of the Prospectus (or, if
such 30th day shall be a Saturday or Sunday or a holiday, on the next
business day thereafter when the New York Stock Exchange is open for
trading), up to an aggregate of 322,500 Additional Shares. Additional Shares
may be purchased only for the purpose of covering over-allotments made in
connection with the offering of the Firm Shares. Upon any exercise of the
over-allotment option, each Underwriter, severally and not jointly, agrees to
purchase from the Company the number of Additional Shares (subject to such
adjustments as you may determine in order to avoid fractional shares) which
bears the same proportion to the number of Additional Shares to be purchased
by the Underwriters as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 10 hereof) bears to the aggregate number of
Firm Shares.
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 a.m., New
York City time, on March __, 1997 (the "Closing Date"). The place of closing for
the Firm Shares and the Closing Date may be varied by agreement between you and
the Company.
Delivery to the Underwriters of and payment for any Additional Shares to be
purchased by the Underwriters shall be made at the aforementioned office of
Smith Barney Inc. at such time on such date (the "Option Closing Date"), which
may be the same as the Closing Date but shall in no event be earlier than the
Closing Date nor earlier than two nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a written
notice from you on behalf of the Underwriters to the Company of the
Underwriters' determination to purchase a number, specified in such notice, of
Additional Shares. The place of closing for any Additional Shares and the
Option Closing Date for such Shares may be varied by agreement between you and
the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 a.m., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the
-3-
<PAGE>
case may be. Such certificates shall be made available to you in New York
City for inspection and packaging not later than 9:30 a.m., New York City
time, on the business day next preceding the Closing Date or the Option
Closing Date, as the case may be. The certificates evidencing the Firm
Shares and any Additional Shares to be purchased hereunder shall be delivered
to you on the Closing Date or the Option Closing Date, as the case may be,
against payment of the purchase price therefor in immediately available funds
to accounts specified by the Company.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment
thereto (or any Abbreviated Registration Statement) to be declared effective
before the offering of the Shares may commence, the Company will endeavor to
cause the Registration Statement or such post-effective amendment to become
effective as soon as possible and will advise you promptly and, if requested
by you, will confirm such advice in writing, when the Registration Statement
or such post-effective amendment has become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of the suspension of qualification of the
Shares for offering or sale in any jurisdiction or the initiation of any
proceeding for such purpose; and (iii) within the period of time referred to
in paragraph (f) below, of any change in the Company's condition (financial
or other), business, prospects, properties, net worth or results of
operations, or of the happening of any event, which makes any statement of a
material fact made in the Registration Statement or the Prospectus (as then
amended or supplemented) untrue or which requires the making of any additions
to or changes in the Registration Statement or the Prospectus (as then
amended or supplemented) in order to state a material fact required by the
Act or the regulations thereunder to be stated therein or necessary in order
to make the statements therein not misleading, or of the necessity to amend
or supplement the Prospectus (as then amended or supplemented) to comply with
the Act or any other law. If at any time the Commission shall issue any stop
order suspending the effectiveness of the Registration Statement, the Company
will make every reasonable effort to obtain the withdrawal of such order at
the earliest possible time.
(c) The Company will furnish to you, without charge (i) four (4)
signed copies of the registration statement as originally filed with the
Commission and of each amendment thereto, including financial statements and
all exhibits to the registration statement, (ii) such number of conformed
copies of the registration statement as originally filed and of each
amendment thereto, but without exhibits, as you may reasonably request, (iii)
such number of copies of the Incorporated Documents, without exhibits, as you
may reasonably request, and (iv) four (4) copies of the exhibits to the
Incorporated Documents.
-4-
<PAGE>
(d) The Company will not file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus or, prior to the
end of the period of time referred to in the first sentence in subsection (f)
below, file any document which, upon filing becomes an Incorporated Document, of
which you shall not previously have been advised or to which, after you shall
have received a copy of the document proposed to be filed, you shall reasonably
object.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered to you, without charge, in such quantities as you have
reasonably requested, copies of each form of the Prepricing Prospectus. The
Company consents to the use, in accordance with the provisions of the Act and
with the securities or Blue Sky laws of the jurisdictions in which the Shares
are offered by the several Underwriters and by dealers, prior to the date of the
Prospectus, of each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the reasonable
opinion of counsel for the Underwriters a prospectus is required by the Act to
be delivered in connection with sales by any Underwriter or dealer, the Company
will expeditiously deliver to each Underwriter and each dealer, without charge,
as many copies of the Prospectus (and of any amendment or supplement thereto) as
you may reasonably request. The Company consents to the use of the Prospectus
(and of any amendment or supplement thereto) in accordance with the provisions
of the Act and with the securities or Blue Sky laws of the jurisdictions in
which the Shares are offered by the several Underwriters and by all dealers to
whom Shares may be sold, both in connection with the offering and sale of the
Shares and for such period of time thereafter as the Prospectus is required by
the Act to be delivered in connection with sales by any Underwriter or dealer.
