<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number: 0-15895
September 30, 1997
- ------------------
DIGITAL MICROWAVE CORPORATION
(Exact name of registrant specified in its charter)
Delaware 77-0016028
- -------------------------------- ------------------------
(State or other jurisdiction (IRS employer
of incorporation or organization) identification number)
170 Rose Orchard Way
San Jose, CA 95134
- ---------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-0777
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
The number of outstanding shares of the Registrant's Common Stock, par value
$.01 per share, was 19,046,706 on October 31, 1997.
Page 1 of 17
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INDEX
PAGE
COVER PAGE 1
INDEX 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 6 - Exhibits and Reports on Form 8-K 15 & 17
SIGNATURE 16
Page 2 of 17
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PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS 9/30/97 03/31/97
----------- ---------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 20,098 $ 40,367
Short-term investments 13,206 17,947
Accounts receivable, net 57,250 44,623
Inventories 48,014 45,900
Other current assets 4,858 3,643
----------- ---------
Total current assets 143,426 152,480
PROPERTY AND EQUIPMENT, NET 21,240 17,726
OTHER ASSETS 15,455 --
----------- ---------
Total assets $180,121 $170,206
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ -- $ 2,016
Current maturities of capital lease
obligations 490 681
Accounts payable 21,936 22,890
Income taxes payable 2,453 1,649
Accrued liabilities 18,597 25,284
----------- ---------
Total current liabilities 43,476 52,520
LONG-TERM LIABILITIES:
Capital lease obligations, net of
current maturities 179 158
----------- ---------
Total liabilities 43,655 52,678
STOCKHOLDERS' EQUITY
Common stock and paid-in capital 127,367 121,676
Other stockholders' equity (20) (63)
Retained earnings (accumulated deficit) 9,119 (4,085)
----------- ---------
Total stockholders' equity 136,466 117,528
Total liabilities and stockholders' equity $180,121 $170,206
----------- ---------
----------- ---------
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 3 of 17
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DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
-------- -------- -------- -------
Net sales $67,106 $41,525 $123,839 $78,332
Cost of sales 43,563 27,783 80,623 52,685
-------- -------- -------- -------
Gross profit 23,543 13,742 43,216 25,647
-------- -------- -------- -------
Operating Expenses:
Research and development 3,709 2,467 7,191 4,928
Selling, general and administrative 11,539 8,702 21,670 16,629
-------- -------- -------- -------
Total operating expenses 15,248 11,169 28,861 21,557
-------- -------- -------- -------
Operating income 8,295 2,573 14,355 4,090
Other income (expense):
Interest and other income, net 65 83 537 96
Interest expense (118) (299) (222) (581)
-------- -------- -------- -------
Income before provision for
income taxes 8,242 2,357 14,670 3,605
Provision for income taxes 824 235 1,467 360
-------- -------- -------- -------
Net income $ 7,418 $ 2,122 $ 13,203 $ 3,245
-------- -------- -------- -------
-------- -------- -------- -------
Net income per share $ 0.37 $ 0.13 $ 0.67 $ 0.20
-------- -------- -------- -------
-------- -------- -------- -------
Weighted average number of
common & common equivalent shares
outstanding 19,969 16,611 19,751 16,436
-------- -------- -------- -------
-------- -------- -------- -------
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 4 of 17
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DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
September 30,
------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income $ 13,203 $ 3,245
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 4,436 2,716
Provision for valuation reserves 3,073 2,383
Provision for warranty reserves 2,072 915
Changes in assets and liabilities:
Increase in accounts receivable (11,199) (2,611)
Increase in inventories (3,602) (13,648)
Increase in other current assets (1,074) (737)
(Decrease) increase in accounts payable (1,408) 265
Increase in income taxes payable 787 --
(Decrease) increase in other accrued liabilities (9,133) 1,433
-------- --------
Net cash used for operating activities (2,845) (6,039)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (3,193) --
Proceeds from available-for-sale securities 7,933 --
Purchase of Granger, Inc., net of cash acquired (11,383) --
Investment in Granger Associates, Ltd. (4,000) --
Purchases of property and equipment (6,808) (2,531)
-------- --------
Net cash used for investing activities (17,451) (2,531)
Cash flows from financing activities:
(Repayments to) borrowings from bank (2,016) 2,889
Payment of capital lease obligations (583) (553)
Payment of assumed Granger, Inc. debt (3,286) --
Sale of common stock 5,689 1,613
-------- --------
Net cash provided by financing activities (196) 3,949
-------- --------
Effect of exchange rate changes on cash 223 149
-------- --------
Net increase (decrease) in cash and cash equivalents (20,269) (4,472)
Cash and cash equivalents at beginning of year 40,367 9,018
-------- --------
Cash and cash equivalents at end of period $20,098 $4,546
-------- --------
-------- --------
SUPPLEMENTAL DATA
Interest paid 230 573
Income tax paid 540 --
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 5 of 17
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DIGITAL MICROWAVE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Digital Microwave Corporation and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated.
