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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE FISCAL YEAR ENDED MARCH 31, 1997.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-15895
DIGITAL MICROWAVE CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 77-0016028
(State of incorporation) (I.R.S. Employer
Identification No.)
170 ROSE ORCHARD WAY SAN JOSE, CALIFORNIA 95134
(Address of principal (Zip Code)
executive offices)
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Registrant's telephone number, including area code: (408) 943-0777
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK--PAR VALUE $0.01 PER SHARE
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. / /
State the aggregate market value of the voting stock held by
non-affiliates of Registrant (based on the last reported sale price of $31.50
per share on the Nasdaq National Market) as of June 2, 1997: Approximately
$574,952,427.
As of June 2, 1997, there were 18,557,148 shares of Common Stock, par value
$0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended March 31, 1997 are incorporated by reference into Parts I and
II of this Form 10-K Report. With the exception of those portions which are
incorporated by reference, the Registrant's fiscal 1997 Annual Report is not
deemed filed as part of this Report.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on August 5, 1997 are incorporated by reference into
Part III of this Form 10-K Report.
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TABLE OF CONTENTS
DIGITAL MICROWAVE CORPORATION
1997 FORM 10-K ANNUAL REPORT
PART I
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Item 1 Business.......................................... 3
Item 2 Properties........................................ 15
Item 3 Legal Proceedings................................. 15
Item 4 Submission of Matters to a Vote of Security
Holders......................................... 15
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters............................. 16
Item 6 Selected Financial Data........................... 16
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 16
Item 8 Financial Statements and Supplementary Data....... 16
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 16
PART III
Item 10 Directors and Executive Officers of the
Registrant...................................... 17
Item 11 Executive Compensation............................ 17
Item 12 Security Ownership of Certain Beneficial Owners
and Management.................................. 17
Item 13 Certain Relationships and Related Transactions.... 17
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................. 18
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ITEM 1. 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 "FACTORS THAT MAY
AFFECT FUTURE FINANCIAL RESULTS" AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE
INTO, THIS FORM 10-K.
INTRODUCTION
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 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 more than 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. The Company
has sold its products to a number of 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
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.
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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 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.
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 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 more
than 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.
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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-TM- II product line has expanded from 23 and 38
GHz to include 7/8, 13, 15, 18 and 26 GHz due to the use of standard design
platforms and software configurable features. 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-TM- 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.
PRODUCTS
The Company's principal product families include the SPECTRUM-TM- II,
QUANTUM-TM-, M Series, and DMC Net. Each product family has characteristics
designed to meet the needs of specific markets or applications and are described
further below.
EXISTING PRODUCTS
SPECTRUM-TM- II. The SPECTRUM-TM- II product line is the latest generation
of products offered by the Company and supersedes the M Series product line. The
SPECTRUM-TM- 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-TM- II product line because of its
enhanced software configurability which provides the Company's customers with
greater flexibility and control. The SPECTRUM-TM- II family consists of products
that operate at 7/8, 13, 15, 18, 23, 26 and 38 GHz.
QUANTUM-TM-. The QUANTUM-TM- product line complements the SPECTRUM-TM- II
and M Series products and is used in conjunction with these products. The
QUANTUM-TM- product line is used in trunking applications within a network. The
QUANTUM-TM- product line features lower transmission frequencies (2 to 15 GHz)
and higher transmission capacities (up to 68 Megabits per second) than the
SPECTRUM-TM- II and M Series product lines.
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-TM- II product line. As of March 31, 1997,
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.
DMC NET-REGISTERED TRADEMARK-. DMC Net-Registered Trademark- is a
sophisticated network monitoring and control system that is designed to
facilitate remote operation and maintenance of microwave radio networks. DMC
Net-Registered Trademark- 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-Registered Trademark- 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.
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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 "Research and Development."
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
March 31, 1996 to March 31, 1997:
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SERVICE PROVIDERS
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AMERICAS
Avantel S.A. BellSouth PCS
Aydin S.A. Pacific Bell Mobile Services
Baja Celular Mexicana SA de CV Rogers Network Services
EUROPE/MIDDLE EAST/AFRICA
Comviq GSM AB Jordan Mobile Telephone Services
E-Plus Mobilfunk GmbH Libancell
Hyper-Tech Advanced Systems Panafon SA
IONICA Polska Telefonia Komorkowa
ASIA/PACIFIC
Beijing Telecom PT Metro Selular Nusantara
Heibei Unicom SMART Communications Inc.
Philipino Telephone Corp. Sterling Cellular
PT Centralindo ST Sichuan Xingrong
PT Kalisutama Perkasa Zhejiang Unicom
OEMs
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Motorola Inc. L.M. Ericsson
Siemens AG
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Although the Company has a large customer base, 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 1997 and 1996,
Siemens AG accounted for 14% and 22%, respectively, of the Company's net
sales. At March 31, 1997, five customers collectively accounted for
approximately 46% of the Company's $92 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 of previous periods, or that the Company will
be able to obtain orders from new customers. The Company's customers
typically are not contractually
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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. See "Factors That
May Affect Future Financial Results."
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 March 31, 1997, the Company employed approximately 230 people in
its sales, service and support organization. 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 1997, fiscal 1996 and fiscal 1995, the
Company invested $10.6 million, $11.1 million, and $11.4 million,
respectively, or approximately 5.9% for fiscal 1997, and 7.4% for each of
fiscal 1996 and fiscal 1995 of net sales on research and development. While
research and development has decreased both in absolute amounts and 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 Company expects research and development expenses to increase in fiscal
year 1998.
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 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
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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 March 31, 1997 was $92 million, as compared with
$84 million at March 31, 1996. 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.
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
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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. See
"Factors That May Affect Future Financial Results."
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 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.
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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.
LITIGATION
The Company is a defendant in various suits and is subject to various claims
that arise in the normal course of business. In the opinion of management, the
ultimate disposition of these claims will not have a material effect on the
Company's business, financial condition and results of operations.
EMPLOYEES
As of March 31, 1997, the Company employed 665 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.
10
<PAGE>
EXECUTIVE OFFICERS OF DMC
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------- --- ------------------------------------------------------------
<S> <C> <C>
Charles D. Kissner 50 Chairman of the Board, President and Chief Executive Officer
Frank Carretta, Jr. 52 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 46 Vice President, Engineering
Shaun McFall 37 Vice President, Corporate Marketing
John P. O'Neil 59 Vice President, Personnel
Carl A. Thomsen 52 Vice President, Chief Financial Officer and Secretary
Carol A. Goudey 49 Treasurer and Assistant Secretary
</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-TM-/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.
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-TM- Division of the Company from February 1995 to
August 1996, and as Vice President and Program Manager of the SPECTRUM-TM-
product line. He joined the Company in August 1984 as product manager, and has
held management positions in marketing, planning, sales and order management.
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.
11
<PAGE>
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. 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 DMC,
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.
12
<PAGE>
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS
The statements in the Annual Report to Stockholders and this Form 10-K
concerning the Company's future products, expenses, revenues, gross margins,
liquidity, and cash needs, as well as the Company's plans and strategies,
contain forward-looking statements concerning the Company's future operations
and financial results. These forward-looking statements are based on current
expectations and the Company assumes no obligation to update this information.
Numerous factors could cause actual results to differ materially from those
described in these statements. In particular, the Company's results 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 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. Prospective investors and
stockholders should carefully consider the factors discussed above and set forth
below in evaluating these forward-looking statements.
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 ability to maintain its gross profit margins is
dependent upon its ability 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.
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, 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, including customer service and support, breadth
of product line, product performance and features, rapid delivery, reliability,
timing of new product introductions by the Company, its customers and its
competitors, and the ability of its customers to obtain financing. 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.
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. 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.
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. 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.
13
<PAGE>
The Company has pursued, and will continue to pursue, growth opportunities
through internal development and acquisitions of complementary business and
technologies. 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.
During any given quarter, a small number of customers account for a
significant portion of the Company's net sales. 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.
SUBSEQUENT EVENTS
In May 1997, the Company acquired Granger, Inc., a U.S. manufacturer of
wireless products and provider of installation services. The purchase price of
Granger, Inc., including the assumption of debt and the purchase of certain
product rights, totaled $14.5 million. The acquisition will be accounted for
under the purchase method of accounting.
In addition, 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 will be
accounted for under the cost method of accounting.
14
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate offices and principal research, development and
manufacturing facilities are located in San Jose, California in four leased
buildings aggregating approximately 170,000 square feet. The Company owns 20,000
square feet of office and manufacturing space in East Kilbride, Scotland, 1,500
square feet of which has been sublet until the year 2004. The Company also
leases 17,000 square feet in Coventry, England. The Company leases one sales
office located in Chicago, Illinois and approximately 23,000 aggregate square
feet of international sales and customer service offices. The Company believes
these facilities are adequate to meet its anticipated needs for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
See "Business--Litigation" under Item 1 of this Form 10-K and Note 4 of
"Notes to Consolidated Financial Statements" incorporated herein by reference
from the Company's 1997 Annual Report to Stockholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The section appearing on the inside front cover of the Company's 1997
Annual Report to Stockholders relating to prices of the Company's Common
Stock is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "Selected Consolidated Financial Data" appearing on page
14 of the Company's 1997 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 10 through
14 of the Company's 1997 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data, and related
notes and Report of Independent Public Accountants appearing on pages 15 through
28 of the Company's 1997 Annual Report to Stockholders are incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers under the caption
"Election of Directors," "Board Meetings and Committees," "Security Ownership
of Certain Beneficial Owners and Management" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on August 5, 1997
(the "Proxy Statement"), is incorporated herein by reference. In addition,
see the discussion under the caption "Business-- Employees-- Executive
Officers" under Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information included in the Company's Proxy Statement under the captions
"Compensation of Directors," "Executive Compensation and Other Information,"
"Stock Options," "Option Exercises and Holdings," "Compensation Committee
Interlocks and Insider Participation" and "Employment and Termination
Arrangements" is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information is included in the Company's Proxy Statement under the
captions "Security Ownership of Certain Beneficial Owners and Management" and
"Employment and Termination Arrangements" is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Business-- Manufacturing and Suppliers" under Item 1 of this Form
10-K and Note 4 of "Notes to Consolidated Financial Statements" of the
Company's 1997 Annual Report to Stockholders incorporated herein by reference.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following consolidated financial statements are contained in the
Company's 1997 Annual Report to Stockholders and are incorporated
herein by reference pursuant to Item 8:
1. Consolidated Balance Sheets as of March 31, 1997 and 1996.
2. Consolidated Statements of Operations for each of the three years
in the period ended March 31, 1997.
3. Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended March 31, 1997.
4. Consolidated Statements of Cash Flows for each of the three years
in the period ended March 31, 1997.
5. Notes to Consolidated Financial Statements.
6. Report of Independent Public Accountants.
2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule for each of the
three years in the period ended March 31, 1997 is submitted herewith:
II Valuation and Qualifying Accounts and Reserves
Schedules not listed above have been omitted because they are not applicable
or required, or information required to be set forth therein is included in the
Consolidated Financial Statements, including the Notes thereto, incorporated
herein by reference.
3. EXHIBITS
The Exhibit Index begins on Page 23 hereof.
(B) No reports on Form 8-K were filed by the Registrant during the quarter
ended March 31, 1997.
(C) See Item 14 (a) 3 above.
(D) See Item 14 (a) 2 above.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: June 27, 1997.
DIGITAL MICROWAVE CORPORATION
By: /s/ CHARLES D. KISSNER
- -----------------------------------------
Charles D. Kissner
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
19
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Digital Microwave Corporation
do hereby constitute and appoint Charles D. Kissner and Carl A. Thomsen, and
each of them, the lawful attorney and agent or attorneys and agents with power
and authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, determine may be
necessary or advisable or required to enable Digital Microwave Corporation to
comply with the Securities and Exchange Act of 1934, as amended, and any rules
or regulations or requirements of the Securities and Exchange Commission in
connection with this Form 10-K Report. Without limiting the generality of the
foregoing power and authority, the powers include the power and authority to
sign the names of the undersigned officers and directors in the capacities
indicated below to this Form 10-K report or amendment or supplements thereto,
and each of the undersigned hereby ratifies and confirms all that said attorneys
and agents or either of them, shall do or cause to be done by virtue hereof.
This Power of Attorney may be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his name.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES SIGNING CAPACITY DATE
- ------------------------------ ---------------------------------------- -------------------
<C> <S> <C>
/s/ CHARLES D. KISSNER Chairman of the Board, President June 27, 1997
- ------------------------------ and Chief Executive Officer
Charles D. Kissner
/s/ CARL A. THOMSEN Vice President, Chief Financial June 27, 1997
- ------------------------------ Officer & Secretary (Principal Financial
Carl A. Thomsen and Accounting Officer)
/s/ RICHARD C. ALBERDING Director June 27, 1997
- ------------------------------
Richard C. Alberding
/s/ JOHN W. COMBS Director June 27, 1997
- ------------------------------
John W. Combs
/s/ CLIFFORD H. HIGGERSON Director June 27, 1997
- ------------------------------
Clifford H. Higgerson
/s/ JAMES D. MEINDL Director June 27, 1997
- ------------------------------
James D. Meindl
/s/ BILLY B. OLIVER Director June 27, 1997
- ------------------------------
Billy B. Oliver
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Digital Microwave Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Digital Microwave
Corporation's Annual Report incorporated by reference in this Form 10-K, and
have issued our report thereon dated April 21, 1997. Our audits were made for
the purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The schedule listed in item 14a(2) is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
consolidated financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
April 21, 1997
21
<PAGE>
SCHEDULE II
DIGITAL MICROWAVE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND DEDUCTIONS/ AT END
DESCRIPTION YEAR EXPENSES WRITE-OFF OF YEAR
- ---------------------------------------- ------------ ---------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended March 31, 1997
Allowance for doubtful accounts..... $1,373 $1,400 $ (589)(A) $ 3,362
Year Ended March 31, 1996
Allowance for doubtful accounts..... $1,413 $ 580 $ 620 $ 1,373
Year Ended March 31, 1995
Allowance for doubtful accounts..... $3,240 $ 276 $2,103 $ 1,413
</TABLE>
- ------------------------
(A) Net of transfers of $683 from other reserve accounts.
22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 33-13431) (reference is also made to Exhibit 4.2).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1993).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1988).
4.2 Rights Agreement dated as of October 24, 1991 between the Company and Manufacturers Hanover Trust
Company of California, including the Certificate of Designations for the Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 1 to the Company's Current Report on 8-K filed on
November 5, 1991).
10.1 Digital Microwave Corporation 1984 Stock Option Plan, as amended and restated on June 11, 1991.
(incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year
ended March 31, 1991).
10.2 Form of Installment Incentive Stock Option Agreement (incorporated by reference to Exhibit 28.2 to the
Company's Registration Statement on Form S-8 (File No. 33-43155)).
10.3 Form of installment Non-qualified Stock Option Agreement (incorporated by reference to Exhibit 28.3 to
the Company's Registration Statement on Form S-8 (File No. 33-43155)).
10.4 Lease of premises located at 170 Rose Orchard Way, San Jose, California (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year-ended March 31, 1991).
10.5 Lease of premises located at 130 Rose Orchard Way, San Jose, California. (incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended March 31, 1991).
10.6 Lease of premises located at 110 Rose Orchard Way, San Jose, California. (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended March 31, 1991).
10.7 Microelectronics Technology, Inc. Development Agreement dated as of March 9, 1984 (incorporated by
reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 33-13431)).
10.8 Form of Indemnification Agreement between the Company and its directors and certain officers
(incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 (File
No. 33-13431)).
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.9* Technology Transfer & Marketing Agreement dated October 2, 1987 between Microelectronics Technology Inc.
and the Company (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1988).
10.10 Loan and Security Agreement dated June 25, 1992 between the Company and CoastFed Business Credit
Corporation (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for
the year ended March 31, 1992).
10.11 Accounts Collateral Security Agreement dated June 25, 1992 between the Company and CoastFed Business
Credit Corporation (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form
10-K for the year ended March 31, 1992).
10.12 Letter of Credit Collateral Agreement dated June 25, 1992 between the Company and CoastFed Business
Credit Corporation (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form
10-K for the year ended March 31, 1992).
10.13 Letter Agreement dated June 23, 1993 between the Company and CoastFed Business Credit Corporation
(incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year
ended March 31, 1993).
10.14* Product Acquisition Agreement dated as of September 23, 1992 between the Company and Microelectronics
Technology, Inc. (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1993).
10.15* Product Acquisition Agreement dated as of December 28, 1992 between the Company and Microelectronics
Technology, Inc. (incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1993).
10.16* Teaming Agreement dated as of November 16, 1993 between the Company and Siemens AG (including the Supply
Agreement dated November 16, 1993 between Siemens AG and E-Plus Mobilfunk GmbH) (incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended March 31,
1994).
10.17 Amendment to Loan Documents between the Company and CoastFed Business Credit Corporation dated as of
July 28, 1994 (incorporated by reference to Exhibit (1) to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994).
10.18 Amended and Restated Accounts and Inventory Collateral Security Agreement between the Company and
CoastFed Business Credit Corporation dated as of July 28, 1994 (incorporated by reference to Exhibit (2)
to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.).
10.19 Loan Agreement dated October 28, 1994 (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1994).
10.20 Agreement on Exchange of Interim Equipment dated October 27, 1994 (incorporated by reference the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994).
10.21 Digital Microwave Corporation 1994 Stock Incentive Plan (incorporated by reference to the Registration
Statement on Form S-8 filed with the Commission on October 17, 1994).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.22 Loan Agreement dated March 21, 1995 between the Company and Bank of the West (incorporated by reference
to Exhibit 10.34 of the Company's Annual Report on Form 10-K for the year ended March 31, 1995).
10.23 Amendment to Loan Agreement dated March 31, 1995 between the Company and Heller Financial, Inc.
(incorporated by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the year
ended March 31, 1995).
10.24 Employment Agreement dated May 1, 1996 between the Company and Charles D. Kissner (incorporated by
reference to Exhibit 10.36 of the Company's Annual Report on Form 10-K for the year ended March 31,
1996).
10.25 Form of Employment Agreement between the Company and certain executive officers (incorporated by
reference to Exhibit 10.38 of the Company's Annual Report on Form 10-K for the year ended March 31,
1996).
10.26 Amendment to Loan Agreement dated June 24, 1996 between the Company and the CoastFed Business Credit
Corporation (incorporated by reference to Exhibit 10.38 of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996).
10.27 Amendment to Loan Agreement effective as of June 25, 1996 between the Company and the CoastFed Business
Credit Corporation (incorporated by reference to Exhibit 10.39 of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996).
10.28 Form of Employment Agreement between the Company and certain executive officers.
13.1 Portions of 1997 Annual Report to Stockholders incorporated herein by reference.
21.1 List of subsidiaries.
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (included on page 20 of this Annual Report on Form 10-K).
27.1 Financial data schedule
- ------------------------
* Confidential treatment of certain portions of this exhibit has been requested.
</TABLE>
25
<PAGE>
Exhibit 10.28
DIGITAL MICROWAVE CORPORATION
FORM OF EMPLOYMENT AGREEMENT
Attached is a form of employment agreement between the Company and
certain executive officers as listed below:
NAME POSITION ANNUAL SALARY
Frank Caretta, Jr. Senior Vice President, Worldwide $200,000
Sales, Service and Marketing
Jack Hillson Senior Vice President and General $135,000
Manager, Operations
Paul A. Kennard Vice President, Engineering $150,000
<PAGE>
E M P L O Y M E N T A G R E E M E N T
This Agreement, dated as of ________, 1996, is between Digital Microwave
Corporation, a California corporation ("Employer"), and ________________
("Employee").
RECITALS
* Employee is and has been employed by Employer and is currently serving as the
_________________.
* Employer desires to continue to employ Employee and to assure itself of the
continued services of Employee for the Period of Employment provided for in this
Employment Agreement, and Employee desires to be employed by Employer for such
period, upon the following terms and conditions.
ACCORDINGLY, the parties agree as follows:
1. Period of Employment.
(a) Basic Term. Employer shall employ Employee to render services to Employer
in the position and with the duties and responsibilities described in Section 2
for the period (the "Period of Employment") commencing on the date of this
Agreement and ending on the date upon which the Period of Employment is
terminated in accordance with Section 4.