If during such period of time any event shall occur that in the judgment of the
Company or in the opinion of counsel for the Underwriters is required to be set
forth in the Prospectus (as then amended or supplemented) or should be set forth
therein in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
to supplement or amend the Prospectus (or to file under the Exchange Act any
document which, upon filing, becomes an Incorporated Document) in order to
comply with the Act or any other law, the Company will forthwith prepare and,
subject to the provisions of paragraph (d) above, file with the Commission an
appropriate supplement or amendment thereto (or to such document), and will
expeditiously furnish to the Underwriters and dealers a reasonable number of
copies thereof. In the event that the Company and you, as Representatives of
the several Underwriters, agree that the Prospectus should be amended or
supplemented, the Company, if requested by you, will promptly issue a press
release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may designate and will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any
-5-
<PAGE>
action which would subject it to service of process in suits, other than
those arising out of the offering or sale of the Shares, in any jurisdiction
where it is not now so subject.
(h) The Company will make generally available to its security
holders a consolidated earnings statement, which need not be audited,
covering a twelve-month period commencing after the effective date of the
Registration Statement and ending not later than 15 months thereafter, as
soon as practicable after the end of such period, which consolidated earnings
statement shall satisfy the provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission, and (ii) from time to
time such other information concerning the Company as you may reasonably
request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating
this Agreement pursuant to Section 10 or Section 11 hereof) or if this
Agreement shall be terminated by the Underwriters because of any failure or
refusal on the part of the Company to comply with the terms or fulfill any of
the conditions of this Agreement, the Company agrees to reimburse the
Representatives for all reasonable out-of-pocket expenses (including fees and
expenses of counsel for the Underwriters) incurred by you in connection
herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectus.
(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the
time and manner of such filing.
(m) Except as provided in this Agreement, the Company will not sell,
contract to sell or otherwise dispose of any Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or grant any
options (other than pursuant to its employee stock option plans, director stock
option plans and employee stock purchase plans) or warrants to purchase Common
Stock, for a period of 90 days after the date of the Prospectus, without the
prior written consent of Smith Barney Inc.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current officers and directors and each of its stockholders designated by you.
(o) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
-6-
<PAGE>
(p) The Company will use its best efforts to have the shares of
Common Stock which it agrees to sell under this Agreement listed, subject to
notice of issuance, on the Nasdaq National Market on or before the Closing Date.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the provisions of the Act. The Commission has not issued
any order preventing or suspending the use of any Prepricing Prospectus.
(b) The Company and the transactions contemplated by this Agreement
meet the requirements for using Form S-3 under the Act. The registration
statement in the form in which it became or becomes effective and also in such
form as it may be when any post-effective amendment thereto shall become
effective and the prospectus and any supplement or amendment thereto when filed
with the Commission under Rule 424(b) under the Act, complied or will comply in
all material respects with the provisions of the Act and will not at any such
times contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except that this representation and warranty does not apply to
statements in or omissions from the registration statement or the prospectus
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by or on behalf of any
Underwriter through you expressly for use therein.
(c) The Incorporated Documents heretofore filed, when they were filed
(or, if any amendment with respect to any such document was filed, when such
amendment was filed), conformed in all material respects with the requirements
of the Exchange Act and the rules and regulations thereunder, any further
Incorporated Documents so filed will, when they are filed, conform in all
material respects with the requirements of the Exchange Act and the rules and
regulations thereunder; no such document when it was filed (or, if an amendment
with respect to any such document was filed, when such amendment was filed),
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading; and no such further document, when it is filed, will
contain an untrue statement of a material fact or will omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading.
(d) All the outstanding shares of Common Stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable and
are free of any preemptive or similar rights; the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor in accordance with the terms hereof, will be validly issued, fully
paid and nonassessable and free of any preemptive or similar rights; and the
capital stock of the Company conforms to the description thereof in the
registration statement and the prospectus.