While the financial information furnished is unaudited, the financial
statements included in this report reflect all adjustments (consisting only
of normal recurring adjustments) which the Company considers necessary for
a fair presentation of the results of operations for the interim periods
covered and of the financial condition of the Company at the date of the
interim balance sheet. The results for interim periods are not necessarily
indicative of the results for the entire year. The condensed consolidated
financial statements should be read in connection with the Digital
Microwave Corporation financial statements included in the Company's annual
report and Form 10-K for the year ended March 31, 1997.
CASH AND CASH EQUIVALENTS
For purposes of the condensed 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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market where cost includes material, labor and manufacturing overhead.
Inventories consist of:
(In thousands)
September 30, 1997 March 31, 1997
------------------ --------------
(Unaudited)
Raw materials 18,439 $ 16,594
Work in process 15,610 15,122
Finished goods 13,965 14,184
------------------ --------------
$ 48,014 $ 45,900
------------------ --------------
------------------ --------------
OTHER ASSETS
Included in other assets are goodwill and other intangibles which are being
amortized on a straight line basis over their useful lives ranging from 5 to 10
years.
Page 6 of 17
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CURRENCY TRANSLATION
In April 1997, the Company changed the functional currency of its
subsidiaries from the U.S. dollar to the local currency of each subsidiary
except for its Latin American subsidiaries. Accordingly, all the assets
and liabilities of these subsidiaries, except for the Latin American
subsidiaries, are remeasured into U.S. dollars at current exchange 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 as a component of
stockholders' equity, except for the Latin American subsidiaries which are
included in the Consolidated Statement of Operations.
FINANCIAL INSTRUMENTS
In April 1997, the Company began entering into forward foreign
exchange contracts to hedge some of its backlog, as well as certain
assets and liabilities denominated in foreign currencies. At
September 30, 1997, the Company had forward foreign exchange contracts
to exchange various foreign currencies for U.S. dollars in the gross
amount of $40.1 million. Market value gains and losses on forward
foreign exchange contracts are recognized as offsets to the exchange
gains or losses on the hedged transactions.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement
on Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share,"
which is required to be adopted by the Company in its third quarter of
Fiscal 1998. At that time the Company will be required to change the
method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements, primary earnings per share will
be replaced with basic earnings per share and fully diluted earnings per
share will be replaced with diluted earnings per share. Under SFAS 128,
basic earnings per share for the second quarters of Fiscal 1998 and 1997
would have been $.39 and $.13, respectively. Diluted earnings per share
would be substantially the same as the reported primary earnings per share.
Page 7 of 17
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PURCHASE OF GRANGER, INC AND INVESTMENT IN GRANGER ASSOCIATES
On May 14, 1997, the Company acquired all of the outstanding shares of
Granger, Inc., a U.S. manufacturer of wireless products and provider of
installation services. The purchase price of Granger, Inc. and the
purchase of certain rights, totaled $14.7 million. In May 1997, the
Company paid $3.3 million of Granger, Inc. debt assumed in the
acquisition. The purchase price and repayment of debt was funded with
existing cash. The acquisition has been accounted for using the purchase
method of accounting.
Accordingly, the results of the operations of Granger, Inc. have been
combined with those of the Company since the date of the acquisition. In
addition, a portion of the purchase price was allocated to the net assets
acquired based on their estimated fair values. The fair value of tangible
assets acquired and liabilities assumed was $5.8 million and $1.9 million,
respectively.
Concurrent with the acquisition of Granger, Inc., the Company made a
minority investment in Granger Associates, Ltd., a privately held company
based in the United Kingdom, for $4.0 million. This minority investment
has been accounted for using the cost method of accounting.