2. Position and Responsibilities.
(a) Position. Employee shall continue employment with Employer as
_______________ and shall perform all services as may be assigned by Employer.
Employee shall devote his best efforts and full-time attention to the
performance of his duties. Employee shall be subject to the direction of
Employer, which shall retain full control of the means and methods by which he
performs the above services and of the place(s) at which all services are
rendered. Employee shall report to another officer of Employer. Employee shall
be expected to travel if necessary or advisable in order to meet the obligations
of his position.
(b) Other Activity. Except upon the prior written consent of Employer,
Employee (during the Period of Employment) shall not (i) accept any other
employment; or (ii) engage, directly or indirectly, in any other business,
commercial, or professional activity (whether or not pursued for pecuniary
advantage) that is or may be competitive with Employer, that might create a
conflict of interest with Employer, or that otherwise might interfere with the
business of Employer, or any
<PAGE>
Affiliate. An "Affiliate" shall mean any person or entity that directly or
indirectly controls, is controlled by, or is under common control with Employer.
Notwithstanding the foregoing, upon reasonable notice to Employer, Employee may
serve as a director of one for profit entity and one not for profit entity so
long as such entity is not competitive with Employer or any Affiliate and where
such service does not otherwise create a conflict of interest.
3. Compensation and Benefits.
(a) Compensation. In consideration of the services to be rendered under this
Agreement, Employer shall pay Employee a base salary of $_________ per year,
payable semi-monthly, pursuant to the procedures regularly established, and as
they may be amended, by Employer in its sole discretion, during the Period of
Employment. Employer shall review annually Employee's compensation and shall
determine, in its sole discretion, whether and how much the existing
compensation shall be adjusted, without regard to any policy or practice
Employer may have for adjusting salaries. In addition to base salary, Employee
shall be eligible to participate in the Employer's executive management
incentive bonus and stock option plans according to the terms of those plans.
(b) Benefits. Employee shall be entitled to vacation leave in accordance with
Employer's standard policies. As Employee becomes eligible therefor, Employee
shall have the right to participate in and to receive benefits from all present
and future benefit plans specified in Employer's policies and generally made
available to similarly situated employees of Employer. The amount and extent of
benefits to which Employee is entitled shall be governed by the specific benefit
plan, as amended. Employee also shall be entitled to any benefits or
compensation tied to termination as described in Section 4. Nothing stated in
this Agreement shall prevent Employer from changing or eliminating any benefit
during the Period of Employment as Employer, in its sole discretion, may deem
necessary or desirable. No statement concerning benefits or compensation to
which Employee is entitled shall alter in any way the term of this Agreement,
any renewal thereof, or its termination. All compensation and comparable
payments to be paid to Employee under this Agreement shall be less withholdings
required by law.
(c) Expenses. Employer shall reimburse Employee for reasonable travel and
other business expenses incurred by Employee in the performance of his duties,
in accordance with Employer's policies, as they may be amended in Employer's
sole discretion.
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate automatically upon the
death of Employee. Employer shall pay to Employee's beneficiaries or estate, as
appropriate, any, compensation then due and owing, including payment for accrued
unused vacation, if any, and will
2
<PAGE>
when due make a payment of any incentive bonus to which the Employee would have
been entitled prorated based on the number of months the Employee was employed
during the incentive bonus period. Thereafter, all obligations of Employer
under this Agreement shall cease. Nothing in this Section shall affect any
entitlement of Employee's heirs to the benefits of any life insurance plan or
other applicable benefits.
[For Carretta and Kennard:] (b) By Disability. If, by reason of any
physical or mental incapacity, Employee has been or will be prevented from
properly performing his duties under this Agreement for more than ninety (90)
consecutive days, then, to the extent permitted by law, Employer may
terminate the Period of Employment without any advance notice. Employer
shall pay Employee all compensation to which he is entitled up through the
day notice of termination is provided, and, in addition, Employer shall when
due make a payment of any incentive bonus to which the Employee would have
been entitled prorated based on the number of months the Employee was
employed during the incentive bonus period; thereafter, all obligations of
Employer under this Agreement shall cease. Nothing in this Section shall
affect Employee's rights under any applicable Employer disability plan.
[For Hillson:] (b) By Disability. If, by reason of any physical or mental
incapacity, Employee has been or will be prevented from properly performing
his duties under the Agreement for more than ninety (90) consecutive days,
then, to the extent permitted by law, Employer may terminate the Period of
Employment without any advance notice. Employer shall pay Employee all
compensation to which he is entitled up through the day notice of termination
is provided, and, in addition, Employee shall be entitled to the following
benefits provided in subparagraph 4(c): severance, health insurance premium
payments, prorated incentive bonus, and continued vesting of stock options;
thereafter, all obligations of Employer under this Agreement shall cease.
Nothing in this Section shall affect Employee's rights under any applicable
Employer disability plan; provided however, that the severance benefits to
which Employee is entitled shall be offset by any disability income payments
received by Employee so that the total monthly severance and disability
income benefit payments for the severance period shall not exceed Employee's
then current salary.
(c) By Employer Not For Cause. At any time, Employer may terminate the
Period of Employment Not for Cause for any reason, by providing Employee ten
(10) days' advance written notice, provided that Employee shall be paid, in
addition to all compensation due and owing through the last day actually
worked, severance in an amount equal to six months of the Employee's then
current base salary. Such severance shall be paid by Employer to Employee in
6 equal monthly installments, commencing one month from the date of
termination, or, at Employer's discretion, in a single lump sum on the
termination date. Employer shall also pay the Employer's share of health
insurance premiums for a period of up to 6 months, or until Employee is
eligible to participate in another employer's plan, whichever comes first,
should Employee elect to convert his health insurance benefits under COBRA.
Employer shall also pay when due any incentive bonus to which the Employee
would have been entitled prorated based on the number of months the Employee
was employed during the incentive bonus period and will permit Employee's
stock options, if any, to continue to vest for 6 months following the
termination date. If Employer terminates the Period of Employment Not for
Cause within eighteen (18) months following a Change of Control as defined in
subparagraph 4(f), Employee shall receive the severance benefits set forth in
subparagraph 4(f)(i)-(iv) rather than the severance benefits set forth in
this subparagraph 4(c). Employer shall have the option, in its complete
discretion, to terminate the Period of Employment at any time prior to the
end of such notice period, provided Employer pays Employee all compensation
due and owing through the last day actually worked plus an amount equal to
the base salary Employee would have earned through the balance of the above
notice period in addition to the severance benefits described above;
thereafter, all of Employer's obligations under this Agreement shall cease.
Employer may dismiss Employee without cause notwithstanding anything to the
contrary contained in or arising from any statements, policies, or practices
of Employer relating to the employment, discipline, or termination of its
employees.
3
<PAGE>
(d) By Employer For Cause. At any time, and without prior notice, Employer may
terminate the Period of Employment for Cause (as defined below). Employer shall
pay Employee all compensation then due and owing; thereafter, all of Employer's
obligations under this Agreement shall cease. Termination shall be for "Cause"
if Employee: (i) acts in bad faith and to the detriment of Employer;
(ii) exhibits in regard to his employment willful misconduct, dishonesty,
habitual neglect of duties, or any willful act or omission that may materially
and adversely affect the Employer's business or that involves fraud,
embezzlement or misappropriation of any property or proprietary information of
the Employer; (iv) is convicted of a crime involving dishonesty, breach of
trust, or physical or emotional harm to any person; or (v) breaches any material
term of this Agreement. If termination is due to Employee's disability, Section
4(b) above shall control, and not this subsection on termination for Cause.
(e) By Employee Not for Cause. At any time, Employee may terminate the Period
of Employment for any reason, with or without cause, by providing Employer ten
(10) days' advance written notice. Employer shall have the option, in its
complete discretion, to make termination of the Period of Employment effective
at any time prior to the end of such notice period, provided Employer pays
Employee all compensation due and owing through the last day actually worked,
plus an amount equal to the base salary Employee would have earned through the
balance of the above notice period, not to exceed ten (10) days; thereafter, all
of Employer's obligations under this Agreement shall cease.
(f) By Employee for Good Reason Upon a Change of Control. Employee may
terminate, without liability, the Period of Employment for Good Reason upon a
Change of Control (as defined below), provided Employee gives Employer sixty
(60) days' advance written notice of the reason for termination and his intent
to terminate this Agreement. During this period, Employer shall have an
opportunity to correct the condition constituting Good Reason. If the condition
is remedied within this period, Employee's notice to terminate shall be
rescinded automatically; if not remedied, termination of the Period of
Employment shall become effective upon expiration of the above notice period.
In this event, Employer shall pay Employee all compensation due and owing
through the last day actually worked. Employer shall also have the option, in
its complete discretion, to make termination effective at any time prior to the
end of the notice period, provided that Employer pays Employee all compensation
due and owing through the balance of the notice period (not to exceed sixty (60)
days).
Employee shall be entitled to exercise his right to terminate this
Agreement for Good Reason only if he gives the required notice not more than
forty-five (45) days after the occurrence of the event that is the basis for
the Good Reason. If Employee terminates the Period of Employment for Good
Reason upon a Change of Control, Employee shall receive the following:
(i) A severance payment equal to twenty-four (24) month's of the
Employee's then base salary. At the discretion of the Employer, the severance
payment may be made in the form of
4
<PAGE>
salary continuation over the equivalent pay periods that the severance covers or
in a lump sum payment.
(ii) A payment when due of the incentive bonus to which the Employee
would have been entitled prorated based on the number of months the Employee was
employed during the incentive bonus period.
(iii) A payment equal to the annual incentive bonus payments
received by Employee, if any, for the previous two years, divided by two.
(iv) Payment of the Employee's share of health insurance premiums for
a period of up to eighteen (18) months, or until Employee is eligible to
participate in another Employer's plan, whichever comes first, should Employee
elect to convert his health insurance benefits under COBRA.