-7-
<PAGE>
(e) The Company is a corporation duly organized and validly existing
in good standing under the laws of the State of Delaware with full corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus, and is
duly registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company and the Subsidiaries (as hereinafter defined) taken as
a whole.
(f) All the Company's subsidiaries (collectively, and including the
Company's subsidiary in India, the "Subsidiaries"), other than the Company's
subsidiary in India, are listed in an exhibit to the Company's Annual Report on
Form 10-K which is incorporated by reference into the Registration Statement.
Each Subsidiary is a corporation duly organized, validly existing and in good
standing in the jurisdiction of its incorporation, with full corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus, and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of such Subsidiary; all the outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable, and are owned by the Company directly, or indirectly
through one of the other Subsidiaries, free and clear of any lien, adverse
claim, security interest, equity or other encumbrance.
(g) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to which
any of their respective properties is subject, that are required to be described
in the Registration Statement or the Prospectus but are not described as
required, and there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement or any
Incorporated Document that are not described or filed as required by the Act or
the Exchange Act.
(h) Neither the Company nor any of the Subsidiaries is in violation
of its certificate or articles of incorporation or bylaws, or other
organizational documents, or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries or of any decree of any court or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries, or in default in any
material respect in the performance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any material agreement, indenture, lease or other instrument to which the
Company or any of the Subsidiaries is a party or by which any of them or any of
their respective properties may be bound.
(i) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company nor the consummation by
the Company of the transactions
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<PAGE>
contemplated hereby (i) requires any consent, approval, authorization or
other order of or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official (except
such as may be required for the registration of the Shares under the Act and
the Exchange Act and compliance with the securities or Blue Sky laws of
various jurisdictions, all of which have been or will be effected in
accordance with this Agreement) or conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the
certificate or articles of incorporation or bylaws, or other organizational
documents, of the Company or any of the Subsidiaries or (ii) conflicts or
will conflict with or constitutes or will constitute a breach of, or a
default under, any agreement, indenture, lease or other instrument that is an
exhibit to the Registration Statement or to any Incorporated Document to
which the Company or any of the Subsidiaries is a party or by which any of
them or any of their respective properties may be bound, or violates or will
violate any statute, law, regulation or filing or judgment, injunction, order
or decree applicable to the Company or any of the Subsidiaries or any of
their respective properties, or will result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company or
any of the Subsidiaries pursuant to the terms of any agreement or instrument
to which any of them is a party or by which any of them may be bound or to
which any of the property or assets of any of them is subject.
(j) The accountants, Arthur Andersen LLP, who have certified or shall
certify the financial statements included or incorporated by reference in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto) are independent public accountants as required by the Act.
(k) The financial statements, together with related schedules and
notes, included or incorporated by reference in the Registration Statement and
the Prospectus (and any amendment or supplement thereto), present fairly the
consolidated financial position, results of operations and changes in financial
position of the Company and the Subsidiaries on the basis stated in the
Registration Statement at the respective dates or for the respective periods to
which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data included
or incorporated by reference in the Registration Statement and the Prospectus
(and any amendment or supplement thereto) are accurately presented and prepared
on a basis consistent with such financial statements and the books and records
of the Company and the Subsidiaries.
(l) The execution and delivery of, and the performance by the Company
of its obligations under, this Agreement have been duly and validly authorized
by the Company, and this Agreement has been duly executed and delivered by the
Company and constitutes the valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as rights
to indemnity and contribution hereunder may be limited by federal or state
securities laws or principles of public policy and except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, arrangement,
fraudulent conveyance, moratorium or other similar laws relating to or affecting
creditors' rights generally and by the general principles of equity.
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<PAGE>
(m) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the capital
stock, or material increase in the short-term debt or long-term debt, of the
Company or any of the Subsidiaries, or any material adverse change, or, to the
knowledge of the Company, any development involving or which may reasonably be
expected to involve, a prospective material adverse change, in the condition
(financial or other), business, net worth or results of operations of the
Company and the Subsidiaries taken as a whole.
(n) Each of the Company and the Subsidiaries has good and marketable
title to all property (real and personal) described in the Prospectus as being
owned by it, free and clear of all liens, claims, security interests or other
encumbrances except such as are described in the Registration Statement and the
Prospectus or in a document filed as an exhibit to the Registration Statement
and all the property described in the Prospectus as being held under lease by
each of the Company and the Subsidiaries is held by it under valid, subsisting
and enforceable leases.