LITIGATION AND CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in the
normal course of its business. In the opinion of management, these
proceedings will not have a material adverse effect on the financial
position and results of operations of the Company.
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 Asia, Eastern Europe, South America, the Middle East and Africa.
The Company performs on-going credit evaluations of its customers' financial
conditions and generally requires no collateral.
Page 8 of 17
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth items from the Condensed Consolidated Statements
of Operations as percentages of net sales:
Three Months Ended Six Months Ended
September 30 September 30,
------------------ ----------------
1997 1996 1997 1996
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 64.9 66.9 65.1 67.3
----- ----- ----- -----
Gross profit 35.1 33.1 34.9 32.7
Research & development 5.5 5.9 5.8 6.3
Selling, general & administrative 17.2 21.0 17.5 21.2
----- ----- ----- -----
Operating income 12.4 6.2 11.6 5.2
Other expense, net (0.1) (0.5) 0.2 (0.6)
----- ----- ----- -----
Income before provision
for income taxes 12.3 5.7 11.8 4.6
Provision for income taxes 1.2 0.6 1.2 0.5
----- ----- ----- -----
Net income 11.1% 5.1% 10.6% 4.1%
----- ----- ----- -----
----- ----- ----- -----
Net sales for the second quarter of fiscal year 1998 were $67.1 million,
compared to $41.5 million reported in the same quarter of fiscal year 1997. Net
sales for the first six months of fiscal 1998 were $123.8 million, compared to
net sales of $78.3 million for the similar period in fiscal 1997. The increase
in net sales in the first half of fiscal 1998 as compared to the first half of
fiscal 1997 was primarily due to higher sales in all major geographic areas.
During the second quarter of fiscal 1998, the Company received $66 million in
new orders shippable over the next twelve months, compared to $48 million in the
second quarter of fiscal 1997. Backlog at September 30, 1997 was $103.5 million,
compared to $106 million at June 30, 1997.
Page 9 of 17
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The Company includes in its backlog purchase orders with respect to which a
delivery schedule has been specified for product shipment within one year.
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.
Gross profits in the second quarter and first half of fiscal 1998 were 2%
higher compared to the same periods in fiscal 1997 primarily due to improved
manufacturing efficiency, lower component material costs, less overtime and
lower expediting costs. In addition, net sales for the first six months of
fiscal 1998 of SPECTRUM II-TM- increased to $77.7 million or 156% from $30.3
million for the similar period of fiscal 1997, while net sales for the
M-Series product line decreased from $20.1 million to $7.8 million for the
same periods. The Company has seen its gross profit continue to improve;
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 results in
downward pricing pressure on the Company's products. See "Factors That May
Affect Future Financial Results."
Research and development expenses increased by $1.2 million, from $2.5 million
in the second quarter of fiscal 1997 to $3.7 million in the same period in
fiscal 1998. For the first half of fiscal 1998, research and development
expenses of $7.2 million were $2.3 million higher than the $4.9 million reported
in the comparable period of fiscal 1997. The increase in research and
development expenses was primarily attributable to the Company's development
of its new Altium-TM- high-capacity wireless platform. 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 continue to increase in fiscal 1998.
Selling, general and administrative expenses of $11.5 million in the second
quarter of fiscal 1998 were higher by $2.8 million compared to $8.7 million in
the second quarter of fiscal 1997. For the first six months of fiscal 1998,
selling, general and administrative expenses increased by $5.1 million to $21.7
million from $16.6 million in the similar period of fiscal 1997. The increase
was mostly attributable to an increase in personnel and related travel expense,
as well as increased sales office costs, as the Company continued to increase
its sales and worldwide support capability. In addition, Goodwill amortization
related to the acquisition of Granger, Inc. on May 14, 1997, as well as the
selling and administrative expenses of Granger, Inc., partially contributed to
the increase. There also was an increase in sales commission and bonus expense
in the first half of fiscal 1998 compared to the similar period of fiscal 1997
due to the increased sales and improved profitability of the Company during that
period.