"Change of Control" shall mean the occurrence of any of the following events as
used herein, after the Effective Date: (i) any "person" (as such term is used
in Sections 13 (d) and 14 (d) of the Securities Exchange Act of 1934, as
amended) other than Digital Microwave or its affiliates (a "Third Party") is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Employer representing fifty percent
(50%) or more of the total voting power represented by the Employer's then
outstanding voting securities; (ii) the stockholders of the Employer approve a
merger or consolidation of the Employer with any other corporation that is a
Third Party, other than a merger or consolidation which would result in the
voting securities of the Employer outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least fifty percent (50%) of
the total voting power represented by the voting securities of the Employer or
such surviving entity outstanding immediately after such merger or
consolidation; or (iii) the stockholders of the Employer approve a plan of
complete liquidation or dissolution of the Employer or an agreement for the sale
or disposition by the Employer of all or substantially all the Employer's assets
to a Third Party. "Change of Control" shall also mean a change in the
composition of the Board over a period of thirty-six (36) months or less such
that a majority of the Board members (rounded up to the next whole number)
ceases, by reason of one or more contested elections for Board membership, to be
comprised of individuals who either (i) have been Board members continuously
since the beginning of such period or (ii) have been elected or nominated for
election as Board members during such period by at least a majority of the Board
members described in clause (i) who were still in office at the time such
election or nomination was approved by the Board.
Termination shall be for "Good Reason" if: (i) there is a material and
adverse change in Employee's position, duties, responsibilities, or status with
Employer; (ii) there is a reduction in Employee's salary then in effect, other
than a reduction comparable to reductions generally
5
<PAGE>
applicable to similarly situated employees of Employer; (iii) there is a
material reduction in Employee's benefits, other than a reduction comparable to
reductions generally applicable to similarly situated employees of Employer;
(iv) the Employer involuntarily relocates the Employee; or (v) Employer
materially breaches this Agreement.
(g) Termination Obligations.
(i) Employee agrees that all property, including, without limitation, all
equipment, tangible Proprietary Information (as defined below), documents,
books, records, reports, notes, contracts, lists, computer disks (and other
computer-generated files and data), and copies thereof, created on any medium
and furnished to, obtained by, or prepared by Employee in the course of or
incident to his employment, belongs to Employer and shall be returned promptly
to Employer upon termination of the Period of Employment.
(ii) All benefits to which Employee is otherwise entitled shall cease upon
Employee's termination of the Period of Employment, unless explicitly continued
either under this Agreement or under any specific written policy or benefit plan
of Employer.
(iii) Upon termination of the Period of Employment, Employee shall be
deemed to have resigned from all offices and directorships then held with
Employer or any Affiliate.
(iv) The representations and warranties contained in this Agreement and
Employee's obligations under this Section 4(g) on Termination Obligations and
Section 5 on Proprietary Information shall survive the termination of the Period
of Employment and the expiration of this Agreement.
(v) Following any termination of the Period of Employment, Employee shall
fully cooperate with Employer in all matters relating to the winding up of
pending work on behalf of Employer and the orderly transfer of work to other
employees of Employer. Employee shall also cooperate in the defense of any
action brought by any third party against Employer that relates in any way to
Employee's acts or omissions while employed by Employer.
5. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and any idea in
whatever form, tangible or intangible, pertaining in any manner to the business
of Employer, or any Affiliate, or its employees, clients, consultants, or any
business associates, which was produced by any employee of Employer, or any
Affiliate, in the course of his or her employment or otherwise produced or
acquired by or on behalf of Employer, or any Affiliate. All Proprietary
Information not generally known outside of Employer's organization, and all
Proprietary Information so known only through
6
<PAGE>
improper means, shall be deemed "Confidential Information." Without limiting
the foregoing definition, Proprietary and Confidential Information shall
include, but not be limited to: (i) formulas, teaching and development
techniques, processes, trade secrets, computer programs, electronic codes,
inventions, improvements, and research projects; (ii) information about costs,
profits, markets, sales, and lists of customers or clients; (iii) business,
marketing, and strategic plans; and (iv) employee personnel files and
compensation information. Employee should consult any Employer procedures
instituted to identify and protect certain types of Confidential Information,
which are considered by Employer to be safeguards in addition to the protection
provided by this Agreement. Nothing contained in those procedures or in this
Agreement is intended to limit the effect of the other.
(b) General Restrictions on Use. During the Period of Employment, Employee
shall use Proprietary Information, and shall disclose Confidential Information,
only for the benefit of Employer and as is necessary to carry out his
responsibilities under this Agreement. Following termination, Employee shall
neither, directly or indirectly, use any Proprietary Information nor disclose
any Confidential Information, except as expressly and specifically authorized in
writing by Employer. The publication of any Proprietary Information through
literature or speeches must be approved in advance in writing by Employer.
6. Arbitration.
(a) Arbitrable Claims. All disputes between Employee (and his attorneys,
successors, and assigns) and Employer (and its Affiliates, shareholders,
directors, officers, employees, agents, successors, attorneys, and assigns)
relating in any manner whatsoever to the employment or termination of Employee,
including, without limitation, all disputes arising under this Agreement,
("Arbitrable Claims") shall be resolved by arbitration. All persons and
entities specified in the preceding sentence (other than Employer and Employee)
shall be considered third-party beneficiaries of the rights and obligations
created by this Section on Arbitration. Arbitrable Claims shall include, but
are not limited to, contract (express or implied) and tort claims of all kinds,
as well as all claims based on any federal, state, or local law, statute, or
regulation, excepting only claims under applicable workers' compensation law and
unemployment insurance claims. By way of example and not in limitation of the
foregoing, Arbitrable Claims shall include any claims arising under Title VII of
the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the
Americans with Disabilities Act, and the California Fair Employment and Housing
Act, as well as any claims asserting wrongful termination, breach of contract,
breach of the covenant of good faith and fair dealing, negligent or intentional
infliction of emotional distress, negligent or intentional misrepresentation,
negligent or intentional interference with contract or prospective economic
advantage, defamation, invasion of privacy, and claims related to disability.
Arbitration shall be final and binding upon the parties and shall be the
exclusive remedy for all Arbitrable Claims, except that Employer may, at its
option, seek injunctive relief and damages in court for any breach
7
<PAGE>
of Section 5 of this Agreement. Subject to the foregoing sentence, THE PARTIES
HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE
CLAIMS.
(b) Procedure. Arbitration of Arbitrable Claims shall be in accordance with
the Employment Dispute Resolution Rules of the American Arbitration Association
("AAA Employment Rules"), except as provided otherwise in this Agreement.
Arbitration shall be initiated by providing written notice to the other party
with a statement of the claim(s) asserted, the facts upon which the claim(s) are
based, and the remedy sought. The burden of proof in any arbitration shall be
allocated as provided by applicable law, unless otherwise specified in this
Agreement. Either party may bring an action in court to compel arbitration
under this Agreement and to enforce an arbitration award. Otherwise, neither
party shall initiate or prosecute any lawsuit or administrative action in any
way related to any Arbitrable Claim. The Federal Arbitration Act shall govern
the interpretation and enforcement of this Section 6.
(c) Arbitrator Selection and Authority. All disputes involving Arbitrable
Claims shall be decided by a single arbitrator. The arbitrator shall be
selected by mutual agreement of the parties within thirty (30) days of the
effective date of the notice initiating the arbitration. If the parties cannot
agree on an arbitrator, then the complaining party shall notify the AAA and
request selection of an arbitrator in accordance with the AAA Employment Rules.
The arbitrator shall have only such authority to award equitable relief,
damages, costs, and fees as a court would have for the particular claim(s)
asserted. The fees of the arbitrator shall be split between both parties
equally. The arbitrator shall have exclusive authority to resolve all
Arbitrable Claims, including, but not limited to, any claim that all or any part
of this Agreement is void or unenforceable.
(d) Confidentiality. All proceedings and all documents prepared in connection
with any Arbitrable Claim shall be confidential and, unless otherwise required
by law, the subject matter thereof shall not be disclosed to any person other
than the parties to the proceedings, their counsel, witnesses and experts, the
arbitrator, and, if involved, the court and court staff. All documents filed
with the arbitrator or with a court shall be filed under seal. The parties
shall stipulate to all arbitration and court orders necessary to effectuate
fully the provisions of this subsection concerning confidentiality.
(e) Continuing Obligations. The rights and obligations of Employee and
Employer set forth in this Section on Arbitration shall survive the termination
of Employee's employment and the expiration of this Agreement.
8
<PAGE>
7. Notices.
Any notice under this Agreement must be in writing and shall be effective upon
delivery by hand, upon facsimile transmission to the number provided below (if
one is provided), or three (3) business days after deposit in the United States
mail, postage prepaid, certified or registered, and addressed to Employer or to
Employee at the corresponding address below. Employee shall be obligated to
notify Employer in writing of any change in his address. Notice of change of
address shall be effective only when done in accordance with this Section.
Employer's Notice Address:
Vice President, Personnel
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, California 95134
Fax Phone No.: (408) 944-1701
Employee's Notice Address:
________________________
________________________
________________________
________________________
8. Action by Employer.
All actions required or permitted to be taken under this Agreement by Employer,
including, without limitation, exercise of discretion, consents, waivers, and
amendments to this Agreement, shall be made and authorized only by the President
or by his or her representative specifically authorized to fulfill these
obligations under this Agreement.
9. Integration.
This Agreement is intended to be the final, complete, and exclusive statement of
the terms of Employee's employment by Employer. This Agreement supersedes all
other prior and contemporaneous agreements and statements pertaining in any
manner to the employment of Employee, and it may not be contradicted by evidence
of any prior or contemporaneous statements or agreements. To the extent that
the practices, policies, or procedures of Employer, now or in the
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<PAGE>
future, apply to Employee and are inconsistent with the terms of this Agreement,
the provisions of this Agreement shall control.
10. Amendments; Waivers.
This Agreement may not be modified, amended, or terminated except by an
instrument in writing, signed by each of the parties. No failure to exercise
and no delay in exercising any right, remedy, or power under this Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, remedy, or power under this Agreement preclude any other or further
exercise thereof, or the exercise of any other right, remedy, or power provided
herein or by law or in equity.
11. Assignment; Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate, or otherwise
dispose of, whether voluntarily or involuntarily, or by operation of law, any
rights or obligations under this Agreement. Any such purported assignment,
transfer, or delegation shall be null and void. Nothing in this Agreement shall
prevent the consolidation of Employer with, or its merger into, any other
entity, or the sale by Employer of all or substantially all of its assets, or
the otherwise lawful assignment by Employer of any rights or obligations under
this Agreement. Subject to the foregoing, this Agreement shall be binding upon
and shall inure to the benefit of the parties and their respective heirs, legal
representatives, successors, and permitted assigns, and shall not benefit any
person or entity other than those specifically enumerated in this Agreement.