(o) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the Shares,
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Prepricing
Prospectus, the Prospectus or other materials, if any, permitted by the Act.
(p) The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties and to
conduct its business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus; the Company and each of
the Subsidiaries has fulfilled and performed all their material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such permit,
subject in each case to such qualification as may be set forth in the
Prospectus; and, except as described in the Prospectus, none of such permits
contains any restriction that is materially burdensome to the Company or any of
the Subsidiaries.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
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(r) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has made
any payment of funds of the Company or any Subsidiary or received or retained
any funds in violation of any law, rule or regulation, which payment, receipt or
retention of funds is of a character required to be disclosed in the Prospectus.
(s) The Company and each of the Subsidiaries have filed all tax
returns required to be filed (or has requested extensions thereof in a timely
manner), which returns are complete and correct, and neither the Company nor any
Subsidiary is in default in the payment of any taxes which were payable pursuant
to said returns or any assessments with respect thereto, except for any such
taxes or assessments that are currently being contested in good faith.
(t) No holder of any security of the Company has any right to require
registration of shares of Common Stock or any other security of the Company
because of the filing of the registration statement or consummation of the
transactions contemplated by this Agreement.
(u) The Company and each of the Subsidiaries own or possess, or can
acquire on commercially reasonable terms, adequate licenses or other rights to
use all patents, trademarks, service marks, trade names, copyrights, mask work
rights, technology, software, know-how and trade secrets necessary to conduct
their respective businesses as described in the Prospectus, and except as
disclosed in the Prospectus, neither the Company nor its Subsidiaries have
received any notice of infringement of or conflict with (and knows of no such
infringement of or conflict with) asserted rights of others with respect to any
patents, trademarks, service marks, trade names, copyrights, mask work rights,
technology, know-how or trade secrets; and, except as disclosed in the
Prospectus, to the knowledge of the Company or its Subsidiaries, the
discoveries, inventions, products, services or processes of the Company and the
Subsidiaries referred to in the Prospectus do not infringe or conflict with any
right or patent of any third party, or any discovery, invention, product or
process which is the subject of a patent application filed by any third party.
(v) The Company has complied with all provisions of Florida Statutes,
517.075, relating to issuers doing business with Cuba.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each of you and
each other Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act
from and against any and all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation) arising out of or based upon any
untrue statement or alleged untrue statement of a material fact contained in any
Prepricing Prospectus or in the Registration Statement or the Prospectus or in
any amendment or supplement thereto, or arising out of or based upon any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance
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<PAGE>
upon and in conformity with the information relating to such Underwriter
furnished in writing to the Company by or on behalf of any Underwriter
through you expressly for use in connection therewith; provided, however,
that the indemnification contained in this paragraph (a) with respect to any
Prepricing Prospectus shall not inure to the benefit of any Underwriter (or
to the benefit of any person controlling such Underwriter) on account of any
such loss, claim, damage, liability or expense arising from the sale of the
Shares by such Underwriter to any person if a copy of the Prospectus shall
not have been delivered or sent to such person within the time required by
the Act and the regulations thereunder, and the untrue statement or alleged
untrue statement or omission or alleged omission of a material fact contained
in such Prepricing Prospectus was corrected in the Prospectus, provided that
the Company has delivered the Prospectus to the several Underwriters in
requisite quantity on a timely basis to permit such delivery or sending. The
foregoing indemnity agreement shall be in addition to any liability which the
Company may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company and the Company shall
assume the defense thereof, including the employment of counsel and payment
of all fees and expenses. Such Underwriter or any such controlling person
shall have the right to employ separate counsel in any such action, suit or
proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Underwriter or such
controlling person unless (i) the Company has agreed in writing to pay such
fees and expenses, (ii) the Company has failed to assume the defense and
employ counsel, or (iii) the named parties to any such action, suit or
proceeding (including any impleaded parties) include both such Underwriter or
such controlling person and the Company and such Underwriter or such
controlling person shall have been advised by its counsel that representation
of such indemnified party and the Company by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or
not such representation by the same counsel has been proposed) due to actual
or potential differing interests between them (in which case the Company
shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Underwriter or such controlling person). It is
understood, however, that the Company shall, in connection with any one such
action, suit or proceeding or separate but substantially similar or related
actions, suits or proceedings in the same jurisdiction arising out of the
same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by Smith Barney Inc., and that all
such fees and expenses shall be reimbursed as they are incurred. The Company
shall not be liable for any settlement of any such action, suit or proceeding
effected without its written consent, but if settled with such written
consent, or if there be a final judgment for the plaintiff in any such
action, suit or proceeding, the Company agrees to indemnify and hold harmless
any Underwriter, to the extent provided in the preceding paragraph, and any
such controlling person from and against any loss, claim, damage, liability
or expense by reason of such settlement or judgment.