Interest and other income, net was $65,000 in the second quarter of fiscal 1998
compared to $83,000 in the similar quarter of fiscal 1997. Interest income for
the
Page 10 of 17
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second quarter of fiscal 1998 increased by $395,000 but was partially offset
by higher losses on foreign exchange as compared to the same period of the
previous year. For the first half of fiscal 1998, interest and other income,
net was $537,000 compared to $96,000 in the same period of fiscal 1997. This
increase was primarily due to higher interest income of $965,000 on higher
average cash balances but was partially offset by higher losses on foreign
exchange as compared to the similar period of fiscal 1997. Interest expense
in the second quarter of fiscal 1998 decreased to $118,000 from $299,000 in
the second quarter of fiscal 1997. For the first six months of fiscal 1998,
interest expense was $222,000 compared to $581,000 in the comparable period
in fiscal 1997. The decrease in interest expense for both periods was
primarily attributable to the Company's lower debt balances during the
comparable periods.
The Company recorded an income tax provision in the second quarter and first
half of both fiscal years 1998 and 1997 at an effective rate of 10%. This was
less than the statutory rate primarily due to the utilization of net operating
loss carry forwards and the deferred tax asset originated from warranty and
asset valuation reserves. The Company expects, assuming continued operating
profitability, that the effective tax rate will reflect a benefit in future
periods as the Company continues to utilize its deferred tax asset.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The statements in this Form 10-Q concerning the Company's expenses, revenue,
liquidity and cash needs contain forward-looking statements concerning the
Company's future operations and financial results within the meaning of 27A of
the Securities Act and section 21E of the Exchange Act. These forward-looking
statements are based on current expectations and the Company assumes no
obligation to update this information. Numerous factors, such as economic and
competitive conditions, timing and volume of incoming orders, shipment volumes,
product margins, and foreign exchange rates, could cause actual results to
differ materially from those described in these statements, and prospective
investors and stockholders should carefully consider the factors set forth below
in evaluating these forward-looking statements.
Sales of the Company's products are concentrated in a small number of customers.
For the second quarter and first half of fiscal 1998, the top three customers
accounted for 21% of the net sales. As of September 30, 1997, three of the
Company's customers accounted for 23% of the backlog. The worldwide
telecommunications industry is dominated by a small number of large
corporations, and the Company expects that a significant portion of its future
product sales will continue to be concentrated in a limited number of customers.
The loss of any existing customer, a significant reduction in the level of sales
to any existing customer, or the failure of the Company to gain additional
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, a substantial
portion of shipments may occur near the end of each quarter. Accordingly,
Page 11 of 17
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the Company's results are difficult to predict and delays in product delivery
or closing of a sale can cause revenues and net income to fluctuate
significantly from anticipated levels and from quarter to quarter.
The markets for the Company's products are extremely competitive and the
Company expects that competition will increase. The Company's existing and
potential competitors include established and emerging companies, such as
California Microwave Corporation, L.M. Ericsson, Siemens AG, Farinon Division
of Harris Corporation, P-COM, Alcatel, Nokia, NERA, NEC, and SIAE, many of
which have more extensive engineering, manufacturing, and marketing
capabilities and significantly greater financial, technical, and personnel
resources than the Company. The Company believes that its ability to compete
successfully will depend on a number of factors both within and outside its
control, including price, quality, availability, product performance and
features; timing of new product introductions by the Company, its customers
and its competitors; the ability of its customers to obtain financing; and
customer service and technical support. The Company continues to experience
customer demands for shorter delivery cycles. The Company increased its
inventory levels in order to respond to this demand, which in turn, may
increase the risk of obsolescence of its inventories.
The Company expects that international sales will continue to account for the
majority of its net product sales for the foreseeable future. As a result, the
Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements; fluctuations in foreign currency
exchange rates; imposition of tariffs and other barriers and restrictions; the
burdens of complying with a variety of foreign laws and general economic and
geopolitical conditions, including inflation and trade relationships.
Manufacturers of digital microwave telecommunications equipment are
experiencing, and are likely to continue to experience, intense price pressure,
which has resulted, and is expected to continue to result, in downward pricing
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 future profitability is dependent upon its ability to
reduce costs, improve manufacturing efficiencies and introduce new products and
product enhancements.
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. From time to time the
Company has experienced delivery delays from key suppliers, which impacted
sales. There can be no assurance that the Company will not experience material
supply problems or component or subsystem delays in the future.
The Company has pursued, and will continue to pursue, growth opportunities
through internal development and acquisitions of complementary business and
technologies.