12. Severability.
If any provision of this Agreement, or its application to any person, place, or
circumstance, is held by an arbitrator or a court of competent jurisdiction to
be invalid, unenforceable, or void, such provision shall be enforced to the
greatest extent permitted by law, and the remainder of this Agreement and such
provision as applied to other persons, places, and circumstances shall remain in
full force and effect.
13. Attorneys' Fees.
In any legal action, arbitration, or other proceeding brought to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees and costs.
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<PAGE>
14. Governing Law.
This Agreement shall be governed by and construed in accordance with the law of
the State of California.
15. Interpretation.
This Agreement shall be construed as a whole, according to its fair meaning, and
not in favor of or against any party. By way of example and not in limitation,
this Agreement shall not be construed in favor of the party receiving a benefit
nor against the party responsible for any particular language in this Agreement.
Captions are used for reference purposes only and should be ignored in the
interpretation of the Agreement.
16. Employee Acknowledgment.
Employee acknowledges that he has had the opportunity to consult legal counsel
in regard to this Agreement, that he has read and understands this Agreement,
that he is fully aware of its legal effect, and that he has entered into it
freely and voluntarily and based on his own judgment and not on any
representations or promises other than those contained in this Agreement.
The parties have duly executed this Agreement as of the date first written
above.
______________________________
EMPLOYEE'S NAME
Digital Microwave Corporation
_______________________________
By: Charles D. Kissner
Its: President and Chief Executive Officer
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<PAGE>
EXHIBIT 13.1
PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol DMIC. The following table sets forth the high and low closing sales
prices of the Company's common stock as reported by Nasdaq for the periods
indicated.
Fiscal Year Ended March 11, 1997 March 31, 1996
High Low High Low
- --------------------------------------------------------------------------------
1st Quarter 18 1/4 8 1/8 14 9 1/2
2nd Quarter 24 1/8 13 3/4 14 5/8 10 3/4
3rd Quarter 29 3/16 20 1/8 12 5/8 9 1/2
4th Quarter 37 5/8 19 1/4 11 1/8 8 1/8
- --------------------------------------------------------------------------------
The Company has not paid dividends on its common stock and does not intend to
pay dividends in the foreseeable future in order to retain earnings for use in
its business. At March 31, 1997, there were approximately 211 stockholders of
record.
<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 "Factors That May Affect Future
Financial Results" and elsewhere in this Annual Report.
OVERVIEW
Digital Microwave Corporation 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 over 70,000
microwave radios worldwide.
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 Fiscal 1997, 1996, and 1995, 94%, 88% and 87%, respectively, of the
Company's revenues were from sales for equipment and services outside the United
States.
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>
YEARS ENDED MARCH 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales......................................................... 100.0% 100.0% 100.0%
Cost of sales..................................................... 66.6 79.7 74.7
--------- --------- ---------
Gross profit...................................................... 33.4 20.3 25.3
Research and development.......................................... 5.9 7.4 7.4
Selling, general and administrative............................... 19.7 18.2 16.1
--------- --------- ---------
Operating income (loss)........................................... 7.8 (5.3) 1.8
Other income (expense), net....................................... (0.5) 0.1 (0.4)
--------- --------- ---------
Income (loss) before provision for income taxes................... 7.3 (5.2) 1.4
Provision (credit) for income taxes............................... 0.7 (1.3) 0.1
--------- --------- ---------
Net income (loss)................................................. 6.6% (3.9)% 1.3%
--------- --------- ---------
--------- --------- ---------
</TABLE>
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
NET SALES. Net sales for Fiscal 1997 were $178.3 million, a 19% increase
compared to net sales of $150.4 million in Fiscal 1996. The increase in net
sales was due to higher sales in all regions. For Fiscal 1997, net sales were
$77.0 million in Europe, $55.7 million in the Asia/Pacific region, and $45.6
million in the Americas, compared to $73.7 million, $40.5 million, and $36.2
million, respectively, in Fiscal 1996. See Note 8 of the Notes to Consolidated
Financial Statements.
The increase in net sales in Fiscal 1997 compared to Fiscal 1996 was also
due to the rapid market acceptance of the SPECTRUM-TM- II product line after its
first commercial shipments in 1995. SPECTRUM II accounted for 41% of total net
sales in Fiscal 1997 compared to 17% in Fiscal 1996.
GROSS PROFIT. Gross profit in Fiscal 1997 was higher than in Fiscal 1996
primarily due to the Company's SPECTRUM II product line, which began shipping in
July 1995. In Fiscal 1997, the Company instituted a
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<PAGE>
formal process improvement program, entitled "Operation NewWave," to improve
manufacturing operations, product development cycle time, and asset
utilization. The Company has started to see results from this program with
improved gross margins and better inventory turnover. A shift in product mix
has also increased gross profit. Fiscal 1996 was negatively impacted by the
shipments of approximately $9.0 million of M Series and other products to
E-Plus, a major European customer, at no margin due to delays in completion
of the SPECTRUM II product. See Note 7 of Notes to Consolidated Financial
Statements. 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 Fiscal 1997 of SPECTRUM II increased to
$73.5 million from $25.6 million in Fiscal 1996. Net sales of QUANTUM
increased to $29.5 million in Fiscal 1997 from $12.9 million in Fiscal 1996.
Net sales in Fiscal 1997 of the M Series product line, which has been largely
replaced by the SPECTRUM II product line, decreased to $31.5 million from
$63.1 million in Fiscal 1996. Net sales for other products and services
amounted to $43.8 million in Fiscal 1997 compared to $48.8 million in Fiscal
1996.
The Company has seen its gross profit improve in Fiscal 1997; 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. Research and development expenses for
Fiscal 1997 of $10.6 million were $0.5 million lower than the $11.1 million
reported in Fiscal 1996. This decrease was primarily attributable to lower
project material costs 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 Fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for Fiscal 1997 increased by $7.7 million to $35.1
million from $27.4 million in Fiscal 1996. This increase was 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. Also contributing to the increase were consulting fees related to the
company-wide process improvement program, 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 $1.8 million due
to the improved profitability of the Company during Fiscal 1997.
INTEREST AND OTHER INCOME, NET. Interest and other income, net for Fiscal
1997 was $0.1 million compared to $2.0 million in Fiscal 1996. Fiscal 1996
included interest income related to income tax refunds of $0.4 million and gain
on the sale of investments of $0.7 million. There were no similar items in
Fiscal 1997. In Fiscal 1997, the Company recorded foreign exchange losses of
$0.3 million primarily related to receivables denominated in foreign currencies,
compared to foreign exchange gains of $0.5 million in Fiscal 1996.
INTEREST EXPENSE. Interest expense for Fiscal 1997 was $1.0 million
compared to $1.9 million 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 Fiscal 1997 at an effective rate of 10%. This was less than the
statutory rate primarily due to the utilization of the net operating loss, tax
credit, and other tax attribute carry-forwards. 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. For 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 carry-back and obtain a refund for
certain net tax operating losses incurred in Fiscal 1995.
11
<PAGE>
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 1995 to
$150.4 million in Fiscal 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 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 8 of Notes to Consolidated
Financial Statements.
GROSS PROFIT. Gross profit as a percentage of net sales decreased to 20.3%
in Fiscal 1996 from 25.3% in Fiscal 1995. The lower gross profit 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 resulting
from 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 lower gross margins. See "Factors That May Affect Future Financial
Results" and Note 7 of Notes to Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased by $0.3 million, from $11.4 million in Fiscal 1995 to $11.1 million in
Fiscal 1996. As a percentage of net sales, research and development expenses
were 7.4% for both Fiscal 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 Fiscal 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, and increases in other administrative
expenses.
INTEREST AND OTHER INCOME (EXPENSE). Interest income for Fiscal 1996 was
$0.5 million compared to $0.1 million in Fiscal 1995 due to interest income of
$0.4 million related to income tax refunds. 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. Other income
(expense), net was $1.4 million in income in Fiscal 1996 compared to a $0.2
million expense in Fiscal 1995. Higher other income was due to the gain on sale
of investment of $0.7 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 recorded 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 carry-back from net 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.
LIQUIDITY AND CAPITAL RESOURCES
In Fiscal 1997, the Company generated $9.3 million in cash from operations,
primarily due to increases in net income and increases in accounts payable
partially offset by increases in accounts receivable and inventories. Total
assets at March 31, 1997 increased by $74.4 million to $170.2 million from $95.8
million at March 31, 1996, principally due to increases in cash and cash
equivalents, short-term investments, inventories, and accounts receivable. The
increase in cash and cash equivalents and short-term investments was due
primarily
12
<PAGE>
to the sale of 2.2 million shares of the Company's common stock in a
secondary offering, which netted $51.6 million. Inventories increased primarily
to support a higher volume of net sales. The increase in accounts receivable was
primarily due to higher net sales of $52.3 million in the fourth quarter of
Fiscal 1997, compared to $36.2 million in the fourth quarter of Fiscal 1996.
Total liabilities at March 31, 1997 of $52.7 million were $6.6 million
higher than the $46.1 million in total liabilities at March 31, 1996. The
increase was primarily due to the increase in accounts payable related to higher
inventory purchases and other accrued liabilities for contract deposits received
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.
CREDIT ARRANGEMENTS. At March 31, 1997, the Company had a $25.0 million
credit facility, with a U.S. bank and a credit company, that expires on June 30,
1997. Borrowings bear interest at the prime rate plus 1.0% per annum (9.50% at
March 31, 1997) and are secured by certain assets of the Company. At March 31,
1997, $2.0 million was outstanding under this credit facility, and $23.0 million
of credit was available based on the underlying collateral. The agreement
requires the Company to maintain certain financial covenants, including minimum
tangible net worth and profitability requirements. In April 1997, the Company
notified the lenders of its intent to terminate the facility as of June 30,
1997. The Company concurrently accepted a commitment from a major bank for a
one-year, unsecured $20.0 million revolving credit facility. The facility
provides borrowing at either the bank's prime reference rate or the applicable
London Interbank Offering Rate plus 1.0% per annum. See Note 3 of Notes to
Consolidated Financial Statements.