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<PAGE>
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the
same extent as the foregoing indemnity from the Company to each Underwriter, but
only with respect to information relating to such Underwriter furnished in
writing by or on behalf of such Underwriter through you expressly for use in the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto.
If any action, suit or proceeding shall be brought against the
Company, any of its directors, any such officer, or any such controlling person
based on the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto, and in respect of which
indemnity may be sought against any Underwriter pursuant to this paragraph (c),
such Underwriter shall have the rights and duties given to the Company by
paragraph (b) above (except that if the Company shall have assumed the defense
thereof such Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at such Underwriter's expense), and the
Company, its directors, any such officer and any such controlling person shall
have the rights and duties given to the Underwriters by paragraph (b) above.
The foregoing indemnity agreement shall be in addition to any liability which
any Underwriter may otherwise have.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities or expenses
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other
hand from the offering of the Shares, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and the
Underwriters on the other in connection with the statements or omissions that
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company, bear to the
total underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault of the Company on the one hand and the Underwriters on the
other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to
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<PAGE>
information supplied by the Company on the one hand or by the Underwriters on
the other hand and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(e) The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined
by a pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) above.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (d) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which
the total price of the Shares underwritten by it and distributed to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7 are several in proportion to the respective
numbers of Firm Shares set forth opposite their names in Schedule I hereto
(or such numbers of Firm Shares increased as set forth in Section 10 hereof)
and not joint.
(f) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under
this Section 7 shall be paid by the indemnifying party to the indemnified
party as such losses, claims, damages, liabilities or expenses are incurred.
The indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
person controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor
to any Underwriter or any person controlling any Underwriter, or to the
Company, its directors or officers, or any person controlling the Company,
shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 7.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of
the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
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(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment
thereto (or an Abbreviated Registration Statement) to be declared effective
before the offering of the Shares may commence, the registration statement or
such post-effective amendment (or an Abbreviated Registration Statement)
shall have become effective not later than 5:30 p.m., New York City time, on
the date hereof, or at such later date and time as shall be consented to in
writing by you, and all filings, if any, required by Rules 424 and 430A under
the Act shall have been timely made; no stop order suspending the
effectiveness of the registration statement shall have been issued and no
proceeding for that purpose shall have been instituted or, to the knowledge
of the Company or any Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
registration statement or the prospectus or otherwise) shall have been
complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, in or affecting the condition (financial or other), business,
properties, net worth, or results of operations of the Company or the
Subsidiaries not contemplated by the Prospectus, which in your opinion, as
Representatives of the several Underwriters, would materially adversely affect
the market for the Shares, or (ii) any event or development relating to or
involving the Company or any officer or director of the Company which makes any
statement made in the Prospectus untrue or which, in the opinion of the Company
and its counsel or the Underwriters and their counsel, requires the making of
any addition to or change in the Prospectus in order to state a material fact
required by the Act or any other law to be stated therein or necessary in order
to make the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your opinion, as
Representatives of the several Underwriters, materially adversely affect the
market for the Shares.