Page 12 of 17
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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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities in the first half of fiscal 1998 was $2.8
million, compared to $6.0 million used for operating activities in the similar
period of fiscal 1997. The use of cash in the first six months of fiscal 1998
was primarily due to the increased level of accounts receivable and inventory
and reduction of accrued liabilities. Accounts receivable increased due to the
higher sales activity. Inventories increased primarily as a result the need to
raise inventory levels to respond to customer demands for shorter delivery
cycles. Other accrued liabilities decreased primarily due to a decrease in
customer deposits and the payments of annual profit sharing and bonus payments.
In May 1997, the Company completed the acquisition of Granger, Inc. for total
consideration of $14.7 million and purchased a minority interest in Granger
Associates, Ltd., a UK company, for $4.0 million. At September 30, 1997, other
assets included the minority interest mentioned above and the excess of cost
over net assets acquired (goodwill), net of accumulated amortization of $10.6
million related to the acquisition of Granger, Inc. Other changes to cash from
investing activities during the first half of fiscal 1998 included the sale of
some short-term investments to fund operations and an increase in property plant
and equipment of $6.3 million primarily due to purchases of additional test
equipment as a result of the higher sales volume and purchases of equipment for
the increased headcount.
At September 30, 1997, the Company's principal sources of liquidity consisted of
$33.3 million in cash and cash equivalents and short-term investments and a
revolving bank credit facility that provides up to $20.0 million in credit, of
which $18.1 million was available. This credit facility expires in June 1998.
The Company's line of credit requires the Company to meet certain financial
covenants, including minimum liquidity, tangible net worth and profitability
requirements. As of September 30, 1997, 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 through fiscal 1998.
Page 13 of 17
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PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held an Annual Meeting of Stockholders on August 5, 1997.
(b) At the Annual Meeting of Stockholders, the following directors were
elected:
Votes
-----
For Withheld
---------- ---------
Charles D. Kissner 16,359,903 73,252
Richard C. Alberding 16,356,374 76,781
John W. Combs 16,357,613 75,542
Clifford H. Higgerson 16,359,403 73,752
James D. Meindl 16,359,273 73,882
Billy B. Oliver 16,356,647 76,508
(c) At the Annual Meeting of Stockholders, the following additional
matters were voted upon:
1. A proposal to ratify and approve certain amendments to the
Company's 1994 Stock Incentive Plan to increase the number of
shares of Common Stock granted to non-employee Directors of the
Company for their service as members of the Board of Directors,
and to clarify the timing of certain grants to non-employee
Directors of the Company.
Affirmative votes: 9,962,750
Negative votes: 6,284,572
Abstain: 40,526
Non-votes: 145,307
2. A proposal to ratify the selection of Arthur Andersen LLP as
independent public accountants for fiscal year 1998.
Affirmative votes: 16,379,559
Negative votes: 27,535
Abstain 26,061
Non-votes --
Page 14 of 17
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
For a list of exhibits to this Form 10-Q, see the exhibit index
located on page 17.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K for the three-month
period ended September 30, 1997.
Page 15 of 17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL MICROWAVE CORPORATION
Date: November 14, 1997 By /s/ Carl A. Thomsen
------------------- --------------------------
Carl A. Thomsen
Vice President, Chief
Financial Officer and Secretary
Page 16 of 17
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.1 Sublease Agreement, dated August 29, 1997, by and between Wyse
Technology Inc., Digital Microwave Corporation and Wyse Technology
Investments, Inc., relating to 3475 North First Street,
San Jose, California.
11.1 Statement Re: Computation of per share earnings.
27.1 Financial data schedule.
Page 17 of 17
<PAGE>
Exhibit 10.1
SUBLEASE AGREEMENT
This Sublease Agreement is made and entered into the 29TH day of AUGUST,
1997 by and between Wyse Technology Inc. (hereinafter "Sublessor" or
"Wyse") Digital Microwave Corporation (hereinafter "Sublessee" or "DMC")
and Wyse Technology Investments Inc. (hereinafter "Landlord" or "WTI").