In May 1997, the Company completed the acquisition of Granger, Inc. for
total consideration of $14.5 million and purchased a minority interest in
Granger Associates, Ltd., a UK company, for $4.0 million. See Note 9 of Notes to
Consolidated Financial Statements.
The Company believes that the liquidity provided by existing cash and
short-term investment balances, anticipated future cash flows from operations,
and the Company's new borrowing arrangements will be sufficient to meet both
working capital and capital expenditure requirements for at least Fiscal 1998.
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS
The Stockholders' Letter and discussions in this Annual Report concerning
the Company's future products, expenses, revenues, gross margins, liquidity, and
cash needs, as well as the Company's plans and strategies, contain
forward-looking statements concerning the Company's future operations and
financial results. These forward-looking statements are based on current
expectations, and the Company assumes no obligation to update this information.
Numerous factors, such as economic and competitive conditions, 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. The Company's backlog may not be representative of actual sales for
any succeeding period because of the timing of orders, delivery intervals,
customer and product mix, and the possibility of changes in delivery schedules
and additions or cancellation of orders.
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 ability to maintain its gross
profit margins is dependent upon its ability to continue to improve
manufacturing efficiencies, lower material costs of products, and introduce
new products and product enhancements.
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, 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
13
<PAGE>
personnel resources than the Company. The Company believes that its ability
to compete successfully will depend on a number of factors, including
customer service and support, breadth of product line, product performance
and features, rapid delivery, reliability, timing of new product
introductions by the Company, its customers and its competitors, and the
ability of its customers to obtain financing.
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.
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. 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.
During any given quarter, a small number of customers account for a
significant portion of the Company's net sales. 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.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales............................................ $ 178,344 $ 150,419 $ 153,650 $ 116,010 $ 103,937
Net income (loss).................................... 11,707 (5,955) 1,982 (22,495) (6,708)
Net income (loss) per share.......................... 0.69 (0.40) 0.14 (1.81) (0.55)
CONSOLIDATED BALANCE SHEETS DATA:
Total assets......................................... $ 170,206 $ 95,797 $ 102,585 $ 84,003 $ 72,990
Long-term liabilities................................ 158 2,782 6,362 459 201
</TABLE>
14
<PAGE>
[CONSOLIDATED BALANCE SHEETS]
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE AND PER
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................ $ 40,367 $ 9,018
Short-term investments................................................................... 17,947 --
Accounts receivable, net of allowance of $3,362 in 1997 and $1,373 in 1996............... 44,623 33,398
Inventories.............................................................................. 45,900 35,347
Other current assets..................................................................... 3,643 2,973
--------- ---------
Total current assets................................................................. 152,480 80,736
--------- ---------
PROPERTY AND EQUIPMENT:
Machinery and equipment.................................................................. 39,477 36,609
Land and buildings....................................................................... 1,262 1,262
Furniture and fixtures................................................................... 7,108 7,602
Leasehold improvements................................................................... 2,119 2,262
--------- ---------
49,966 47,735
Accumulated depreciation and amortization................................................ (32,240) (32,674)
--------- ---------
Net property and equipment............................................................... 17,726 15,061
--------- ---------
$ 170,206 $ 95,797
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit.......................................................................... $ 2,016 $ 3,106
Current maturities of note payable....................................................... -- 3,334
Current maturities of capital lease obligations.......................................... 681 1,025
Accounts payable......................................................................... 22,890 16,252
Income taxes payable..................................................................... 1,649 973
Accrued liabilities...................................................................... 25,284 18,590
--------- ---------
Total current liabilities............................................................ 52,520 43,280
LONG-TERM LIABILITIES:
Note payable, net of current maturities.................................................. -- 1,944
Capital lease obligations, net of current maturities..................................... 158 838
--------- ---------
Total liabilities.................................................................... 52,678 46,062
--------- ---------
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; 18,510,569 shares in 1997 and
15,820,783 shares in 1996 issued and outstanding....................................... 185 159
Additional paid-in capital............................................................... 121,491 65,368
Unrealized holding loss on available-for-sale securities................................. (63) --
Accumulated deficit...................................................................... (4,085) (15,792)
--------- ---------
Total stockholders' equity........................................................... 117,528 49,735
--------- ---------
$ 170,206 $ 95,797
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
15
<PAGE>
[CONSOLIDATED STATEMENTS OF OPERATIONS]
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Sales: .................................................................. $ 178,344 $ 150,419 $ 153,650
Cost of sales................................................................ 118,778 119,918 114,760
---------- ---------- ----------
Gross profit............................................................... 59,566 30,501 38,890
---------- ---------- ----------
OPERATING EXPENSES:
Research and development..................................................... 10,596 11,108 11,379
Selling, general and administrative.......................................... 35,071 27,416 24,763
---------- ---------- ----------
Total operating expenses................................................... 45,667 38,524 36,142
---------- ---------- ----------
Income (loss) From Operations.............................................. 13,899 (8,023) 2,748
Other Income (expense):
Interest income.............................................................. 371 538 151
Interest expense............................................................. (978) (1,860) (530)
Other income (expense), net.................................................. (284) 1,437 (167)
---------- ---------- ----------
Total other income (expense)............................................... (891) 115 (546)
---------- ---------- ----------
Income (loss) before provision (credit) for income taxes................... 13,008 (7,908) 2,202
Provision (credit) for income taxes.......................................... 1,301 (1,953) 220
---------- ---------- ----------
NET INCOME (LOSS)............................................................ 11,707 $ (5,955) $ 1,982
---------- ---------- ----------
NET INCOME (LOSS) PER SHARE.................................................. $ 0.69 $ (0.40) $ 0.14
---------- ---------- ----------
Weighted Average Number of Common and Common Equivalent Shares Outstanding... 16,941 14,895 13,845
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
[CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY]
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------- PAID-IN UNREALIZED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL HOLDING LOSS DEFICIT EQUITY
------------ ----------- ---------- ------------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
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
Sale of stock in secondary
offering........................... 2,200,000 22 51,568 -- -- 51,590
Stock options exercised.............. 489,786 4 4,270 -- -- 4,274
Tax benefit related to employee stock
transaction........................ -- -- 285 -- -- 285
Unrealized holding loss on
available-for-sale securities...... -- -- -- (63) -- (63)
Net Income........................... -- -- -- -- 11,707 11,707
------------ ----- ---------- ----- ------------ ------------
BALANCE, MARCH 31, 1997.............. 18,510,569 $ 185 $ 121,491 $ (63) $ (4,085) $ 117,528
------------ ----- ---------- ----- ------------ ------------
------------ ----- ---------- ----- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
[CONSOLIDATED STATEMENTS OF CASH FLOWS]
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................. $ 11,707 $ (5,955) $ 1,982
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization............................................... 5,790 6,332 6,356
Provision for uncollectable accounts........................................ 1,400 580 276
Provision for inventory reserves............................................ 4,271 8,795 958
Provision for warranty reserves............................................. 2,385 1,678 1,911
Changes in assets and liabilities:
(Increase) in accounts receivable......................................... (12,674) (1,492) (5,774)
(Increase) decrease in inventories........................................ (14,846) 904 12,212)
Decrease in tax refund receivable......................................... -- 1,820 778
(Increase) decrease in other current assets............................... (575) 1,559 (1,503)
Increase (decrease) in accounts payable................................... 6,638 (5,144) 5,398
Increase (decrease) in income tax payable................................. 967 (602) 168
(Decrease) in accrued litigation.......................................... -- -- (19,900)
Increase (decrease) in other accrued liabilities.......................... 4,215 (639) 4,119
---------- ---------- ----------
Net cash provided by (used for) operating activities.................... 9,278 7,836 (17,443)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................................ (8,509) (4,527) (8,111)
Purchase of available-for-sale securities..................................... (17,947) -- --
---------- ---------- ----------
Net cash used for investing activities.................................. (26,456) (4,527) (8,111)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from banks......................................................... 15,300 16,188 36,744
Repayments to banks........................................................... (21,561) (28,423) (16,124)
Payments of capital lease obligations......................................... (1,025) (1,019) (695)
Sale of common stock.......................................................... 55,864 15,812 4,025
---------- ---------- ----------
Net cash provided by financing activities............................... 48,578 2,558 23,950
---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH....................................... (51) 132 (39)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 31,349 5,999 (1,643)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................ 9,018 3,019 4,662
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................................... $ 40,367 $ 9,018 $ 3,019
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
[NOTES TO CONSOLIDATED FINANCIAL STATEMENTS]
NOTE 1. DESCRIPTION OF BUSINESS
Digital Microwave Corporation (the "Company") designs, manufactures, and
markets advanced wireless solutions for worldwide telephone network
interconnection and access. Transmitting and receiving multiple digital lines,
Digital Microwave's high performance digital microwave systems carry voice,
data, and digitized video signals across a full spectrum of frequencies and
capacities. The Company has sold over 70,000 radios, which operate in nearly
every kind of environment around the world. Digital Microwave Corporation was
founded in January 1984, and is traded under the symbol DMIC on the Nasdaq
National Market.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Digital Microwave Corporation and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated.
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of 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.
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, 1997 and 1996, this
amounted to $574,000 and $719,000, respectively, and are included in cash and
cash equivalents in the accompanying Consolidated Balance Sheets.
The following is a summary of cash and cash equivalents as of March 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash and money market funds.............................................. $ 16,576 $ 9,018
U.S. Treasuries and government agencies.................................. 4,844 --
Commercial paper......................................................... 18,947 --
--------- ---------
Total................................................................ $ 40,367 $ 9,018
--------- ---------
--------- ---------
</TABLE>
SHORT-TERM INVESTMENTS. The Company invests its excess cash in high-quality
and easily marketable instruments to ensure cash is readily available for use in
its current operations. Accordingly, all of the Company's marketable securities
are classified as "available-for-sale" in accordance with the provisions of the
Statement of Financial Accounting Standards No. 115. At March 31, 1997, the
Company's available-for-sale securities had contractual maturities ranging from
4 months to 30 months, and the weighted average maturity was 15 months.
All short-term investments are reported at fair market value with the
related unrealized holding gains and losses reported as a component of
stockholders' equity. Unrealized holding losses on the portfolio of
approximately $63,000 were recorded as of March 31, 1997. There were no realized
gains or losses on sales of available-for-sale securities during Fiscal 1997,
1996, or 1995.