(c) You shall have received on the Closing Date, an opinion of
Morrison & Foerster LLP, counsel for the Company, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, to the effect
that:
(i) The Company is a corporation duly incorporated and
validly existing in good standing under the laws of the State of Delaware with
full corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify does not have a material adverse effect on the condition
(financial or other), business, properties, net worth or results of operations
of the Company and the Subsidiaries taken as a whole;
(ii) The authorized and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the Prospectus;
and the authorized capital stock of the Company conforms in all material
respects as to legal matters to the description thereof contained in the
Prospectus under the caption "Description of Capital Stock";
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(iii) All the shares of capital stock of the Company
outstanding prior to the issuance of the Shares have been duly authorized
and validly issued, and are fully paid and nonassessable;
(iv) The Shares have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor in accordance with
the terms hereof, will be validly issued, fully paid and nonassessable and
free of any preemptive, or to the best knowledge of such counsel after
reasonable inquiry, similar rights that entitle or will entitle any person to
acquire any Shares upon the issuance thereof by the Company;
(v) The form of certificates for the Shares conforms to the
requirements of the Delaware General Corporation Law;
(vi) The Registration Statement and all post-effective
amendments, if any, have become effective under the Act and, to the best
knowledge of such counsel after reasonable inquiry, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose are pending before or contemplated by the Commission; and any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
accordance with Rule 424(b);
(vii) The Company has corporate power and authority to
enter into this Agreement and to issue, sell and deliver the Shares to the
Underwriters as provided herein, and this Agreement has been duly authorized,
executed and delivered by the Company and is a valid, legal and binding
agreement of the Company, enforceable against the Company in accordance with
its terms, except as enforcement of rights to indemnity and contribution
hereunder may be limited by federal or state securities laws or principles of
public policy and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance,
moratorium or other similar laws relating to or affecting creditors' rights
generally and by general principles of equity;
(viii) The Company is not in violation of its respective
certificate or articles of incorporation or bylaws, or other organizational
documents, or to the best knowledge of such counsel after reasonable inquiry, is
not in default in the performance of any material obligation, agreement or
condition contained in any bond, debenture, note or other evidence of
indebtedness, except as may be disclosed in the Prospectus;
(ix) Neither the offer, sale or delivery of the Shares, the
execution, delivery or performance of this Agreement, compliance by the Company
with the provisions hereof nor consummation by the Company of the transactions
contemplated hereby conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational documents, of the Company or
any agreement, indenture, lease or other instrument to which the Company is a
party or by which it or any of its properties is bound that is an exhibit to the
Registration Statement or to any Incorporated Document, or is known to such
counsel
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after reasonable inquiry, or will result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company, nor
will any such action result in any violation of any existing law, regulation,
ruling (assuming compliance with all applicable state securities and Blue Sky
laws) , judgment, injunction, order or decree known to such counsel after
reasonable inquiry, applicable to the Company, or any of its properties;
(x) No consent, approval, authorization or other order of,
or registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official is required on the part
of the Company (except as have been obtained under the Act and the Exchange Act
or such as may be required under state securities or Blue Sky laws governing the
purchase and distribution of the Shares) for the valid issuance and sale of the
Shares to the Underwriters as contemplated by this Agreement;
(xi) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements and the
notes thereto and the schedules and other financial and statistical data
included therein, as to which such counsel need not express any opinion) comply
as to form in all material respects with the requirements of the Act; and each
of the Incorporated Documents (except for the financial statements and the notes
thereto and the schedules and other financial and statistical data included
therein, as to which counsel need not express any opinion) complies as to form
in all material respects with the Exchange Act and the rules and regulations of
the Commission thereunder;
(xii) To the best knowledge of such counsel after
reasonable inquiry, (A) other than as described or contemplated in the
Prospectus (or any supplement thereto), there are no legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or any of
their property, is subject, which are required to be described in the
Registration Statement or Prospectus (or any amendment or supplement thereto)
and (B) there are no agreements, contracts, indentures, leases or other
instruments, that are required to be described in the Registration Statement or
the Prospectus (or any amendment or supplement thereto) or to be filed as an
exhibit to the Registration Statement or any Incorporated Document that are not
described or filed as required, as the case may be;
(xiii) To the best knowledge of such counsel after
reasonable inquiry, the Company is not in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to the Company or
of any decree of any court or governmental agency or body having jurisdiction
over the Company;
(xiv) The statements in the Registration Statement and
Prospectus, insofar as they are descriptions of contracts, agreements or other
legal documents, or refer to statements of law or legal conclusions, are
accurate and present fairly the information required to be shown;
(xv) To the best knowledge of such counsel after
reasonable inquiry, the statements in the Prospectus under the caption
"Business - Intellectual Property" are true and correct statements in all
material respects;
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(xvi) Although counsel has not undertaken, except as
otherwise indicated in their opinion, to determine independently, and does not
assume any responsibility for, the accuracy or completeness of the statements in
the Registration Statement, such counsel has participated in the preparation of
the Registration Statement and the Prospectus, including review and discussion
of the contents thereof (including review and discussion of the contents of all
Incorporated Documents), and nothing has come to the attention of such counsel
that has caused them to believe that the Registration Statement (including the
Incorporated Documents) at the time the Registration Statement became effective,
or the Prospectus, as of its date and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that any amendment or
supplement to the Prospectus, as of its respective date, and as of the Closing
Date or the Option Closing Date, as the case may be, contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no opinion with respect to the financial statements and the notes
thereto and the schedules and other financial and statistical data included in
the Registration Statement or the Prospectus or any Incorporated Document).