For consideration of the rent, covenants, agreements and conditions herein
contained, Sublessor, Sublessee and the Landlord hereby agree as follows:
1. Subleased Premises. Wyse leases from Landlord certain premises which
contain 167,200 square feet in the building located at 3475 North First
St., San Jose, CA 95134 (hereinafter referred to as "Premises") which are
the subject of that certain Lease dated March 19, 1993 between Wyse and
Landlord. Wyse hereby subleases to DMC, and DMC hereby subleases from
Wyse, for the term and upon conditions herein after set forth, the
Subleased Premises, as shown on the drawing attached hereto as Exhibit A
and incorporated herein by this reference. The Subleased Premises contains
62,023 rentable square feet ("RSF"). Landlord hereby provides his
unqualified consent to this sublease of the Subleased Premises.
2. Term. Subject to the terms and conditions set forth herein, the term of
this Sublease shall commence on the date (the "Commencement Date") set
forth on Exhibit B ("Commencement Date Memorandum") and shall terminate on
January 1, 2002, except that it is understood and agreed by the Sublessee
and the Sublessor that the right and interest of Sublessee under this
Sublease are derivative of those of Sublessor under the Lease between
Sublessor Landlord and not any greater than such rights and interest of
Sublessor as to the Subleased Premises.
3. Occupancy. Between the date first written above and September 15, 1997,
Sublessor shall give Sublessee notice of the availability of the Premises
("Notice of Occupancy"). Physical occupancy will be granted to DMC within
one week of the Notice of Occupancy.
4. Use. Sublessee is permitted to use the Subleased Premises for general
office, administration, assembly and warehouse activities.
5. Rent.
(a) During the term of this Sublease, Sublessee covenants and agrees to
pay to Sublessor as full rental for the Subleased Premises, without
previous notice or demand therefore, rent at the gross rate of $1.50
per moth per RSF, which equals a total monthly payment of $93,034.50.
Rent shall be paid on or before the first day of each calendar month
during the term of the Sublease hereof, with the first
WTI, Bldg. 2 Sublease (08/29/97) Page 1
<PAGE>
such monthly installment to be paid upon the date that DMC executes this
Sublease Agreement. The first installment shall be the rent for the
month of October, 1997.
*(b) Notwithstanding the foregoing, Wyse will provide DMC with two weeks
free rental, from September 15, 1997 through September 30, 1997. This
is based on an anticipated Commencement Date prior to September 15.
(c) As security for Sublessee's faithful performance under the Sublease,
DMC shall upon execution of the Sublease pay the sum of $93,034.50
(equaling one month's rent) for security deposit. Except for
reasonable charges for cleaning the Subleased Premises, the security
deposit will be remitted to Sublessee within forty-five (45) days of
the termination of the Sublease (unless the Sublease is terminated for
default of Sublessee.) Wyse is under no obligation to keep the
security deposit in an account separate from its normal business
accounts, neither is it required to accrue interest on the deposit for
the benefit of DMC.
(d) Rent Inclusions. The gross rental rate includes-
(i) Common Area Maintenance Charges (CAM), property taxes and
other operating expenses. It also includes access to and
use of the electronic security system, which is installed in
the building.
(ii) Use, by DMC's on-site employees, of the cafeteria and
recreation center (which includes lockers, showers, weight
room, sauna, pool and Jacuzzi).
Rent does not include utilities or janitorial services
(see Section 6, below).
(e) Late Payments. In the event that Sublessee fails to remit payments as
described above, Sublessee shall additionally be liable for interest
on the unpaid amount, calculated at one and one-half percent (1 1/2%)
per month (or the highest amount permitted by law) on the unpaid
balance due.
6. Condition of Subleased Premises. Sublessee hereby agrees to accept the
Subleased Premises on an "as is", "as built" condition on the Commencement
Date of the term of this Sublease. Sublessor shall leave premises in
broom-clean condition. It being understood and agreed that Sublessor makes
no warranties, express or implied, as to the Subleased Premises including
by way of example, and not limitation, any warranties of suitability,
fitness for purpose of use or habitability.
7. Utilities. Sublessee shall contract for provision of utility services
(natural gas, electricity, telephones and water) directly with the
provider(s). Sublessor shall not be responsible to provide any such
utilities to the
WTI, Bldg. 2 Sublease (08/29/97) Page 2
<PAGE>
Subleased Premises. Additionally, DMC is responsible to provide its own
janitorial services for the Subleased Premises.
8. Insurance. Sublessee shall, prior to Commencement Date, provide Sublessor
with a certificate of insurance naming Landlord and Sublessor as additional
named insureds.