19
<PAGE>
The following is a summary of short-term investments as of March 31:
<TABLE>
<CAPTION>
1997
-----------------------------------------
MARKET VALUE UNREALIZED
COST AT AT BALANCE HOLDING GAIN
EACH ISSUE SHEET DATE (LOSS)
----------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Auction rate preferred notes......................... $ 3,000 $ 3,000 $ --
Corporate notes...................................... 15,010 14,947 (63)
----------- ------------- ---------
Total............................................ $ 18,010 $ 17,947 $ (63)
----------- ------------- ---------
----------- ------------- ---------
</TABLE>
SUPPLEMENTAL STATEMENTS OF CASH FLOWS DISCLOSURES. Cash paid for interest
and income taxes for each of the three fiscal years presented in the
consolidated statements of cash flows was as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest......................................................... $ 1,003 $ 1,753 $ 1,556
Income taxes..................................................... $ 381 $ 172 $ 62
</TABLE>
The following non-cash transactions occurred during the Fiscal years ended:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit related to employee stock transactions................. $ 285 $ 55 $ --
Property purchased under capital leases............................ -- $ 1,324 $ 1,314
Reduction of accounts payable to vendor in connection with the sale
of stock......................................................... $ -- $ 5,000 $ --
</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,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Raw materials........................................................... $ 16,594 $ 11,840
Work-in-process......................................................... 15,122 16,342
Finished goods.......................................................... 14,184 7,165
--------- ---------
$ 45,900 $ 35,347
--------- ---------
--------- ---------
</TABLE>
Inventories contained components and assemblies in excess of the Company's
current estimated requirements and were reserved at March 31, 1997 and 1996. In
the third quarter of Fiscal 1996, the Company charged cost of sales for
approximately $7.0 million for excess and obsolete inventories as a result of
product transitions. Due to competitive pressures, it is possible that these
estimates could change in the foreseeable future.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost.
Depreciation and amortization are calculated 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 $2,691,000 and $3,641,000 for Fiscal 1997 and 1996,
respectively. Accumulated amortization on leased assets was $1,016,000 and
$1,044,000 as of March 31, 1997 and 1996, respectively.
20
<PAGE>
ACCRUED LIABILITIES. Accrued liabilities included the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Customer deposits....................................................... $ 9,954 $ 4,839
Accrued contract obligations (See Note 7)............................... 1,632 3,759
Accrued payroll and benefits............................................ 3,606 1,522
Accrued commissions..................................................... 4,131 3,246
Accrued warranty........................................................ 2,923 3,076
Other................................................................... 3,038 2,148
--------- ---------
$ 25,284 $ 18,590
--------- ---------
--------- ---------
</TABLE>
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. For Fiscal 1997 the aggregate net foreign exchange loss was
$344,000; for Fiscal 1996 the net foreign exchange gain was $506,000; and for
Fiscal 1995 the aggregate net foreign exchange loss was $39,000.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
temporary cash investments and trade receivables. The Company has cash
investment policies that limit the amount of credit exposure to any one
financial institution and restrict placement of investments to financial
institutions evaluated as highly credit worthy. 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, the
Middle East, and Latin and South America. The Company performs ongoing 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, and duty charges.
Service revenue, which is less than 10% of net sales for each of the three
Fiscal years presented, is recognized when 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.
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 for calculating earnings per share, 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 basic earnings per
share, the dilutive effect of stock options will be excluded. Under SFAS 128,
basic earnings (loss) per share for Fiscal 1997, 1996 and 1995 would have been
$0.73, $(0.40) and $0.15 per share, respectively. Diluted earnings per share
would be substantially the same as the reported primary earnings per share.
21
<PAGE>
STOCK COMPENSATION. Effective April 1, 1996, the Company adopted the
disclosure provisions of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation. In accordance with the provisions of
SFAS 123, the Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans. Note 6 of these Consolidated Financial
Statements contains a summary of the pro forma effects on reported net income
and earnings per share for Fiscal 1997 and 1996 based on the fair market value
of the options granted at grant date as prescribed by SFAS 123.
NOTE 3. CREDIT ARRANGEMENTS
At March 31, 1997, the Company had a $25.0 million credit facility with a
U.S. bank and a credit company that expires on June 30, 1997. Borrowings bear
interest at the prime rate plus 1.0% per annum (9.50% at March 31, 1997) and are
secured by certain assets of the Company. At March 31, 1997, $2.0 million was
outstanding under this credit facility, and $23.0 million of credit was
available based on the underlying collateral. The agreement requires the Company
to maintain certain financial covenants, including minimum tangible net worth
and profitability requirements. In April 1997, the Company notified the lender
of its intent to terminate the facility as of June 30, 1997. The Company
concurrently accepted a commitment from a major bank for a one-year, unsecured
$20.0 million revolving credit facility. The facility provides borrowing at
either the bank's prime reference rate or the applicable London Interbank
Offering Rate plus 1.0% per annum.
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. The note was secured by all equipment in the Company's
San Jose, California facility and bore interest at prime plus 2.25% per annum.
The note was prepaid in full on December 2, 1996, including a 1% prepayment
penalty.
NOTE 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 2018. At March 31, 1997,
future minimum payment obligations under these leases were as follows:
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31,
------------------------
CAPITAL OPERATING
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
1998..................................................................... $ 736 $ 2,490
1999..................................................................... 162 2,123
2000..................................................................... -- 1,837
2001..................................................................... -- 1,821
2002..................................................................... -- 956
2003 and beyond.......................................................... -- 1,576
----- -----------
Future minimum lease payments............................................ 898 $ 10,803
-----------
-----------
Less amount representing interest (9% to 14%)............................ (59)
-----
Present value of minimum lease payments.................................. 839
Less current maturities.................................................. (681)
-----
Long-term lease obligations.............................................. $ 158
-----
-----
</TABLE>
Rent expense under operating leases was approximately $3,472,000, $3,679,000
and $3,458,000 for the years ended March 31, 1997, 1996 and 1995, respectively.
LEGAL CONTINGENCIES. 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.
22
<PAGE>
CONTINGENCIES IN MANUFACTURING AND 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.
NOTE 5. INCOME TAXES
The Company provides for income taxes using an asset and liability approach,
under which deferred income taxes are provided based upon enacted tax laws and
rates applicable to periods in which the taxes become payable.
The domestic and foreign components of income (loss) before provision for
income taxes were as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic....................................................... $ 11,962 $ (9,845) $ 1,182
Foreign........................................................ 1,046 1,937 1,020
--------- --------- ---------
$ 13,008 $ (7,908) $ 2,202
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision (credit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal...................................................... $ 1,118 $ (2,018) $ 220
State........................................................ 44 -- --
Foreign...................................................... 139 65 --
--------- --------- ---------
Total current.............................................. $ 1,301 $ (1,953) $ 220
Deferred:...................................................... -- -- --
--------- --------- ---------
$ 1,301 $ (1,953) $ 220
--------- --------- ---------
--------- --------- ---------
</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,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected tax provision (credit)................................ $ 4,553 $ (2,689) $ 749
State taxes net of Federal benefit............................. 367 (343) --
Change in valuation allowance.................................. (3,079) 3,346 (624)
Reversal of previously provided taxes upon settlement of the
IRS audit.................................................... -- (2,018) --
FSC commission................................................. (581) -- --
Other.......................................................... 41 (249) 95
--------- --------- ---------
$ 1,301 $ (1,953) $ 220
--------- --------- ---------
--------- --------- ---------
</TABLE>
23
<PAGE>
The major components of the net deferred tax asset consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Inventory reserves.................................................... $ 4,583 6,041
Depreciation.......................................................... -- 685
Warranty reserves..................................................... 1,023 1,158
Bad debt reserves..................................................... 696 655
Net operating loss carry-forwards..................................... 1,032 3,879
Tax credits........................................................... 5,084 5,514
Other................................................................. 3,397 1,430
---------- ----------
15,815 19,362
Less: Valuation reserve--Operations................................... (15,815) (18,894)
Less: Valuation reserve--Equity....................................... -- (468)
---------- ----------
Net deferred tax asset................................................ $ -- $ --
---------- ----------
---------- ----------
</TABLE>
The valuation allowance provides a reserve against deferred tax assets that
may expire or go unutilized by the Company. 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. Foreign net operating loss carry-forwards of $1.9 million will expire
at various dates from 1999 through 2004. State net operating loss carry-forwards
totaling $6.5 million will expire at various dates from the year 1998 through
2001. The tax credit carry-forwards will expire at various dates from the year
2005 through 2012.
NOTE 6. COMMON STOCK
STOCK OPTION PLANS. The Company's 1984 Stock Option Plan ("1984 Plan")
provides for the grant of both incentive and nonqualified stock options to key
employees and certain independent contractors of the Company. At March 31, 1997,
options to purchase 320,268 common shares were outstanding under the 1984 Plan,
of which 182,668 options were exercisable at prices ranging from $5.25 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 1,183,330 shares of common stock
to be issued under the 1994 Plan over a ten-year term. In August 1996, the
stockholders approved 1,000,000 additional shares of common stock under the
1994 Plan. This Plan also provides for an automatic increase on the first
trading day of each calendar year for five years after the adoption of the
1994 Plan, beginning January 1995, of an amount equal to one percent (1%) of
the number of shares of common stock outstanding, but in no event will any
such annual increase exceed 150,000 shares. The total authorized number of
shares of common stock under the 1994 Plan is 2,333,330. At March 31, 1997,
options to purchase 1,603,016 shares were outstanding, of which 508,742 were
exercisable at prices ranging from $8.25 to $35.50 per share. At March 31,
1997, the number of shares available for future grants is 649,306.
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 of Directors of the Company.
On April 18, 1996, the Company adopted the 1996 Non-Officer Employee Stock
Option Plan ("1996 Plan"). The 1996 Plan authorizes 500,000 shares of common
stock to be reserved for issuance to non-officer key
24
<PAGE>
employees as an incentive to continue in the service of the Company. The 1996
Plan will terminate on the date on which all shares available are issued. At
March 31, 1997, 387,450 shares were outstanding, none of which were
exercisable, at prices ranging from $8.25 to $19.50, and 112,550 shares were
available for future grants.