In rendering their opinion as aforesaid, counsel may rely upon an opinion
or opinions, each dated the Closing Date, of other counsel retained by them or
the Company as to laws of any jurisdiction other than the United States or the
State of California, provided that (1) each such local counsel is acceptable to
the Representatives, (2) such reliance is expressly authorized by each opinion
so relied upon and a copy of each such opinion is delivered to the
Representatives and is, in form and substance satisfactory to them and their
counsel, and (3) counsel shall state in their opinion that they believe that
they and the Underwriters are justified in relying thereon. In rendering their
opinions as aforesaid, counsel may rely as to matters of fact, to the extent
such counsel deems proper, on certificates of the executive officers of the
Company and public officials.
(d) You shall have received on the Closing Date an opinion of Wilson
Sonsini Goodrich & Rosati, counsel for the Underwriters, dated the Closing Date
and addressed to you, as Representatives of the several Underwriters, with
respect to the matters referred to in clauses (iv), (vi), (vii), (xi) and
(xvi) of the foregoing paragraph (c) and such other related matters as you may
request.
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(e) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and the
Closing Date from Arthur Andersen LLP, independent public accountants,
substantially in the forms heretofore approved by you.
(f) (i)No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Company, shall be contemplated by the
Commission at or prior to the Closing Date; (ii) there shall not have been any
change in the capital stock of the Company nor any material increase in the
short-term or long-term debt of the Company (other than in the ordinary course
of business) from that set forth or contemplated in the Registration Statement
or the Prospectus (or any amendment or supplement thereto); (iii) there shall
not have been, since the respective dates as of which information is given in
the Registration Statement and the Prospectus (or any amendment or supplement
thereto), except as may otherwise be stated in the Registration Statement and
Prospectus (or any amendment or supplement thereto), any material adverse change
in the condition (financial or other), business, prospects, properties, net
worth or results of operations of the Company and the Subsidiaries taken as a
whole; (iv) the Company and the Subsidiaries shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Company and the Subsidiaries, taken as a
whole, other than those reflected in the Registration Statement or the
Prospectus (or any amendment or supplement thereto); and (v) all the
representations and warranties of the Company contained in this Agreement shall
be true and correct on and as of the date hereof and on and as of the Closing
Date as if made on and as of the Closing Date, and you shall have received a
certificate, dated the Closing Date and signed by the chief executive officer
and the chief financial officer of the Company (or such other officers as are
acceptable to you), to the effect set forth in this Section 8(f) and in
Section 8(g) hereof.
(g) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(h) Prior to the Closing Date the Shares shall have been listed,
subject to notice of issuance, on the Nasdaq National Market.
(i) The Company shall have furnished or caused to be furnished to
you such further certificates and documents as you shall have requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel.
Any certificate or document signed by any officer of the Company and
delivered to you, as Representatives of the Underwriters, or to counsel for the
Underwriters, shall be deemed a representation and warranty by the Company to
each Underwriter as to the statements made therein.
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<PAGE>
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the satisfaction on and as of any Option Closing Date
of the conditions set forth in this Section 8, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (f) shall be dated the Option
Closing Date in question and the opinions called for by paragraphs (c) and (d)
shall be revised to reflect the sale of Additional Shares.
9. EXPENSES. The Company agrees to pay the following costs and expenses
and all other costs and expenses incident to the performance by it of its
obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
Prepricing Prospectus, the Prospectus, the Incorporated Documents, and all
amendments or supplements to any of them, as may be reasonably requested for use
in connection with the offering and sale of the Shares; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the Shares,
including any stamp taxes in connection with the original issuance and sale of
the Shares; (iv) the printing (or reproduction) and delivery of this Agreement,
the preliminary and supplemental Blue Sky Memoranda and all other agreements or
documents printed (or reproduced) and delivered in connection with the offering
of the Shares; (v) the listing of the Shares on the Nasdaq National Market; (vi)
the registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states as provided in Section 5(g)
hereof (including the reasonable fees, expenses and disbursements of counsel for
the Underwriters relating to the preparation, printing or reproduction, and
delivery of the preliminary and supplemental Blue Sky Memoranda and such
registration and qualification); (vii) the filing fees and the reasonable fees
and expenses of counsel for the Underwriters in connection with any filings
required to be made with the National Association of Securities Dealers, Inc.;
(viii) the transportation and other expenses incurred by or on behalf of Company
representatives (but not by or on behalf of the Underwriters) in connection with
presentations to prospective purchasers of the Shares; and (ix) the fees and
expenses of the Company's accountants and the fees and expenses of counsel
(including local and special counsel) for the Company.