9. DMC's Covenants.
(a) Except as set forth in this Agreement, all Sublessee's covenants and
obligations to the Sublessor and the Landlord under this Sublease
shall be the same as the covenants and obligations of Sublessor to
Landlord under the Lease and all Amendments hereto, which are attached
hereto as Exhibit C and incorporated herein by reference, to the
extent that such covenants and obligations are applicable to the
Subleased Premises and the Sublease terms.
(b) Sublessee hereby covenants and agrees to indemnify, hold harmless and
at the option of Sublessor, defend Sublessor in all suits, actions and
proceedings arising out of, related to, or concerning either (i) any
default or non-performance by Sublessee of this Sublease, including
without limitation, those covenants and obligations undertaken in the
preceding subparagraph, or (ii) the use or occupancy by Sublessee of
the Subleased Premises, except to the extent that such arises from the
negligence or willful misconduct on the part of the Sublessor.
(c) In the event of any dispute and/or litigation between the Sublessee
and the Landlord, the Sublessee will hold the Sublessor harmless.
10. Wyse's Covenants.
(a) Except as set forth above or as otherwise required by the context of
the Lease, all of the Sublessor's covenants and obligations under the
Sublease shall be the same as the covenants and obligations of
Landlord to Sublessor under the Lease and all Amendments thereto.
(b) In the event of any dispute and/or litigation between the Sublessor
and the Landlord, the Sublessor will hold the Sublessee harmless.
(c) Wyse hereby covenants and agrees to indemnify, hold harmless and at
the option of DMC, defend DMC in all suits, actions and proceedings
arising out of, related to, or concerning any default or
non-performance by Wyse of this Sublease, except to the extent that
such arises from the negligence or willful misconduct on the part of
the DMC.
11. Landlord Covenants: Except as set forth herein, or as otherwise required by
the contents of the Lease, all of Landlord's covenants and obligations
under
WTI, Bldg. 2 Sublease (08/29/97) Page 3
<PAGE>
the Sublease shall be the same as the covenants and obligations of Landlord
to Sublessor under the Lease and all Amendments thereto.
12. Parking. A minimum of four (4) parking spaces per one thousand (1,000) RSF
shall be available to DMC. Such parking spaces shall be identified in a
general manner on the Exhibit A. The spaces will not be reserved or
specifically marked as being for the benefit of DMC. Use thereof shall be
in accordance with any current Landlord rules or regulations governing
same.
13. Option to Extend. Wyse and Landlord shall grant DMC a one time, personal
option to extend the Term for up to three (3) years upon at least six (6)
month's written notice from DMC prior to the end of the Term. Rent for the
extended term will be at the then current fair market value for the
Subleased Premises.
14. Signs. DMC will have the right, subject to agreement by Wyse and
compliance with any applicable laws, ordinances or other regulations, to
install (i) a sign on the Subleased Premises and (ii) a monument type sign
at the parking lot entry way on First St. Any signs will be installed and
maintained solely at Sublessee's expense.
15. Special Access to Subleased Premises. In addition to rights of access set
forth in Section 12 of the Lease, Wyse shall, at all reasonable times (and
upon reasonable notice except in cases of emergency) have access via the
Subleased Premises to the "roof access door" located therein.
16. Assignment. DMC shall not assign this Sublease or any of its rights or
obligations hereunder without the written consent of Wyse and WTI. Such
consent shall not be unreasonably withheld provided the proposed assignee
is financially equivalent to DMC, will use the Premises for similar
purposes, and DMC remains responsible for the assignee's performance in its
role as assignor.
17. Miscellaneous:
(a) The terms "Sublessor', "Sublessee" and "Landlord" shall, as
applicable, include their legal representatives, successor and
assigns. All covenants herein made binding upon Landlord, Sublessee
and Sublessor shall be equally binding on its agents, employees and
others claiming the right to be in the Subleased Premises through or
under the Sublessee or Sublessor. The Sublease shall be binding upon
and shall inure to the benefit of the parties hereto and their
respective assigns.
(b) This Sublease shall be governed by the laws of the State of
California.
WTI, Bldg. 2 Sublease (08/29/97) Page 4
<PAGE>
(c) All notices required to be made hereunder shall be sent to the
following addresses, or such other addresses as a party may later
designate:
TO SUBLESSEE:
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, CA 95134
Attention: John O'Neil
TO SUBLESSOR:
Wyse Technology Inc.