At March 31, 1997, the Company had reserved 3,072,590 shares for future
issuance under the 1984, 1994, and 1996 Plans.
The following table summarizes the Company's stock option activity under all
Plans:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- -----------------------------
WTD AVG EX WTD AVG EX OPTION PRICE PER
SHARES PRICE* SHARES PRICE* SHARES SHARE
--------- ----------- --------- ----------- ----------- ----------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year..... 1,810 $ 11.50 1,464 $ 10.48 1,362 $0.22 - $26.00
Granted.................................... 1,117 16.38 897 12.30 855 9.87 - 18.13
Exercised.................................. (459) 8.73 (271) 6.44 (531) 0.22 - 13.25
Expired or canceled........................ (157) 12.94 (280) 13.76 (222) 5.25 - 26.00
--------- ----------- --------- ----------- ----- ----------------
Options outstanding at end of year........... 2,311 $ 14.26 1,810 $ 11.50 1,464 $0.50 - $26.00
--------- ----------- --------- ----------- ----- ----------------
Exercisable at end of year................... 691 600 337
Weighted average fair value of options
granted.................................. $ 9.02 $ 5.88
--------- ---------
</TABLE>
- ------------------------
* Weighted average exercise price
The following summarizes the stock options outstanding at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
ACTUAL RANGE OF EXERCISE PRICES 3/31/97 CONTRACTUAL LIFE EXERCISE PRICE 3/31/97 EXERCISE PRICE
- -------------------------------- ------------- ------------------- ----------------- ------------- -----------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 5.250 - 10.625................ 684 8.01 $ 8.49 220 $ 7.67
$11.250 - 18.500................ 1,138 8.36 13.99 444 13.44
$19.250 - 35.500................ 489 9.27 22.97 28 23.74
- ---------------- ----- --- ------ ----- ------
$5.250 - 35.500................. 2,311 8.45 $ 14.26 691 $ 12.03
- ---------------- ----- --- ------ ----- ------
</TABLE>
In accordance with the disclosure requirements of SFAS 123, if the Company
had elected to recognize compensation cost based on the fair market value of the
options granted at grant date as prescribed, income and earnings per share would
have been reduced to the pro forma amounts indicated in the table below. The pro
forma effect on net income for Fiscal 1997 and 1996 is not representative of the
pro forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
Fiscal 1996.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net income (loss)--as reported........................................... $ 11,707 $ (5,955)
Net income (loss)--pro forma............................................. $ 7,844 $ (8,282)
Net income (loss) per share--as reported................................. $ 0.69 $ (0.40)
Net income (loss) per share--pro forma................................... $ 0.46 $ (0.56)
</TABLE>
25
<PAGE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield....................................... 0.0%
Expected stock volatility..................................... 74.3%
Risk-free interest rate....................................... 5.3% - 7.1%
Expected life of options from vest date....................... 0.7 years
Forfeiture rate............................................... actual
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. In August 1996, the Company adopted an
Employee Stock Purchase Plan ("The Plan") and reserved 300,000 shares of common
stock for issuance under the Plan. Employees, subject to certain restrictions,
may purchase common stock under this Plan through payroll withholding at a price
per share of 85% of the fair market value at the beginning or end of the
purchase period, as defined under the Plan. The Company sold 30,312 shares in
Fiscal 1997 under this Plan at a price per share of $14.13 and 269,688 shares
remained available for future issuance under the Plan at March 31, 1997.
STOCKHOLDERS' RIGHTS AGREEMENT. In October 1991, the Company adopted a
Stockholders' Rights Agreement pursuant to which one Preferred Share Purchase
Right was distributed for each outstanding share of common stock. Each Right
entitles stockholders to buy one one-hundredth of a share of Series A Junior
Participating Preferred Stock at an exercise price of $50.00 upon certain
events. The Rights expire on October 23, 2001, unless earlier redeemed by the
Company.
The Rights become exercisable if a person acquires 15% or more of the
Company's common stock or announces a tender offer that would result in such
person owning 15% or more of the Company's common stock. If the Rights become
exercisable, the holder of each Right (other than the person whose
acquisition triggered the exercisability of the Rights) will be entitled to
purchase, at the Right's then-current exercise price, a number of shares of
the Company's common stock having a market value of twice the exercise price.
In addition, if the Company were to be acquired in a merger or business
combination after the Rights became exercisable, each Right will entitle its
holder to purchase, at the Right's then-current exercise price, common stock
of the acquiring company having a market value of twice the exercise price.
The Rights are redeemable by the Company at a price of $0.01 per Right at any
time within ten days after a person has acquired 15% or more of the Company's
common stock.
NOTE 7. CUSTOMER AGREEMENT
In November 1993, the Company entered into an agreement with Siemens AG to
supply SPECTRUM-TM- II digital microwave radios to E-Plus Mobilfunk GmbH. As of
March 31, 1995, the Company had not met its product acceptance or delivery
schedule, and, as a result, recorded significant reserves for product discounts
on interim equipment, equipment returns and other related costs. 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.
NOTE 8. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company operates in a single industry segment, the design and
manufacture of short- and medium-haul digital transmission products.
One customer (Siemens AG) accounted for 14% and 22% of net sales for Fiscal
1997 and 1996, respectively. No other customers accounted for more than 10% of
net sales during Fiscal 1997, 1996, or 1995.
26
<PAGE>
Geographic information for Fiscal 1997, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM OTHERS ELIMINATIONS TOTAL
---------- --------- --------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997
SALES TO UNAFFILIATED CUSTOMERS........................ $ 149,882 $ 22,416 $ 6,046 $ -- $ 178,344
INTERCOMPANY SALES..................................... 22,233 -- -- (22,233) --
---------- --------- ----------
NET SALES.............................................. $ 172,115 $ 22,416 $ 6,046 $ (22,233) $ 178,344
---------- --------- --------- ------------ ----------
OPERATING INCOME (LOSS)................................ $ 12,533 $ 2,893 $ 141 $ (1,668) $ 13,899
---------- --------- --------- ------------ ----------
IDENTIFIABLE ASSETS.................................... $ 155,341 $ 15,858 $ 759 $ (1,752) $ 170,206
---------- --------- --------- ------------ ----------
1996
Sales to unaffiliated customers........................ $ 133,370 $ 13,935 $ 3,114 $ -- $ 150,419
Intercompany sales..................................... 9,981 -- -- (9,981) --
---------- --------- --------- ------------ ----------
Net sales.............................................. $ 143,351 $ 13,935 $ 3,114 $ (9,981) $ 150,419
---------- --------- --------- ------------ ----------
Operating income (loss)................................ $ (10,138) $ 1,767 $ 220 $ 128 $ (8,023)
---------- --------- --------- ------------ ----------
Identifiable assets.................................... $ 92,760 $ 6,539 $ 2,016 $ (5,518) $ 95,797
---------- --------- --------- ------------ ----------
1995
Sales to unaffiliated customers........................ $ 126,171 $ 24,995 $ 2,484 $ -- $ 153,650
Intercompany sales..................................... 20,287 -- -- (20,287) --
---------- --------- --------- ------------ ----------
Net sales.............................................. $ 146,458 $ 24,995 $ 2,484 $ (20,287) $ 153,650
---------- --------- --------- ------------ ----------
Operating income....................................... $ 1,384 $ 1,159 $ 199 $ 6 $ 2,748
---------- --------- --------- ------------ ----------
Identifiable assets.................................... $ 102,687 $ 7,269 $ 1,469 $ (8,840) $ 102,585
---------- --------- --------- ------------ ----------
</TABLE>
Intercompany sales to the Company's foreign subsidiaries are transacted at
prices comparable to those offered to unaffiliated customers, after taking into
account the value added to products and services by the subsidiaries.
The following table represents export sales from the United States to
unaffiliated customers by geographic region:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Canada and South America.............................................. $ 28,718 $ 14,876 $ 30,565
Europe................................................................ 54,594 59,732 52,105
Asia/Pacific.......................................................... 55,738 40,570 23,601
------------ ------------ ------------
Total export sales................................................ $ 139,050 $ 115,178 $ 106,271
------------ ------------ ------------
------------ ------------ ------------
Export sales as a % of net sales...................................... 78% 77% 69%
</TABLE>
NOTE 9. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
In May 1997, the Company acquired Granger, Inc., a U.S. manufacturer of
wireless products and provider of installation services. The purchase price of
Granger, Inc., including the assumption of debt and the purchase of certain
product rights, totaled $14.5 million. The acquisition will be accounted for
under the purchase method of accounting.
In addition, 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 will be
accounted for under the cost method of accounting.
27
<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,
1997 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, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1997 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
San Jose, California
April 21, 1997
28
<PAGE>
Exhibit 21.1
DIGITAL MICROWAVE CORPORATION
LIST OF SUBSIDIARIES
DMC Telecom U.K. Ltd.
East Kilbride, Scotland
DMC Telecom Canada, Inc.
Toronto, Canada
DMC de Mexico, S.A. de C.V.
Mexico City, Mexico
Digital Microwave India Private, Limited
New Delhi, India
DMC Telecom Philippines, Inc.
Metro Manila, Philippines
Granger, Inc.
Sunnyvale, California
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included (or incorporated by reference) in this Form 10-K into
the Company's previously filed Registration Statements (File Nos. 33-16539, 33-
37173, 33-43155, 33-85270, 33-94438, 333-00855, 333-11385, 333-11387, 333-11389
and 333-25953) on Form S-8.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
June 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) ANNUAL REPORT
FILED BY REFERENCE ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 40,367
<SECURITIES> 17,947
<RECEIVABLES> 47,985
<ALLOWANCES> 3,362
<INVENTORY> 45,900
<CURRENT-ASSETS> 152,480
<PP&E> 49,966
<DEPRECIATION> 32,240
<TOTAL-ASSETS> 170,206
<CURRENT-LIABILITIES> 52,520
<BONDS> 0
0
0
<COMMON> 185
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 170,206
<SALES> 178,344
<TOTAL-REVENUES> 178,344
<CGS> 118,778
<TOTAL-COSTS> 118,778
<OTHER-EXPENSES> 45,667
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 978
<INCOME-PRETAX> 13,008
<INCOME-TAX> 1,301
<INCOME-CONTINUING> 11,707
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,707
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
</TABLE>