10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective amendment
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by the Company, by notifying you, or
by you, as Representatives of the several Underwriters, by notifying the
Company.
If any one or more of the Underwriters shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing
Date, and the aggregate number of Shares which such defaulting Underwriter or
Underwriters are obligated but fail or refuse to purchase is not more than
one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing
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<PAGE>
Date, each non-defaulting Underwriter shall be obligated, severally, in the
proportion which the number of Firm Shares set forth opposite its name in
Schedule I hereto bears to the aggregate number of Firm Shares set forth
opposite the names of all non-defaulting Underwriters or in such other
proportion as you may specify in accordance with Section 20 of the Master
Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares
which such defaulting Underwriter or Underwriters are obligated, but fail or
refuse, to purchase. If any one or more of the Underwriters shall fail or
refuse to purchase Shares which it or they are obligated to purchase on the
Closing Date and the aggregate number of Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Shares which
the Underwriters are obligated to purchase on the Closing Date and
arrangements satisfactory to you and the Company for the purchase of such
Shares by one or more nondefaulting Underwriters or other party or parties
approved by you and the Company are not made within 36 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company. In any such case which does not
result in termination of this Agreement, either you or the Company shall have
the right to postpone the Closing Date, but in no event for longer than seven
days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any such default of any
such Underwriter under this Agreement. The term "Underwriter" as used in this
Agreement includes, for all purposes of this Agreement, any party not listed
in Schedule I hereto who, with your approval and the approval of the Company,
purchases Shares which a defaulting Underwriter is obligated, but fails or
refuses, to purchase.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company, by notice to the Company, if prior to the Closing
Date or any Option Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, (i) trading in securities
generally on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market shall have been suspended or materially limited, (ii) a
general moratorium on commercial banking activities in New York or California
shall have been declared by either federal or state authorities, or (iii) there
shall have occurred any outbreak or escalation of hostilities or other
international or domestic calamity, crisis or change in political, financial or
economic conditions, the effect of which on the financial markets of the United
States is such as to make it, in your judgment, impracticable or inadvisable to
commence or continue the offering of the Shares at the offering price to the
public set forth on the cover page of the Prospectus or to enforce contracts for
the resale of the Shares by the Underwriters. Notice of such termination may be
given to the Company by telegram, telecopy or telephone and shall be
subsequently confirmed by letter.
12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set forth
in the last paragraph on the cover page, the stabilization legend on the inside
cover page, and the statements in the first and third paragraphs under the
caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
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<PAGE>
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Sections 6(b) and 7 hereof.
13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10 and 11
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at 170 Rose Orchard Way, San Jose, California 95134, Attention:
Charles D. Kissner, Chairman of the Board, President and Chief Executive
Officer; or (ii) if to you, as Representatives of the several Underwriters, care
of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention:
Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, its directors and officers and the other controlling
persons referred to in Section 7 hereof and their respective successors and
assigns, to the extent provided herein, and no other person shall acquire or
have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Shares in his
status as such purchaser.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
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<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
DIGITAL MICROWAVE CORPORATION
By:
---------------------------------
Charles D. Kissner,
Chairman of the Board, President
and Chief Executive Officer
Confirmed as of the date first above mentioned
on behalf of themselves and the other several
Underwriters named in Schedule I hereto.
SMITH BARNEY INC.
OPPENHEIMER & CO., INC.
COWEN & COMPANY
As Representatives of the Several Underwriters
By: SMITH BARNEY INC.
By:
--------------------------------------
Geoffrey L. Tickner, Jr.
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SCHEDULE I
NAME OF COMPANY
<TABLE>
<CAPTION>
NUMBER OF UNDERWRITER FIRM SHARES
- ------------------------------------------------------------ ----------------
<S> <C>
Smith Barney Inc.. . . . . . . . . . . . . . . . . . . . . .
Oppenheimer & Co., Inc. . . . . . . . . . . . . . . . . . .
Cowen & Company. . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . 2,150,000
</TABLE>