3471 N. First St., MS 150-3
San Jose, CA 95134-1803
Attention: Facilities Manager
TO LANDLORD:
Wyse Technology Investments Inc.
c/o Wyse Technology Inc.
Same address as above for Sublessor
Attention: Katherine Jen
(d) Brokers and Commissions. The parties hereby represent that other than
Colliers Parrish International Inc. and Cornish & Carey Commercial they
have not obtained the services of any real estate brokers or agents
for the purposes of leasing the Subleased premises and that each will
indemnify and hold harmless the other parties from such claims in the
event that any other party established a right derived from such
indemnifying party to receive commissions or any payment as a
consequence of this Sublease.
Wyse is responsible for the commission arising from the Sublease
transaction. The aforementioned brokers have separately agreed upon
the method by which the commission will be shared between them.
Neither Wyse, WTI or DMC shall be liable to either brokerage firm for
breach of such commission agreement.
(e) The parties hereby agree that there shall be no recording of this
Sublease or notice of this Sublease in any registry of deeds with any
public agency, and that the terms and conditions of this Sublease are
confidential and shall not be disclosed to any third party without a
need to know for financial, legal or other substantial reasons.
WTI, Bldg. 2 Sublease (08/29/97) Page 5
<PAGE>
(f) Sublessee agrees to reimburse all of Sublessor's costs and expenses
in seeking and obtaining any judicial enforcement of this Sublease,
including, without limitation, all resulting reasonable attorneys fees.
In witness whereof, the parties hereto have caused this instrument to be
executed in triplicate as of the date first written above.
DIGITAL MICROWAVE CORPORATION WYSE TECHNOLOGY INC.
BY: /s/ Carl A. Thomsen BY: /s/ Gary A. Martell
-------------------------- ------------------------------
Carl A. Thomsen Gary A. Martell
- ----------------------------- ----------------------------------
(Print or type name) (Print or type name)
Vice President, CFO VP Finance & Admin
- ----------------------------- ----------------------------------
(Title) (Title)
8/29/97 9/2/97
- ----------------------------- ----------------------------------
(Date) (Date)
WYSE TECHNOLOGY INVESTMENTS INC.
BY: /s/ Katherine Jen
--------------------------
Katherine Jen
- -----------------------------
(Print or type name)
Secretary
- -----------------------------
(Title)
8/30/97
- -----------------------------
(Date)
WTI, Bldg. 2 Sublease (08/29/97) Page 6
<PAGE>
Exhibit 11.1
DIGITAL MICROWAVE CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
1997 1996 1997 1996
------ ------ ------ ------
Primary:
Weighted average shares outstanding 18,886 15,951 18,714 15,917
Common stock equivalents 1,083 660 1,037 519
------ ------ ------ ------
19,969 16,611 19,751 16,436
------ ------ ------ ------
------ ------ ------ ------
Fully Diluted:
Weighted average shares outstanding 18,886 15,951 18,714 15,917
Common stock equivalents 1,214 990 1,168 828
------ ------ ------ ------
20,100 16,941 19,882 16,745
------ ------ ------ ------
------ ------ ------ ------
Earnings per share:
Primary $ .37 $ .13 $ .67 $ .20
------ ------ ------ ------
------ ------ ------ ------
Fully Diluted $ .37 $ .13 $ .66 $ .19
------ ------ ------ ------
------ ------ ------ ------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL QUARTER ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 20,098
<SECURITIES> 13,206
<RECEIVABLES> 61,144
<ALLOWANCES> 3,894
<INVENTORY> 48,014
<CURRENT-ASSETS> 143,426
<PP&E> 55,877
<DEPRECIATION> 34,637
<TOTAL-ASSETS> 180,121
<CURRENT-LIABILITIES> 43,476
<BONDS> 0
0
0
<COMMON> 190
<OTHER-SE> 136,276
<TOTAL-LIABILITY-AND-EQUITY> 180,121
<SALES> 123,839
<TOTAL-REVENUES> 123,839
<CGS> 80,623
<TOTAL-COSTS> 80,623
<OTHER-EXPENSES> 28,861
<LOSS-PROVISION> 592
<INTEREST-EXPENSE> 222
<INCOME-PRETAX> 14,670
<INCOME-TAX> 1,467
<INCOME-CONTINUING> 13,203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,203
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.66
</TABLE>
